<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 3, 1998
REGISTRATION NO. 333-38739
================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 3 TO FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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GRAND ADVENTURES TOUR & TRAVEL PUBLISHING CORPORATION
(Name of small business issuer in its charter)
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<S> <C> <C>
OREGON 4724 93-0950786
(State or other jurisdiction of (Primary industrial (I.R.S. Employer
classification
incorporation or organization) code number) Identification No.)
GRAND ADVENTURES TOUR & TRAVEL
PUBLISHING CORPORATION MATTHEW O'HAYER
211 EAST 7TH ST., 11TH FLOOR 211 EAST 7TH ST., 11TH FLOOR
AUSTIN, TEXAS 78701 AUSTIN, TEXAS 78701
(512) 391-2000 (512) 391-2000
(Address, including zip code, and telephone (Name, address, including zip code, and
number, including area code, of registrant's telephone number, including area code, of
principal executive offices and principal agent for service)
place of business)
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Copies to:
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<C> <C>
VINCE MOUER MARK ROBERTSON
KUPERMAN, ORR, MOUER & ALBERS, P.C. ROBERTSON & WILLIAMS, INC.
100 CONGRESS AVENUE, SUITE 1400 3033 NORTHWEST 63RD STREET, SUITE 160
AUSTIN, TEXAS 78701-4042 OKLAHOMA CITY, OKLAHOMA 73116
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
- ------------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
- ------------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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<PAGE> 2
CROSS REFERENCE SHEET
(PURSUANT TO RULE 404(a))
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ITEM
NO. ITEM LOCATION IN PROSPECTUS
- ---- ---- ----------------------
<C> <S> <C>
1. Front of Registration Statement and Outside Front
Cover Page of Registration......................... Front of Registration Statement; Outside
Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus......................................... Inside Front Cover and Outside Back Cover
Pages of Prospectus
3. Summary Information and Risk Factors................. Prospectus Summary; Risk Factors
4. Use of Proceeds...................................... Use of Proceeds
5. Determination of Offering Price...................... Underwriting
6. Dilution............................................. Dilution
7. Selling Security Holders............................. Not Applicable
8. Plan of Distribution................................. Underwriters
9. Legal Proceedings.................................... Not Applicable
10. Directors, Executive Officers, Promoters and Control
Persons............................................ Management
11. Security Ownership of Certain Beneficial Owners and
Management......................................... Principal Stockholders
12. Description of Securities To Be Registered........... Description of the Securities
13. Interests of Named Experts and Counsel............... Experts, Legal Matters
14. Disclosure of Commission's Position on
Indemnification for Securities Act Liabilities..... Management
15. Organization Within Last Five Years.................. Prospectus Summary -- Overview; Prospectus
Summary -- Use of Proceeds; Use of
Proceeds; The Business -- The Merger;
Security Ownership of Certain Beneficial
Owners and Management; Management --
Certain Relationships and Related
Transactions
16. Description of Business.............................. Available Information; Risk Factors,
Management's Discussion and Analysis of
Financial Condition; The Business
Security Ownership of Certain Beneficial
Owners and Management; Management;
Description of the Common Stock; Index
to Financial Statements
17. Management's Discussion and Analysis of Plan of
Operation.......................................... The Business; Management's Discussion and
Analysis of Financial Conditions and
Results of Operation
18. Description of Property.............................. The Company
19. Certain Relationships and Related Transactions....... Use of Proceeds; The Business;
Management -- Certain Relationships and
Transactions
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ITEM
NO. ITEM LOCATION IN PROSPECTUS
- ---- ---- ----------------------
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20. Market for Common Equity and Related Stockholder
Matters............................................ Risk Factors; Description of Securities;
Shares Eligible for Future Sale
21. Executive Compensation............................... Management
22. Financial Statements................................. Financial statements
23. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................ Not Applicable
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<PAGE> 4
PROSPECTUS
1,200,000 Shares
GATT LOGO
Common Stock
All of the shares of common stock, $.0001 par value (the "Common Stock"),
offered hereby (the "Offering") are being sold by Grand Adventures Tour & Travel
Publishing Corporation, an Oregon corporation (the "Company" or "GATT"). Prior
to this Offering, the Company's Common Stock has been traded on a very limited
basis on the over-the-counter electronic bulletin board maintained by the
National Association of Securities Dealers under the symbol "GATT." If this
Offering is successfully completed, the Company will be listed on Boston Stock
Exchange and in the NASDAQ SmallCap(TM) Market. See
"UNDERWRITING -- Determination of Offering Price" for a discussion of the
factors considered in determining the public offering price. In December 1997,
the Company effected a 1-for-7 reverse stock split. The last trade effected by a
shareholder prior to the reverse stock split being reflected in the trading
records of the NASDAQ Electronic Bulletin Board was effected at a per share
price of 31/32nds ($6.78 as adjusted for the reverse stock split). At the close
of business on February 2, 1998, the closing bid price was $4 3/4 and the
closing ask price was $6.00.
---------------------
THESE ARE SPECULATIVE SECURITIES. THE SECURITIES OFFERED HEREBY INVOLVE A HIGH
DEGREE OF RISK, AND SUBSTANTIAL DILUTION AND SHOULD BE CONSIDERED ONLY BY
PERSONS WHO CAN AFFORD THE ENTIRE LOSS OF THEIR INVESTMENT. SEE "RISK FACTORS"
BEGINNING AT PAGE 7 AND "DILUTION" AT PAGE 14.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
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===============================================================================================================
UNDERWRITING DISCOUNT PROCEEDS TO
PRICE TO THE PUBLIC AND COMMISSIONS(1) COMPANY(2)(3)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share........................ $5.00 $0.50 $4.50
- ---------------------------------------------------------------------------------------------------------------
Total............................ $6,000,000 $600,000 $5,400,000
===============================================================================================================
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). See "UNDERWRITING."
(2) Before deducting expenses payable by the Company, estimated at $400,000. See
"USE OF PROCEEDS" and "UNDERWRITING."
(3) The Company has granted the Underwriters an option, exercisable within 45
business days from the date of this Prospectus, to purchase up to 180,000
additional shares of Common Stock upon the same terms and conditions as set
forth above, solely to cover over-allotments, if any. If such over-allotment
option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds to Company will be $6,900,000,
$690,000 and $6,210,000, respectively. See "UNDERWRITING."
The shares of Common Stock being offered by this Prospectus are offered by
the Underwriters, subject to prior sale, when, as and if delivered to and
accepted by the Underwriters subject to certain other conditions. It is expected
that delivery of the shares of Common Stock will be made against payment
therefor at the offices of Capital West Securities, Inc., 211 North Robinson,
16th Floor, Oklahoma City, Oklahoma 73102, on or about January February 9, 1998.
CAPITAL WEST SECURITIES, INC.
THIS PROSPECTUS IS DATED FEBRUARY 4, 1998
<PAGE> 5
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING PURCHASES OF THE COMMON STOCK TO STABILIZE THEIR MARKET PRICE OR
PURCHASES OF THE COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION IN THE
COMMON STOCK MAINTAINED BY THE UNDERWRITERS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
---------------------
The Company's executive officers and directors, entities affiliated with
them and employees of the Company and holders of at least 5% of the outstanding
Common Stock affiliated with the executive officers and directors will
beneficially own shares of Common Stock representing more than 29% of the total
voting power of the Common Stock after giving effect to the Offering. These
persons, if acting in concert, will be able to exercise control over the
Company's affairs and are likely to be able to control the Board of Directors
and the disposition of any matter submitted to a vote of stockholders. See,
"RISK FACTORS -- Voting Control by Existing Management and Stockholders" and
"PRINCIPAL STOCKHOLDERS."
---------------------
The Company has filed a Registration Statement on Form SB-2 under the
Securities Act of 1933, as amended, with the Securities and Exchange Commission
(the "Commission") with respect to the Securities offered pursuant to this
Prospectus. This Prospectus, which forms a part of the Registration Statement,
does not contain all of the information included in the Registration Statement
and the exhibits thereto. For further information, reference is made to the
Registration Statement and amendments thereof and to the exhibits thereto, which
are available for inspection without charge at the office of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549. Copies of the Registration
Statement may be obtained from the Commission at prescribed rates.
---------------------
The Company is publicly held and traded and files annual and other periodic
reports pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, and such reports and other information filed by the Company may be
inspected and copied at the public reference facilities of the Commission in
Washington, D.C., and can be obtained from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates.
The Commission maintains a website that contains reports, proxy and information
statements and other information regarding issuers that file electronically with
the Commission at http://www.sec.gov.
---------------------
The mailing address of the Company's principal executive offices is 211
East 7th Street, 11th Floor, Austin, Texas 78701, and its telephone number is
(512) 391-2000.
2
<PAGE> 6
SUMMARY
The following summary is qualified in its entirety by reference to the
detailed information and financial statements (including the notes thereto) and
the pro forma financial information appearing elsewhere in this Prospectus.
Unless otherwise indicated, the information in this Prospectus: (i) reflects a
1-for-7 reverse split of Common Stock effected prior to commencement of this
Offering (the "Reverse Stock Split"); (ii) assumes the conversion of
approximately $905,182 of the Company's convertible indebtedness into 395,303
shares of Common Stock upon the closing of this Offering (the "Conversion"); and
(iii) assumes that the Underwriters' over-allotment option will not be
exercised.
THE COMPANY
The Company serves a portion of the travel industry known as "interliners"
through two divisions operated within its wholly-owned subsidiary. 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. One division (the "Publishing Division") publishes a
magazine and other promotional material directed at the interline market, see
"THE BUSINESS -- The Publishing Division," infra, and the other (the "Marketing
Division") offers travel accommodations to interliners. See "THE BUSINESS -- The
Marketing Division." infra.
The Publishing Division produces, publishes, and distributes Interline
Adventures, a 27 year-old, four-color, 120 plus-page magazine, scheduled for
bi-monthly publication in 1998, and then supplements that publication with other
information between the editions of the larger magazine. The Marketing Division,
under the name "Interline TravelReps," provides hotel and resort accommodations,
consisting of rooms or vacation packages (comprised of some combination of
rooms, meals and services) and berths or seats on cruises and escorted tours.
The Company uses the operations of the Publishing Division to market the
products offered by the Marketing Division. In addition to advertising and
products sold by the Marketing Division, the Publishing Division advertises
other travel accommodations and travel services in exchange for advertising
revenues or "room night" credits which can then be sold by the Marketing
Division. The Marketing Division procures its supply of hotel and resort
accommodations, cruise ship cabins, and tour reservations from the operators of
those businesses and then sells the products to the interliner at a price which
reflects a discount to the prevailing retail price. The amount charged to the
customer is established and published in the magazine and in the Company's other
publications and is quoted over the telephone by the Marketing Division's
reservation specialists.
Prior to commencing its operations within the interline travel industry,
the Company existed under the name "Riley Investments, Inc." but conducted no
business under that name. Prior to changing its name to Riley Investments, Inc.,
the Company operated under the name "Pace Group International, Inc." as a
producer of English language educational materials.
MARKET OPPORTUNITY
The market that exists to service the interline market is highly
fragmented, generally consisting of small operators serving the market either as
an adjunct to a retail tour operation or by concentrating on an extremely narrow
segment. There are a handful of major interline companies that are established
and offer a relatively broad service, yet none of these operations could be
considered to have a dominant position. The Company believes that with
sufficient capital, it will be able to publish its magazine more frequently, and
more importantly, print and distribute a much larger number of copies, thereby
dramatically enhancing the Company's market presence. The increased distribution
levels should also serve to enhance the Company's ability to realize advertising
income and market its travel products.
3
<PAGE> 7
The Company's supply of travel accommodations is contingent upon the
existence of unused or unreserved travel accommodations. As the Company's
customer base grows, or as the retail travel market fully utilizes the travel
accommodations in a given market, the Company may encounter difficulty providing
its customers the accommodations they desire. See, "RISK FACTORS -- Dependence
on Travel Suppliers." The Company believes that the increased market presence it
hopes to achieve with the proceeds of this Offering will assist in its
development of more assured sources of its existing travel products and of a
broader range of products which will present viable alternatives for interline
customers should their first choice of travel products not be available.
RECENT EVENTS
Since September 1, 1997, the Company has realized gross proceeds of
$500,050 from a private placement (referred to hereinafter as the "1997 Private
Placement") of Subordinated Promissory Notes in an aggregate principal amount of
$500,000 and 500,000 shares of Common Stock (adjusted to approximately 71,429 as
a result of the Reverse Stock Split.) The Common Stock offered to the purchaser
of Subordinated Promissory Notes was sold for a per share consideration of
$.0007, as adjusted for the Reverse Stock Split. In connection with the issuance
of these shares of Common Stock, and upon consummation of this Offering, the
Company will recognize a one-time, non-recurring, non-cash expense of $357,095,
which equals the difference between the Company's estimation of the fair market
value of the Common Stock at the date of issuance and the consideration paid by
noteholders in connection with such issuance. If this Offering is not
consummated, then this charge will be amortized over the term of the
Subordinated Promissory Notes using the interest method.
Prior to consummation of this Offering, the Company effected a 1 for 7
reverse stock split (referred to hereinafter as the "Reverse Stock Split"). The
Company anticipates that the holders of approximately $905,182 of the Company's
convertible indebtedness will convert such indebtedness into 395,303 shares of
Common Stock (the "Conversion") immediately upon consummation of this Offering.
Unless otherwise indicated, the information in this Prospectus assumes that the
1997 Private Placement, the Conversion and the Reverse Stock Split were
consummated prior to this Offering. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and "SELECTED FINANCIAL
INFORMATION."
THE OFFERING
Common Stock Offered....... 1,200,000 shares
Common Stock Outstanding
Prior to the
Offering(1)................ 1,827,021
After the Offering(1).... 3,027,021
Use of Proceeds............ The Company intends to use the net proceeds of the
Offering to retire the notes issued in the 1997
Private Placement; expand its magazine
publications; purchase furniture and equipment;
retire past due vendor liabilities and provide
operating capital and general corporate purposes.
See "USE OF PROCEEDS."
Proposed Boston Stock
Exchange Symbol.......... GAD
Proposed NASDAQ
SmallCap(TM) Market
Symbol................... GATT
- ---------------
(1) Does not include: (i) 292,066 shares of Common Stock issuable upon exercise
of warrants issued and outstanding as of the date of this Prospectus; (ii)
shares of Common Stock issuable upon exercise of the Underwriters' Warrants
to be issued in connection with the sale of shares of Common Stock in this
Offering; or (iii) 450,000 shares of Common Stock reserved for issuance
under the Company's stock option plans, of which 105,666 shares are subject
to outstanding options. See "UNDERWRITING" and "MANAGEMENT -- Stock Option
Plans."
4
<PAGE> 8
RISK FACTORS
The securities offered hereby are speculative and involve a high degree of
risk, including risk associated with the travel industry, general economic
conditions, dependence on suppliers and technology, competition and the risks of
development stage companies in general. Investors should carefully consider the
risk factors enumerated herein before investing in the Common Stock. See "RISK
FACTORS."
5
<PAGE> 9
SUMMARY -- FINANCIAL AND OPERATING DATA
The following table sets forth selected historical financial information of
the Company for each of the two fiscal years ended December 31, 1995 and 1996
and the nine months ended September 30, 1997, all as adjusted for the Reverse
Stock Split. The following financial information should be read in conjunction
with such financial statements, including the notes thereto and the Pro Forma
Balance Sheet included elsewhere herein. Also see "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
<TABLE>
<CAPTION>
UNAUDITED
YEAR ENDED YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1995 1996 1997
------------ ------------ -----------------
<S> <C> <C> <C>
STATEMENT OF INCOME DATA
Revenues
Hotel revenue................................. $2,289,018 $ 4,249,454 $3,473,835
Cruise and tour revenue....................... 0 6,339,179 5,722,149
Magazine subscription and advertising
revenue.................................... 0 374,789 340,276
Merchandise and other revenue................. 37,874 39,904 14,013
---------- ----------- ----------
Total Revenues........................ 2,326,892 11,003,326 9,550,273
---------- ----------- ----------
Cost of Sales
Hotel cost.................................... 1,751,919 3,273,552 2,520,221
Cruise and tour cost.......................... 0 5,562,876 5,078,400
Magazine publishing cost...................... 0 75,120 396,201
Merchandise cost.............................. 13,822 2,340 0
---------- ----------- ----------
Total Cost of Sales................... 1,765,741 8,913,888 7,994,822
---------- ----------- ----------
Gross Profit.......................... 561,151 2,089,438 1,555,451
Operating Expenses
Selling, general and administrative
expenses................................... 530,488 1,816,025 704,360
Wages......................................... 342,544 1,111,081 803,436
Depreciation and amortization................. 52,863 34,987 29,978
---------- ----------- ----------
Total Operating Expenses.............. 925,895 2,962,093 1,537,774
---------- ----------- ----------
Net Income (Loss) Before Income Taxes........... (364,744) (872,655) 17,676
Income Tax Expense.............................. 0 0 0
Net Income (Loss)............................... $ (364,744) $ (872,655) $ 17,676
========== =========== ==========
Net Income (Loss) Per Common Share (Note 2)..... $ (0.28) $ (0.64) $ 0.01
========== =========== ==========
Weighted Average Common Shares Outstanding
(adjusted for 1 for 7 reverse stock split).... 1,300,000 1,361,430 1,631,839
========== =========== ==========
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
-------------------------------------------------
PRO FORMA
AS ADJUSTED PRO FORMA
FOR THE 1997 AS ADJUSTED FOR
ACTUAL PRIVATE PLACEMENT THE OFFERING
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BALANCE SHEET DATA
Cash and Cash Equivalents.......................... $ 190,870 $ 640,920 $ 5,140,920
Total Assets....................................... 2,239,574 2,739,624 7,189,624
Long-term Obligations.............................. 803,480 946,385 64,473
Accumulated Deficit................................ (1,775,131) (1,775,131) (2,182,226)
Total Stockholders' Equity......................... (1,175,971) (818,826) 4,679,261
</TABLE>
6
<PAGE> 10
RISK FACTORS
In consideration whether to subscribe for the purchase of Shares, investors
should consider the following:
LIMITED HISTORICAL FINANCIAL INFORMATION
The financial statements included within this Prospectus contain pro forma
financial information as of December 31, 1995, all as more particularly set
forth in the notes to such historical and pro forma financial statements. This
historical financial information is being furnished in accordance with
applicable disclosure requirements. Investors are cautioned, however, that the
results of operations of these divisions prior to their acquisition by the
Company are not likely to be indicative of the results of operations of such
divisions thereafter because of changes in management, operating plans,
integration of the various operating divisions, the Company's long-term
strategic plan, and other factors. Similarly, the financial information
respecting the Company since December 31, 1995, while the Company was
integrating the operations of the acquired divisions, implementing changes in
management policies and practices, and effecting other broad-scale changes may
not be indicative of the results of operations for the combined enterprise in
the future.
ABSENCE OF OPERATING CAPITAL/GOING CONCERN QUALIFICATION
The Company has an accumulated deficit of $1,775,131 as of September 30,
1997 ($544,164 of this deficit is attributable to periods prior to the Company's
commencement of operations within the interline travel industry). As of
September 30, 1997, the Company had negative shareholders' equity of $1,175,971
and a working capital deficit of $828,748. 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. As a result of all of these
criteria, the Company is considered to be in unsound financial condition.
Historically, the Company has had insufficient cash or near-cash reserves
and insufficient current sources of operating income to satisfactorily implement
its business strategy and otherwise operate effectively. This has forced the
Company to publish and distribute its informational products on an inconsistent
basis, defer the payment of certain expense and otherwise limit its efforts to
promote sales growth. Although the Company believes that this Offering, if
successful, will provide enough capital to fully implement its business plan for
the next three to five years, if implementation of the Company's business plan
does not generate cash resources in sufficient amounts and at appropriate times,
the Company may require additional capital or may be required to slow the
implementation of its business strategy. At this point in time, there can be no
assurances that the Company will be able to locate and procure such additional
capital. See, "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS."
RECENT OPERATING LOSSES
Although the Company has attained marginal profitability in its two most
recent fiscal quarters, prior to those periods and since the date of acquisition
of its current operating assets, the Company has operated at a loss. See,
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS." Management believes that the capital infusion represented by a
successful completion of this Offering will permit the Company to fully
implement its business plan and achieve ongoing profitability, but there can be
no assurances in this regard.
DEPENDENCE ON KEY EMPLOYEES
The Company relies on the experience and ability of its executive officers,
senior management and employees of its operating divisions, the loss of any one
of whom could have a material adverse effect on the Company. The Company's
future performance will depend on its ability to attract and retain key
personnel and skilled employees, particularly in the areas of negotiation of
agreements with travel service providers and marketing of travel service
products to interline travelers. Among the most significant of its employees are
Matthew O'Hayer, the Company's Chief Executive Officer, and Joseph S. "Jay"
Juba, the Company's President and Chief Operating Officer. Although the Company
is considering the purchase of key-man life
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<PAGE> 11
insurance insuring the lives of Messrs. O'Hayer and Juba, no key executive is
currently covered by key man life insurance. See, "MANAGEMENT."
BUSINESS SEASONALITY
As most travel by interliners takes place during times when there are both
empty seats on airlines and accommodations available at a given travel location,
travel volume for the interline industry tends to decrease when the leisure
travel industry generally, and airlines and cruise lines in particular,
experience high traffic volume. Accordingly, generally high traffic volumes,
together with a lack of available travel accommodations at traditionally popular
travel destinations, have generally resulted in low interline traffic volumes
from the middle of November through the middle of January. Management has taken
a number of steps in an attempt to address the seasonality which confronts the
Company, including the implementation of special promotional campaigns and the
procurement of a substantial supply of travel accommodations at locations not
traditionally frequented by holiday travelers. There can be no assurance that
this seasonality will not have a material adverse effect on the Company or the
Company's financial condition. See, "THE BUSINESS -- The Marketing
Division -- Seasonality" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS."
COMPETITION
The Company is aware of over 30 competitors in the interline travel
industry, all of which are privately-held and for which no reliable sales
information is available. Two of the companies, Caesar's and Magellan, have been
in the travel business for over 20 years and have an established market presence
and variety of products and services. In providing travel services, the Company
believes that competition in the interline industry is based principally on
market visibility and the nature and variety of products and services offered
rather than merely price. The Company believes that it benefits from being able
to offer a broad variety of products in a variety of destinations. The Company
generally offers the prevailing interline discount rate, and on specific
customer requests, typically matches lower rates offered by others. See "THE
BUSINESS -- The Marketing Division -- Competition." In publishing the Magazine,
the Company competes with the ASU Travel Guide, an approximately 400-page
quarterly listing with a significant readership. The ASU Travel Guide is not
affiliated with any reservation or travel firm providing the types of support
services offered by the Company. Although the Company has designed its products
and services and its expansion strategy with a view to operating in this
competitive environment, there can be no assurance that the Company will be able
to compete effectively or profitably. Many of the Company's competitors have
significant management and financial resources and more established market
niches than the Company. See "THE BUSINESS -- The Publishing
Division -- Competition."
DIVIDENDS NOT LIKELY
The Company makes no assurances that its proposed operations will result in
sufficient revenues to enable profitable operations or to generate positive cash
flow. For the foreseeable future, the Company anticipates that it will use any
funds available to finance the growth of the Company and that it will not pay
cash dividends to stockholders. See "DIVIDEND POLICY."
RISKS ASSOCIATED WITH THE TRAVEL INDUSTRY; GENERAL ECONOMIC CONDITIONS
The Company's results of operations will be dependent upon factors
affecting the travel industry. The Company's revenues and earnings are
especially sensitive to events that affect domestic and international air
travel, cruise travel and resort hotels in Mexico and the Caribbean. A number of
factors, most notably labor disturbances, but including political instability,
armed hostilities, international terrorism, extreme weather conditions, a rise
in fuel prices, a decline in the value of the U.S. dollar and excessive
inflation, could result in an overall decline in demand for interline travel.
These types of events could have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, demand for
the Company's travel services may be significantly related to the general level
of economic activity and employment in the
8
<PAGE> 12
U.S. Therefore, any significant economic downturn or recession in the U.S. could
have a material adverse effect on the Company's business, financial condition
and results of operations.
DEVELOPMENT OF AIRLINE EMPLOYEE INFORMATION
The Company anticipates that an increase in the size of the Company's
mailing list would increase the Company's revenues. While the Company believes
that its marketing efforts will add names to the mailing list, the Company also
believes that it could add names more rapidly if it could utilize employee lists
from airlines or air freight carriers or member lists from airline employee
unions. There can be no assurances that the Company will be able to reach
agreement with any of these parties regarding a means of reaching their
employees or members or that the Company, if such access is granted, can devise
and implement a strategy to profitably utilize such lists. See, "THE
BUSINESS -- The Publishing Division; Marketing."
DEPENDENCE ON TRAVEL PROVIDERS
The Company is dependent upon travel providers for access to their
capacity. The Company anticipates that a significant portion of the Company's
revenues will be derived from the sale of capacity of relatively few travel
providers. Moreover, although no individual provider represents more than 10% of
any of the Company's business segments, certain portions of the Company's
business are dominated by a limited number of providers, the loss of any of whom
as a customer of the Company could have a material adverse effect on a
substantial portion of the Company's business. The Company's agreements with its
travel providers can generally be canceled or modified by the travel provider
upon relatively short notice. The failure of a travel provider, loss of a
contract, changes in the Company's pricing agreements or commission schedules,
or more restricted access to travel providers' capacity could have a material
adverse effect on the Company's business, financial condition and results of
operations. See, "THE BUSINESS -- The Marketing Division."
The Company's supply of travel products, whether offered by a given service
provider or offered by a number of providers, within a given travel destination
is often contingent upon the availability of excess supply of such
accommodations. The Company has commitments, some of which are not legally
binding, for some accommodations which are not subject to availability of excess
capacity. Although the Company has encountered a shortage of travel
accommodations in a given market only infrequently, the Company is aware of the
possibility that a substantial growth in its interline customer base may produce
a demand for interline travel accommodations in excess of the Company's
available supply. The Company believes that there is substantial excess
capacity, both in the market for interline products generally and in particular
destinations, which is not currently made available to the Company for inclusion
within its product line and that, as the Company's interline customer base
grows, the Company will be positioned to augment its product offerings to
satisfy any increase in demand or, alternatively, to offer products which are
reasonable substitutes for products which are not available. The Company's
future success and ability to meet its growth objectives may depend on its
ability to procure additional and more certain supplies of travel products in
sufficient quantities to satisfy the demands of its customer base. See, "THE
BUSINESS -- The Marketing Division -- Sources of Supply."
DEPENDENCE UPON TECHNOLOGY
The Company's business is dependent upon a number of different
state-of-the-art information and telecommunication technologies to facilitate
its access to information and manage a high volume of inbound and outbound
calls. Any failure of this technology would have a material adverse effect on
the Company's business, financial condition and results of operations. The
Company is dependent upon certain third party vendors, including central
reservation systems operators such as the SABRE Group, for access to certain
information. Any failure of these systems or restricted access by the Company
would have a material adverse effect on the Company's business, financial
condition and results of operations. See, "THE BUSINESS -- Facilities."
9
<PAGE> 13
LIMITED AND UNCERTAIN MARKET FOR COMMON STOCK
The Common Stock has been traded in the over-the-counter market and is
traded on the OTC Electronic Bulletin Board under the symbol "GATT," but there
has been very little consistent trading volume, with significant changes in the
bid and asked quotations for the Common Stock as a result of relatively minor
changes in the supply and demand and without any necessary correlation between
prices and the business, prospects, or results of operations of the Company. The
Company believes that during the last few months, the Common Stock traded in
small amounts at prices of approximately $0.81 to $2.50 per share (before giving
effect to the Reverse Stock Split), but because of the lack of a continuous,
consistent trading volume, such figures should not be considered a reliable
indication of the market price for the Common Stock. Subscribers in this
Offering should be extremely cautious in relying on price quotations and other
market information respecting the Common Stock in making an investment decision.
See "DESCRIPTION OF SECURITIES -- Determination of Offering Price." The Company
believes that the current trading activity does not represent a viable trading
market for the Common Stock.
The public offering price was determined solely through negotiations among
the Company and representatives of the Underwriters based on several factors,
and may not be indicative of the market price for the Common Stock after the
completion of the Offering. Among the factors considered in such negotiations
were prevailing market conditions, the results of operations of the Company in
recent periods, the market capitalizations and stages of development of other
companies which the Company and the Underwriters believe to be comparable to the
Company, estimates of the business potential of the Company and the present
state of the Company's development. See "UNDERWRITING -- Determination of
Offering Price."
PRICE INSTABILITY
Upon successful completion of this Offering, the Common Stock will be
listed on the Boston Stock Exchange (the "BSE") and included in the NASDAQ
SmallCap(sm) Market (the "SmallCap Market"). Although the Common Stock will be
listed and included, there can be no assurances that an active public market
will develop. Moreover, even if a public trading market for the Common Stock
develops, the trading price of the Company's Common Stock could be subject to
fluctuations in response to quarterly variations in results of operations,
announcements of new services or products by the Company or its competitors,
changes in financial estimates by securities analysts and other events or
factors. Recent history relating to the market prices of other newly public
companies indicates that the market price of the Company's Common Stock
following the Offering may be highly volatile. At various times, the stock
market has experienced volatility that has particularly affected the market
prices for stock of particular industry groups, such as retail-oriented
companies, often without regard to a particular company's operating results.
POTENTIAL CONFLICTS OF INTEREST
Certain of the officers and directors of the Company are also officers,
directors and shareholders of BEI Holdings, Inc. ("BEI"). The Company and
Airfair are parties to a Marketing Agreement pursuant to which the Company is
permitted (i) to market travel accommodations held by a BEI subsidiary to its
customers and (ii) to retain a portion of each sale of such accommodations as a
commission. To date, the amount of such sales and such commissions have been
immaterial and, although the Company believes that the commission to be retained
is not less than the commission which would be received from a third party, the
Company has not obtained an independent appraisal of the fairness of such
agreement. The Company has undertaken to not engage in transactions with
affiliates on terms less favorable to the Company than might be received from
independent third parties. See, "CERTAIN RELATIONSHIPS AND MATERIAL
TRANSACTIONS."
BLANK CHECK PREFERRED STOCK
The Board of Directors has the authority to issue the Preferred Stock in
one or more series and to fix the rights, preferences, privileges and
restrictions thereof, including dividend rights, dividend rates, conversion
rights, voting rights, terms of redemption, redemption prices, liquidation
preferences and the number of shares constituting any series or the designation
of such series, without further vote or action by the stockholders. The
10
<PAGE> 14
issuance of Preferred Stock may have the effect of delaying, deferring or
preventing a change in control of the Company without further action by the
stockholders and may adversely affect the voting and other rights of the holders
of Common Stock. The issuance of Preferred Stock with voting and conversion
rights may adversely affect the voting power of the holders of Common Stock,
including the loss of voting control to others, and otherwise result in dilution
of the holders of Common Stock. At present, the Company has no Preferred Stock
outstanding and no plans to issue any of the Preferred Stock. See "DESCRIPTION
OF SECURITIES."
SUBSTANTIAL DILUTION/DISPARITY OF PRICES PAID BY SHAREHOLDERS
The offering price of Common Stock is substantially in excess of book
value. On the basis of an assumed offering price of $5.00 per share (the
mid-point in the range of offering prices set forth on the cover of this
Prospectus), this Offering involves an immediate dilution of approximately $3.58
per share of Common Stock (approximately 72% of the offering price per share)
between the offering price per share and the pro forma net tangible book value
per share of the Common Stock immediately after the completion of this Offering.
See "DILUTION." In addition, because a substantial number of shares of the
Company's common stock were issued in connection with a merger effected in
October 1996 with Airfair (see, "THE BUSINESS -- The Merger and Integration of
Operating Divisions"), and because no appraisal of Airfair was performed at the
time of the merger, the consideration surrendered by the Airfair shareholders is
of uncertain value and it is possible that such shareholders would be deemed to
have paid substantially less for their shares of the Company's common stock than
will be paid by subscribers to this Offering.
FUTURE ISSUANCES OF COMMON STOCK
The Company has issued warrants to acquire common stock at exercise prices
less than the Offering Price and indebtedness entitling the holders thereof to
convert such indebtedness into shares of Common Stock at conversion prices less
than the Offering Price. The outstanding warrants entitle the holders thereof to
acquire a total of 292,066 shares of Common Stock at a weighted average exercise
price of $6.87. The convertible indebtedness issued by the Company entitled the
holders thereof, as of September 30, 1997, to acquire a total of 395,303 shares
of common stock at a weighted average conversion price of $2.29. Representations
in this Prospectus as to the number of shares of Common Stock outstanding before
and after this Offering are presented subject to the assumption that all
convertible indebtedness of the Company is converted immediately prior to the
commencement of this Offering. See, "SHARES ELIGIBLE FOR FUTURE SALE."
LIMITED UNDERWRITING EXPERIENCE
Capital West Securities, Inc ("Capital West"), one of the Underwriters, was
first registered as a broker-dealer in May 1995 and has participated in only
eight public equity offerings as an underwriter, acting as a manager or
comanager in five of those offerings. All eight of the public offerings were
successfully completed. Prospective purchasers of the securities offered hereby
should consider this limited experience in evaluating this Offering. See
"UNDERWRITING."
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of shares of Common Stock by the Company or its existing
stockholders, or the perception that such sales may occur, could adversely
affect the market price of the Common Stock. Upon completion of the Offering,
3,027,021 shares of Common Stock will be outstanding (3,207,021 shares
outstanding assuming exercise of the Underwriters' overallotment option in
full). Of the outstanding shares, the 1,200,000 shares (1,380,000 shares
assuming the Underwriters' overallotment option is exercised in full) sold in
the Offering, and approximately 40,000 shares held by existing stockholders who
are not, as of the date of this Prospectus, "affiliates" of the Company, will be
tradeable without restriction. The remaining shares of Common Stock to be
outstanding after the Offering are "restricted securities" (the "Restricted
Securities") within the meaning of Rule 144 under the Securities Act and may not
be publicly resold, except in compliance with the registration requirements of
the Securities Act or pursuant to an exemption from registration, including that
11
<PAGE> 15
provided by Rule 144 promulgated under the Securities Act. The Company believes
that the holders of approximately 400,000 of the Restricted Securities have
satisfied the one-year holding period mandated by Rule 144 and are capable of
sale in accordance with the other requirements of that rule. Approximately 32%
of the outstanding shares of Common Stock after the Offering (assuming that the
Underwriter's over-allotment option is not exercised), in addition to being
Restricted Securities, are subject to agreements to not sell such Restricted
Shares for a 12-month period or, in the case of certain executive officers of
the Company, a 24-month period. Holders of $500,000 of indebtedness entitling
them to convert such indebtedness, and the interest accrued thereon, into
approximately 294,000 shares of Common Stock have agreed with the Company that
they will not sell the shares issuable upon such conversion for a period of nine
months following the date of this Prospectus. Sales of substantial amounts of
Common Stock, or the perception that such sales could occur, could adversely
affect the prevailing market price of the Common Stock. See "SHARES ELIGIBLE FOR
FUTURE SALE" and "UNDERWRITING."
In addition to the outstanding shares of Common Stock, there are 292,066
shares subject to outstanding warrants and options at a weighted average
exercise price of $6.87 per share. There are also 450,000 shares of Common Stock
reserved for issuance under the Company's stock option plans, of which 105,666
shares are subject to outstanding options at a weighted average exercise price
of $7.00 per share. See "MANAGEMENT -- Incentive Stock Option Plan."
Registration statements are expected to be filed to permit the resale of shares
issuable upon exercise and, the resale of the shares acquired upon exercise
could adversely affect the prevailing market price of the Common Stock. See
"SHARES ELIGIBLE FOR FUTURE SALE."
CERTAIN GENERAL AND FORWARD-LOOKING INFORMATION
This Prospectus contains information developed by the Company, general
industry information from third party sources, estimates of market size and
characteristics, projected market growth, anticipated capital requirements,
assumptions concerning competitive conditions, and other matters. All of such
material is based on a number of variables, hypotheticals, and assumptions,
including third party data believed reliable but not fully verified or
verifiable independently by management of the Company. Further, the effect of
such information on the business of the Company is based on estimates and future
circumstances, including events that have not occurred, which may not occur, or
which may occur with difference consequences from those forecast. If investors
were to consult their own advisors and industry experts, it should be expected
that their views may differ from those set forth herein. Future operating
results are impossible to predict. No representation or warranty of any kind is
made by the Company, and none should be inferred, respecting the future accuracy
or completeness of such forward-looking information. See, "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
VOTING CONTROL BY EXISTING MANAGEMENT AND STOCKHOLDERS
The Company's executive officers and directors, entities affiliated with
them and employees of the Company and holders of at least 5% of the outstanding
Common Stock affiliated with the executive officers and directors will
beneficially own shares of Common Stock representing more than 29% of the total
voting power of the Common Stock after giving effect to the Offering. These
persons, if acting in concert, will be able to exercise control over the
Company's affairs and are likely to be able to control the Board of Directors
and the disposition of any matter submitted to a vote of stockholders.
12
<PAGE> 16
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,200,000 shares being
offered hereby are estimated to be approximately $5.0 million (approximately
$5.78 million if the Underwriters' over-allotment option is exercised in full),
assuming an offering price of $5.00 per share and after deducting the estimated
underwriting discounts and commissions and offering expenses. Although such uses
are subject to change, the Company expects to use the net proceeds (assuming no
exercise of the Underwriters' over-allotment option) in fiscal 1998
approximately as follows:
<TABLE>
<CAPTION>
APPROXIMATE APPROXIMATE PERCENTAGE
USE DOLLAR AMOUNT OF NET PROCEEDS
--- ------------- ----------------------
<S> <C> <C>
Marketing/Publishing Expenses..................... $3,125,000 62.5%
Furniture and Equipment........................... 500,000 10.0%
Operating Capital................................. 625,000 12.5%
Repayment of debt incurred in connection with 1997
Private Placement Financing(1)(2)............... 500,000 10.0%
Repayment of accumulated past due vendor
liabilities(3).................................. 250,000 5.0%
---------- --------
Total................................... $5,000,000 100.0%
========== ========
</TABLE>
- ---------------
(1) This debt is unsecured, bears interest at the rate of 10% per annum, and
matures on the earlier to occur of this Offering or September 30, 1999.
(2) Of this sum, approximately $100,000 was used for expenses associated with
this Offering.
(3) These debts are reflected on the Company's balance sheet as accounts
payable, do not bear interest and, although generally past due, have no
specified maturity date. The names of the vendor, the date or dates over
which such liabilities accrued and the service provided by such vendor are
as follows:
<TABLE>
<CAPTION>
NAME DATE(S) SERVICE
---- ------------- -------------------------------------
<S> <C> <C>
Intertel 12/94-present telephone system
MCI 8/97-present long distance
Kruse, Landa & Maycock 10/96-11/96 legal fees to predecessor business
UPS 8/96-12/96 delivery
</TABLE>
None of these vendors are affiliated with the Company.
Where appropriate, proceeds of this Offering also may be used to acquire
competitors who help the Company to more completely serve its markets and
clientele or to expand the Company's clientele, although there are no present
understandings, agreements or commitments with respect to any such acquisitions.
Any remaining net proceeds are to be used for working capital and other
general corporate purposes. Pending application of the proceeds described above,
the net proceeds of the Offering will be invested in short-term, investment
grade, interest-bearing securities.
DIVIDEND POLICY
The Company makes no assurance that its proposed operations will result in
sufficient revenues to enable profitable operations or to generate positive cash
flow. For the foreseeable future, the Company anticipates that it will use any
funds available to finance the growth of the Company and that it will not pay
cash dividends to stockholders.
The payment of dividends, if any, in the future is within the discretion of
the Board of Directors and will depend on the Company's earnings, its capital
requirements, restrictions imposed by lenders and financial condition and other
relevant factors.
13
<PAGE> 17
DILUTION
At September 30, 1997, pro forma net tangible book value of the Company's
Common Stock was approximately ($701,580), or ($0.38) per share, after giving
effect to (i) the 1997 Private Placement, (ii) the Reverse Stock Split and (iii)
the Conversion, all as if completed at September 30, 1997. "Pro forma net
tangible book value" per share of Common Stock is defined as total tangible
assets of the Company less total liabilities, divided by the total number of
shares of Common Stock outstanding. Giving effect to the Offering, at an assumed
public offering price of $5.00 per share the adjusted pro forma net tangible
book value of Common Stock at September 30, 1997 would have been approximately
$1.42 per share of Common Stock. This will represent an immediate dilution of
$3.58 per share to new investors purchasing shares of Common Stock in this
Offering. The following table illustrates the per share dilution to new
investors:
<TABLE>
<S> <C>
Assumed public offering price per share..................... $ 5.00
Pro Forma net tangible book value per share at September 30,
1997...................................................... $(0.38)
Increase attributable to new investors...................... $ 1.80
Pro forma net tangible book value per share after the
Offering.................................................. $ 1.42
Dilution per share to new investors......................... $ 3.58
</TABLE>
The foregoing discussion and table do not assume the exercise of warrants
and stock options which are outstanding as of the date of this Prospectus and
entitling the holders thereof to purchase 397,733 shares of Common Stock at a
weighted average exercise price per share of $6.90, after giving effect to the
Reverse Stock Split.
A significant portion of the outstanding shares of Common Stock, including
substantially all of the shares of Common Stock owned by officers, directors and
affiliates of the Company, were issued in connection with a Merger between the
Company, a wholly-owned subsidiary of the Company and Airfair Publishing, Inc.
See "THE BUSINESS -- The Merger" and "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS." Prior to the Merger, there was no reliable trading market for
shares of Common Stock, or any other reliable means of ascertaining the value of
the securities surrendered, as part of the merger, and in exchange for shares of
the Company's Common Stock.
14
<PAGE> 18
CAPITALIZATION
The following table sets forth: (i) the capitalization of the Company as of
September 30, 1997, as adjusted for the Reverse Stock Split; (ii) the effect of
the completion of the 1997 Private Placement, with net proceeds to the Company
of approximately $450,000, as if completed at September 30, 1997; and (iii) the
pro forma capitalization of the Company as of such date, after giving effect to
the Conversion and the sale of the 1,200,000 shares of Common Stock offered
hereby at the offering price of $5.00 per share. This table should be read in
conjunction with "USE OF PROCEEDS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS," "PRO FORMA BALANCE SHEET" and
the financial statements and notes appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
--------------------------------------------------
PRO FORMA
--------------------------------------------------
AS ADJUSTED AS ADJUSTED
FOR THE FOR THE AS ADJUSTED
REVERSE STOCK 1997 PRIVATE FOR THE
SPLIT(1)(2) PLACEMENT(1)(3) OFFERING(4)(5)
------------- --------------- --------------
<S> <C> <C> <C>
Long-term obligations............................ $ 803,480 $ 946,385 $ 64,473
Stockholders' equity:
Preferred stock -- 10,000,000 shares authorized;
none issued and outstanding at September 30,
1997........................................... -- -- --
Common Stock; $.0001 par value: 30,000,000 shares
authorized; 1,431,718 shares issued and
outstanding at September 30, 1997; 3,027,021
shares issued and outstanding as adjusted for
the Offering and the Conversion................ $ 136 $ 143 $ 303
Additional paid-in capital....................... $ 599,024 $ 956,162 $ 6,861,184
Accumulated deficit.............................. $(1,775,131) $(1,775,131) $(2,182,226)
Total stockholders' equity............. $(1,175,971) $ (818,826) $ 4,679,261
Total capitalization................... $ (372,491) $ 127,559 $ 4,743,734
</TABLE>
- ---------------
(1) Excludes 450,000 shares of Common Stock reserved for issuance pursuant to
the Company's stock option plans (of which 105,666 are subject to
outstanding options), and 292,066 shares subject to outstanding warrants.
See "MANAGEMENT -- Stock Option Plans," "DESCRIPTION OF SECURITIES" and
"SHARES ELIGIBLE FOR FUTURE SALE."
(2) See Note 1 to Selected Financial Information on page 17.
(3) See Note 2 to Selected Financial Information on page 17.
(4) Excludes 450,000 shares of Common Stock reserved for issuance pursuant to
the Company's stock option plans (of which 105,666 are subject to
outstanding options), and 412,066 shares subject to outstanding warrants.
See "MANAGEMENT -- Stock Option Plans," "DESCRIPTION OF SECURITIES" and
"SHARES ELIGIBLE FOR FUTURE SALE."
(5) See Note 3 to Selected Financial Information on page 17.
15
<PAGE> 19
SELECTED FINANCIAL INFORMATION
ASSETS
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA PRO FORMA FOR THE 1 FOR 7
ADJUSTMENTS ADJUSTMENTS STOCK SPLIT AND PRO FORMA
FOR FOR THE 1997 ADJUSTMENTS PRO FORMA
1 FOR 7 PRIVATE PRIVATE FOR THE FOR THE
ACTUAL STOCK SPLIT(1) PLACEMENT(2) PLACEMENT(1)(2) OFFERING(3) OFFERING(1)(2)(3)
----------- -------------- ------------ --------------- ------------ -----------------
<S> <C> <C> <C> <C> <C> <C>
Current Assets
Cash and cash equivalents --
restricted................ $ 190,870 $ 450,050(2) $ 640,920 $ 4,500,000(3) $ 5,140,920
Accounts receivable, net of
allowance for doubtful
accounts of $8,810 in
1997...................... 76,254 76,254 0 76,254
Due from affiliate.......... 140,134 140,134 0 140,134
Prepaid expenses............ 0 0 0
Prepaid hotel cost.......... 565,744 565,744 0 565,744
Prepaid cruise and tour
cost...................... 810,321 810,321 0 810,321
----------- ----- --------- ----------- ----------- -----------
Total Current
Assets.............. 1,783,323 0 450,050 2,233,373 4,500,000 6,733,373
Property and Equipment, at
cost, net of accumulated
depreciation................ 49,300 49,300 0 49,300
Other Assets
Deferred debt expense....... 50,000(2) 50,000 (50,000) 0
Deferred charges and other
assets.................... 26,113 26,113 0 26,113
Intangible assets, net of
accumulated
amortization.............. 380,838 380,838 0 380,838
----------- ----- --------- ----------- ----------- -----------
$ 2,239,574 $ 0 $ 500,050 $ 2,739,624 $ 4,450,000 $ 7,189,624
=========== ===== ========= =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable............ $ 343,434 $ 343,434 0 $ 343,434
Other current liabilities... 482,964 482,964 (21,675)(3) 461,289
Current portion of long-term
debt...................... 337,339 337,339 (144,500)(3) 192,839
Due to affiliate............ 0 0
Deferred hotel revenue...... 501,754 501,754 0 501,754
Deferred cruise and tour
revenue................... 827,581 827,581 0 827,581
Deferred subscription
revenue................... 118,994 118,994 0 118,994
----------- ----- --------- ----------- ----------- -----------
Total Current
Liabilities......... 2,612,066 2,612,066 (166,175) 2,445,891
Other Liabilities
Private placement debt...... 500,000(2) 500,000 (500,000) 0
Debt discount............... (357,095)(2) (357,095) 357,095 0
--------- -----------
Net....................... 142,905(2) 142,905 (142,905) 0
Long-term debt.............. 803,480 803,480 (739,007)(3) 64,473
Deferred discount........... 0 0 0
----------- ----- --------- ----------- ----------- -----------
Total Other
Liabilities......... 803,480 142,905 946,385 (881,912) 64,473
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......... 952 (816)(1) 7(2) 143 160(3) 303
Additional paid-in
capital................... 598,208 816(1) 357,138(2) 956,162 5,905,022(3) 6,861,184
Accumulated deficit......... (1,775,131) (1,775,131) (407,095)(2) (2,182,226)
----------- ----- --------- ----------- ----------- -----------
Total Stockholders'
Equity (Deficit).... (1,175,971) 0 357,145 (818,826) 5,498,087 4,679,261
----------- ----- --------- ----------- ----------- -----------
$ 2,239,574 $ 0 $ 500,050 $ 2,739,624 $ 4,450,000 $ 7,189,624
=========== ===== ========= =========== =========== ===========
</TABLE>
16
<PAGE> 20
- ---------------
(1) The 1 for 7 Reverse Stock Split:
<TABLE>
<S> <C>
Outstanding shares of Common Stock Before Split:............ 9,522,024
Outstanding shares of Common Stock After Split:........... 1,360,289
Decrease in shares outstanding:........................... 8,161,735
Decrease in par value outstanding @ $0.0001 per share:.... $ 816
</TABLE>
(2) The 1997 Private Placement (as adjusted for the Reverse Stock Split):
<TABLE>
<S> <C>
Record issuance of Private Placement Notes Payable
Gross Notes Payable:...................................... $500,000
Less Commissions (Charged to Deferred Debt Expense):........ (50,000)
Plus Proceeds From Sale of Stock (71,429 shares @
$.0007): .............................................. 50
Net Proceeds:............................................... $450,050
</TABLE>
Amount attributable to shares/discount on notes issued in Private
Placement:
<TABLE>
<S> <C>
Offering Price.............................................. $ 5.00
Price of shares in the Private Placement.................... 0.0007
Shares in Private Placement................................. 71,429
Discount to be charged to earnings upon repayment of Private
Placement indebtedness.................................... $357,095
</TABLE>
(3) The Offering:
<TABLE>
<S> <C>
Record Public Offering of Common Stock Offering Proceeds
(1,200,000 shares @ $5.00)................................ $6,000,000
Less: Commissions......................................... (600,000)
Less: Offering Expenses................................... (400,000)
Less: Repayment of Private Placement Debt................. (500,000)
Net Proceeds.............................................. $4,500,000
Record Conversion of Debt to Common Stock
Accrued Interest on Convertible Debt...................... $ 21,675
Short-term Convertible Debt............................... $ 144,500
Long-term Convertible Debt................................ $ 739,007
Total Converted Debt...................................... $ 905,182
Number of Common Shares issued on conversion.............. 395,303
Record Stockholder Equity Accounts
Total Offering Shares..................................... 1,200,000
Total Converted Shares.................................... 395,303
Total Shares Issued....................................... 1,595,303
Par value of shares issued @ $0.0001 per share............ $ 160
Additional Paid-in Capital................................ $5,905,022
Total Shares Outstanding After Offering:.......... 3,027,021
</TABLE>
17
<PAGE> 21
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.
The Company was incorporated October, 1987 under the name "Pace Group
International, Inc." and, until November 1995, through a wholly-owned
subsidiary, marketed English language training programs developed by the
Company's founder. The Company ceased doing business under the Pace name in
November 1995 and changed its name to Riley Investments, Inc. Effective October
10, 1996, the Company merged a newly formed and wholly-owned acquisition
subsidiary with and into Airfair Publishing, Inc. ("Airfair"), which owned the
assets what now comprise substantially all of the operating assets and business
of the Company. Airfair became a wholly-owned subsidiary of the Company
following the merger and conducts all of the Company's operations. In view of
the merger and the new management team installed in connection with the merger,
operating strategies, expansion plans, resources, and other factors, management
does not believe that a discussion of the operations of the Company prior to the
Airfair 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."
BEI Holdings, Inc. ("BEI"), formed Airfair as a subsidiary on January 5,
1996, with the intention of using it 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, Inventory Merchandising
Services, ("IMS"), a subsidiary of BEI, transferred its hotel and resort
operations to Airfair, effective January 1, 1996 (these assets had been acquired
from an unrelated third party, on December 1, 1994, in consideration of the
assumption of $144,394 in liabilities). In the spring of 1996, BEI distributed
all of its shares of Airfair's common stock to its shareholders.
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), as compared to $578,988
in accounts payable as of December 31, 1996, of which $313,271 were more 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 printing vendors agreed to convert its
trade payable balance of $6,398 to a note payable bearing interest at 8% per
annum and providing for twelve monthly payments. During the first six months of
1997, five of the
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<PAGE> 22
Company's vendors agreed to convert their accumulated accounts payable balances
to notes in accordance with the following schedule:
<TABLE>
<CAPTION>
VENDOR (TYPE) ACCOUNT PAYABLE BALANCE INTEREST RATE # OF MONTHLY PAYMENTS
- ------------- ----------------------- ------------- ---------------------
<S> <C> <C> <C>
printing $ 9,548 10% 48
computer $25,000 10% 24
printing $27,206 9% 48
printing $36,905 6% 9
printing $53,502 8% 32
</TABLE>
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 frame 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 $3.50 of interest due. The holders of the
debentures may convert the unpaid principal into shares of the Company's common
stock at a conversion price of $1.75 per share. These debentures were issued
with warrants which entitle the holders thereof to purchase 142,858 shares of
the Company's common stock at a exercise price of $7.00 per share, as adjusted
for the Reverse Stock Split. 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. Of the cash balance of
$190,870, approximately $190,605 represents 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 and the remaining $265
represents petty cash. 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.
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<PAGE> 23
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.
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 within the financial statements and "CERTAIN RELATIONSHIPS AND RELATED
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 AS REDUCTION OF COST REDUCTION TO PERIOD INCOME (LOSS) AS
REPORTED ON REPRICED ROOMS INCURRED 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>
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.
20
<PAGE> 24
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 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>
ADJUSTMENT FOR ALLOCATION OF
REDUCTION OF COST COST REDUCTION ADJUSTED
HOTEL REVENUE HOTEL COST ON REPRICED TO PERIOD ROOM
AS REPORTED AS REPORTED ROOMS 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... 1,105,218 687,600 159,835 (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>
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 of
increased computer programming cost for modifications
21
<PAGE> 25
to the reservation system, commissions incurred for the relatively new Germany
and Canada operations which receive 60% of the margins on their production (in
recognition 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 RELATIONSHIPS AND
RELATED 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 70% to Airfair and 30% to IMS. In
February 1996, BEI incurred a large one-time gain which exceeded its expenses
for that month. 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.
On December 1, 1997, the Company finished negotiating a new lease agreement
for office space. The terms of the lease agreement call for 10,567 square feet
of net rentable area for a period of five years and three months with an option
to renew for five years. Monthly rent payments over the initial term of the
lease are $10,567 beginning March 1, 1998 to February 28, 1999; $11,448 from
March 1, 1999 to February 28, 2000; $12,328 from March 1, 2000 to February 28,
2001; $12,478 from March 1, 2001 to February 28, 2003. The option year rates
will be based on market conditions upon the renewal date. The Company currently
is paying its portion of rent under that certain management services agreement
with BEI/IMS previously mentioned. It is anticipated that the Company will
dissolve that management services agreement sometime around January 1, 1998 and
will directly acquire all services being furnished under that agreement. With
the exception of the above new lease agreement, the Company does not anticipate
a material increase in expenses above what was incurred under the management
services agreement.
Operating expenses for the fiscal year ended December 31, 1996 were
generally high due to expenses associated with the acquisition and operation of
the Company's cruise and magazine divisions. In addition, during the first
quarters of 1996, the Company incurred approximately $85,000 in legal expenses
associated with its acquisition of its interline and magazine assets and the
merger between the Company and Airfair Publishing Corporation.
LIQUIDITY AND CAPITAL RESOURCES
The Company has an accumulated deficit of $1,775,131 as of September 30,
1997, 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
22
<PAGE> 26
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 ITEX Corporation common
stock 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 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 second quarter of 1997, 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) 5,714 Company common stock
warrants were issued to the loan broker and 2,857 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, permitting the
outstanding principal balance to be converted (at the note holders' option) into
Company common stock at $3.50 per share, and providing for 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 commencing May 1, 1998 and
on each anniversary of that date thereafter until May 1, 2000, on which date the
debentures mature. 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 $3.50 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 $1.75 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.
The Company has obtained an additional $500,000 bridge loan (referred to
elsewhere herein as the "1997 Private Placement") as of October 24, 1997. In
addition, the Company has borrowed $70,000 from a shareholder, which sum bears
interest at the rate of 10% per annum and is to be repaid out of the proceeds of
this Offering. This borrowing represents short-term working capital. These funds
will be utilized for publications, operating expenses and some of the offering
expenses incurred in connection with this Offering.
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
23
<PAGE> 27
generated through the Offering contemplated by this Prospectus, will be
sufficient to fund the Company's needs over the next 3 to 5 years. 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.
FASB Statement 128, a recently issued accounting standard, will have an
impact on financial statements when adopted. It is not expected that the Company
will be impacted by other recently issued standards:
FASB Statement 128 presents new standards for computing and presenting
earnings per share (EPS). The Statement is effective for financial statements
for both interim and annual periods ending after December 15, 1997.
If adoption of SFAS 128 would have been required for fiscal years ended
December 31, 1996 and 1995, the changes in earnings per share amounts would have
been immaterial.
If adoption of SFAS 128 would have been required for the nine months and
three months ended September 30, 1997, the earnings per share amounts would have
been reported as follows:
<TABLE>
<S> <C>
Earnings per common share (nine months) (as reported)....... $.01
Earnings per common share (three months) (as reported)...... $.04
Earnings per share if reported under SFAS 128:
Nine Months
Earnings per common share.............................. $.01
Earnings per common share-assuming dilution............ $.01
Three Months Earnings per common share.................... $.04
Earnings per common share-assuming dilution............ $.04
</TABLE>
FASB Statement 131 presents news standards for disclosures about segment
reporting. The Company does not believe that this accounting standard applies to
the Company as all operations of the Company are integrated for financial
reporting and decision making purposes.
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.
24
<PAGE> 28
Management is currently unaware of any trends or conditions other than
those previously mentioned in this management's discussion and analysis that
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.
25
<PAGE> 29
THE BUSINESS
The Company serves a portion of the travel industry known as "interliners"
through two divisions operated within its wholly-owned subsidiary. 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. One division (the "Publishing Division") publishes a
magazine and other promotional material directed at the interline market, see
"THE BUSINESS -- The Publishing Division," infra, and the other (the "Marketing
Division") offers travel accommodations to interliners. See "THE BUSINESS -- The
Marketing Division," infra. Primarily because interliners have a high propensity
to travel at the last minute or during off-peak periods when "stand-by" space is
available at hotels and resorts and on cruise ships, interliners are generally
able to procure hotel or resort accommodations in destination locations, cabins
on cruise ships and other travel products at rates representing a courtesy
discount of up to 50% off of established rates. The discount is available
because the travel industry views interline bookings as incremental or marginal
revenue that supplements normal marketing revenue. A principal characteristic of
the interline travel industry is that interliners are generally unaware of the
many opportunities, discounts and specials that are available to them at any
given time. The industry that exists to service the interline market is highly
fragmented, generally consisting of small operators serving the market either as
an adjunct to a retail tour operation or by concentrating on an extremely narrow
segment. There are a handful of major interline companies that are established
and offer relatively broad service, yet none of these operations could be
considered to have a dominant position.
THE PUBLISHING DIVISION
The Products
The Publishing Division produces, publishes and distributes Interline
Adventures (formerly Airfair Magazine), a 27-year-old, 4-color, 120 plus-page,
bi-monthly magazine, Interline Adventures (the "Magazine") provides general
travel editorial coverage and, in a section known as the Interline Vacation
Guide, a significant focus on cruise and tour opportunities for interliners. The
Publishing Division attempts to supplement and update the Magazine's information
on product availability via a smaller, 4-color, publication. A portion of the
net proceeds of this offering will be used to insure that the Publishing
Division will be able to publish the Magazine and its other publications
(collectively the "Publications") regularly and predictably, thereby assuring a
more constant and regular presence in the interline market. See "USE OF
PROCEEDS."
The Publishing Division's publication serve as the primary marketing
channel for the Marketing Division, which uses the Publications to advertise its
products and services and to generate inquiries and sales. In addition, the
Magazine provides an advertising outlet for the cruise lines, hotels and resorts
frequented by the Company's clients.
The Publishing Division currently sends approximately 15,000 copies of the
Magazine to subscribers, mails up to another 40,000 copies on a promotional
basis, and distributes up to 20,000 more copies through the Company's airline
representatives. Copies not delivered directly to subscribers are placed in
airport areas and rooms reserved for and frequented by airline employees
(hereinafter referred to as "Employee Areas"). Among these areas and rooms are
employee break rooms, reservation and office areas, and "pass bureaus." "Pass
bureaus" are offices maintained by each airline in an attempt to facilitate
employee travel on other airlines -- i.e., a Continental employee wishing to
make travel arrangements on American Airlines may utilize the services of
Continental's pass bureau. Airlines generally establish a pass bureau in their
"hub airports." The Company's financial performance and operations to date have
been severely constrained by a lack of capital. As a result of the lack of
adequate capital, the Company has shipped approximately half of the total number
of magazines and brochures called for by the Company's business plan.
Marketing
The Magazine derives revenue from sales of subscriptions to interliners and
sales of advertising to hotels, resorts, cruise lines and other service
providers located at or leaving from destination locations. The following
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<PAGE> 30
table sets forth information relating to business activity of the Magazine
Division and revenue directly attributable to the Magazine during the nine
months ended September 30, 1997:
<TABLE>
<S> <C>
Number of Subscribers:...................................... 13,507
Subscription Revenue:....................................... $ 71,881
Number of Advertisers --
Hotels/Resorts:........................................... 87
Cruise Lines:............................................. 13
Tours:.................................................... 3
Classified:............................................... 20
Total Advertisers......................................... 123
Advertising Sales --
Hotels/Resorts:........................................... $ 210,265
Cruise Lines:............................................. 46,990
Tours:.................................................... 7,300
Classified:............................................... 3,900
----------
Total Advertising Sales:.................................. $ 268,395
Number of Airline Employees(2):............................. +500,000(1)
Number of Interliners(3):................................... +2,000,000(1)
</TABLE>
- ---------------
(1) Estimated
(2) Employees based in America and employed by domestic (American) passenger
carriers, excludes interliners who are employees of non-passenger carriers
such as courier or delivery services, employees of nondomestic passenger
carriers and employees of domestic passenger carriers based in foreign
countries
(3) Defined as the total number of airline employees and airline retirees,
excludes family members of airline employees and retirees, some of whom may
be offered interline benefits
The Magazine is marketed to potential subscribers and to existing
subscribers by subscription renewals and through advertising and promotions.
Advertising and subscription cards are placed within the brochures distributed
by the Marketing Division to Employee Areas. Complimentary copies of the
Magazine are mailed to selected interliners who have previously made purchases
from the Marketing Division and to individuals who have previously inquired
about the possibility of subscribing to the Magazine. As the Company more firmly
establishes its frequent traveler program discussed below, see "The Marketing
Division," infra, it anticipates that it will be able to more effectively target
its efforts to promote the Magazine. See "Competition," below.
The Company anticipates that an increase in the size of the Company's
mailing list would increase both the rates the Publishing Division can charge
for advertising within the Magazine and the number of customers within the
Marketing Division's customer base. While the Company believes that there are a
number of viable and effective means of increasing its mailing list, it also
believes that the most rapid means would be to utilize employee lists from
airlines or air freight carriers or member lists from airline employee unions.
At least to date, neither airlines nor airline employee unions have provided
lists of airline employees to interline companies, and there can be no
assurances that airlines, airfreight carriers or unions will provide the Company
with access to employee or member lists. Mailing to all or substantially all of
the employees of a major airline would require more operating capital than has
been available to the Company to date. The Company has not undertaken this sort
of mailing because it is relatively capital intensive and the Company, prior to
this Offering, has lacked the operating capital necessary to undertake such
mailings. If this Offering is successful, management anticipates that it will
commence test mailings (and undertake other evaluative measures) to ascertain
the efficiency of mailing directly to employees. There can be no assurance that
major airlines will grant the Company access to employees or retiree lists or
that the Company, if such access is granted, can devise and implement a strategy
to profitably utilize such lists.
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<PAGE> 31
Advertising space within the Magazine is marketed to hotels, resorts,
cruise lines and tour operators through direct telemarketing and distribution of
media kits to the advertisers and, on a selective basis, to agencies
representing the advertisers. Although many advertisers are hotels, resorts,
cruise lines, and tour operators who have rate agreements with the Marketing
Division, and their advertisements display the phone number of the Marketing
Division, the Magazine also sells advertising space to interline operators which
have no agreement or arrangement with the Marketing Division. The Company has
attempted to pursue both advertisers that are only adjuncts to the interline
travel industry, such as luggage manufacturers, and those that have no
connection to the travel industry, but the subscription base and total
distribution base of the Magazine has discouraged such advertisers. The Company
offers many advertisers the opportunity to purchase advertising space within the
Magazine in exchange for rooms in hotels, resort accommodations and cruise
cabins, which it then re-markets for cash at an additional profit. See "The
Marketing Division," infra.
Advertisers generally, and in particular advertisers who do not have rate
agreements with the Marketing Division, focus on subscriber base and total
distribution of publications in determining both in which publications to place
advertising and how much to pay for advertising space. To date the subscription
base and total distribution of the Magazine has been too small to attract
significant advertising sales. Upon successful completion of this Offering, the
Company intends to switch the Magazine, from a "paid" circulation to a
"controlled" circulation. A "paid" circulation is calculated on the basis of the
number of subscriptions sold. A "controlled" circulation is based on the number
of magazines sent to an identified recipient at an identified address with his
approval, without regard to whether the intended recipient has paid for a
subscription. The Company has approximately 13,000 subscribers, but has a
mailing list of approximately 125,000 reliable interline addresses. In general,
in terms of advertising rates and revenues, a "paid" circulation is more
valuable than a "controlled" circulation and more recipients are more valuable
than a lesser number. Company management believes that the diminution in value
associated with the shift from a "paid" to a "controlled" circulation will be
more than offset by the increase in size of the circulation base. Although there
can be no assurances in this regard, Company management also believes that it
can increase the size of "controlled" circulation and thereby increase
acceptance from advertisers and advertising revenues.
Competition
The Magazine competes with other publications for readership and for
advertisers' patronage. Most information available to interline travelers
consists of brochures distributed by other interline companies, hotel and resort
operators, cruise lines and escorted tour operators. The Magazine is the only 4
color publication available which is updated and published six times annually.
The Magazine has one primary competitor, the ASU Travel Guide -- a 400-page
guide, published quarterly, with the look and feel of a paperback novel. It
competes with the Magazine for advertisements targeting interliners. The ASU
Travel Guide has been published successfully for a number of years and enjoys
widespread circulation. The Company hopes to compete for advertising sales by
increasing distribution and offering to accept room nights or other travel
accommodations as payment from some advertisers.
Sources of Materials
The Magazine is printed and distributed by a contract printing operation at
prices negotiated from time to time between the Company and printers. There are
a number of printers who could print and distribute the Magazine. Chief among
the factors influencing the Company's expenses in printing and distributing the
Magazine is the price of paper. Paper prices are volatile and, although
currently higher than historical averages and, in the belief of the Company's
management, not likely to rise significantly in the foreseeable future, the
possibility that paper prices will rise further cannot be completely discounted.
Significant increases in paper prices could have a materially adverse effect on
the printing expenses of the Magazine and the profitability of the Company.
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<PAGE> 32
THE MARKETING DIVISION
The Products
The Marketing Division, under the name "Interline TravelReps," provides
hotel and resort accommodations (comprised of rooms or vacation packages
consisting of some combination of rooms, meals and services) and berths or seats
on cruises and escorted tours. The hotel and resort accommodations offered by
the Marketing Division are located in North and South America and Europe, with
access to properties throughout the world and a particular focus on
accommodations in Mexico and the Caribbean. The Marketing Division offers space
on cruises and escorted tours and offers cruises on 27 lines with over 100 ships
in various worldwide destinations and a wide variety of escorted tours,
primarily to England, Europe and Africa. Cruise lines and escorted tour
operators typically limit the interline companies that market their products or
commodities to those which have a demonstrated ability to effectively serve
interline travelers. The Company is permitted to market all of the major cruise
lines serving the interline market. The Company maintains an office in Boca
Raton, Florida, in order to facilitate its relations with the substantial number
of cruise lines that are located in that area. Retention of the ability to sell
cruise cabins to the interline market is key to the continued success of the
Company's and is subject to the continued satisfaction of the cruise lines with
the Company's service. Moreover, although the Company sells all of the major
cruise lines serving the interline market, many of the cruise lines are part of
holding company structures.
Should one of these holding companies fail, the possible adverse effects on
the Company would be twofold. First, the Company would be denied a significant
supply of cruise berths to be sold to its interline travel customers. Second,
the amount of overall supply in the cruise industry would be reduced, which
would also reduce the amount of usual or "marginal" capacity available for sale
to interlines. To date, during the Company's operations within the interline
industry, no major cruise line operator has failed, making it difficult to
estimate with prevision the impact such failure would have on the Company's
operation. There can be no assurances that such impact would not be materially
adverse. An analogous situation arose during the recent American Airlines labor
strike. During this period, the other airlines were loaded to and operating at
full capacity. Full capacity in turn meant that the operating airlines had no
open seats for interline travelers and, moreover, that almost all active airline
employees had full flight schedules without time for a pleasure trip. Company
revenues during the strike were dramatically reduced. Immediately after the
strikes were settled, the Company had a dramatic increase in bookings and sales,
representing what the Company believes to have been pent-up demand. There can be
no assurances that labor issues and other travel industry developments will not
produce a set of circumstances during which the Company experiences
substantially reduced levels of demand for its products or that the Company, if
such circumstances remain in place for an extended period, will have the
financial strength and resources necessary to adequately address or compensate
for such reduced levels of demand.
The Marketing Division markets its hotel and resort rooms and packages,
cruises, and escorted tour products through advertisements within the Magazine,
but also advertises in the magazines and newsletters published by or for a given
airline's employees and distributes brochures and flyers into airline Employee
Areas. The Marketing Division has a network of more than 500 current and former
airline employees who distribute the Publications in airport Employee Areas
throughout the United States, Canada, the United Kingdom and western Europe. The
Marketing Division's other significant marketing tools are its reservation
center and the reservation agents there who answer phone calls placed by
interliners in response to the Marketing Division's promotional activities.
The amount charged to the interline customer is established and published
in the Magazine and the other Publications and is quoted over the phone by the
Marketing Division's reservation specialists. The Company does not rigidly
adhere to its price quotations and will negotiate with customers in an attempt
to match or better competitor's quotations. The average hotel or resort
accommodation sale, typically booked less than two weeks prior to travel, is
approximately $600 with typical margins for the Company of 18% to 35%. The most
popular destinations are: Cancun (36%), Jamaica (20%) and Cozumel (19%). Hotel
and resort accommodations sales in 1996 totaled $4.2 million. Through the
nine-month period ended September 30, 1997, sales of hotels or resort
accommodations totaled $3,473,835, as compared to $3,386,886 for the same
nine-month
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<PAGE> 33
period of 1996. The average cruise or escorted tour sale is approximately $1,600
with typical margins of 8% to 17%. The Marketing Division works with all major
cruise lines, and no single line accounted for more than 10% of its $6.3 million
in sales in 1996. Through the nine-month period ended September 30, 1997, sales
of cruises and escorted tours totaled $5,722,149, as compared to $4,766,539 for
the same nine-month period of 1996.
Seasonality
As already noted, when airlines operate at nearly full capacity, interline
travel decreases -- as a consequence of the airlines having fewer open seats for
airline travelers to occupy, airline employees having less time for leisure
travel and, possibly, full occupancy rates at destinations frequented by retail
travelers during these traditional holiday periods. While the most dramatic
events that lead to full capacities (labor issues, airline failures and similar
occurrences) have happened infrequently, airlines usually operate at high
capacities during the holiday season -- from the middle of November through the
middle of January. The Marketing Division and the rest of the interline industry
has found that very few of its interline customers travel during this period
and, since the Company does not recognize income until a customer travels, the
Company's income during this eight-week period is substantially lower than the
income during the remainder of the year.
The Company has found that, although actual travel is reduced during the
holiday season, reservation activity is not reduced -- presumably the airline
employees recognize the demands on their time during the holiday season and plan
to vacation after it. Management has taken a number of steps in an attempt to
address this seasonality, including the implementation of special promotional
campaigns and the procurement of a substantial supply of travel accommodations
at locations not traditionally frequented by holiday travelers. The promotional
campaigns have met with mixed success and management believes that further
refinement of this strategy will produce more uniform success. There can be no
assurance that this seasonality will not have a material adverse effect on the
Company or the Company's financial condition.
Sources of Supply
The Marketing Division primarily procures its supply of hotel and resort
accommodations, cruise ship cabins, and tour reservations directly from the
operators of those businesses. The Marketing Division negotiates the prices,
terms and, in some cases, availability of hotel and resort accommodations over
the telephone or via facsimile machines and, occasionally, at industry
conferences where hotel and resort operators within a given region meet with
both interline companies and travel wholesalers (which typically buy blocks of
hotel rooms or resort accommodations and resell them to travel agencies). With
the exception of instances where the Company is able to procure a more favorable
rate as a result of volume guaranties or aggressive negotiations, the Marketing
Division usually procures the interline rate quoted by a given hotel or resort
operator to all interline operators. In contrast to hotel and resort operators,
most cruise lines and tour operators pay a commission based on a pre-determined
price to the interline customer.
On a limited basis, the Marketing Division may also acquire access to
travel accommodations through dollar denominated non-cash arrangements. Most
typically, the Company provides advertising in the Magazine for room nights and
such room nights are then marketed to interline customers. No assurances can be
given that such non-cash transactions will yield a significant supply of travel
products for sale by the Marketing Division. In addition to these direct
non-cash transactions, the Company is party to a marketing agreement with
Inventory Merchandising Services, Inc. ("IMS"), a subsidiary of BEI Holdings,
Inc., pursuant to which IMS has agreed to permit the Marketing Division, on an
exclusive basis, to sell travel accommodations which IMS acquires through barter
transactions. IMS conducts a barter exchange business and, with some frequency,
obtains travel accommodations through barter transactions. Pursuant to the
marketing agreement, IMS makes the travel accommodations available for sale by
the Company and, upon sale, the Company pays to IMS a sum equal to 25% of the
proceeds received by the Company, net of IMS cost of goods sold, with respect to
the sale of such inventory. See "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS."
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<PAGE> 34
The Company's supply of travel products within a given travel destination,
whether offered by a given service provider or offered by a number of providers,
is often contingent upon the availability of excess supply of such
accommodations. Travel providers who cannot anticipate the existence of future
excess capacity, and therefore unwilling to surrender the possibility of selling
rooms at retail prices, are typically unwilling to provide interline companies
with commitments for available space more than two-to-three weeks in advance of
a given travel date. Some travel providers, who are able to anticipate the
existence of future excess capacity, are able and desire to provide the Company
with committed availability for a given number of room nights or cruise berths
in an attempt to maximize their occupancy rates and marginal revenues.
Management of the Company believes that hotels operate at occupancy rates of
approximately 70%, although hotels in certain markets, and hotels within almost
any market over a given period, can experience higher occupancy rates, thereby
limiting the space available for sale by interline companies. Although the
Company has encountered a shortage of travel accommodations in a given market
only infrequently, the Company is aware of the possibility that a substantial
growth in its interline customer base may produce a demand for interline travel
accommodations in excess of the Company's available supply. Cruise lines operate
at substantially higher occupancy rates and attain these rates by offering
discounts on cruises where a lack of demand, and therefore the existence of
excess capacity, is anticipated. The Company is offered these discounts with
other retail and interline cruise marketers. The Company believes that there is
substantial excess capacity, both in the market for interline products generally
and in particular destinations, which is not currently made available to the
Company for inclusion within its product line and that, as the Company's
interline customer base grows, the Company will be positioned to augment its
product offerings to satisfy any increase in demand or, alternatively, to offer
products which are reasonable substitutes for products which are not available.
The Company's future success and ability to meet its growth objectives may
depend on its ability to procure additional and more certain supplies of travel
products in sufficient quantities to satisfy the demands of its customer base.
Customer Loyalty Program
The Company's management has implemented several product features in an
attempt to improve its products and differentiate them from the products and
services of competitors. In doing so, the Company has attempted to specifically
tailor the products offered to the needs and concerns of interliners. In July
1996, the Company launched PERX, a customer loyalty/referral program designed to
generate repeat travel business for the Marketing Division, as well as
subscribers to the Magazine. Membership in PERX allows eligible interliners to
receive points for each trip taken with the Marketing Division in a manner
similar to the many frequent flyer/guest programs operated by airlines and
hotels worldwide. In addition, PERX members will receive points for travel by
anyone they directly refer to the program. Points are redeemable for discounts
and/or free trips. In July 1996, approximately 150,000 brochures containing an
application for the PERX program were distributed. Although there is no
enrollment fee for interliners who join PERX, the Company anticipates the
following benefits from wide enrollment in PERX: (i) increase in the Company's
share of the interline market, (ii) increase in the Magazine's circulation,
enabling the Company to adjust advertising rates and underwrite the Magazine's
production and distribution costs; (iii) creation of an enthusiastic sales team
not requiring additional compensation; and (iv) establishment of a mailing list
that will supplement the lists available through the Company's own records and
may contain the names of recipients that might otherwise be reached only through
more expensive channels (e.g., paid advertising). The Company's efforts to date,
which have been severely limited by the Company's shortage of operating capital,
have resulted in approximately 7,000 interline enrollees in the PERX program.
The Company plans to use a portion of the proceeds of this Offering for
marketing expenses which are to include increased marketing of the PERX program.
No assurances can be given that sufficient numbers of interliners will enroll in
PERX so as to permit the Company to realize any of the foregoing benefits.
Competition
Management of the Company believes that competition within the interline
industry is based principally on market visibility and the nature and variety of
products and services offered. As most interline companies are quoted the same
price by hotels, resorts, cruise lines and tour operators, price is not usually
the basis for a
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<PAGE> 35
competitive advantage. There are over 30 competitors in the interline travel
industry. None are publicly held so reliable sales information is not available.
However, two companies, Caesar's and Magellan, which have been in the travel
business for more than 20 years, currently may have greater sales, resources,
and management experience and depth than the Company and may be able to compete
very effectively with them. The balance of the Company's competition is largely
made up of smaller organizations formed by former airline employees and retail
travel operators which view the interline market as merely a portion of their
business. Most interline companies tend to focus on a specific destination
(Mexico and the Caribbean, Ski Trips, etc.) or specific airline (e.g., only
Continental). Others, like the Company, offer a more complete range of interline
products and services.
FACILITIES
The Company maintains an extensive phone and computer system with which it
handles the calls generated by its advertisements and completes the reservation
process through its reservation centers. The phone system and computer system
maintained by the Company are critical elements in the Marketing Division's
marketing efforts. The Company has installed an extensive phone system and
computer network which the Company believes is capable of handling the Marketing
Division's needs for the foreseeable future. The Marketing Division's ability to
service interliners will be dramatically reduced should either the phone or
computer system become inoperable. The Company believes that it has taken
appropriate steps to assure that the phone and computer system are as reliable
and well protected as electronic equipment can reasonably be expected to be.
There can be no assurances, however, that the Company's electronic equipment
will at all times be usable by the Marketing Division in its efforts to service
interline customers.
The Company occupies approximately 9,700 square feet of office space at 211
East Seventh Street, Suite 1100, Austin, Texas 78701, its main office, and 630
square feet of office space at 1499 West Palmetto Park Road, Suite 222, Boca
Raton, Florida 33486. The Company's phone number is (512) 391-2000. The Company
owns no property other than office furniture, equipment and software.
The Company employs 48 people, 43 of whom are full time and 5 of whom are
part time. It is anticipated that up to 200 additional personnel will be
required to meet the demands of the projected market over the next five years.
Most of these positions will be in the areas of reservations and operations
processing and servicing the Company's projected volume increases. None of the
Company's employees are members of a labor union and, since the date of the
Merger, the Company has not suffered any work stoppages or labor unrest.
GOVERNMENT REGULATION
There are currently no federal laws or regulations governing the sale of
travel products but a relative small number of states have laws relating to the
sale of travel products or the operation of travel agencies. The State of Texas,
where the Company's principal business operations are conducted, has no such
laws or regulations. The Company is uncertain as to whether the states which do
impose regulation would apply such laws to the Company's operations, but
management believes that compliance with the laws of any state which imposes
regulation, under the regulatory structure currently in place, would not have a
material adverse effect upon the company's operations or business. Although the
Company is not aware of any pending legislation imposing additional regulation
upon the Company's operations within the travel industry, there can be no
assurances that the federal or any state government will not impose
requirements, such as requirements imposing licensure or bonding requirements,
which might have a material adverse effect upon the Company's operations.
INTELLECTUAL PROPERTY
The Company has filed a federal trademark application to register the
trademark "Interline PERX Vacation Club" but has not yet heard any response from
the United States Patent and Trademark Office with respect to its application.
There can be no assurances that the Company will be able to obtain a federal
registration of this trade name. The Company has not filed trademark
applications with respect to any of the other trade names that it currently
uses. If this offering is successful, the Company will evaluate whether
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<PAGE> 36
meaningful trademark protection can be obtained for its other trademarks. There
can be no assurances that the Company will ever be able to obtain meaningful
trademark protection for its trade names such as "Interline Adventures" and
Interline "TravelReps."
LEGAL PROCEEDINGS
There are no legal proceedings pending against the Company.
THE MERGER AND INTEGRATION OF OPERATION DIVISIONS
Effective October 10, 1996, the Company, then operating as Riley
Investments, Inc., acquired as a wholly-owned subsidiary, Airfair Publishing,
Inc. ("Airfair"), an Austin, Texas based travel services group that consisted of
the businesses that now comprise the Company's operations. The acquisition was
accomplished by the merger (the "Merger") of a newly created, wholly-owned
subsidiary of the Company with and into Airfair, which was the surviving
corporation. The Merger was effected by the conversion of the issued and
outstanding shares of common stock of Airfair (the "Airfair Stock") into new
shares of common stock of the Company (the "Common Stock") on the basis of one
share of Common Stock for each share of Airfair Stock issued and outstanding, or
an aggregate of 9,125,000 shares of common stock, which represented
approximately 96% of the common stock of the Company. As adjusted for the
Reverse Stock Split, the number of shares of Common Stock issued to shareholders
of Airfair totaled 1,303,572. Following the Merger, the executive officers and
directors of Airfair, who were appointed to similar positions of the Company,
and owned approximately 65% of the issued and outstanding Common Stock. To
better reflect the nature of its business following the acquisition, Riley
changed its name to Grand Adventures Tour & Travel Publishing Corporation.
Airfair acquired its operation in two transactions -- in 1995 it acquired
the bulk of its hotel and resort operations from a former Continental Airlines
employee and in early 1996 it acquired the Magazine and the cruise and escorted
tours operations. Since the date of these acquisitions, the Company has
undertaken measures to integrate the hotel and resort operations with the cruise
and escorted tour operations, to expand the scope and improve the quality of the
Magazine, to enhance the products offered by the Marketing Division both in
terms of products offered and customer services, and to upgrade the technical
infrastructure underlying all of the Company's operations. Management believes
that it has made substantial progress in all of these areas but such progress
has yet to be reflected in tangible operating results and there can be no
assurance that such tangible operating results will be forthcoming.
OPERATIONS BEFORE THE MERGER
Before its activities under the name of Riley Investments, Inc., the
Company was known as Pace Group International, Inc., and operated until November
1, 1995, through its then wholly-owned subsidiary, Pace International Research,
Inc. ("PIR"), which globally marketed English language training programs
developed by the Company's founder, Edwin T. Cornelius, Jr. Despite the
proprietary nature of PIR's products, the then operating Company continually
failed to generate net income. Since disposing of its operating subsidiary in
late 1995, the Company has had no assets or operations until the Merger.
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MANAGEMENT
The following table sets forth information concerning the directors and
executive officers of the Company and their age and position with the Company.
Each director holds office until the next annual stockholders' meeting and
thereafter until the individual's successor is elected and qualified. Officers
serve at the pleasure of the board of directors.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Matthew O'Hayer....................... 42 Chairman, Chief Executive Officer
Joseph S. ("Jay") Juba................ 34 President, Chief Operating Officer, Secretary
Darrell Barker........................ 49 Chief Financial Officer, Treasurer
Fernando Cruz Silva................... 37 Senior Vice President of Sales & Marketing
Patti Macchi.......................... 52 Vice President of Cruise Sales & Marketing
Robert Sandner........................ 44 Director
Robert G. Rader....................... 62 Director Designee*
</TABLE>
- ---------------
* Mr. Rader will be appointed to the Board of Directors as of the date of this
Prospectus.
Matthew O'Hayer has served as Chairman and Chief Executive Officer of the
Company since the Merger and of Airfair since its inception. Mr. O'Hayer founded
Barter Exchange, Inc. (now known as BEI Holdings, Inc. "BEI") in 1983, served as
its President and Chief Executive Officer from its founding until 1995 and has
served as its Chairman and Chief Executive Officer since 1995. Mr. O'Hayer also
serves on the boards of several small businesses and non-profit organizations.
Joseph S. ("Jay") Juba has served as President and Chief Operating Officer
of the Company since the Merger and of Airfair since its inception. He was
elected to the same offices of BEI in January, 1996. Mr. Juba joined BEI in 1991
as Director of Advertising after working for more than five years in the
advertising industry. From May 1994 through December 1995, Mr. Juba served as
Senior Vice President of BEI.
Darrell Barker, a Certified Public Accountant, has served as Chief
Financial Officer of the Company and BEI since March 1996. Mr. Barker provided
consulting services with respect to accounting from October 1995 through
February 1996. From June 1994 to October 1995, Mr. Barker served as Senior
Vice-President of Finance for USA Health Network of Phoenix, Arizona. From May
1993 until June 1994, Mr. Barker was President and co-owner of Texas Medical
Billing Administrators, Inc., a physician services company located in San
Antonio, Texas. Mr. Barker served as Vice-President of Finance and was a
director for Texas Savings Life Insurance Company in Austin, Texas from October
1987 until April 1993.
Fernando Cruz Silva, serves as Senior Vice President of Sales and
Marketing. Prior to joining Airfair in January 1996, Mr. Silva held the same
titles at Inventory Merchandising Services, Inc. ("IMS"), a subsidiary of BEI.
Mr. Silva became employed by IMS in May of 1994 after having worked as Director
of Sales and Marketing at the Fiesta Americana Hotel in Cancun, Mexico, and the
Las Brisas resort in Acapulco, Mexico and served in senior sales capacities at
the Hyatt and Fiesta Americana hotels in Puerto Vallarta, Mexico City, and
Cancun.
Patti Macchi is Vice President of Sales for the Company but also
contributes editing and marketing expertise to the magazine. Ms. Macchi joined
the Company in 1990 after working for six years with Norwegian Caribbean Line.
Ms. Macchi is responsible for negotiating rates and maintaining relationships
with the 27 cruise lines represented in IRL's product offering.
Robert Sandner has served as a director of Airfair since February 1996 and
of the Company since the Merger. A co-founder of BEI, Mr. Sander has served as
director of BEI and IMS throughout the last five years. Mr. Sandner served as
President of Cellular Resources, Inc. of South Texas a cellular service provider
based in Uvalde, Texas from its inception in 1991 and until its sale in August
1996. Prior to the organization of Cellular Resources, Inc., Mr. Sandner held
various offices within BEI and operated a barter franchise office in San
Antonio, Texas.
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Robert G. Rader has agreed to serve as a director of the Company as of the
date of this Prospectus which is the date the Company's Registration Statement
relating to this Offering is declared effective by the United States Securities
& Exchange Commission. Since the founding of Capital West Securities, Inc.
("Capital West") in 1995, Mr. Rader has served as its Managing Director of
Corporate Finance. Capital West serves as the managing underwriter of this
Offering.
The following is a list of other significant employees of the Company:
Joe F. Brummer, age 31, became director of Marketing in January, 1996.
Mr. Brummer served in the same capacity within Airfair's
predecessor-in-interest since June 1995. Prior to becoming Director of
Marketing, Mr. Brummer served as an account executive with IMS since 1992.
Prior to this employment with IMS, Mr. Brummer worked for the Honolulu
advertising agency of Peck Sims Mueller. Mr. Brummer is responsible for
overseeing the Company's marketing communication efforts including
collateral development, list management, advertising, public relations, and
promotions.
Shannan Rivers, age 29, serves as General Manager of the Company's
Reservation Center, which fields all incoming reservation and information
calls and processes all booked reservations for both Interline Travel and
Interline Representatives, Ltd. Ms. Rivers joined Airfair in February of
1995 after spending seven years with Adventure Tours, USA, most recently as
Destination Manager.
MANAGEMENT COMPENSATION
The following table reflects compensation paid to the two mostly highly
compensated executive officers of the Company.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
---------------------------- ---------------------------------
AWARDS PAYOUTS
----------------------- -------
RESTRICTED SECURITIES
STOCK UNDERLYING LTIP ALL OTHER
SALARY(1)(2) BONUS OTHER AWARD OPTIONS PAYOUTS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) ($) SARS(#) ($) ($)
--------------------------- ---- ------------ ----- ----- ---------- ---------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Matthew O'Hayer..................... 1996 $91,476 $0 $0 $0 0 $0 $0
Chairman & CEO
Joseph S. ("Jay") Juba,............. 1996 $67,200 $0 $0 $0 0 $0 $0
President, COO and Secretary
</TABLE>
- ---------------
(1) The above compensation schedule reflects that portion of shared management
members compensation allocated to the Company within the terms of a
management agreement among the Company, BEI Holdings, Inc. ("BEI"), and
Inventory Merchandising Services, Inc. a wholly-owned subsidiary of BEI, See
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
(2) Messrs. O'Hayer and Juba have accepted salary reductions of 40% and 25%,
respectively, for fiscal year 1997, meaning that the salaries allocable to
Messrs. O'Hayer and Juba for fiscal year 1997 would be $55,035 and $53,760,
respectively.
COMPENSATION OF DIRECTORS
The Company does not currently compensate directors for any services
provided as a director.
Mark T. Waller, a former director of the Company, entered into an advisory
services agreement in October 10, 1996. Mr. Waller was also granted a
non-qualified stock option in August, 1996. See, "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS."
EMPLOYMENT CONTRACTS
Matthew O'Hayer, who serves as the Company's Chairman of the Board and
Chief Executive Officer is not party to an employment agreement with the Company
or any affiliate thereof.
35
<PAGE> 39
Joseph S. Juba, the President and Chief Operating Officer of the Company
has signed an employment agreement with BEI Holdings, Inc. ("BEI"), and pursuant
to the terms of a management agreement (the "Management Agreement") executed by
Airfair, BEI Holdings, Inc. ("BEI") and Inventory Merchandising Services, Inc.
("IMS" and, together with Airfair and BEI, the "Employers"), the Company
reimburses BEI for that portion of Mr. Juba's time allocable to the Company.
See, "CERTAIN RELATIONSHIPS AND TRANSACTIONS." The following is a description of
the terms and conditions of Mr. Juba's employment agreement which was entered
into March 1, 1995:
Mr. Juba is paid $84,000 per year with 7% annual increases, commencing with
the first anniversary of the employment agreement, and a bonus equal to 2% of
both BEI's and Airfair's company's Pre-Tax Net Income after allocations of
corporate overhead, based upon audited financial statements. Such bonus to be
calculated on an annual basis, with quarterly draws of up to 50% of bonus due
with respect to each quarter's net income. Mr. Juba was granted shares of common
stock of BEI and Airfair, subject to repurchase rights which lapse over time.
Mr. Juba is paid an auto allowance of $420 per month for two years commencing in
April, 1996. Mr. Juba is subject to three-year prohibitions (commencing with the
date of employment termination) on competition, non-disclosure and non-use of
proprietary information, contact with current or future customers or
interference with the Employers' relationship with any current or future
customers, but if terminated without cause, the prohibitions on competition and
interference are terminated. If the Employers terminate the agreement without
cause or if the Employer materially reduces the responsibilities of the
employee, (i) the employee is to be paid all non-salary monetary compensation
accrued through the date of termination and (ii) the employee is to receive, for
a period of months equal to the number of years of the employee's service to one
or more of the Employers since September 5, 1991, a monthly cash severance
payment equal to the highest monthly salary paid to the employee. The employee
is indemnified against any lawsuits or claims by any third party arising out of
any action taken in good faith by the employee in the performance of his duties.
The Company also has an Advisory Services Agreement with Mark T. Waller,
one of the Company's former directors, dated October 10, 1996. During the term
of this Agreement, the Company will engage the Consultant to provide advisory
services in connection with designing and implementing a long-term strategic
plan to enhance the Company's ability to attain its goals following the Merger.
The term of the Advisory Services Agreement is for 5 years from October 10,
1996. Compensation for advisory services is $100 per year plus reimbursement for
Company approved actual expenses incurred when performing the above services.
The consultant serves as an independent contractor.
LONG-TERM INCENTIVE PLAN
The Company has a long-term stock incentive plan (LTSIP) that reserves
shares of Common Stock for grants to employees and others who are determined to
be key to the future operational success of the Company.
The Company's shareholders have recently enacted measures to reduce the
number of shares subject to the LTSIP from a total of 1,000,000 to a total of
450,000.
Pursuant to the terms of the Merger, 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. The exercise price of each employee option is $7.00 after Reverse Stock
Split. An option's maximum term is five years. Employee options were granted on
August 1, 1996 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.
36
<PAGE> 40
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Prior to this Offering and as of the date of this Prospectus, the Company
has had only one disinterested director. The Company has agreed with the state
securities administrators of certain states, as well as the Boston Stock
Exchange and the Nasdaq SmallCap(SM) Market, that from and after the
consummation of this Offering, the Company will have at least two directors who
are independent and capable of exercising independent judgment. The Company
represents that (A) all future material affiliated transactions and loans will
be made or entered into on terms that are no less favorable to the Company than
those that can be obtained from unaffiliated third parties; and (B) all future
material affiliated transactions and loans, and any forgiveness of loans, will
be approved by a majority of the Company's independent directors who (i) do not
have an interest in the transactions and (ii) have access, at the Company's
expense, to the Company's or independent legal counsel. Unless otherwise
indicated, the terms of the following transactions were not the results of arm's
length negotiations, but in the opinion of management of the Company each
transaction is on terms as fair to the Company as could be obtained in arm's
length negotiations in similar circumstances.
ACQUISITION OF INTERLINE TRAVEL DIVISION
On December 1, 1994, IMS acquired assets from Louis J. and Claudia Nackos
in exchange for the assumption by IMS of $144,394 in liabilities. These assets
are the basis of the Marketing Division's hotel operations. In connection with
the formation of Airfair on January 6, 1996, IMS transferred certain interline
travel operating assets to Airfair in exchange for Airfair's assumption of the
related liabilities. At the time of such transfer and assumption by Airfair,
Airfair lacked sufficient disinterested directors to certify such transactions.
ORGANIZATION OF THE COMPANY'S SUBSIDIARY
Airfair, the Company's operating subsidiary, was initially organized in
January 1996 as a subsidiary of BEI Holdings, Inc. ("BEI"). In anticipation of
distributing its shares of Airfair's common stock to the shareholders of BEI,
and in order to provide Airfair's executive officers with an increased equity
stake in Airfair, BEI granted 71,429 shares of Airfair common stock (as adjusted
for Reverse Stock Split) to Joseph S. Juba and 14,286 shares to Fernando Cruz
Silva. At the time of the grant, Mr. Juba was President, Chief Operating Officer
and Secretary of BEI and Airfair, and Mr. Cruz Silva was Senior Vice President
of Sales and Marketing for both companies.
From organization of the Company through March 1, 1996, the Company
obtained the services of its principal executives, Matthew O'Hayer, Jay Juba,
and after his employment on March 25, 1996, Darrell Barker, together with
computer access, accounting services, rental space and related administrative
support, from BEI, which allocated 70% of the direct costs of such items to the
Company and the remaining 30% to Inventory Merchandising Services, Inc., a
wholly-owned subsidiary of BEI ("IMS"). Effective March 1, 1996, the Company
entered into a management agreement with IMS under which it agreed to provide
the Company with such executive services and administrative support for a fee
equal to 0.5% of the Company's gross revenue per month plus a portion of the
direct payroll expenses of certain members of management who serve BEI, IMS, and
Airfair. These management fees amounted to approximately $68,475 for the year
ended December 31, 1996. Such management fees include reimbursement for an
allocable portion of the time of such executives devoted to the business affairs
of the Company as follows: Matthew O'Hayer, approximately 70% of his time at an
annual salary of $130,680; Joseph S. Juba, approximately 80% of his time at an
annual salary of $84,000; and Darrell Barker, approximately 50% of his time at
an annual salary of $60,000. The Management Agreement terminated on December 31,
1997, when the Company moved to new office space. At the time the Management
Agreement was agreed upon, the Company lacked sufficient disinterested directors
to ratify its terms and conditions.
Airfair and IMS have also entered into an inventory marketing agreement
whereby Airfair sells certain IMS inventories. Airfair is required to make
monthly payments to IMS equaling (i) the cash value of IMS's acquisition cost in
the inventory plus (ii) 25% of the collected revenue generated from such sales
less such cash value. The Marketing Agreement has been terminated, by agreement
of Airfair and IMS, as of
37
<PAGE> 41
January 31, 1998. At the time the Marketing Agreement was agreed upon, the
Company lacked sufficient disinterested directors to ratify its terms and
conditions.
In order to provide short-term financing for Airfair, BEI advanced certain
amounts to it prior to the Merger. At December 31, 1996, Airfair and the Company
owed BEI $88,213 in connection with such advances. At the time of these
advances, the Company lacked sufficient disinterested directors to ratify their
terms and conditions.
ACQUISITION OF INTERLINE REPRESENTATIVES, LTD., AND AIRFAIR PUBLISHING CORP.
On January 13, 1996, effective January 1, 1996, Airfair acquired the cruise
line operations of the Marketing Division and the Magazine and the related
assets, by assuming liabilities of $204,326 (which assumed liabilities have been
paid), paying $30,000 in cash, and delivering promissory notes aggregating
$359,465. The promissory notes were personally guaranteed by Matthew O'Hayer.
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of September 30, 1997, as adjusted for
the Reverse Stock Split and for the Conversion, the name and shareholdings,
including options to acquire 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 the
shareholdings of all executive officers and directors as a group. The address of
each of the individuals listed below is the address of the Company.
<TABLE>
<CAPTION>
PERCENTAGE OF PERCENTAGE OF
NATURE OF NUMBER OF OWNERSHIP OWNERSHIP
NAME OF PERSON OR GROUP OWNERSHIP SHARES OWNED BEFORE OFFERING AFTER OFFERING
----------------------- --------- ------------ --------------- --------------
<S> <C> <C> <C> <C>
Matthew O'Hayer............................. Direct 557,714 30.5% 18.4%
Joseph S. "Jay" Juba........................ Direct 157,142 8.6% 5.2%
Fernando Cruz Silva......................... Direct 44,285 2.4% 1.5%
Robert Sandner.............................. Direct 114,285 6.3% 3.8%
All executive officers and directors as a
group (seven persons)..................... Direct 873,426 47.8% 28.9%
Options 21,427 1.2% .7%
Total............................. 894,853 49.0% 29.6%
</TABLE>
The Company's executive officers and directors, entities affiliated with
them and employees of the Company and holders of at least 5% of the outstanding
Common Stock affiliated with the executive officers and directors will
beneficially own shares of Common Stock representing more than 29% of the total
voting power of the Common Stock after giving effect to the Offering. These
persons, if acting in concert, will be able to exercise control over the
Company's affairs and are likely to be able to control the Board of Directors
and the disposition of any matter submitted to a vote of stockholders.
38
<PAGE> 42
DESCRIPTION OF SECURITIES
COMMON STOCK
The Company is authorized to issue 30,000,000 shares of Common Stock, of
which 1,360,289 shares are currently issued and outstanding. Holders of shares
of Common Stock are entitled to receive such dividends as may be declared by the
Board of Directors from assets legally available for that purpose after payment
of dividends required to be paid on outstanding shares of Preferred Stock, if
any, and are entitled at all meetings of stockholders to one vote for each share
held by them. The shares of Common Stock are not redeemable and do not have any
preemptive or conversion rights. All of the outstanding shares of Common Stock
are fully paid and nonassessable. In the event of a voluntary or involuntary
winding up or dissolution, liquidation, or partial liquidation of the Company,
holders of Common Stock shall participate, pro rata, in any distribution of the
assets of the Company remaining after payment of liabilities subject to the
prior distribution rights of any outstanding shares of Preferred Stock. The
rights of the holders of Common Stock will be subject to, and may be adversely
effected by, the rights of the holders of Preferred Stock, if any.
As of September 30, 1997, there were 320 holders of record of Common Stock.
PREFERRED STOCK
The Company is authorized to issue 10,000,000 shares of Preferred Stock.
The Preferred Stock may be issued in one or more series, with such voting
powers, designations, preferences, rights, qualifications, limitations and
restrictions as shall be set forth in a resolution of the Company's Board of
Directors providing for the issue thereof. The issuance of Preferred Stock,
while providing flexibility in connection with possible financing, acquisitions
and other corporate purposes, could, among other things, adversely affect the
voting power of holders of Common Stock and, under certain circumstances, be
used as a means of discouraging, delaying or preventing a change in control of
the Company. At the closing of this Offering, the Company will have no shares of
Preferred Stock outstanding and has no plans to issue any of the Preferred
Stock.
TRANSFER AGENT
The transfer agent for the Common Stock is OTR Stock Transfer Registry.
MARKET FOR COMMON STOCK
The Common Stock has been traded irregularly and infrequently in the
over-the-counter market and quoted on OTC EBB under the symbol "GATT" and quoted
in the pink sheets published by the National Quotations Bureau. Since May 1995,
from time to time, a very small number of securities broker-dealers published
only intermittent quotations for the Common Stock, and there was no continuous,
consistent trading market. The trading volume in the Common Stock has been and
is extremely limited, reflecting the fact that a very limited number of shares
are believed by the Company to be eligible for public trading. During the above
period, the limited nature of the trading market created the potential for
significant changes in the trading price for the Common Stock as a result of
relatively minor changes in the supply and demand for Common Stock and perhaps
without regard to the Company's business activities. The following table sets
forth, for each
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<PAGE> 43
of the Company last eight fiscal quarters, the high and low bid and ask prices
for the Common Stock. All of the transactions were effected prior to the Reverse
Stock Split:
<TABLE>
<CAPTION>
BID ASK
-------------------- --------------------
QUARTER ENDED HIGH LOW HIGH LOW
------------- ---- --- ---- ---
<S> <C> <C> <C> <C>
September 30, 1997.......................................... 1 3/4 11/16 1 3/4 1
June 30, 1997............................................... 2 1/2 1 3/4 2 1/2 1/34
March 31, 1997.............................................. 2 1/2 1 1/8 2 1/2 1 7/8
December 31, 1996........................................... 2 5/8 1 1/2 3 1/2 2 1/4
September 30, 1996.......................................... 3 2 1/4 4 5/8 3 1/4
June 30, 1996............................................... 2 3/4 2 1/4 4 1/4 3 1/2
March 31, 1996.............................................. 2 1/4 3/10 3 7/8 2
December 31, 1995........................................... 3 3
</TABLE>
Because of the lack of specific transaction information and the Company's belief
that quotations during the period were particularly sensitive to actual or
anticipated volume of supply and demand, the Company does not believe that such
quotations during this period are reliable indicators of a trading market for
the Common Stock. Such prices are without retail mark-up, mark-down, or
commissions.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this Offering, the Common Stock has been traded on the National
Association of Security Dealers, Inc.'s electronic bulletin board. Trading
actively is very infrequent. Sales of substantial amounts of Common Stock in the
public market could adversely affect the market price of the Common Stock.
Upon completion of the Offering (and after giving effect to the 1 for 7
Reverse Stock Split,) the Company will have outstanding 3,027,021 shares of
Common Stock. Of these shares, all of the 1,200,000 shares sold in the Offering
(assuming no exercise of the Underwriters' over allotment option) will be
transferable without restriction or further registration under the Securities
Act, unless they are held by "affiliates" of the Company within the meaning of
Rule 144 promulgated under the Securities Act. Of the remaining shares,
approximately 1,747,000 shares are Restricted Securities, and, as such, may not
be sold in the absence of registration under the Securities Act or an exemption
therefrom under Rules 144 and 701, and approximately 40,000 shares will be
eligible for sale without restriction or further registration under Rule 144(k),
unless they are held by "affiliates" of the Company or subject to "lock-up"
agreements summarized below.
Of the Restricted Shares, 44,285 shares are 12-Month Lock-up Shares, or
cumulatively approximately 1.46% of the outstanding shares of Common Stock after
this Offering. See "RISK FACTORS -- Shares Eligible for Future Sale." Upon
expiration of the 12-month period, these shares will be eligible for immediate
resale, subject, in certain cases, to certain volume, timing and other
requirements of Rule 144 promulgated under the Securities Act. In addition to
the 12-Month Lock-up Shares, an additional 829,141 shares of the Restricted
Stock are 24-Month Lock-up Shares, or cumulatively 27.4% of the outstanding
Common Stock after this Offering. See, "UNDERWRITING."
In general, under Rule 144, any person (or persons whose shares are
aggregated for purposes of Rule 144) who beneficially owns Restricted Shares
with respect to which at least one year has elapsed since the later of the date
the shares were acquired from the Company or from an affiliate of the Company,
is entitled to sell, within any three month period, a number of shares that does
not exceed the greater of: (i) 1% of the then outstanding shares of Common Stock
of the Company; or (ii) the average weekly trading volume in Common Stock during
the four calendar weeks preceding such sale. Sales under Rule 144 are also
subject to certain manner-of-sale provisions and notice requirements, and to the
availability of current public information about the Company. A person who is
not an affiliate, has not been an affiliate within 90 days prior to sale and who
beneficially owns Restricted Shares with respect to which at least two years
have elapsed since the later of the date the shares were acquired from the
Company or from an affiliate of the Company, is
40
<PAGE> 44
entitled to sell such shares under Rule 144(k) without regard to any of the
volume limitations or other requirements described above.
In addition to the outstanding shares of Common Stock, and exclusive of
options granted pursuant to the Company's employee stock option plan, there are
292,066 shares of Common Stock subject to outstanding warrants and options at a
weighted average exercise price of $6.87 per share (as adjusted for the Reverse
Stock Split). Such warrants are exercisable for a period expiring at various
dates between 2003 and 2004. The Company has granted the holders of such
warrants certain registration rights relating to the Common Stock purchasable
upon the exercise of such warrants. The Company has agreed with the Boston Stock
Exchange that it will not issue or grant warrants, options or other securities
convertible or exercisable into shares of the Common Stock at a conversion or
exercise price less than 85% of the market price of the Common Stock as of the
time of such issuance or grant.
As of the date of this Prospectus, certain of the Company's creditors held
indebtedness, which, in accordance with its terms, could be converted into
shares of Common Stock. The convertible indebtedness totaled $905,182 and, upon
full conversion, would represent 395,303 shares of Common Stock (as adjusted for
the Reverse Stock Split). The weighted average conversion price of the
convertible indebtedness is $2.29. The Company anticipates that, in connection
with the closing of this Offering, that holders of convertible indebtedness will
convert such indebtedness.
The Company can make no prediction as to the effect, if any, that sales of
shares of Common Stock or the availability of shares for sale will have on the
market price of Common Stock. Nevertheless, sales of significant amounts of
Common Stock could adversely affect the prevailing market price of Common Stock,
as well as impair the ability of the Company to raise capital through the
issuance of additional equity securities. Prior to this Offering, there has been
no trading market for the Common Stock. The Company anticipates that the trading
market in the Common Stock, if any, will be limited based upon the number of
shares currently outstanding and anticipated to be sold in this Offering.
As of the date of this Prospectus, the Company has reserved an aggregate of
450,000 shares of Common Stock for issuance pursuant to the Company's stock
option plan and options to purchase 739,666 shares were outstanding on September
30, 1997. After giving effect to the Reverse Stock Split, there are 105,666
shares of Common Stock subject to employee stock options. As soon as practicable
following the Offering, the Company intends to file a registration statement
under the Securities Act to register shares of Common Stock reserved for
issuance under such plans. See "MANAGEMENT -- Stock Option Plan."
UNDERWRITING
Each of the underwriters named below (the "Underwriters") have severally
agreed, subject to the terms and conditions of the Underwriting Agreement, to
purchase from the Company the number of Shares set forth opposite their
respective names below. The nature of the obligations of the Underwriters is
such that if any of such shares are purchased, all must be purchased.
<TABLE>
<CAPTION>
NAME NUMBER OF SHARES
---- ----------------
<S> <C>
Capital West Securities, Inc. .............................. 400,000
J.P. Turner & Company, L.L.C. .............................. 350,000
Robb, Peck, McCooey Clearing Corporation.................... 150,000
Barclay Investments, Inc. .................................. 100,000
Frederick & Company, Inc. .................................. 50,000
Hornblower & Weeks Incorporated............................. 50,000
Kashner Davidson Securities Corporation..................... 50,000
Smith, Moore & Company...................................... 50,000
---------
Total............................................. 1,200,000
=========
</TABLE>
41
<PAGE> 45
The Underwriters have advised the Company that they propose initially to
offer the Common Stock offered hereby to the public at the price to public set
forth on the cover page of this Prospectus. The Underwriters may allow a
concession to selected dealers who are members of the National Association of
Securities Dealers, Inc. ("NASD") not in excess of $0.25 per share.
Capital West Securities, Inc., one of the Underwriters, was first
registered as a broker-dealer in May 1995. Capital West has participated in only
eight public equity offerings as an underwriter, although certain of its
employees have had experience in underwriting public offerings while employed by
other broker-dealers. All eight of the public equity offerings were successful.
Prospective purchasers of the securities offered hereby should consider Capital
West's limited underwriting experience in evaluating this Offering.
The Company has granted an option to the Underwriters, exercisable within
45 business days after the date of this Prospectus, to purchase up to an
aggregate of 180,000 additional shares of Common Stock at the initial price to
public, less the underwriting discount, set forth on the cover page of this
Prospectus. The Underwriters may exercise the option only for the purpose of
covering over-allotments. To the extent that the Underwriters exercise such
option, each Underwriter will be committed, subject to certain conditions, to
purchase from the Company on a pro rata basis that number of additional shares
of Common Stock which is proportionate to such Underwriters' initial commitment.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act.
The Company has agreed to pay to the Underwriters a non-accountable expense
allowance of 3% of the gross proceeds derived from the sale of the shares of
Common Stock underwritten (including the sale of any shares of Common Stock
subject to the Underwriters' over-allotment option), $45,000 of which has been
paid as of the date of this Prospectus. The Company also has agreed to pay all
expenses in connection with qualifying the Common Stock offered hereby for sale
under the laws of such states as the Underwriters may designate, including
filing fees and fees and expenses of counsel retained for such purposes by the
Underwriters, and registering the Offering with the NASD.
In connection with this Offering, the Company has agreed to sell to the
Underwriters, for a price of $.001 per warrant, warrants (the "Underwriters'
Warrants") to purchase shares of Common Stock equal to 10% of the total number
of shares of Common Stock sold pursuant to this Offering, excluding shares
subject to the over-allotment option. The Underwriters' Warrants are exercisable
at a price equal to 120% of the public offering price or $6.00 per share for a
period of four years commencing one year from the date of this Prospectus (the
"Exercise Period"). The Underwriters' Warrants grant to the holders thereof,
with respect to the registration under the Securities Act of the securities
directly and indirectly issuable upon exercise of the Underwriters' Warrants,
one demand registration right during the Exercise Period, as well as piggyback
registration rights at any time.
Holders of 32% of the shares of Common Stock (including the directors and
executive officers of the Company and those investors who were issued shares in
the 1997 Private Placement) outstanding after completion of this Offering have
agreed for a period of 12 months after the date of this Prospectus, they will
not offer, sell or otherwise dispose of any shares of Common Stock owned by
them. Certain of the Company's executive officers have agreed to enter into
similar lock-up agreements with regard to 873,426 shares of Common Stock they
own, representing 28.9% of the Common Stock outstanding after completion of this
Offering, except that the term thereof is 36 months and the officers and
directors will be permitted to sell a limited number of shares after the
expiration of 24 months and prior to expiration of the 36-month period if
certain criteria are satisfied. Creditors holding $500,000 of convertible
indebtedness permitting conversion at a per share price of $1.75 (as adjusted
for the Reverse Stock Split) have agreed to not sell the shares issued upon any
such conversion for a period of nine months after the date of this prospectus.
Prior to this Offering, the market for the Common Stock has been extremely
limited and there can be no assurance that a regular trading market will develop
upon the completion of this Offering. The public offering price was determined
by negotiations between the Company and the Underwriters. The primary factors
considered in determining such offering price included the history of and
prospects for the Company's business
42
<PAGE> 46
and the industry in which the Company competes, market valuation of comparable
companies, market conditions for public offerings, the prospects for future
earnings of the Company, an assessment of the Company's management, the general
condition of the securities markets, the demand for similar securities of
comparable companies and other relevant factors.
Robert G. Rader, who has agreed to serve as a director of the Company upon
completion of this Offering, is employed by Capital West Securities, Inc. as
Managing Director of Corporate Finance.
The Underwriters have advised the Company that the Underwriters do not
expect any sales by the Underwriters to accounts over which they exercise
discretionary authority.
DETERMINATION OF OFFERING PRICE
The public offering price was determined solely through negotiations among
the Company and representatives of the Underwriters based on several factors,
and may not be indicative of the market price for the Common Stock after the
completion of the Offering. Among the factors considered in such negotiations
were prevailing market conditions, the results of operations of the Company in
recent periods, the market capitalizations and stages of development of other
companies which the Company and the Underwriters believe to be comparable to the
Company, estimates of the business potential of the Company and the present
state of the Company's development.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered hereby
has been passed upon for the Company by Kuperman, Orr, Mouer & Albers, P.C.,
Austin, Texas. Robertson & Williams, Inc. of Oklahoma City, Oklahoma, has served
as counsel to the Underwriters in connection with this Offering.
EXPERTS
The consolidated financial statements of the Company for the years ended
December 31, 1996, and 1995, appearing in this Prospectus and Registration
Statement have been audited by Andersen, Andersen & Strong, Salt Lake City,
Utah, independent auditors, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance upon such report given upon the
authority of such firm as an expert in accounting and auditing.
ADDITIONAL INFORMATION
As permitted by the rules and regulations of the Commission, this
Prospectus does not contain all of the information set forth in the Registration
Statement and in the exhibits and schedules thereto. For further information
with respect to the Company and the Common Stock offered hereby, reference is
made to the Registration Statement and the exhibits thereto Statements contained
in this Prospectus concerning the provisions of documents filed with the
Registration Statement as exhibits and schedules are necessarily summaries of
such documents, and each such statement is qualified in its entirety by
reference to the copy of the applicable document filed with the Commission. The
Registration Statement, including the exhibits and schedules thereto, may be
inspected without charge and copied upon payment of the charges prescribed by
the Commission at the Public Reference Room of the Commission, Room 1024, 450
Fifth Street, N.W., Washington, D.C. 20549. The Commission maintains a website
that contains reports, proxy and information statements and other information
regarding issuers that file electronically with the Commission at
http://www.sec.gov.
43
<PAGE> 47
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Consolidated Balance Sheets at September 30, 1997 and
1996...................................................... F-2
Consolidated Statements of Operations for the first three
months ended September 30, 1997 and 1996.................. F-3
Consolidated Statements of Operations for the nine months
ended September 30, 1997 and 1996......................... F-4
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1997 and 1996......................... F-5
Notes to Consolidated Financial Statements for the nine
months ended September 30, 1997........................... F-6
Independent Auditor's Report (Andersen, Andersen &
Strong)................................................... F-15
Consolidated Balance Sheets at December 31, 1996 and 1995... F-16
Consolidated Statements of Operations for the Two Years
ended December 31, 1996 and 1995.......................... F-17
Consolidated Statement of Stockholders' Equity for the Two
Years ended December 31, 1996 and 1995.................... F-18
Consolidated Statements of Cash Flows for the Two Years
ended December 31, 1996 and 1995.......................... F-19
Notes to Consolidated Financial Statements for December 31,
1996 and 1995............................................. F-20
</TABLE>
F-1
<PAGE> 48
GRAND ADVENTURES TOUR & TRAVEL PUBLISHING CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
------------- -------------
UNAUDITED
<S> <C> <C>
Current Assets
Cash and cash equivalents (Note 2)........................ $ 265 $ 12,358
Restricted cash (Note 2).................................. 190,605 --
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 1,360,289 and 1,300,000
shares in 1997 and 1996, respectively (Note 11)(as
adjusted for the Reverse Stock Split).................. 136 130
Additional paid-in capital................................ 599,204 54,870
Accumulated deficit....................................... (1,775,131) (778,731)
---------- ----------
Total Stockholders' (Deficit)..................... (1,175,971) (723,731)
---------- ----------
$2,239,574 $1,915,169
========== ==========
</TABLE>
F-2
<PAGE> 49
GRAND ADVENTURES TOUR & TRAVEL PUBLISHING CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
------------- -------------
(UNAUDITED)
<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 (Loss)........................................... $ 72,779 $ (250,509)
========== ==========
Net Income (Loss) Per Common Share (Note 2)................. $ 0.04 $ (0.20)
========== ==========
Weighted Average Common Shares Outstanding (as adjusted for
the Reverse Stock Split).................................. 1,631,839 1,300,000
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 50
GRAND ADVENTURES TOUR & TRAVEL PUBLISHING CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
------------------------------
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
------------- -------------
(UNAUDITED)
<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 Income (Loss) Before Income Taxes....................... 17,676 (402,739)
Income Tax Expense.......................................... -- --
Net Income (Loss)........................................... $ 17,676 $ (402,739)
========== ==========
Net Income (Loss) Per Common Share (Note 2)................. $ 0.01 $ (0.31)
========== ==========
Weighted Average Common Shares Outstanding (as adjusted for
the Reverse Stock Split).................................. 1,631,839 1,300,000
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 51
GRAND ADVENTURES TOUR & TRAVEL PUBLISHING CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
------------------------------
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
------------- -------------
(UNAUDITED)
<S> <C> <C>
Cash Flows from Operating Activities
Net Income (Loss)......................................... $ 17,676 $ (402,739)
Adjustments to reconcile net loss to cash provided by
operating activities:
Depreciation and amortization.......................... 29,978 24,026
Changes in operating assets and liabilities:
Restricted cash...................................... (147,635) 0
Accounts receivable.................................. (56,343) (20,422)
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..................... 203,866 844,877
Deferred subscription revenue........................ 13,934 97,162
Deferred discount.................................... (54,644) 0
--------- ----------
Net Cash Provided (Used) by Operating
Activities...................................... (608,720) (80,706)
--------- ----------
Cash Flows from Investing Activities:
Capitalized legal fees.................................... 0 (16,337)
Purchase of property and equipment........................ 0 (17,000)
Proceeds from sale of equipment........................... 0 10,507
--------- ----------
Net Cash Provided (Used) by Investing
Activities...................................... 0 (22,830)
--------- ----------
Cash Flows from Financing Activities:
Proceeds from sale of common stock........................ 0 55,000
Proceeds from notes payable............................... 786,892 100,000
Repayments of notes payable............................... (177,906) (39,106)
--------- ----------
Net Cash Provided by Financing Activities......... 608,986 115,894
--------- ----------
Net Increase (Decrease) in Cash........................... 265 12,358
Cash at Beginning of Period............................... 0 0
Cash at End of Period..................................... $ 265 $ 12,358
========= ==========
Supplemental Cash Flow Information
Cash paid during the period for interest.................. $ 65,288 $ 28,732
</TABLE>
Supplemental schedule of noncash investing and financing activities:
For the nine months ended September 30, 1997, the Company had a
noncash transaction whereby Goodwill was reduced by $224,963 and the
associated debt was reduced by $224,963 (See Notes 4 and 5).
During the nine months ended September 30, 1996, the Company acquired
certain assets of Interline Representatives, Ltd. and Airfair Publishing
Corp. for $593,791 (See Note 4). The acquisition consideration consisted of
$30,000 in cash and the assumption of liabilities totalling $204,326 and
notes payable totalling $359,465.
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 52
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
General
Management has included all adjustments which, in the opinion of
management, are necessary in order to make the financial statements not
misleading.
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 reserves with Humboldt Bank and Bank One totaled approximately $190,605 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
F-6
<PAGE> 53
GRAND ADVENTURES TOUR & TRAVEL PUBLISHING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 (as adjusted for the
Reverse Stock Split) 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.
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.
F-7
<PAGE> 54
GRAND ADVENTURES TOUR & TRAVEL PUBLISHING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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 (1,214,286 as adjusted for the 1-for-7 reverse
split effected by the Company in December, 1997 (the "Reverse Stock Split"))
shares issued. An additional 600,000 (85,714, as adjusted for the Reverse Stock
Split) shares were authorized by the Board of Directors and issued to two
shareholders, resulting in a total of 9,100,000 (1,300,000, as adjusted for the
Reverse Stock Split) 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>
F-8
<PAGE> 55
GRAND ADVENTURES TOUR & TRAVEL PUBLISHING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 on
shares with a par value of $.0001. The transaction was accounted for as a
reverse acquisition.
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.
F-9
<PAGE> 56
GRAND ADVENTURES TOUR & TRAVEL PUBLISHING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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)
-------- --------
Net............................................... $380,838 $628,379
======== ========
</TABLE>
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 on March 1, 1996
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. Prior to the
management agreement, all general and administrative expenses of BEI were
allocated 70% to the Company and 30% to IMS. In February 1996, BEI incurred a
significant one-time gain which exceeded its expenses for that month. As such,
both the Company and IMS were the beneficiaries of an expense credit for that
month. The Company's portion of that allocation was a credit of approximately
$142,000.
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.
7. LONG-TERM DEBT
At September 30, 1997 and 1996 long-term debt (as adjusted for the Reverse
Stock Split) 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 $3.50 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 $7.00 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
</TABLE>
F-10
<PAGE> 57
GRAND ADVENTURES TOUR & TRAVEL PUBLISHING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1997 1996
---------- ---------
<S> <C> <C>
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 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 $3.50
of interest due, unpaid principal is convertible into
common stock at a conversion price of $1.75 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, then
$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 $3.50
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>
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.
F-11
<PAGE> 58
GRAND ADVENTURES TOUR & TRAVEL PUBLISHING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 415,070 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 569,143 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 64,826 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 89,788 shares, were returned to the Company and 84,097 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 1,214,286 shares issued (as adjusted for
the Reverse Stock Split). An additional 85,714 shares (as adjusted for the
Reverse Stock Split) were authorized by the Board of Directors and issued to two
shareholders, resulting in a total of 1,300,000 shares (as adjusted for the
Reverse Stock Split) 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, Airfair issued 3,571 (as adjusted for the Reverse
Stock Split) shares of common stock 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 of the merger. Airfair shares outstanding on
the effective date totaled 9,125,000 (adjusted to 1,303,571 for the Reverse
Stock Split. 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
F-12
<PAGE> 59
GRAND ADVENTURES TOUR & TRAVEL PUBLISHING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
54,861 shares. As adjusted for the Reverse Stock Split, Airfair shareholders
received a total of 1,303,572 shares of Company Common Stock and the non-Airfair
shareholders held 54,861 shares of Common Stock.
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.
On October 24, 1997, the Company consummated a $500,050 bridge financing
consisting of 10% notes in an aggregate principal amount of $500,000 and 71,429
shares of common stock at a per share price of $0.0007. The net proceeds of the
financing have been allocated to the shares of Common Stock and promissory notes
based on their relative fair market values. The allocation to the shares results
in the notes being recorded at a discount. Upon successful completion of this
Offering and payment of the notes, the Company will recognize a one-time,
non-recurring, non-cash expense equal to the discount and deferred debt expense
on the notes. Upon a successful completion of this Offering, the Company
estimates that the charge to earnings will be $428,521. If this Offering is not
successfully consummated, the Company will amortize the charge to earnings over
the term of the bridge financing notes (two years), using the interest method.
On December 24, 1997, the Company borrowed $70,000 from a trust established
by a shareholder of the Company. This loan is secured by certain of the
Company's accounts receivable, bears interest at the rate of 10% per annum and
matures on the earlier of consummation of this Offering or March 23, 1998.
14. STOCK OPTION PLAN
The Company has a long-term stock incentive plan (LTSIP) that authorizes an
aggregate of 450,000 shares of common stock for future grants, and if adjusted
for the Reverse Stock Split, there will be 142,857 shares of common stock
subject to the Plan. 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 $7.00 (as adjusted
for the Reverse Stock Split) and the exercise price of options granted to
shareholders range from $3.50 to $7.00 (as adjusted for the Reverse Stock
Split). 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. 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.
F-13
<PAGE> 60
GRAND ADVENTURES TOUR & TRAVEL PUBLISHING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the status of the Company's outstanding stock options as of
September 30, 1997 (as adjusted for the Reverse Stock Split) is presented below:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
- ----------------------------------------- ------------------------------------------------
WEIGHTED-
RANGE OF NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED
EXERCISE OUTSTANDING REMAINING AVERAGE EXERCISABLE AT AVERAGE
PRICES 9/30/97 CONTRACTUAL LIFE EXERCISE PRICE 9/30/97 EXERCISE PRICE
- -------- ----------- ---------------- -------------- -------------- --------------
<C> <C> <C> <C> <C> <C>
$7.00 44,809 4 years $7.00 14,524 7.00
$7.00 60,857 4 years $7.00 15,715 7.00
105,666 30,239
======= ======
</TABLE>
F-14
<PAGE> 61
INDEPENDENT AUDITOR'S REPORT
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.) as of December 31, 1996 and its subsidiary (Airfair Publishing, Inc.) as
of December 31, 1996 and 1995, and the related consolidated statements of
operations, stockholders' equity and cash flows for the period November 1, 1996
through December 31, 1996 (for Grand Adventures Tour & Travel Publishing
Corporation) and for the years ended December 31, 1996 and 1995 (for its
subsidiary Airfair Publishing, Inc.). These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 and their cash flows for
the periods referred to above, 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.
On November 14, 1997, the Board of Directors approved a reverse stock split
whereby, the Company would issue 1 share of common stock for every 7 shares of
common stock held by existing shareholders at the date of the transaction. As
discussed in Note 11 of the financial statements, all share transactions,
outstanding shares and related share amounts throughout the accompanying
financial statements have been adjusted to take into effect the 1-for-7 reverse
stock split.
ANDERSEN, ANDERSEN & STRONG, LC
April 4, 1997
(except for Note 15, as to which the date is May 1, 1997,
and the effect of the 1-for-7 reverse stock split as described
in Note 11, as to which the date is November 14, 1997)
Salt Lake City, Utah
F-15
<PAGE> 62
GRAND ADVENTURES TOUR & TRAVEL PUBLISHING CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
ASSETS
<TABLE>
<CAPTION>
1996 1995
----------- ---------
<S> <C> <C>
Current Assets
Restricted cash (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
Cash overdraft............................................ $ 50,723 $ --
Accounts payable.......................................... 578,988 6,787
Other current liabilities................................. 129,145 --
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 1,358,432 and 1,300,000
shares in 1996 and 1995, respectively (as adjusted for
1-for-7 stock split) (Note 11)......................... 136 1,300
Additional paid-in capital (deficit)...................... 599,024 (1,300)
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.
F-16
<PAGE> 63
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)........................ $ (.64) $ (.28)
=========== ==========
Weighted Average Common Shares Outstanding (as adjusted for
the Reverse Stock Split).................................. 1,361,430 1,300,000
=========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-17
<PAGE> 64
GRAND ADVENTURES TOUR & TRAVEL PUBLISHING CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
ADDITIONAL
COMMON STOCK PAID-IN RETAINED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
--------- ------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
All share transactions are adjusted
for 1-for-7 reverse stock split (see
Note 11)
Balance at January 1, 1995............ -- $ -- -- $ (11,248) $ (11,248)
Issuance of shares pursuant to
spin-off of Airfair from IMS........ 1,300,000 1,300 (1,300) -- --
Net (Loss)............................ -- -- -- (364,744) (364,744)
--------- ------- -------- ----------- -----------
Balance at December 31, 1995.......... 1,300,000 1,300 (1,300) (375,992) (375,992)
Cancellation of shares................ (84,096) (9) 9 -- --
Effect of 1-for-15 reverse stock split
(exclusive of fractional shares).... (689,690) (69) 69 -- --
Issuance of common shares ($7.00 per
share).............................. 3,571 4 24,996 -- 25,000
Exchange of Airfair shares for shares
in the Company...................... 828,647 (1,090) 575,250 (544,160) 30,000
Net (Loss)............................ -- -- -- (872,655) (872,655)
--------- ------- -------- ----------- -----------
Balance at December 31, 1996.......... 1,358,432 $ 136 $599,024 $(1,792,807) $(1,193,647)
========= ======= ======== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-18
<PAGE> 65
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:
Restricted cash...................................... (43,240) --
Accounts receivable.................................. (28,720) --
Prepaid hotel cost................................... (225,260) (14,015)
Prepaid cruise and tour cost......................... (578,915) --
Accounts payable..................................... 629,710 --
Accrued expenses..................................... 71,584 (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 Used by Operating Activities............. (262,898) --
--------- ---------
Cash Flows from Investing Activities:
Capitalized legal fees.................................... (16,337) --
Purchase of property and equipment........................ (30,000) --
Proceeds from sale of equipment........................... 10,507 --
--------- ---------
Net Cash Used by Investing Activities............. (35,830) --
--------- ---------
Cash Flows from Financing Activities:
Proceeds from sale of common stock........................ 55,000 --
Proceeds from notes payable............................... 345,674 --
Repayments of notes payable............................... (152,669) --
--------- ---------
Net Cash Provided by Financing Activities......... 248,005 --
--------- ---------
Net Increase (Decrease) in Cash........................... (50,723) --
Cash at Beginning of Period............................... -- --
Cash at End of Period (Overdraft)......................... $ (50,723) $ --
========= =========
Supplemental Cash Flow Information
Cash paid during the year for interest.................... $ 38,402 $ --
</TABLE>
Supplemental Schedule of noncash investing and financing activities:
During 1996, the Company acquired certain of Interline Representation, Ltd.
and Airfair Publishing Corp. for $593,791 (see Note 4). The acquisition
consideration consisted of cash and assumption of liabilities and notes payable
as follows:
<TABLE>
<S> <C>
Cash.............................................. $ 30,000
Assumption of Liabilities......................... 204,326
Assumption of Notes Payable....................... 359,465
--------
$593,791
========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-19
<PAGE> 66
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.
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.
F-20
<PAGE> 67
GRAND ADVENTURES TOUR & TRAVEL PUBLISHING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 (as adjusted for
1-for-7 stock split) 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.
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.
Impairment of Long-Lived Assets
Intangible assets represent the excess of the purchase price over the fair
value of the net assets of acquired companies. The Company carries its
intangible assets at their purchase prices, less amortized amounts, but subject
to annual review for impairment. In performing an evaluation, the estimated
future undiscounted cash flows associated with the asset are compared to the
asset's carrying amount to determine if a write-down to market value is
required. The Company intends to annually assess the carrying value of its
long-lived assets using the analysis described above.
F-21
<PAGE> 68
GRAND ADVENTURES TOUR & TRAVEL PUBLISHING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Marketing and Advertising Costs
All costs relating to marketing and advertising are expensed in the year
incurred.
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).
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 1,214,286 shares issued (as adjusted for the Reverse Stock
Split). An additional 85,714 shares (as adjusted for the Reverse Stock Split)
were authorized by the Board of Directors and issued to two shareholders,
resulting in a total of 1,300,000 shares (as adjusted for the 1 for 7 Reverse
Stock Split) 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>
F-22
<PAGE> 69
GRAND ADVENTURES TOUR & TRAVEL PUBLISHING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 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 (as adjusted
for 1-for-7 stock split).................................. (.28)
</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.
F-23
<PAGE> 70
GRAND ADVENTURES TOUR & TRAVEL PUBLISHING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 on March 1, 1996
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. Prior to the
management agreement, all general and administrative expenses of BEI were
allocated 70% to the Company and 30% to IMS. In February 1996, BEI incurred a
significant one-time gain which exceeded its expenses for that month. As such,
both the Company and IMS were the beneficiaries of an expense credit for that
month. The Company's portion of that allocation was a credit of approximately
$142,000.
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.
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.
F-24
<PAGE> 71
GRAND ADVENTURES TOUR & TRAVEL PUBLISHING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $7.00 (as adjusted for 1-for-7 reverse stock
split) 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>
The annual maturities of long-term debt for the next five years are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, AMOUNT
------------ --------
<S> <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.
F-25
<PAGE> 72
GRAND ADVENTURES TOUR & TRAVEL PUBLISHING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
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
On December 17, 1997, the Company's shareholders approved a reverse stock
split whereby, the Company would issue 1 share of common stock for every 7
shares of common stock held by existing shareholders at the date of the
transaction. All share transactions, outstanding shares, and related share
amounts have been adjusted to take into effect the 1-for-7 reverse stock split.
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 (415,069 shares as adjusted) 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
(569,143 shares as adjusted) 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%
F-26
<PAGE> 73
GRAND ADVENTURES TOUR & TRAVEL PUBLISHING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 (64,286 shares as adjusted) 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 (89,788 shares as adjusted), were returned to the
Company and 588,674 shares (84,096 shares as adjusted) 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 (1,214,286 shares as
adjusted) issued. An additional 600,000 shares (85,714 shares as adjusted) were
authorized by the Board of Directors and issued to two shareholders, resulting
in a total of 9,100,000 shares (1,300,000 shares as adjusted) 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 (3,571 shares as adjusted) 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 (1,303,571 shares as adjusted). 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 (54,861 shares as adjusted).
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
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
F-27
<PAGE> 74
GRAND ADVENTURES TOUR & TRAVEL PUBLISHING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 450,000 shares (as adjusted for 1-for-7 reverse stock split) 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 $7.00 (price adjusted
for 1-for-7 reverse stock split). An option's maximum term is five years.
Employee options were granted on August 1, 1996 and vest in three years. In
addition to options granted to employees, the Company has granted options to
security holders. These options are fully vested and have share exercise prices
ranging from $3.50 to $7.00 (as adjusted).
A summary of the status of the Company's stock option grants (as adjusted
for 1-for-7 stock reverse stock split) as of December 31, 1996, and the changes
during the year ending December 31, 1996 is presented below: (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.)
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
FIXED OPTIONS SHARES EXERCISE PRICE
------------- -------- ----------------
<S> <C> <C>
Balance -- January 1, 1996................................. -- $ --
Granted -- Stockholders.................................... 144,924 6.58
Granted -- Employees....................................... 43,571 7.00
Exercised.................................................. -- --
Forfeited.................................................. -- --
--------
Balance, -- December 31, 1996.............................. 188,495
========
Exercisable at December 31, 1996........................... 159,448
========
Weighted-average fair value of options granted during the
year..................................................... $ 2.66
========
</TABLE>
The following table summarizes information about fixed stock options
outstanding at December 31, 1996 (as adjusted for 1-for-7 reverse stock split):
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
- --------------------------------------------------------------------- -------------------------------
NUMBER WEIGHTED-AVERAGE NUMBER
RANGE OF OUTSTANDING REMAINING WEIGHTED-AVERAGE EXERCISABLE WEIGHTED-AVERAGE
EXERCISE PRICES 12/31/96 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/96 EXERCISE PRICE
- --------------- ----------- ---------------- ---------------- ----------- ----------------
<C> <C> <C> <C> <C> <C>
$7.00 144,924 4 years $6.58 144,924 $6.58
7.00 43,572 4 years 7.00 14,524 7.00
------- -------
188,496 159,448
======= =======
</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 $.67.
F-28
<PAGE> 75
GRAND ADVENTURES TOUR & TRAVEL PUBLISHING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. GOING-CONCERN
As shown in 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
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) 5,714*
Company common stock warrants to be issued to Avonwood Capital and 2,857* stock
warrants to Stan Moyer (a principal of Avonwood), all exercisable at $7.00* 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 $3.50* 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 $3.50* 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 $1.75* 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.
*As adjusted for 1-for-7 reverse stock split.
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reflected in the consolidated balance sheets for
restricted cash, accounts receivable, cash overdraft, accounts payable and notes
payable approximate the respective values due the short maturities of those
instruments. The estimated fair values have been determined by the Company using
appropriate valuation methodologies and available market information.
Considerable judgement is necessarily required in
F-29
<PAGE> 76
GRAND ADVENTURES TOUR & TRAVEL PUBLISHING CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
interpreting market data to develop the estimates of fair value, and,
accordingly, the estimates are not necessarily indicative of the amounts that
the Company could realize in a current market exchange. A comparison of the
carrying value of those financial instruments, none of which are held for
trading purposes, is as follows:
<TABLE>
<CAPTION>
CARRYING FAIR
AMOUNT VALUE
-------- --------
<S> <C> <C>
Assets:
Restricted cash........................................... $ 43,240 $ 43,240
Accounts receivable....................................... 19,911 19,911
Liabilities:
Cash overdraft............................................ 50,723 50,723
Accounts payable.......................................... 578,988 578,988
Short-term debt........................................... 502,573 502,573
Long-term debt............................................ 254,223 254,223
</TABLE>
Restricted cash, cash overdraft, accounts receivable and accounts
payable. The carrying value of such items approximates their fair value at
December 31, 1996.
Short-term debt and long-term debt. Fair value of such debt is based on
rates currently available to the Company for debt of similar terms and remaining
maturities. There are no quoted prices for the debt or similar debt.
F-30
<PAGE> 77
=========================================================
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY
SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER,
TO, OR A SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH OFFER OR
SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary.................................. 3
Risk Factors............................. 7
Use of Proceeds.......................... 13
Dividend Policy.......................... 13
Dilution................................. 14
Capitalization........................... 15
Selected Financial Information........... 16
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................. 18
The Business............................. 26
Management............................... 34
Certain Relationships and Related
Transactions........................... 37
Principal Stockholders................... 38
Description of Securities................ 39
Shares Eligible for Future Sale.......... 40
Underwriting............................. 41
Legal Matters............................ 43
Experts.................................. 43
Additional Information................... 43
Financial Statements..................... F-1
</TABLE>
---------------------
Until March 1, 1998 (25 days after the date of this Prospectus), all dealers
effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
=========================================================
=========================================================
1,200,000 SHARES
GATT LOGO
--------------------
PROSPECTUS
--------------------
CAPITAL WEST SECURITIES, INC.
FEBRUARY 4, 1998
=========================================================
<PAGE> 78
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Articles of Incorporation of Grand Adventures Tour & Travel
Publishing Corporation (the "Company") provide that, to the fullest extent
permitted by Oregon law, directors and former directors of the Company shall
not be liable to the Company or its shareholders for monetary damages occurring
in their capacity as a director. Oregon law does not currently authorize the
elimination or limitation of the liability of a director to the extent the
director is found liable (i) for any breach of the director's duty of loyalty
to the Company or its shareholders, (ii) for acts or omissions not in good
faith that constitute a breach of duty of the director of the Company or which
involve intentional misconduct or a knowing violation of law, (iii) for
transactions from which the director received an improper benefit, whether the
benefit resulted from an action taken within the scope of the director's office
or (iv) for acts or omissions for which the liability of a director is
expressly provided by law.
The Company's Articles of Incorporation and its Bylaws grant mandatory
indemnification to directors and officers of the Company to the fullest extent
authorized under the Oregon Business Corporation Act. In general, an Oregon
corporation may indemnify a director or officer who was, is or is threatened to
be made a named defendant or respondent in a proceeding by virtue of his
position in the corporation if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, in the case of criminal proceedings, had no reasonable cause
to believe his conduct was unlawful. An Oregon corporation may indemnify an
officer or director in an action brought by or in the right of the corporation
only if such director or officer was not found liable to the corporation,
unless or only to the extent that a court finds him to be fairly and reasonably
entitled to indemnity for such expenses as the court deems proper.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses to be incurred in connection with the issuance
and distribution of the shares of Common Stock covered by this Registration
Statement, all of which will be paid by the Company, are as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee . . . . . . . . . . . $2,850
Boston Stock Exchange Listing Fee . . . . . . . . . . . . . . . . . . . . $7,500
National Association of Securities Dealers, Inc. Filing Fee . . . . . . . $1,063
Printing and Engraving* . . . . . . . . . . . . . . . . . . . . . . . . $75,000
Legal Fees and Expenses*. . . . . . . . . . . . . . . . . . . . . . . . $90,000
Accounting Fees and Expenses* . . . . . . . . . . . . . . . . . . . . . $20,000
Travel* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $15,000
Miscellaneous* . . . . . . . . . . . . . . . . . . . . . . . . . . . . $9,000
Total** . . . . . . . . . . . . . . . . . . . . . . . . . . . $220,413
</TABLE>
- ----------
* Estimated
** To the extent that the actual offering expenses exceed the limitation on
the payment of offering expenses set forth in the Prospectus and/or
imposed by applicable state securities law, Grand Adventures Tour &
Travel Publishing Corporation, will pay such excess offering expense.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
The following sets forth certain information regarding sales of
securities of the Company issued within the past three years, which were not
registered pursuant to the Securities Act of 1933, as amended (the "Securities
Act"). The following information has been adjusted to reflect the 1-for-7 split
for all Common Stock to be effected in October, 1997 (the "Reverse Stock
Split"):
II-1
<PAGE> 79
On October 10, 1996, the Company, in connection with a merger (the
"Merger") of a newly created, wholly-owned subsidiary of the Company with and
into Airfair Publishing, Inc. ("Airfair"), which operated the businesses that
now comprise the Company's operations, the Company issued the following
securities:
(i) 1,303,571 shares of Common Stock to shareholders of
Airfair. Such issuance was exempt from registration
pursuant to either or both Section 4(2) of the Securities
Act or Rule 506 under the Securities Act ("Rule 506"),
based on the absence of any public solicitation, there
being a limited number of shareholders of Airfair (a
significant number of whom were accredited investors), and
the investors' access to information and sophistication;
(ii) incentive options to acquire 51,571 shares of Common Stock
to employees and officers of Airfair to replace incentive
stock options to acquire 325,000 shares of Airfair common
stock. Based on the absence of any public solicitation,
there being a limited number of shareholders of Airfair (a
significant number of whom were accredited investors), the
investors' access to information and sophistication, and
compliance with the requirements of Rule 701 promulgated
under the Securities Act ("Rule 701"), the options granted
to the employees and officers of Airfair were exempt from
registration pursuant to any or all of Section 4(2) of the
Securities Act or Rules 506 or 701. The exercise of such
options will be made pursuant to Rule 701;
(iii) warrants to acquire 13,095 shares of Common Stock to
replace warrants to acquire an equal number of shares of
Airfair common stock. Under the terms of the Airfair
warrants, upon consummation of the Merger, such warrants
were automatically converted into an equivalent warrant to
acquire shares of the Company's common stock. Each of
these warrant holders was an accredited investor and had
received their Airfair warrants or claim options in
transactions exempt under one or both of Rule 506 or
Section 4(2) of the Securities Act. It is a condition to
exercise of the warrants that such exercise not be
integrated with any prior registered offering and that the
holders certify, at the time of exercise, that such holder
is an accredited investor. The Company believes that the
issuance of these warrants was not a sale of securities by
the Company but, if such issuance is a "sale" within the
meaning of the Securities Act, that such issuances was,
and that the issuance of shares of common stock upon
exercise of the warrants will be, exempt from the
registration requirements of the Securities Act under
either or both Section 4(2) of the Securities Act or Rule
506;
(iv) warrants to acquire 8,571 shares of Common Stock issued to
Avonwood Capital Corporation ("Avonwood") and F. Stanton
Moyer in satisfaction of their bona fide claims to Airfair
warrants which, if issued timely by Airfair, would have
caused Mr. Moyer and Avonwood to have held Airfair
warrants at the time of the Merger and to have been issued
warrants together with the individuals described in
subparagraph (iii) above. Mr. Moyer and Avonwood are
highly sophisticated and accredited investors and their
claim for Airfair warrants arose from a transaction exempt
from the registration requirements of the Securities Act.
It is a condition to exercise of the warrants that such
exercise not be integrated with any prior registered
offering and that the holders certify, at the time of
exercise, that such holder is an accredited investor. The
Company believes that the issuance of these warrants was
and that the issuance of shares of Common Stock upon
exercise of the warrants will be, exempt from the
registration requirements of the Securities Act under
either of both Section 4(2) of the Securities Act or Rule
506; and
(v) an option to acquire 114,285 shares of Common Stock to
Mark T. Waller, then a director and substantial share-
holder of the Company. The issuance to Mr. Waller was
effected in accordance with the terms of an advisory
services agreement between Mr. Waller and the Company.
Such warrant issuance was exempt from the registration
requirements of the
II-2
<PAGE> 80
Securities Act pursuant to either or both Section 4(2) of
the Securities Act or Rule 506 under the Securities Act.
Effective as of October 10, 1996, the Company issued to a consultant a
warrant to acquire 400 shares of Common Stock. The warrant was issued to the
consultant as consideration for assistance to the Company in procuring a
valuable relationship and contract with a significant cruise line operator. The
consultant is a sophisticated investor with extensive knowledge of the Company
and its markets. It is a condition to exercise of the warrants that such
exercise not be integrated with any prior registered offering and that the
holders certify, at the time of exercise, that such holder is an accredited
investor. The Company believes that the issuance of these warrants was not a
sale of securities by the Company but, if such issuance is a "sale" within the
meaning of the Securities Act, that such issuances was, and that the issuance
of shares of common stock upon exercise of the warrants will be, exempt from
the registration requirements of the Securities Act under either or both
Section 4(2) of the Securities Act or Rule 506. Based on these factors, the
Company believes that the warrant issuance to Mr. Calhoun was exempt under
Section 4(2) of the Securities Act.
In February, 1997, the Company granted to several employees incentive
stock options to acquire a total of 64,142 shares of Common Stock. The options
granted to these employees were, and the exercise of such options will be,
effected in accordance with the provisions of Rule 701.
In November, 1996, the Company issued to Dennis O'Connor a warrant to
acquire 1,428 shares of Common Stock. The warrant was issued to Mr. O'Connor, a
securities lawyer, in consideration for consulting services rendered to the
Company and related to the Company's status as a formerly defunct reporting
company. Mr. O'Connor is an accredited and sophisticated investor and was
provided with access to all material information regarding the Company. It is a
condition to exercise of the warrants that such exercise not be integrated with
any prior registered offering and that the holders certify, at the time of
exercise, that such holder is an accredited investor. The Company believes that
the issuance of these warrants was not a sale of securities by the Company but,
if such issuance is a "sale" within the meaning of the Securities Act, that
such issuances was, and that the issuance of shares of common stock upon
exercise of the warrants will be, exempt from the registration requirements of
the Securities Act under either or both Section 4(2) of the Securities Act or
Rule 506. Based on these facts, the Company believes that the issuance of this
warrant to Mr. O'Connor was exempt under Section 4(2) of the Securities Act.
In March, 1997, the Company issued to a consultant providing the
Company with computer services, a convertible note in the principal amount of
$25,000, convertible into 7,142 shares of Common Stock. The consultant shared
office space with an affiliate of the Company, and has extensive knowledge of
the Company's business. It is a condition to exercise of the conversion feature
that such conversion not be integrated with any prior offering of the Company's
securities. The Company believes that the issuance of this convertible note
was, and the issuance of shares to occur when conversion of such notes will be,
exempt from the registration requirements of the Securities Act based on
Section 4(2) of the Act.
In April, 1997, the Company completed a private placement (the "First
1997 Placement") of convertible notes and warrants to ten accredited investors.
The aggregate principal amount of the convertible notes was $500,000 and
II-3
<PAGE> 81
no portion of the consideration (which consisted entirely of cash) was
attributed to the warrants. The warrants entitle the holders to acquire an
aggregate of 142,857 shares of Common Stock. It is a condition to exercise of
the warrants that such exercise not be integrated with any prior registered
offering and that each holder certify, at the time of exercise, that such
holder is an accredited investor. The Company believes that the issuance of
notes and warrants was, and that the issuance of shares of common stock upon
exercise of the warrants will be, exempt from the registration requirements of
the Securities Act under either or both Section 4(2) of the Securities Act or
Rule 506 under the Securities Act.
In April 1997, holders of Notes issued by Airfair in 1996 agreed to exchange the
1996 notes for convertible notes issued by the Company which, although
unsecured, incorporated a conversion feature. Each of the note holders is an
accredited investor and each of them, or their purchaser representative, as the
case may be, received complete access to the books and records of the Company.
The Company believes that this transaction was exempt under Section 4 (2) of the
Securities Act, based on the absence of any public solicitation, the Note
holders' prior relationship with the Company and their accredited status. Based
on the absence of any payment of remuneration at the time of conversion of the
convertible notes, the Common Stock to be issued upon such conversion will be
exempt from registration pursuant to the provisions of Section 3(a) and 9 of the
Securities Act.
In April 1997, in consideration for consulting services provided in
connection with restructuring of the 1996 Notes, the Company issued to F.
Stanton Moyer and Avonwood warrants to acquire an aggregate of 8,571 shares of
Common Stock. It is a condition to exercise of the warrants that such exercise
not be integrated with any prior registered offering and that the holders
certify, at the time of exercise, that such holder is an accredited investor.
Based on the absence of any public solicitation, the status of Mr. Moyer and
Avonwood as accredited and sophisticated investors and their access to
information regarding the Company, the Company believes that these issuances
are, and that the issuance of shares upon the warrants will be, exempt from
registration pursuant to the provisions of Section 4(2) of the Securities Act.
In April 1997, the Company issued to Robert A. Barrett a warrant to
acquire 7,142 shares of Common Stock. Mr. Barrett is the principal shareholder
of the two corporations which sold to Airfair most of the business operations
the Company currently operates. A substantial portion of the purchase price paid
by Airfair to these two corporations were promissory notes payable to each of
them. The warrant was issued to Mr. Barrett as partial consideration for his
causing the two corporations to discount the two promissory notes substantially.
Mr. Barrett is very knowledgeable about the Company's industry and the Company's
operations and is a sophisticated investor. It is a condition to exercise of the
warrants that such exercise not be integrated with any prior registered offering
and that the holders certify, at the time of exercise, that such holder is an
accredited investor. The Company believes that the issuance of these warrants
was not a sale of securities by the Company but, if such issuance is a "sale"
within the meaning of the Securities Act, that such issuances was, and that the
issuance of shares of common stock upon exercise of the warrants will be, exempt
from the registration requirements of the Securities Act under either or both
Section 4(2) of the Securities Act or Rule 506. Based upon these factors, and in
the absence of any public solicitation, the Company believes that this
transaction is exempt from registration pursuant to the provisions of Section
4(2) of the Securities Act.
On October 24, 1997, the Company concluded a private placement of Notes
and Shares. The aggregate offering price was $500,050 and the aggregate
principal amount of the Notes was $500,000. Each of the investors is an
accredited investor and the Company believes that the private placement
was exempt under the provisions of either or both Rule 506 or Section 4(2) of
the Securities Act.
On December 24, 1997, the Company borrowed $70,000 from a trust
established by one of the Company's shareholders. The note issued by the Company
bears interest at the rate of 10% per annum, is secured by certain of the
Company's accounts receivable and matures on the earlier to occur of the
consummation of the Offering or March 23, 1998. The trustee of the trust is a
shareholder of and advisor to the Company and a sophisticated and accredited
investor. The Company believes that the issuance of this Note is exempt under
either or all of Rule 504, Rule 506 or Section 4(2) of the Securities Act.
II-4
<PAGE> 82
ITEM 27. EXHIBITS.
<TABLE>
<CAPTION>
Exhibit No. Name of Exhibit
<S> <C>
1.01 Underwriting Agreement between Grand
Adventures Tour & Travel Publishing
Corporation and underwriter (filed
electronically herewith)
1.02 Warrant Agreement between Grand
Adventures Tour & Travel Publishing
Corporation and underwriter (filed
electronically herewith)
**1.03 Lock-up Agreements between certain
officers, directors and shareholders
of Grand Adventures Tour & Travel
Publishing Corporation and
underwriter (filed electronically
herewith)
*2.01 Agreement and Plan of Merger entered
into effective July 19,1996, by and
between Riley Investments, Inc., and
Airfair Publishing, Inc.
*3.01 Restated Articles of Incorporation of
Grand Adventures Tour & Travel
Publishing Corporation
**3.02 Amended and Restated Bylaws of Grand
Adventures Tour & Travel Publishing
Corporation
**3.03 Articles of Amendment to Articles of
Incorporation of Grand Adventures
Tour & Travel Publishing Corporation
(filed electronically herewith)
**5.01 Opinion of Kuperman, Orr, Mouer &
Albers, P.C. regarding legality of
Common Stock (filed electronically
herewith)
*10.01 Advisory Services Agreement effective
October 10, 1996 by and between Riley
Investments, Inc. and Mark Waller
*10.02 Long Term Stock Incentive Option Plan
*10.03 Non-Qualified Stock Option granted
effective August 19, 1996 by Riley
Investments, Inc. to Mark Waller
*10.04 Indemnification and Pledge Agreement
between Grand Adventures Tour &
Travel Publishing Corporation and
Mark Waller
**10.05 Employment Agreement with Joseph S.
Juba
**10.06 Employment Agreement with Fernando
Cruz-Silva
**10.07 Management Agreement between Grand
Adventures Tour & Travel Publishing
Corporation, BEI Holdings, Inc. and
Inventory Marketing Services, Inc.
**10.08 Marketing Agreement between Grand
Adventures Tour & Travel Publishing
Corporation and Inventory
Merchandising Services, Inc.
**11.01 Statement of Computation of Earnings
</TABLE>
II-5
<PAGE> 83
<TABLE>
<S> <C>
**21.01 List of Subsidiaries
23.01 Consent of Kuperman, Orr, Mouer &
Albers, P.C. (filed electronically
herewith)
23.02 Consent of Andersen, Andersen &
Strong (filed electronically
herewith)
23.03 Consent of Robert G. Rader (filed
electronically herewith)
</TABLE>
----------
* Incorporated by reference from Form 8-K filed October 15, 1996.
** Filed previously
ITEM 28. UNDERTAKINGS.
1. The undersigned Registrant hereby undertakes:
(a) to provide to the Underwriters at the closing specified in
the Underwriting Agreement certificates in such
denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each
purchaser.
(b) for determining any liability under the Securities Act,
treat the information omitted from the form of prospectus
filed as part of this Registration Statement in reliance
upon Rule 430A and contained in a form of prospectus filed
by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act as part of this
Registration Statement as of the time the Commission
declared it effective.
(c) to file, during any period in which offers or sales are
made, a post-effective amendment to this Registration
Statement to:
(i) include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change
in the information in the Registration Statement; and
(iii) include any additional or changed material information on
the plan of distribution.
(d) that, for the purpose of determining liability under the
Securities Act, each post-effective amendment shall be
deemed to be a new registration statement of the
securities offered, and the offering of the securities at
that time shall be deemed to be the initial bona fide
offering thereof.
(e) to file a post-effective amendment to remove from
registration any of the securities that remain unsold at
the termination or end of the offering.
2. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant
II-6
<PAGE> 84
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as
amended (the "Act") the Registrant certifies that it has reasonable grounds to
believe that it meets all the requirements of filing on Form SB-2 and has duly
caused this Amendment No. 3 to Registration Statement on Form SB-2 to be signed
on its behalf by the undersigned, thereon duly authorized in the City of
Austin, State of Texas on February 3, 1998.
Grand Adventures Tour & Travel Publishing
Corporation an Oregon corporation
By: /s/ Matthew O'Hayer
---------------------------------
Matthew O'Hayer Chairman of the Board and Chief
Executive Officer
Pursuant to the requirements of the Act, this Registration Statement has
been signed below by the following persons in the capacities and on February 3,
1998.
/s/ Joseph S. Juba
----------------------------------------------------
Joseph S. Juba President, Chief Operating Officer
and Secretary
/s/ Darrell Barker
----------------------------------------------------
Darrell Barker Chief Financial Officer and Treasurer
/s/ Fernando Cruz Silva
----------------------------------------------------
Fernando Cruz Silva Senior Vice President of Sales
& Marketing
/s/ Patti Macchi
----------------------------------------------------
Patti Macchi Vice President of Cruise Sales &
Marketing
/s/ Robert Sandner
----------------------------------------------------
Robert Sandner Director
II-7
<PAGE> 85
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Name of Exhibit
<S> <C>
1.01 Underwriting Agreement between Grand
Adventures Tour & Travel Publishing
Corporation and underwriter (filed
electronically herewith)
1.02 Warrant Agreement between Grand
Adventures Tour & Travel Publishing
Corporation and underwriter (filed
electronically herewith)
**1.03 Lock-up Agreements between certain
officers, directors and shareholders
of Grand Adventures Tour & Travel
Publishing Corporation and
underwriter (filed electronically
herewith)
**2.01 Agreement and Plan of Merger entered
into effective July 19,1996, by and
between Riley Investments, Inc., and
Airfair Publishing, Inc
**3.01 Restated Articles of Incorporation of
Grand Adventures Tour & Travel
Publishing Corporation
*3.02 Amended and Restated Bylaws of Grand
Adventures Tour & Travel Publishing
Corporation
**3.03 Articles of Amendment to Articles of
Incorporation of Grand Adventures
Tour & Travel Publishing Corporation
(filed electronically herewith)
**5.01 Opinion of Kuperman, Orr, Mouer &
Albers, P.C. regarding legality of
Common Stock (filed electronically
herewith)
**10.01 Advisory Services Agreement effective
October 10, 1996 by and between Riley
Investments, Inc. and Mark Waller
**10.02 Long Term Stock Incentive Option Plan
**10.03 Non-Qualified Stock Option granted
effective August 19, 1996 by Riley
Investments, Inc. to Mark Waller
**10.04 Indemnification and Pledge Agreement
between Grand Adventures Tour &
Travel Publishing Corporation and
Mark Waller
*10.05 Employment Agreement with Joseph S.
Juba
*10.06 Employment Agreement with Fernando
Cruz- Silva
*10.07 Management Agreement between Grand
Adventures Tour & Travel Publishing
Corporation, BEI Holdings, Inc. and
Inventory Marketing Services, Inc.
*10.08 Marketing Agreement between Grand
Adventures Tour & Travel Publishing
Corporation and Inventory
Merchandising Services, Inc.
*11.01 Statement of Computation of Earnings
</TABLE>
II-8
<PAGE> 86
<TABLE>
<S> <C>
*21.01 List of Subsidiaries
23.01 Consent of Kuperman, Orr, Mouer &
Albers, P.C. (filed electronically
herewith)
23.02 Consent of Andersen, Andersen &
Strong (filed electronically
herewith)
23.03 Consent of Robert G. Rader (filed
electronically herewith)
</TABLE>
----------
* Previously Filed
** Incorporated by reference from Form 8-K filed October 15, 1996.
II-9
<PAGE> 1
1,200,000 SHARES
GRAND ADVENTURES TOUR & TRAVEL PUBLISHING CORPORATION
(an Oregon corporation)
(Par Value $0.0001 Per Share)
UNDERWRITING AGREEMENT
_______________, 1998
CAPITAL WEST SECURITIES, INC.
211 N. Robinson
16th Floor, One Leadership Square
Oklahoma City, Oklahoma 73102
Ladies/Gentlemen:
Grand Adventures Tour & Travel Publishing Corporation, an Oregon
corporation (the "Company"), hereby confirms its agreement with Capital West
Securities, Inc. ("Capital West") as representative of the several underwriters
named in Schedule A hereto (herein collectively called the "Underwriters") as
follows:
1. DESCRIPTION OF SHARES. The Company proposes to issue and sell
1,200,000 shares (the "Firm Shares") of its authorized and unissued common
stock, par value $0.0001 per share (the "Common Stock") to the Underwriters
upon the terms and subject to the conditions set forth herein. The Company
also proposes to grant to the Underwriters an option to purchase, for the sole
purpose of covering over-allotments in connection with the sale of Firm Shares,
an aggregate of up to 180,000 additional shares ("Option Shares") of Common
Stock upon the terms and subject to the conditions set forth herein and as
provided in Section 7 hereof. As used in this Agreement, the term "Shares"
shall include the Firm Shares and the Option Shares. All shares of Common
Stock of the Company, including the Shares, are hereinafter referred to as
"Common Stock."
2. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF THE COMPANY.
Unless otherwise indicated or the context otherwise requires, references to the
"Company" in this Section 2 are references to Grand Adventures Tour & Travel
Publishing Corporation, an Oregon corporation. The Company represents and
warrants to and agrees with the Underwriters, as follows:
(a) A registration statement on Form SB-2 (File No.
333-38739) with respect to the Shares, including a prospectus subject to
completion, has been prepared by the Company in conformity with the
requirements of the Securities Act of 1933, as amended (the "Act"), and the
applicable rules and regulations (the "Rules and Regulations") of the
Securities and Exchange Commission (the "Commission") under the Act and has
been filed with the Commission; such amendments to such registration statement
and such amended prospectuses subject to completion, as may have been required
prior to the date hereof have been similarly prepared and filed with the
Commission; and the Company will file such additional amendments to such
registration statement and such amended prospectuses subject to completion, as
may hereafter be required. The Company
<PAGE> 2
meets the requirements for use of a Registration Statement on Form SB-2.
Copies of such registration statement and any amendments and of each related
prospectus subject to completion have been delivered to you.
If the registration statement has been declared effective
under the Act by the Commission, the Company will prepare and promptly file
with the Commission the information omitted from the registration statement
pursuant to Rule 430A(a) of the Rules and Regulations or as part of a
post-effective amendment to the registration statement (including a final form
of prospectus). If the registration statement has not been declared effective
under the Act by the Commission, the Company will prepare and promptly file a
further amendment to the registration statement, including a final form of
prospectus. The term "Registration Statement" as used in this Agreement shall
mean such registration statement, including financial statements, schedules and
exhibits, in the form in which it became or becomes, as the case may be,
effective (including, if the Company omitted information from the registration
statement pursuant to Rule 430A(a) of the Rules and Regulations, the
information deemed to be a part of the registration statement at the time it
became effective pursuant to Rule 430A(b) of the Rules and Regulations) and, in
the event of any amendment thereto after the effective date of such
registration statement, shall also mean (from and after the effectiveness of
such amendment) such registration statement as so amended. The term
"Prospectus" as used in this Agreement shall mean the prospectus relating to
the Shares as included in such Registration Statement at the time it becomes
effective (including, if the Company omitted information from the Registration
Statement pursuant to Rule 430A(a) of the Rules and Regulations, the
information deemed to be a part of the Registration Statement at the time it
became effective pursuant to Rule 430A(b) of the Rules and Regulations), except
that if any revised prospectus shall be provided to the Underwriters by the
Company for use in connection with the offering of the Shares that differs from
the Prospectus on file with the Commission at the time the Registration
Statement became or becomes, as the case may be, effective (whether or not such
revised prospectus is required to be filed with the Commission pursuant to Rule
424(b)(3) of the Rules and Regulations), the term "Prospectus" shall refer to
such revised prospectus from and after the time it is first provided to the
Underwriters for such use.
(b) The Commission has not issued any order preventing or
suspending the use of any Preliminary Prospectus or instituted proceedings for
that purpose, and each such Preliminary Prospectus has conformed in all
material respects to the requirements of the Act and the Rules and Regulations
and, as of its date, has not included any untrue statement of a material fact
or omitted to state a material fact necessary to make the statements therein,
or necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading; and at the time the Registration
Statement became or becomes, as the case may be, effective and at all times
subsequent thereto up, to and on the Closing Date (hereinafter defined) and on
any later date on which Option Shares are to be purchased, (i) the Registration
Statement and the Prospectus, and any amendments or supplements thereto,
contained and will contain all material information required to be included
therein by the Act and the Rules and Regulations and will in all material
respects conform to the requirements of the Act and the Rules and Regulations,
and (ii) neither the Registration Statement nor the Prospectus, nor any
amendments or supplements thereto, will include any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein, in the light of the circumstances
under which they were
-2-
<PAGE> 3
made, not misleading; provided, however, that none of the representations and
warranties contained in this subparagraph shall apply to information contained
in or omitted from the Registration Statement or the Prospectus or any such
amendment or supplement in reliance upon, and in conformity with, written
information furnished to the Company by any Underwriter specifically for
inclusion therein.
(c) Each contract, agreement, instrument, lease, license
or other item required to be described in the Registration Statement or the
Prospectuses or filed as an exhibit to the Registration Statement has been so
described or filed, as the case may be.
(d) The Company and each of its Subsidiaries (as such
term is defined in Rule 405 under the Act) has been duly incorporated and is
validly existing as a corporation in good standing under the laws of the
jurisdiction of its organization, with full corporate power and authority to
own, lease and operate its properties and to conduct its business as described
in the Registration Statement; each of the Company and its Subsidiaries is duly
qualified to do business as a foreign corporation and is in good standing in
each jurisdiction in which the ownership or leasing of its properties or the
conduct of its business requires such qualification except where the failure to
be so qualified or to be in good standing would not have a material adverse
effect on the condition (financial or otherwise), earnings, operations,
business or business prospects of the Company and its Subsidiaries considered
as a whole; each of the Company and its Subsidiaries is in possession of and
operating in compliance with all authorizations, licenses, certificates,
consents, orders and permits from state, Federal and other regulatory
authorities which are material to the conduct of its business, all of which are
valid and in full force and effect; neither the Company nor its Subsidiaries is
in violation of its charter or bylaws or in default in the performance or
observance of any material obligation, agreement, covenant or condition
contained in any material indenture, mortgage, deed of trust, loan agreement,
bond, debenture, note agreement or other evidence of indebtedness, or any
material lease, contract, joint venture, or other agreement or instrument to
which it is a party or by which its property is bound or in violation of any
law, order, rule, regulation, writ, injunction, judgment or decree of any
government, governmental agency or body or court, domestic or foreign, of which
it has knowledge except such failures to comply as would not, individually or
in the aggregate, have a material adverse effect on the Company and its
Subsidiaries considered as a whole.
(e) The Company has full legal right, power and authority
to enter into this Agreement and perform the transactions contemplated hereby.
This Agreement and the Warrant Agreement (the "Warrant Agreement") by and
between the Company and the Underwriters have been duly authorized, executed
and delivered by the Company and are valid and binding agreements on the part
of the Company, enforceable in accordance with their respective terms, except
as rights to indemnification and contribution hereunder may be limited by
applicable law and except as the enforcement hereof may be limited by
applicable bankruptcy, insolvency, reorganization moratorium or other similar
laws relating to or affecting creditors' rights generally, or by general
equitable principles; the performance of this Agreement and the Warrant
Agreement and the consummation of the transactions herein and therein
contemplated will not result in a breach or violation of any of the terms and
provisions of, or constitute a default under, (i) any material indenture,
mortgage, deed of trust, loan agreement, bond, debenture, note agreement or
other evidence of indebtedness, or any
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<PAGE> 4
material lease, contract, joint venture or other agreement or instrument to
which the Company is a party or by which the property of the Company is bound
including any licenses from third parties, or (ii) the Certificate of
Incorporation and Bylaws of the Company, or (iii) any law, order, rule,
regulation, writ, injunction, judgment or decree of any government or
governmental agency or body or court, domestic or foreign, having jurisdiction
over the Company or over the properties of the Company, except for breaches,
violations or defaults that individually or in the aggregate, would not have a
material adverse effect on the Company; and no consent, approval, authorization
or order of any court or governmental agency or body is required for the
consummation of the transactions herein contemplated, except such as may be
required under the Act, the Securities and Exchange Act of 1934, as amended
(the "Exchange Act"), or under state or other securities or Blue Sky laws, all
of which requirements have been satisfied in all material respects.
(f) Except as disclosed in the Registration Statement or
the Prospectus, there is no action, suit or proceeding before or by any court
or governmental agency or body, domestic or foreign, now pending, or, to the
knowledge of the Company, threatened, against or affecting the Company or its
Subsidiaries which (i) is required to be disclosed in the Registration
Statement or the Prospectus or which might result in any material adverse
change in the condition, financial or otherwise, or in the earnings, business
affairs or business prospects of the Company and its Subsidiaries considered as
one enterprise, or which might materially and adversely affect the properties
or assets thereof; or (ii) which might be expected to materially and adversely
affect the consummation of the transactions contemplated by this Agreement; all
pending legal or governmental proceedings to which the Company or its
Subsidiaries is a party or of which any of their respective properties or
assets is the subject which are not described in the Registration Statement,
including ordinary routine litigation incidental to the Company's business,
could not reasonably be expected to result in a material adverse change in the
condition, financial or otherwise, or the earnings, business affairs or
business properties of the Company and its Subsidiaries considered as one
enterprise; and there are no contracts or documents of the Company or its
Subsidiaries which are required to be described in the Registration Statement
or the Prospectus, or to be filed as exhibits thereto, by the Act or by the
Rules and Regulations which have not been accurately described in all material
respects and filed as exhibits to the Registration Statement. To the best of
the Company's knowledge, the contracts so described in the Prospectus are in
full force and effect on the date hereof, and neither the Company nor its
Subsidiaries is in breach of or default under, and to the Company's knowledge,
no other party is in material breach of or material default under, any of such
contracts.
(g) All outstanding shares of capital stock of the
Company have been duly authorized and validly issued and are fully paid and
nonassessable, have been issued in compliance with all Federal and state
securities laws, were not issued in violation of or subject to any preemptive
rights or other rights to subscribe for or purchase securities (other than such
preemptive rights or other rights to subscribe for or purchase securities as
were fully complied with or expressly waived or with respect to the violation
of which the right to make claim is barred by the applicable statute of
limitations), and the authorized and outstanding capital stock of the Company
conforms in all material respects to the statements relating thereto contained
in the Registration Statement and the Prospectus (and such statements correctly
state the substance of the instruments defining the capitalization of the
Company); the Firm Shares and the Option Shares to be purchased from the
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<PAGE> 5
Company hereunder have been duly authorized for issuance and sale to the
Underwriters pursuant to this Agreement and, when issued and delivered by the
Company against payment therefor in accordance with the terms of this
Agreement, will be duly and validly issued and fully paid and nonassessable;
the shares of Common Stock issuable under the warrant (the "Underwriters'
Warrant") to be granted to the Underwriters under the Warrant Agreement have
been duly authorized for issuance and sale to the Underwriters pursuant to this
Agreement and, when issued and delivered by the Company against payment
therefor in accordance with the terms of the Warrant Agreement, will be duly
and validly issued and fully paid and nonassessable; and no preemptive right,
co-sale right, registration right, right of first refusal or other similar
right of stockholders exists with respect to any of the Firm Shares, Option
Shares or shares of Common Stock issuable under the Underwriters' Warrant or
the issuance and sale thereof other than those that have been expressly waived
prior to the date hereof and those that will automatically expire upon the
consummation of the transactions contemplated on the Closing Date. No further
approval or authorization of any stockholder, the Board of Directors or others
is required for the issuance and sale or transfer of the Shares except as may
be required under the Act, the Exchange Act or under state or other securities
or Blue Sky laws. Except as disclosed in or contemplated by the Prospectus and
the financial statements of the Company (including the notes thereto) included
in the Prospectus, the Company has no outstanding options to purchase, or any
preemptive rights or other rights to subscribe for or to purchase, any
securities or obligations convertible into, or any contracts or commitments to
issue or sell, shares of its capital stock or any such options, rights,
convertible securities or obligations. The description of the Company's stock
option, stock bonus and other stock plans or arrangements, and the options or
other rights granted and exercised thereunder, set forth in the Prospectus
accurately and fairly presents the information required to be shown with
respect to such plans, arrangements, options and rights. The shares of Common
Stock reserved for issuance upon exercise of the Company's outstanding options
and warrants have been duly and validly authorized and are sufficient in number
to meet the exercise requirements of such options.
(h) Andersen Andersen & Strong, L.C., which has examined
the financial statements (together with related schedules and notes) of the
Company filed with the Commission as a part of the Registration Statement and
which are included in the Prospectus, are independent accountants within the
meaning of the Act and the Rules and Regulations; the audited and pro forma
financial statements of the Company, together with the related schedules and
notes, and the unaudited financial information, forming part of the
Registration Statement and Prospectus, fairly present the financial position
and the results of operations of the Company at the respective dates and for
the respective periods to which they apply; and all audited and pro forma
financial statements, together with the related schedules and notes, and the
unaudited and pro forma financial information, filed with the Commission as
part of the Registration Statement, have been prepared in accordance with
generally accepted accounting principles consistently applied throughout the
periods involved except as may be otherwise stated therein. The selected and
summary financial and statistical data included in the Registration Statement
present fairly the information shown therein and have been compiled on a basis
consistent with the audited financial statements presented therein. No other
financial statements or schedules are required to be included in the
Registration Statement.
(i) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus, except as otherwise
stated therein, (i) there has been no material
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<PAGE> 6
adverse change in the business, properties, operations, condition (financial or
otherwise) or in the earnings, business affairs or business prospects of the
Company and its Subsidiaries, whether or not arising in the ordinary course of
business, (ii) there have been no transactions entered into by the Company
other than those in the ordinary course of business, which are material with
respect to the Company, (iii) there has been no obligation that is material to
the Company, direct or contingent, incurred by the Company or any Subsidiary,
except obligations incurred in the ordinary course of business, (iv) there has
been no change in the capital stock of the Company, (v) there has been no
change in the outstanding indebtedness of the Company which is material to the
Company, (vi) there has been no dividend or distribution of any kind declared,
paid or made by the Company on behalf of any class of its respective capital
stock, (vii) there has been no redemption, purchase or acquisition or agreement
to redeem, purchase or acquire shares of Common Stock of the Company, or (viii)
to the knowledge of the Company, there has been no change in any Federal,
state, or other laws, rules, or regulations (or interpretations thereof)
applicable to the business of the Company that would have a material adverse
effect on the Company, and, to the knowledge of the Company, no such change is
pending other than as described in the Prospectus.
(j) Except as described in the Prospectus, (i) the
Company and its Subsidiaries have good and marketable title to all properties
and assets described in the Prospectus as owned by them, free and clear of all
liens, charges, encumbrances or restrictions of any kind, except those
described in the Prospectus, or those not material, singly or in the aggregate,
to the business of the Company and its Subsidiaries considered as a whole, (ii)
the agreements to which the Company is a party described in the Prospectus are
valid agreements, enforceable by the Company, except as the enforcement thereof
may be limited by applicable bankruptcy, insolvency, reorganization, moratorium
or other similar laws affecting creditors' rights generally or by general
equitable principles, and (iii) the Company has valid and enforceable leases
for the properties described in the Prospectus as leased by it except as
enforcement may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
creditors' rights generally or by general equitable principles.
(k) All Federal, state, local and foreign tax returns
required to be filed by the Company or its Subsidiaries in any jurisdiction
have been filed, and all material taxes, including withholding taxes, penalties
and interest, assessments, fees and other charges due or claimed to be due from
such entities have been paid other than those being contested in good faith and
for which adequate reserves have been provided or those currently payable
without penalty or interest; and adequate charges, accruals and reserves have
been provided for in the financial statements referred to in Section 2(g) above
in respect of all Federal, state, local and foreign taxes for all periods as to
which the tax liability of the Company or its Subsidiaries has not been finally
determined or remains open to examination by applicable taxing authorities.
(l) No labor dispute with the employees of the Company or
its Subsidiaries exists or, to the knowledge of the Company, is imminent; and
the Company is not aware of any existing or imminent labor disturbance by the
employees of any of its principal suppliers, manufacturers, contractors or
customers which might be expected to result in any material adverse change in
the condition, financial or otherwise, or in the earnings, business affairs or
business prospects of the Company and its Subsidiaries considered as one
enterprise. No collective bargaining agreement
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<PAGE> 7
exists with any of the Company's employees and, to the Company's knowledge, no
such agreement is imminent.
(m) The Company and its Subsidiaries own or possess, or
can acquire on reasonable terms, the patents, patent rights, licenses,
inventions, copyrights, know-how (including trade secrets and other unpatented
and/or unpatentable proprietary or confidential information, systems or
procedures), trademarks, service marks and trade names presently employed by
them in connection with the business now operated by them and neither the
Company nor its Subsidiaries has received any notice or is otherwise aware of
any infringement of or conflict with asserted rights of others with respect to
any patent or proprietary rights or of any facts or circumstances which would
render any patent and proprietary rights invalid or inadequate to protect the
interest of the Company or its Subsidiaries therein, and which infringement or
conflict (if the subject of any unfavorable decision, ruling or finding) or
invalidity or inadequacy singly or in the aggregate, would result in any
material adverse change in the condition, financial or otherwise, or in the
earnings, business affairs or business prospects of the Company and its
Subsidiaries considered as one enterprise.
(n) Except as set forth in the Prospectus, the Company
and its Subsidiaries are in compliance in all material respects with all
applicable laws, statutes, ordinances, rules or regulations, the enforcement of
which, individually or in the aggregate, would be reasonably expected to have a
material adverse effect on the condition, financial or otherwise, or the
earnings, business affairs or business prospects of the Company and its
Subsidiaries considered as one enterprise.
(o) The Common Stock has been approved for quotation on
Nasdaq SmallCap Market(SM) subject to official notice of issuance.
(p) The Company has been advised concerning the
Investment Company Act of 1940, as amended (the "1940 Act"), and the rules and
regulations thereunder, and has in the past conducted, and intends in the
future to conduct, its affairs in such a manner as to ensure that it will not
become an "investment company" within the meaning of the 1940 Act and such
rules and regulations.
(q) The Company has not distributed and will not
distribute prior to the Closing Date or on any date on which Option Shares are
to be purchased, as the case may be, any offering material in connection with
the offering and sale of the Shares other than the Prospectus, the Registration
Statement and other materials permitted by the Act.
(r) The Company has not at any time during the last five
years (i) made any unlawful contribution to any candidate for foreign office,
or failed to disclose fully any contribution in violation of law, or (ii) made
any payment to any Federal or state governmental officer or official, or other
person charged with similar public or quasi-public duties, other than payments
required or permitted by the laws of the United States or any jurisdiction
thereof.
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<PAGE> 8
(s) The Company has not taken and will not take, directly
or indirectly, any action designed to or that might be reasonably expected to
cause or result in stabilization or manipulation of the price of the Common
Stock to facilitate the sale or resale of the Shares. The Company has not
effected any sales of securities required to be disclosed in Item 26 of Form
SB-2 under the Act, other than as disclosed in the Registration Statement.
(t) Each officer and director of the Company and each
beneficial owner of at least 5% of the outstanding shares of Common Stock and
options and warrants to purchase Common Stock outstanding prior to the
effective date of the Registration Statement have agreed in writing that such
persons will not, for a period expiring 12 months after the effective date of
the Registration Statement, offer to sell, contract to sell, sell short, or
otherwise sell or dispose of any shares of Common Stock of the Company, any
options or warrants to purchase any shares of Common Stock of the Company, or
any securities convertible into or exchangeable for shares of the Common Stock
owned directly by such person or with respect to which such person has the
power of disposition otherwise than (i) as a gift or gifts, provided the donee
or donees thereof agree to be bound by this restriction or (ii) with the prior
written consent of Capital West. Messrs. O'Hayer, Juba and Sandner shall be
subject to a two (2) year lock-up unless the trading price of the Common Stock
of the Company is equal to or greater than 115% of the registered offering
price for 20 consecutive trading days, at which time, O'Hayer may sell up to
2,000 shares of Common Stock per month during the second year and Juba and
Sandner may sell up to 1,000 shares of Common Stock per month during the second
year; and, subject to the limitations of Rule 144, to the extent that any of
Messrs. O'Hayer, Juba and Sandner do not sell, in any given month, the full
number of shares of Common Stock which they were entitled to sell, such unsold
amount shall be available for sale in subsequent months without regard to any
other sales.
(u) Except as described in the Registration Statement,
(i) neither the Company nor its Subsidiaries is in violation of any Federal,
state, local or foreign laws or regulations relating to pollution or protection
of human health, the environment (including, without limitation, ambient air,
surface water, groundwater, land surface or subsurface strata) or wildlife,
including, without limitation, laws and regulations relating to the release or
threatened release of chemicals, pollutants, contaminants, wastes, toxic
substances, hazardous substances, petroleum or petroleum products
(collectively, "Environmental Materials") or to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of
Environmental Materials (collectively, the "Environmental Laws"), except such
violations as would not, singly or in the aggregate, have a material adverse
effect on the condition, financial or otherwise, or the earnings, business
affairs or business prospects of the Company and its Subsidiaries considered as
one enterprise, and (ii) to the best of the Company's knowledge, there are no
events or circumstances that could form the basis of an order for clean-up or
remediation, or an action, suit or proceeding by any private party or
governmental body or agency, against or affecting the Company or its
Subsidiaries relating to any Environmental Materials or the violation of any
Environmental Laws, which, singly or in the aggregate, could reasonably be
expected to have a material adverse effect on the condition, financial or
otherwise, or the earnings, business affairs or business prospects of the
Company and its Subsidiaries considered as one enterprise.
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<PAGE> 9
(v) The Company and its Subsidiaries maintain a system of
internal accounting controls sufficient to provide reasonable assurances that
(i) transactions are executed in accordance with management's general or
specific authorizations; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles as in effect in the United States and to maintain asset
accountability; (iii) access to bank accounts is permitted only in accordance
with management's general or specific authorization; and (iv) the recorded
accountability for assets is compared with existing assets at reasonable
intervals and appropriate action is taken with respect to any differences.
(w) There are no outstanding loans, advances (except
normal advances for business expenses in the ordinary course of business) or
guarantees of indebtedness by the Company to or for the benefit of any of the
officers or directors of the Company or any of the members of the families of
any of them, except as disclosed in the Registration Statement and the
Prospectus. Neither the Company nor any employee or agent of the Company has
made any payment or transfer of any funds or assets of the Company or conferred
any personal benefit by use of the Company's assets, or received any funds,
assets or personal benefit in violation of any law, rule or regulation.
(x) On the Closing Date and upon delivery of the Option
Shares, as applicable, all transfer and other taxes (other than income taxes)
that are required to be paid in connection with the sale and transfer of the
Shares to the Underwriters will have been paid.
(y) The Company does not currently have and has never had
any pension plan subject to the provisions of the Employee Retirement Income
Security Act of 1974, as amended, including the regulations and published
interpretations thereunder ("ERISA"); no "reportable event" (as defined in
ERISA) has occurred with respect to any "pension plan" (as defined in ERISA)
for which the Company would have any liability, the Company has not incurred
and does not expect to incur liability under (i) Title IV of ERISA with respect
to termination of, or withdrawal from, any "pension plan" or (ii) Sections 412
or 4971 of the Internal Revenue Code of 1986, as amended, including the
regulations and published interpretations thereunder (the "Code"); and each
"pension plan" for which the Company would have any liability that is intended
to be qualified under Section 401(a) of the Code is so qualified in all
material respects and nothing has occurred, whether by action or by failure to
act, which would cause the loss of such qualification.
(z) The Company confirms as of the date hereof that it is
in compliance with all provisions of Section 517.075, Florida Statutes (Chapter
92-198, Laws of Florida) An Act Relating to Disclosure of Doing Business with
Cuba (the "Cuba Act"), and the Company further agrees that if it commences
engaging in business with the government of Cuba or with any person or
affiliate located in Cuba after the date the Registration Statement becomes or
has become effective with the Commission or the Florida Department of Banking
and Finance (the "Department"), whichever date is later, or if the information
reported or incorporated by reference in the Prospectus, if any, concerning the
Company's business in Cuba or with any person or affiliate located in Cuba
changes in any material way, the Company will provide the Department notice of
such business or change, as appropriate, in a form acceptable to the
Department.
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<PAGE> 10
(aa) Any certificate signed by any officer of the Company
and delivered to the Underwriters or to counsel for the Underwriters shall be
deemed a representation and warranty by the Company to each Underwriter as to
the matters covered thereby.
(bb) Except as may be set forth in the Prospectus, the
Company has not incurred any liability for a fee, commission, or other
compensation on account of the employment of a broker or finder in connection
with the transactions contemplated by the Underwriting Agreement.
(cc) The Company and each subsidiary is insured by
insurers of recognized financial responsibility against such losses and risks
and in such amounts as are prudent and customary in the businesses in which the
Company and the subsidiaries are engaged.
3. PURCHASE, SALE AND DELIVERY OF SHARES. On the basis of the
representations and warranties herein contained and subject to the terms and
conditions herein set forth, the Company agrees to sell to each Underwriter,
severally and not jointly, and each Underwriter, severally and not jointly,
agrees to purchase from the Company, respectively, at a purchase price per
share of $5.00 per Share, the number of Shares set forth in Schedule A hereto
(subject to adjustment as provided in Section 10).
Delivery of definitive certificates for the Firm Shares to be
purchased by the Underwriters pursuant to this Section 3 shall be made against
payment of the purchase price therefor by the Underwriters by certified or
official bank check in next day funds, payable to the order of the Company at
the offices of Capital West Securities, Inc., 211 N. Robinson, 16th Floor, One
Leadership Square, Oklahoma City, Oklahoma 73102, or at such other place as
shall be agreed upon by the Underwriters and the Company, at 9:30 a.m. on the
fourth business day following the first day that Shares are traded (or at such
time and date to which payments and delivery shall have been postponed pursuant
to Section 10 hereof), such time and date of payment and delivery being herein
called the "Closing Date." The certificates for the Firm Shares to be so
delivered will be made available to you at such office or at such other
location as you may reasonably request for checking at least one business day
prior to the Closing Date and will be in such names and denominations as you
may request, such request to be made at least two business days prior to the
Closing Date. If the Underwriters so elect, delivery of the Shares may be made
by credit through full fast transfer to the accounts at Depository Trust
Company designated by the Underwriters.
It is understood that Capital West, individually and not as
representative of the several Underwriters, may (but shall not be obligated to)
make payment of the purchase price on behalf of any Underwriter or Underwriters
whose check or checks shall not have been received by Capital West prior to the
Closing Date for the Firm Shares to be purchased by such Underwriter or
Underwriters. Any such payment by Capital West shall not relieve any such
Underwriter or Underwriters of any of its or their obligations hereunder.
After the Registration Statement becomes effective, the
several Underwriters intend to offer the Firm Shares to the public as set forth
in the Prospectus.
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<PAGE> 11
The information set forth in the last paragraph on the front
cover page (insofar as such information relates to the Underwriters) and under
"Underwriting" in any Preliminary Prospectus and in the final form of
Prospectus filed pursuant to Rule 424(b) constitutes the only information
furnished by the Underwriters to the Company for inclusion in any Preliminary
Prospectus, the Prospectus or the Registration Statement, and you, on behalf of
the Underwriters, represent and warrant to the Company that the statements made
therein do not include any untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to make such
statements, in the light of the circumstances in which they were made, not
misleading.
4. FURTHER COVENANTS OF THE COMPANY. The Company covenants with
the several Underwriters as follows:
(a) The Company will use its best efforts to cause the
Registration Statement and any amendment thereof, if not effective at the time
and date that this Agreement is executed and delivered by the parties hereto,
to become effective as promptly as possible; it will notify you, promptly after
it shall receive notice thereof, of the time when the Registration Statement or
any subsequent amendment to the Registration Statement has become effective or
any supplement to the Prospectus has been filed; if the Company omitted
information from the Registration Statement at the time it was originally
declared effective in reliance upon Rule 430A(a) of the Rules and Regulations,
the Company will provide evidence satisfactory to you that the Prospectus
contains such information and has been filed, within the time period
prescribed, with the Commission pursuant to subparagraph (1) or (4) of Rule
424(b) of the Rules and Regulations or as part of a post-effective amendment to
such Registration Statement as originally declared effective which is declared
effective by the Commission; if for any reason the filing of the final form of
Prospectus is required under Rule 424(b)(3) of the Rules and Regulations, it
will provide evidence satisfactory to you that the Prospectus contains such
information and has been filed with the Commission within the time period
prescribed; it will notify you promptly of any request by the Commission for
the amending or supplementing of the Registration Statement or Prospectus or
for additional information; promptly upon your request, it will prepare and
file with the Commission any amendments or supplements to the Registration
Statement or Prospectus which, in the opinion of counsel for the several
Underwriters, may be necessary or advisable in connection with the distribution
of the Shares by the Underwriters; it will promptly prepare and file with the
Commission, and promptly notify you of the filing of, any amendments or
supplements to the Registration Statement or Prospectus which may be necessary
to correct any statements or omissions, if, at any time when a prospectus
relating to the Shares is required to be delivered under the Act, any event
shall have occurred as a result of which the Prospectus or any other prospectus
relating to the Shares as then in effect would include any untrue statement of
a material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; in case any
Underwriter is required to deliver a prospectus nine months or more after the
effective date of the Registration Statement in connection with the sale of the
Shares, it will prepare promptly upon request, but at the expense of such
Underwriter, such amendment or amendments to the Registration Statement and
such prospectus or prospectuses as may be necessary to permit compliance with
the requirements of Section 10(a)(3) of the Act; and it will file no amendment
or supplement to the Registration Statement or Prospectus which shall not
previously have been submitted to you a reasonable time prior to the proposed
filing thereof or to which you
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<PAGE> 12
shall reasonably object in writing, subject, however, to compliance with the
Act, the Rules and Regulations thereunder and the provisions of this Agreement.
(b) The Company will advise you, promptly after it shall
receive notice or obtain knowledge thereof of the issuance of any stop order by
the Commission suspending the effectiveness of the Registration Statement or of
the initiation or threat of any proceeding for that purpose; and it will
promptly use its best efforts to prevent the issuance of any stop order or to
obtain its withdrawal at the earliest possible moment if such stop order should
be issued.
(c) The Company will cooperate with the Underwriters and
Underwriters' counsel in connection with their efforts to qualify the Shares
for offering and sale under the securities laws of such jurisdictions as you
may designate as to continue such qualifications in effect for so long as may
be required for purposes of the distribution of the Shares, except that the
Company shall not be required in connection therewith or as a condition thereof
to qualify as a foreign corporation or to execute a general consent to service
of process in any jurisdiction or to make any undertaking with respect to the
conduct of its business. In each jurisdiction in which the Shares shall have
been qualified as above provided, the Company will make and file such
statements and reports in each year as are or may be reasonably required by the
laws of such jurisdiction.
(d) The Company will furnish you, as soon as available,
copies of the Registration Statement (three of which will be signed a include
all exhibits), each Preliminary Prospectus, the Prospectus and any amendments
or supplements to such documents, including any prospectus prepared to permit
compliance with Section 10(a)(3) of the Act, all in such quantities as you may
from time to time reasonably request.
(e) The Company will make generally available to its
stockholders as soon as practicable, but in any event not later than the 45th
day following the end of the fiscal quarter first occurring after the first
anniversary of the effective date of the Registration Statement, an earnings
statement (which will be in reasonable detail but need not be audited)
complying with the provisions of Section 11(a) of the Act and covering a
twelve-month period beginning after the effective date of the Registration
Statement.
(f) As long as the Company is a reporting company under
the Exchange Act, the Company will furnish to its stockholders, as soon as
practicable after the end of each respective period, annual reports (including
financial statements audited by independent certified public accountants) and
unaudited quarterly reports of operations for each of the first three quarters
of the fiscal year, and for a period of five years after the effective date of
the Registration Statement, the Company will furnish to the several
Underwriters hereunder, upon request (i) concurrently with furnishing such
reports to its stockholders, statements of operations of the Company for each
of the first three quarters in the form furnished to the Company's
stockholders; (ii) concurrently with furnishing to its stockholders, a balance
sheet of the Company as of the end of such fiscal year, together with
statements of operations, of stockholders' equity, and of cash flows of the
Company for such fiscal year, accompanied by a copy of the certificate or
report thereon of independent accountants; (iii) as soon as they are available,
copies of all reports and financial statements furnished to or filed with the
Commission, any securities exchange or the National Association of
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Securities Dealers, Inc. ("NASD"); (v) every material press release and every
material news item or article in respect of the Company or its affairs which
was released or prepared by the Company (excluding, in each case customary
product-related press releases and articles); and (vi) any additional
information of a public nature concerning the Company, or its business which
you may reasonably request. During such five-year period, if the Company shall
have active subsidiaries, the foregoing financial statements shall be on a
consolidated basis to the extent that the accounts of the Company and its
Subsidiaries are consolidated, and shall be accompanied by similar financial
statements for any significant subsidiary which is not so consolidated. For a
period of five years from the date of the Registration Statement, the Company
will furnish to you and, upon request, to each of the other Underwriters, as
soon as available, a copy of each report of the Company mailed to holders of
the Common Stock or publicly filed with the Commission or any automated
quotation system or national securities exchange on which any class of
securities of the Company is listed.
(g) The Company will apply the net proceeds from the sale
of the Shares being sold by it in the manner set forth under the caption "Use
of Proceeds" in the Prospectus.
(h) The Company will maintain a transfer agent and, if
necessary under the jurisdiction of incorporation of the Company, a registrar
(which may be the same entity as the transfer agent) for its Common Stock.
(i) The Company will file Form SR in conformity with the
requirements of the Act and the Rules and Regulations.
(j) The Company shall comply with all provisions of all
undertakings contained in the Registration Statement.
(k) If the transactions contemplated hereby are not
consummated by reason of any failure, refusal or inability on the part of the
Company to perform any agreement on its part to be performed hereunder or to
fulfill any condition of the Underwriters' obligations hereunder, or if the
Company shall terminate this Agreement under Section 11(a), the Company will
reimburse the several Underwriters for all out-of-pocket accountable expenses
(including fees and disbursements of counsel for the several Underwriters)
actually incurred by the Underwriters in investigating, preparing to market or
marketing the Shares, up to an aggregate of $45,000, which amount has already
been paid and which shall be reimbursed to the Company to the extent not
actually incurred.
(l) If at any time during the 90-day period after the
Registration Statement becomes effective, any rumor, publication or event
relating to or affecting the Company shall occur as a result of which in your
opinion the market price of the Common Stock has been or is likely to be
materially affected (regardless of whether such rumor, publication or event
necessitates a supplement to or amendment of the Prospectus), the Company will,
after written notice from you advising the Company to the effect set forth
above, forthwith prepare, consult with you concerning the substance of, and
disseminate a press release or other public statement, reasonably satisfactory
to you, responding to or commenting on such rumor, publication or event.
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<PAGE> 14
(m) For a period of 180 days after the date of this
Agreement, without the prior written consent of Capital West, the Company shall
not, directly or indirectly, offer, sell, contract to sell, pledge, grant any
option to purchase or otherwise dispose (or announce any offer, sale, contract
of sale or other disposition of), any shares of Common Stock or any other
shares of capital stock of the Company, or any securities convertible into or
exercisable or exchangeable for, or warrants, options or rights to purchase or
acquire, shares of Common Stock or any other shares of capital stock of the
Company, or any interest in the Common Stock (including derivative interests)
other than the Company's issuance and sale of Shares in accordance with the
Underwriting Agreement, and the issuance of stock options under, or the
issuance of Common Stock upon the exercise of stock options granted under, any
stock option plan described in the Prospectuses.
(n) During a period of 90 days from the effective date of
the Registration Statement, the Company will not file a registration statement
registering shares under any employee benefit plan.
(o) On the Closing Date the Company will sell to you, for
$.001 per share of Common Stock covered by each warrant, the Underwriters'
Warrants to purchase one share of Common Stock of the Company for each ten
shares of the Company's Common Stock which have been sold (or purchased by the
Underwriters), excluding any over-allotment shares, as set forth in the
Prospectus. The Underwriters' Warrants shall have the terms and be in the form
filed as an exhibit to the Registration Statement. At any time during the
period commencing 12 months and ending five years after the effective date of
the offering and at the written request of the then holders of 51% of the
Underwriters' Warrants and the Common Stock of the Company issued upon the
exercise of the Underwriters' Warrants, and on one occasion, the Company will
file with the Commission and process to effectiveness a registration statement
covering not less than 51% of the shares of the Common Stock of the Company
issuable and/or issued upon the exercise of the Underwriters' Warrants. The
Company must file a registration statement only if the shares of Common Stock
issuable under the Underwriters' Warrants cannot be sold without registration
under Rule 144 promulgated under the Act. The Company agrees to use its
commercially reasonable best efforts to cause the filing to become effective.
The costs of the filing of such registration statement including but not
limited to, legal (including legal fees relating to clearance in the various
states, limited however to such states as may be reasonably requested),
accounting and printing fees, shall be borne by the Company but the Company
shall not be responsible for the cost of any separate counsel to review the
registration statement on behalf of or to advise the selling stockholders and
shall not be responsible for the payment of any underwriting discount or
commissions with respect to such sale. Such registration statement shall
comply with any undertaking applicable to such shares. If the Company
otherwise than upon the request of the owners of the Underwriters' Warrants or
the shares of Common Stock issuable upon the exercise thereof files a
registration statement under the Act with respect to any of its securities at
any time (other than on Form S-4, S-8, or any other form that does not provide
for resales by selling security holders), the Company will give such persons 30
days' notice of its intention to do so, and at their written request given
within 10 days of the receipt of such notice, will include in such registration
statement such number of such Shares as they may specify, all at no cost to
them (except for underwriting discounts and the fees and expenses of counsel to
such holders). In connection with any such registration statement covering all
or a part of such shares, the Company agrees that it will covenant with the
owners of such shares with respect
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<PAGE> 15
to such shares and the offering thereof, in customary form substantially to the
effect contained in this Section 4. If the offering pursuant to any
registration statement provided for herein is made through Underwriters, the
Company agrees to enter into an underwriting agreement in customary form with
such underwriters in which the Company and the underwriters and each person who
controls such underwriters within the meaning of the Act grant to each other
customary reciprocal indemnities against liabilities under the Act.
(p) As long as the Company is a reporting company under
the Exchange Act, the Company will comply with the Act, the Exchange Act, the
rules and regulations of the NASD and applicable state securities or Blue Sky
laws so as to permit the continuance of sales and dealings in the Common Stock
under the Act, the Exchange Act, the rules and regulations of the NASD, and
applicable state securities or Blue Sky laws, including the filing with the
NASD and the Commission of all reports required to be filed pursuant to the
applicable provisions of the rules and regulations of the NASD, the Act, and
the Exchange Act, and will deliver to the holders of the Common Stock all
reports required to be provided to such holders pursuant to the applicable
provisions of the rules and regulations of the NASD, the Act, the Exchange Act,
and applicable state securities or Blue Sky laws.
(q) Immediately following the later to occur of: (i) the
Option Closing Date, as defined in Section 6(h)(3), below, or (ii) 30 days
following the Closing Date, the Company shall take and complete all necessary
corporate and stockholder action that will allow Capital West to designate one
person of its choosing to serve as a member of the Board of Directors of the
Company.
5. EXPENSES.
(a) The Company agrees with each Underwriter that the
Company will pay and bear all costs and expenses in connection with the
preparation, printing and filing of the Registration Statement (including
financial statements, schedules and exhibits), Preliminary Prospectuses and the
Prospectus and any amendments or supplements thereto; the printing of this
Agreement, the Preliminary Blue Sky Survey and any Supplemental Blue Sky
Survey, the Underwriters' Questionnaire and Power of Attorney and any
instruments related to any of the foregoing; the issuance and delivery of the
Shares hereunder to the Underwriters, including transfer taxes, if any, and the
cost of all certificates representing the Shares and transfer agents' and
registrars' fees; the fees and disbursements of counsel for the Company; all
fees and other charges of the Company's independent public accountants; the
cost of furnishing to the Underwriters copies of the Registration Statement
(including appropriate exhibits), Preliminary Prospectus and the Prospectus,
and any amendments or supplements to any of the foregoing; and all postage
costs incurred in connection with the qualification of the Shares under the
laws of such jurisdictions as you may designate; and all other expenses
directly incurred by the Company in connection with the performance of its
obligations hereunder.
(b) Capital West shall be entitled to receive from the
Company, for itself and not as representative of the Underwriters, a
nonaccountable expense allowance equal to three percent of the aggregate public
offering price of Shares sold to the Underwriters in connection with the
Offering (out of which the Capital West shall pay all filing fees, expenses and
disbursements, except
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<PAGE> 16
for postage costs, incurred in connection with the qualification of the Shares
under the laws of such jurisdictions as you may designate including fees and
expenses of Underwriters' counsel), reduced by any amounts advanced by the
Company to Capital West pursuant to the terms of the Letter of Intent. Capital
West shall be entitled to withhold this allowance on the Closing Date.
6. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of
the Underwriters to purchase and pay for Shares as provided herein shall be
subject to the accuracy, as of the date hereof and the Closing Date and any
later date on which Option Shares are to be purchased (the "Option Closing
Date"), as the case may be, of the representations and warranties of the
Company herein, to the performance by the Company of its obligations hereunder,
and to the following additional conditions:
(a) The Registration Statement shall have become
effective not later than 5:30 p.m. on the date hereof, or with the consent of
the Underwriters, at a later time and date, not later, however, than 5:30 p.m.
on the first business day following the date hereof, or at such later time and
date as may be approved by a majority in interest of the Underwriters; and no
stop order suspending the effectiveness of the Registration Statement shall
have been issued under the Act or proceedings therefor initiated or threatened
by the Commission and any request on the part of the Commission for additional
information (to be included in the Registration Statement or the Prospectus or
otherwise) shall have been complied with to the reasonable satisfaction of
counsel to the Underwriters. If the Company has elected to rely upon Rule 430A
of the Rules and Regulations, the price of the Shares and any price-related
information previously omitted from the effective Registration Statement
pursuant to such Rule 430A shall have been transmitted to the Commission for
filing pursuant to Rule 424(b) of the Rules and Regulations within the
prescribed time period, and prior to the Closing Date the Company shall have
provided evidence satisfactory to the Underwriters of such timely filing, or a
post-effective amendment providing such information shall have been promptly
filed and declared effective in accordance with the requirements of Rule 430A
of the Rules and Regulations. Qualification under the securities laws of such
states as you may deem necessary to the success of the underwriting of the
issue and sale of the Shares upon the terms and conditions set forth in this
Agreement or contemplated by this Agreement and containing no provisions
unacceptable to you will have been secured, and no stop order (or the
equivalent thereof) will be in effect denying or suspending effectiveness of
such qualification, nor will any stop order proceedings (or the equivalent
thereof) with respect thereto be instituted or pending or threatened under such
laws.
(b) At the Closing Date and the Option Closing Date, if
any, counsel for the Underwriters shall have been furnished with such documents
and opinions as they may require for the purpose of enabling them to pass upon
the issuance and sale of the Shares as contemplated herein and related
proceedings or in order to evidence the accuracy of any of the representations
and warranties, or the fulfillment of any of the conditions, herein contained;
and all proceedings taken by the Company in connection with the issuance and
sale of the Shares as herein contemplated shall be satisfactory in form and
substance to the Underwriters and counsel for the Underwriters.
(c) There shall not have been, since the date hereof or
since the respective dates as of which information is given in the Registration
Statement and the Prospectus, any change in the
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<PAGE> 17
condition (financial or otherwise), earnings, operations, business affairs or
business prospects of the Company and its Subsidiaries considered as one
enterprise, whether or not arising in the ordinary course of business which, in
your sole judgment, is material and adverse and that makes it, in your sole
judgment, impracticable or inadvisable to proceed with the public offering of
the Shares as contemplated by the Prospectus, and the Underwriters shall have
received a certificate of the President or Vice President of the Company and of
the chief financial or chief accounting officer of the Company, dated as of the
Closing Date, to the effect that (i) there has been no such material adverse
change, (ii) the representations and warranties in Section 2 hereof are true
and correct with the same force and effect as though expressly made at and as
of the Closing Date, (iii) the Company has complied with all agreements and
satisfied all conditions on its part to be performed or satisfied at or prior
to the Closing Date, and (iv) no stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for that purpose have
been initiated or threatened by the Commission or any Blue Sky jurisdiction.
(d) At the Closing Date the Underwriters shall have
received:
(1) The opinion, dated as of the Closing Date of
Kuperman, Orr, Mouer & Albers, P.C., counsel for the Company, in form and
substance satisfactory to counsel for the Underwriters, to the effect that:
(i) The Company has been duly incorporated and is
validly existing as a corporation in good standing under the laws of the State
of Oregon.
(ii) The Company has corporate power and authority
to own, lease and operate its properties and to conduct its business as
described in the Registration Statement and the Prospectus and to enter into
and perform its obligations under this Agreement and to issue, sell and deliver
to the Underwriters the Firm Shares or the Option Shares, as the case may be,
to be issued and sold by it hereunder.
(iii) The Company is duly qualified to do business
as a foreign corporation and is in good standing in the States of Texas and
Florida, and to the best of its knowledge is not required to be qualified to do
business as a foreign corporation in any other jurisdiction.
(iv) At the Closing Date, after giving effect to
the sale of the Firm Shares, the authorized capital stock of the Company is as
set forth in the Prospectus under the caption "Capitalization" as of the dates
stated therein; the issued and outstanding shares of Common Stock have been
duly authorized and validly issued and are fully paid and nonassessable and
have not been issued in violation of any preemptive right contained in the
Certificate of Incorporation or Bylaws of the Company or, to such counsel's
knowledge, any co-sale right, registration right, right of first refusal or
other similar right (other than such preemptive rights or other rights to
subscribe for or purchase securities as were fully complied with or expressly
waived or with respect to the violation of which the right to make a claim is
barred by the applicable statute of limitation).
(v) The Firm Shares and the Option Shares, as the
case may be, to be purchased from the Company hereunder have been duly
authorized for issuance and sale to the
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<PAGE> 18
Underwriters pursuant to this Agreement and, when issued and delivered by the
Company pursuant to this Agreement against payment therefor in accordance with
the terms hereof, will be validly issued and fully paid and nonassessable, and
will not be issued in violation of any preemptive right under the Certificate
of Incorporation or Bylaws of the Company or, to such counsel's knowledge, any
co-sale right, right of first refusal or other similar right and the
stockholders of the Company have no preemptive right under the Certificate of
Incorporation or Bylaws of the Company or, to such counsel's knowledge, other
rights to purchase any of the Shares; the shares of Common Stock reserved for
issuance upon the exercise of the Underwriters' Warrants have been duly and
validly authorized and are sufficient in number to meet the exercise
requirements thereof, and such shares of Common Stock, when issued upon
exercise, will be duly and validly issued, fully paid (assuming exercise in
accordance with the Warrant Agreement and receipt by the Company of the
exercise price thereof) and nonassessable; the stockholders of the Company have
no preemptive right under the Certificate of Incorporation or Bylaws of the
Company or, to such counsel's knowledge, other rights to purchase any of the
Shares; and the shares of Common Stock reserved for issuance upon the exercise
of the Company's outstanding options have been duly and validly authorized and
are sufficient in number to meet the exercise requirements of such options, and
such shares of Common Stock, when issued upon exercise, will be duly and
validly issued, fully paid (assuming exercise in accordance with the governing
instruments therefor and receipt by the Company of the exercise price thereof)
and nonassessable.
(vi) The issuance of the Shares to be purchased
hereunder is not subject to preemptive or other similar rights arising by
operation of law or, to the best of their knowledge and information, otherwise.
(vii) Each Subsidiary has been duly incorporated
and is validly existing as a corporation and is in good standing under the laws
of the jurisdiction of its incorporation, has full corporate power and
authority to own, lease and operate its properties and to conduct it business
as described in the Registration Statement, and is duly qualified as a foreign
corporation to transact business and is in good standing in the States of Texas
and Florida, and to the best of its knowledge any Subsidiary is not required to
be qualified to do business as a foreign corporation in any other jurisdiction;
all of the issued and outstanding capital stock of such Subsidiary have been
duly authorized and validly issued, is fully paid and nonassessable and, to the
best of their knowledge and information, is owned by the Company directly or
through subsidiaries, free and clear of any security interest, mortgage,
pledge, lien, encumbrance, claim or equity.
(viii) This Agreement and the Warrant Agreement have
been duly authorized by all necessary corporate action on the part of the
Company and have been duly executed and delivered by the Company and assuming
due authorization, execution and delivery by the Underwriters, are valid and
binding agreements of the Company, except insofar as indemnification and
contribution provisions may be limited by applicable law or equitable
principles, and except as enforceability may be limited by bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting creditors'
rights generally or any general equitable principles;
(ix) The Registration Statement has been declared
effective under the Act; any required filing of the Prospectus pursuant to Rule
424(b) has been made in the manner and
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<PAGE> 19
within the time period required by Rule 424(b) and, to the best of their
knowledge and information, no stop order suspending the effectiveness of the
Registration Statement has been issued under the Act or proceedings therefor
have been initiated or are pending or threatened by the Commission.
(x) The Registration Statement, Prospectus and
each amendment or supplement to the Registration Statement and Prospectus, as
of their respective effective or issue dates (other than the financial
statements and supporting schedules included therein, as to which no opinion
need be rendered) complied as to form in all material respects with the
requirements of the Act and the applicable Rules and Regulations.
(xi) The terms and provisions of the capital stock
of the Company conform in all material respects to the description thereof
contained in the Prospectus under the caption "Description of Securities";
(xii) The information in the Prospectus under the
caption "Description of Securities" to the extent that they constitute matters
of law or legal conclusions, has been reviewed by such counsel and accurately
and fairly summarizes in such counsel's opinion the matters described therein
and to the knowledge of such counsel, there are no outstanding options,
warrants, convertible securities, or other rights to acquire from the Company
any capital stock, except as described in the Registration Statement; in
addition, the forms of certificates evidencing the Company stock comply with
Oregon law;
(xiii) To the best of their knowledge and
information, except as set forth in the Prospectus, there is not pending or
threatened any action, suit, proceeding, inquiry or investigation, to which the
Company or its Subsidiaries is a party, or to which the property of the Company
or its Subsidiaries is subject, before or brought by any court or government
agency or body, which might reasonably be expected to result in any material
adverse change in the condition, financial or otherwise, or in the earnings,
business affairs or business prospects of the Company and its Subsidiaries
considered as one enterprise, or which might reasonably be expected to
materially and adversely affect the properties or assets thereof or the
consummation of this Agreement or the performance by the Company of its
obligations hereunder; and all pending legal or governmental proceedings to
which the Company or its Subsidiaries is a party or that affect any of their
respective properties that are not described in the Prospectus, including
ordinary routine litigation incidental to the business, could not reasonably be
expected to result in a material adverse change in the condition, financial or
otherwise, or in the earnings, business affairs or business prospects of the
Company and its Subsidiaries considered as one enterprise.
(xiv) The information in the Prospectus under the
captions "Business and Properties - Legal Proceedings", " - Governmental
Regulation" and "- Properties", "Certain Transactions" and "Description of
Capital Stock" in the Prospectus and Items 24 and 26 of Part II of the
Registration Statement to the extent that such items constitute matter of law,
summaries of legal matters, documents or proceedings, or legal conclusions, has
been reviewed by them and is correct in all material respects, and there are no
legal or governmental actions, suits or proceedings pending or threatened
against the Company or its Subsidiaries that are required to be described in
the Prospectus are not described as required by the Act or the applicable Rules
and Regulations.
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<PAGE> 20
(xv) All descriptions in the Prospectus of
contracts and other documents are accurate in all material respects; to the
best of their knowledge and information, there are no agreements, no contracts,
indentures, mortgages, loan agreements, notes, leases or other instrument
required to be described or referred to in the Registration Statement or to be
filed as exhibits thereto other than those described or referred to therein or
filed as exhibits thereto, the descriptions thereof or references thereto are
correct in all material respects, and to the best of counsel's knowledge and
information, the Company is not in default in the due performance or observance
of any material obligation, agreement, covenant or condition contained in any
contract, indenture, mortgage, loan agreement, note, lease or other instrument
so described, referred to or filed as exhibits thereto.
(xvi) No authorization, approval, consent or order
of any court or governmental authority or agency (other than under the Act or
the Rules and Regulations, which have been obtained, or as may be required
under the securities or Blue Sky laws of the various states) is required in
connection with the due authorization, execution and delivery of this Agreement
or for the offering, issuance or sale of the Shares to the Underwriters; and
the execution, delivery and performance of this Agreement and the consummation
of the transactions contemplated herein and compliance by the Company with its
obligations hereunder (other than performance of the Company's indemnification
and contribution obligations hereunder, concerning which no opinion need be
expressed) will not, whether with or without the giving of notice or lapse of
time or both, conflict with or constitute a breach or violation of, or default
under, or result in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of the Company or its Subsidiaries
pursuant to any material contract, indenture, mortgage, loan agreement, note,
lease or other instrument to which the Company or its Subsidiaries is a party
or by which it or any of them may be bound, or to which any of the property or
assets of the Company or its Subsidiaries is subject, nor will such action
result in any violation of the provisions of the Certificate of Incorporation
or Bylaws of the Company, or any applicable law, administrative regulation or
court decree, provided, however, no opinion need be rendered concerning state
securities or Blue Sky laws.
(xvii) To the best of such counsel's knowledge and
information, with the exception of the Underwriters' Warrants, no holder of any
security of the Company has any right to require registration of any shares of
Common Stock or any other security of the Company and, except as set forth in
the Registration Statement and Prospectus, all holders of securities of the
Company having rights to registration of such shares of Common Stock, or other
securities, because of the filing of the Registration Statement by the Company
have, with respect to the offering contemplated thereby, waived such rights or
such rights have expired by reason of lapse of time following notification of
the Company's intent to file the Registration Statement, or have included
securities in the Registration Statement pursuant to the exercise of such
rights.
(xviii) The Company is not an "investment company" or
an entity "controlled" by an "investment company" as such terms are defined in
the 1940 Act.
(xix) To the best of such counsel's knowledge and
information, neither the Company nor its Subsidiaries are in violation of their
charter or by-laws.
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<PAGE> 21
In rendering such opinion, such counsel may rely as to matters
of fact (but not as to legal conclusions), to the extent they deem proper, on
certificates of responsible officers of the Company and public officials. Such
opinion shall not state that it is to be governed or qualified by, or that it
is otherwise subject to, any treatise, written policy or other document
relating to legal opinions, including with limitation, the Legal Opinion Accord
of the ABA Section of Business Law (1991).
In giving their opinion required by subsection (d)(1) of this
Section, Kuperman, Orr, Mouer & Albers, P.C. shall additionally state that
nothing has come to their attention that would lead them to believe that the
Registration Statement, at the time it became effective, contained an untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not misleading or
that the Prospectus, at the effective date of the Registration Statement
(unless the term "Prospectus" refers to a prospectus which has been provided to
the Underwriters by the Company for use in connection with the offering of the
Shares which differs from the Prospectus declared effective by the Commission,
in which case at the time it is first provided to the Underwriters for such
use) or at the Closing Date, included an untrue statement of a material fact or
omitted to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading. Such opinion may state that such counsel does not assume any
responsibility for the accuracy, completeness or fairness of the statements
contained in the Registration Statement and the Prospectus except as otherwise
expressly provided in such opinion, and such counsel need express no opinion or
belief as to the financial statements, schedules, and other financial or
statistical data included in the Registration Statement or Prospectus.
(2) The opinion, dated as of Closing Date, of
Robertson & Williams, Inc., counsel for the Underwriters, in form and substance
satisfactory to you, with respect to the sufficiency of all such corporate
proceedings and other legal matters relating to this Agreement and the
transactions contemplated hereby as you may reasonably require, and the Company
shall have furnished to such counsel such papers, opinions and information as
they request to enable them to pass upon such matters.
(e) At the time of the execution of this Agreement, the
Underwriters shall have received from Andersen Andersen & Strong, L.C. a letter
dated such date, in form and substance satisfactory to the Underwriters, to the
effect that:
(1) they are independent public accountants with
respect to the Company and its Subsidiaries within the meaning of the Act and
the Rules and Regulations;
(2) it is their opinion that the consolidated
balance sheet included in the Registration Statement and covered by their
opinion therein complies as to form in all material respects with the
applicable accounting requirements of the Act and the Rules and Regulations;
(3) based upon limited procedures set forth in
detail in such letter, nothing has come to their attention which causes them to
believe that, at a specified date not more than three days prior to the date of
this Agreement, (A) the unaudited consolidated balance sheet of the
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Company and its Subsidiaries included in the Registration Statement does not
comply as to form in all material respects with the applicable accounting
requirements of the Act and the Rules and Regulations or is not presented in
conformity with generally accepted accounting principles applied on a basis
substantially consistent with that of the audited financial statements included
in the Registration Statement, or (B) at a specified date not more than three
days prior to the date of this Agreement, there has been any change in the
capital stock of the Company or any increase in the combined long term debt of
the Company and its Subsidiaries or any decrease in combined net current assets
or net assets as compared with the amounts shown in the December 31, 1996
balance sheet included in the Registration Statement or, during the period from
December 31, 1996 to a specified date not more than three days prior to the
date of this Agreement, there were any decreases, as compared with the
corresponding period in the preceding year, in combined revenues, net income or
net income per share of the Company and its Subsidiaries, except in all
instances for changes, increases or decreases which the Registration Statement
and the Prospectus disclose have occurred or may occur;
(4) in addition to the examination referred to in
their opinion and the limited procedures referred to in clause (3) above, they
have carried out certain specified procedures, not constituting an audit, with
respect to certain amounts, percentages and financial information which are
included in the Registration Statement and Prospectus and which are specified
by the Underwriters, and have found such amounts, percentages and financial
information to be in agreement with the relevant accounting, financial and
other records of the Company and its Subsidiaries identified in such letter;
and
(5) they have compared the information in the
Prospectus under selected captions with the disclosure requirements of
Regulation S-B and on the basis of limited procedures specified in such letter
nothing came to their attention as a result of the foregoing procedures that
caused them to believe that this information does not conform in all material
respects with the disclosure requirements of Item 402 of Regulation S-B.
(f) At the Closing Date, the Underwriters shall have
received from Andersen Andersen & Strong, L.C. a letter, dated as of the
Closing Date, to the effect that they reaffirm the statements made in the
letter furnished pursuant to subsection (e) of this Section 6, except that the
specified date referred to shall be a date not more than three days prior to
the Closing Date and, if the Company has elected to rely on Rule 430A of the
1933 Act Regulations, to the further effect that they have carried out
procedures as specified in clause (4) of subsection (e) of this Section 6 with
respect to certain amounts, percentages and financial information specified by
the Underwriters and deemed to be a part of the Registration Statement pursuant
to Rule 430(A)(b) and have found such amounts, percentages and financial
information to be in agreement with the records specified in such clause (4).
(g) At the Closing Date, the Common Stock shall have been
approved for listing on the American Stock Exchange.
(h) In the event that the Underwriters exercise their
option provided in Section 7 hereof to purchase all or any portion of the
Option Shares, the representations and warranties of
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<PAGE> 23
the Company contained herein and the statements in any certificates furnished
by the Company hereunder shall be true and correct as of the Option Closing
Date and, at the Option Closing Date, the Underwriters shall have received:
(1) A certificate, dated the Option Closing Date,
of the President or a Vice President of the Company and of the Chief
Financial or Chief Accounting Officer of the Company confirming that
the certificate delivered at the Closing Date pursuant to Section 5(c)
hereof remains true and correct as of the Option Closing Date (except
that all references in such Section to "Closing Date" shall be deemed
to refer to the "Option Closing Date").
(2) The opinions of Kuperman, Orr, Mouer &
Albers, P.C., counsel for the Company, in form and substance
satisfactory to counsel for the Underwriters, dated the Option Closing
Date, relating to the Option Shares and otherwise to the same effect
as the opinion required by Section 5(b)(1) hereof (except that all
references in such Section to "Closing Date" shall be deemed to refer
to the "Option Closing Date").
(3) The opinion of Robertson & Williams, Inc.,
counsel for the Underwriters, dated the Option Closing Date, relating
to the Option Shares to be purchased on the Option Closing Date and
otherwise to the same effect as the opinion required by Section
5(b)(2) hereof (except that all references in such Section to "Closing
Date" shall be deemed to refer to the "Option Closing Date").
(4) A letter from Andersen Andersen & Strong,
L.C. in form and substance satisfactory to the Underwriters and dated
the Option Closing Date, substantially the same in form and substance
as the letter furnished to the Underwriters pursuant to Section 5(e)
hereof, except that the "specified date" in the letter furnished
pursuant to this Section 6(h)(4) shall be a date not more than three
days prior to the Option Closing Date.
(i) The Company and the Underwriters shall have entered
into the Warrant Agreement and the Company shall have sold to the Underwriters
the Underwriters' Warrants, which shall be in the form attached as an exhibit
to the Warrant Agreement.
If any condition specified in this Section shall not have been
fulfilled when and as required to be fulfilled, this Agreement may be
terminated by the Representative by notice to the Company at any time at or
prior to Closing Date, and such termination shall be without liability of any
party to any other party except as provided in Section 4 and except that
Sections 4(j) and 8 shall survive any such termination and remain in full force
and effect.
7. OPTION SHARES.
(a) On the basis of the representations and warranties
herein contained, but subject to the terms and conditions herein set forth, the
Company hereby grants to the several Underwriters, for the purpose of covering
over-allotments in connection with the distribution and sale of the Firm Shares
only, a non-transferable option to purchase up to an aggregate 180,000 Option
Shares at the purchase price per share for the Firm Shares set forth in Section
3 hereof. Such
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<PAGE> 24
option may be exercised by Capital West on behalf of the several Underwriters
on one occasion in whole or in part during the period of 30 days from and after
the date on which the Firm Shares are initially offered to the public, by
giving notice to the Company. The number of Option Shares to be purchased by
each Underwriter upon the exercise of such option shall be the same proportion
of the total number of Option Shares to be purchased by the several
Underwriters pursuant to the exercise of such option as the number of Firm
Shares purchased by such Underwriter (set forth in Schedule A hereto) bears to
the total number of Firm Shares purchased by the several Underwriters (set
forth in Schedule A hereto), adjusted by the Underwriters in such manner as to
avoid fractional shares.
Delivery of definitive certificates for the Option Shares to
be purchased by the several Underwriters pursuant to the exercise of the option
granted by this Section 7 shall be made against payment of the purchase price
therefor by the several Underwriters by certified or official bank check or
checks drawn in same day funds, payable to the order of the Company. Such
delivery and payment shall take place at the offices of Capital West
Securities, Inc., 211 N. Robinson, 16th Floor, Oklahoma City, Oklahoma 73102 or
at such other place as may be agreed upon between the Underwriters and the
Company on the Closing Date, if written notice of the exercise of such option
is received by the Company not later than three full business days prior to the
Closing Date.
The certificates for the Options Shares so to be delivered
will be made available to you at such office or other location including,
without limitation, in Oklahoma City, as you may reasonably request for
checking at least two full business days prior to the date of payment and
delivery and will be in such names and denominations as you may request, such
request to be made at least three full days prior to such date of payment and
delivery. If the Underwriters so elect, delivery of the Shares may be made by
credit through full fast transfer to the accounts at Depository Trust Company
by the Underwriters.
It is understood that Capital West, individually, and not as
the representative of the Underwriters, may (but shall not be obligated to)
make payment of the purchase price on behalf of any Underwriter or Underwriters
whose check or checks shall not have been received by you prior to the date of
payment and delivery for the Option Shares to be purchased by such Underwriter
or Underwriters. Any such payment by Capital West shall not relieve any
Underwriter of any of its or their obligations hereunder.
(b) Upon exercise of any option provided for in Section
7(a) hereof the obligations of the Underwriters to purchase such Option Shares
will be subject (as of the date hereof and as of the date of payment for such
Option Shares) to the accuracy of and compliance with the representations and
warranties of the Company herein, to the accuracy of the statements of the
Company and officers of the Company made pursuant to the provisions hereof, to
the performance by the Company of their respective obligations hereunder, and
to the condition that all proceedings taken at or prior to the payment date in
connection with the sale and transfer of such Option Shares shall be
satisfactory in form and substance to you and to Underwriters' counsel, and you
shall have been furnished with all such documents, certificates and opinions as
you may reasonably request in order to evidence the accuracy and completeness
of any of the representations, warranties or
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<PAGE> 25
statements, the performance of any of the covenants of the Company or the
compliance with any of the conditions herein contained.
8. INDEMNIFICATION AND CONTRIBUTION.
(a) The Company agrees to indemnify and hold harmless
each Underwriter against any losses, claims, damages or liabilities, joint or
several, as incurred, to which such Underwriter may become subject under the
Act or otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon (i) any breach of
any representation, warranty, agreement or covenant of the Company herein
contained, or (ii) any untrue statement or alleged untrue statement made by the
Company in Section 2 hereof, or (iii) any untrue statement or alleged untrue
statement of a material fact contained (A) in the Registration Statement, any
Preliminary Prospectus, the Prospectus or any amendment or supplement thereto,
or (B) in any blue sky application or other document executed by the Company
specifically for that purpose or based upon written information furnished by
the Company filed in any state or other jurisdiction in order to qualify any or
all of the Shares under the securities laws thereof (any such application,
documents or information being hereinafter called a "Blue Sky Application"), or
(iii) the omission or alleged omission to state in the Registration Statement
or any amendment thereto a material fact required to be stated therein or
necessary to make the statements therein not misleading, or the omission or
alleged omission to state in any Preliminary Prospectus, the Prospectus or any
supplement thereto or in any Blue Sky Application a material fact required to
be stated therein or necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading; and shall
reimburse each Underwriter for any legal or other expenses reasonably incurred
by such Underwriter in connection with investigating or defending against or
appearing as a third-party witness in connection with any such loss, claim,
damage, liability or action, notwithstanding the possibility that payments for
such expenses might later be held to be improper, in which case the person
receiving them shall promptly refund them; except that the Company shall not be
liable in any such case to the extent, but only to the extent, that any such
loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission made in
the Registration Statement, such Preliminary Prospectus or the Prospectus, or
any amendment or supplement, in reliance upon and in conformity with written
information furnished to the Company by or on behalf of any Underwriter
specifically for use in the preparation thereof and, provided further, that the
indemnity agreement provided in this Section 8(a) with respect to any
Preliminary Prospectus shall not inure to the benefit of any Underwriter from
whom the person asserting any losses, claims, charges, liabilities or
litigation based upon any untrue statement or alleged untrue statement of
material fact or omission or alleged omission to state therein a material fact
purchased Shares, if a copy of the Prospectus in which such untrue statement or
alleged untrue statement or omission or alleged omission was corrected has not
been sent or given to such person within the time required by the Act and the
Rules and Regulations thereunder, unless such failure is the result of
noncompliance by the Company with Section 4(c) hereof.
(b) Each Underwriter severally, but not jointly, shall
indemnify and hold harmless the Company against any losses, claims, damages or
liabilities, joint or several, as incurred, to which the Company may become
subject, under the Act or otherwise, insofar as such losses, claims,
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<PAGE> 26
damages or liabilities (or actions in respect thereof) arise out of or are
based upon (i) any untrue statement or alleged untrue statement of a material
fact contained (A) in the Registration Statement, Preliminary Prospectus, the
Prospectus or any amendment or supplement thereto, or (B) in any Blue Sky
Application, or (ii) the omission or alleged omission to state in the
Registration Statement or any amendment thereto a material fact required to be
stated therein or necessary to make the statements therein not misleading, or
the omission or alleged omission to state in any Preliminary Prospectus, the
Prospectus or any supplement thereto or in any Blue Sky Application a material
fact required to be stated therein or necessary to make the statements therein,
in the light of the circumstances under which they were made, not misleading;
except that such indemnification shall be available in each such case to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in reliance upon and in
conformity with written information furnished to the Company through the
Underwriters by or on behalf of such Underwriter specifically for use in the
preparation thereof; and shall reimburse any legal or other expenses reasonably
incurred by the Company in connection with investigation or defending against
any such loss, claim, damage, liability or action.
(c) Promptly after receipt by an indemnified party under
subsection (a) or (b) above of notice of any claim or the commencement of any
action, the indemnified party shall, if a claim in respect thereof is to be
made against the indemnifying party under such subsection, notify the
indemnifying party in writing of the claim or the commencement of that action;
the failure to notify the indemnifying party shall not relieve it from any
liability which it may have to an indemnified party otherwise than under such
subsection. If any such claim or action shall be brought against an indemnified
party, and it shall notify the indemnifying party thereof, the indemnifying
party shall be entitled to participate therein and, to the extent that it
wishes, jointly with any other similarly notified indemnifying party, to assume
the defense thereof with counsel reasonably satisfactory to the indemnified
party; provided, however, if the defendants in any such action include both the
indemnified parties and the indemnifying party and the indemnified party shall
have reasonably concluded that there may be legal defenses available to it
and/or other indemnified parties which are different from or additional to
those available to the indemnifying party, the indemnified party or parties
shall have the right to select separate counsel to assume such legal defenses
and to otherwise participate in the defense of such action on behalf of such
indemnified party or parties. After notice from the indemnifying party to the
indemnified party of its election to assume the defense of such claim or
action, the indemnifying party shall not be liable to the indemnified party
under such subsection for any legal or other expenses subsequently incurred by
the indemnified party in connection with the defense thereof unless (i) the
indemnified party shall have employed separate counsel in accordance with the
proviso to the preceding sentence (it being understood, however, that the
indemnifying party shall not be liable for the expenses of more than one
separate counsel (together with appropriate local counsel) approved by the
indemnifying party, representing all the indemnified parties under Section 8(a)
and 8(b) hereof who are parties to such action), (ii) the indemnifying party
shall not have employed counsel satisfactory to the indemnified party to
represent the indemnified party within a reasonable time after notice of
commencement of the action, or (iii) the indemnifying party has authorized the
employment of counsel for the indemnified party at the expense of the
indemnifying party. In no event shall any indemnifying party be liable in
respect of any amounts paid in settlement of any action unless the indemnifying
party shall have
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<PAGE> 27
approved the terms of such settlement; provided, however, that such consent
shall not be unreasonably withheld.
(d) In order to provide for just and equitable
contribution in any action in which a claim for indemnification is made
pursuant to this Section 8 for which it is judicially determined (by the entry
of a final judgment or decree by a court of competent jurisdiction and the
expiration of time to appeal or the denial of the last right of appeal) that
such indemnification may not be enforced in such case notwithstanding the fact
that this Section 8 provides for indemnification in such case, all the parties
hereto shall contribute to the aggregate losses, claims, damages or liabilities
to which they may be subject (after contribution from others) in such
proportion so that the Underwriters are responsible pro rata for the portion
represented by the percentage that the underwriting discount bears to the
initial public offering price, and the Company is responsible for the remaining
portion; provided, however, that (i) no Underwriter shall be required to
contribute any amount in excess of the underwriting discount applicable to the
Shares purchased by such Underwriter, and (ii) no person guilty of a fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to a contribution from any person who is not guilty of such fraudulent
misrepresentation. This subsection (d) shall not be operative as to any
Underwriter to the extent that the Company has received indemnity under this
Section 8.
(e) The obligations of the Company under this Section 8
shall be in addition to any liability which the Company may otherwise have, and
shall extend, upon the same terms and conditions, to each officer and director
of each Underwriter and to each person, if any, who controls any Underwriter
within the meaning of the Act; and the obligations of the Underwriters under
this Section 8 shall be in addition to any liability that the respective
Underwriters may otherwise have, and shall extend, upon the same terms and
conditions, to each director of the Company (including any person who, with his
consent, is named in the Registration Statement as about to become a director
of the Company), to each officer of the Company who has signed the Registration
Statement and to each person, if any, who controls the Company within the
meaning of the Securities Act, in either case, whether or not such person is a
party to any action or proceeding.
(f) The parties to this Agreement hereby acknowledge that
they are sophisticated business persons who were represented by counsel during
the negotiations regarding the provisions hereof including without limitation
the provisions of this Section 8, and are fully informed regarding said
provisions. They further acknowledge that the provisions of this Section 8
fairly allocate the risks in light of the ability of the parties to investigate
the Company and its business in order to assure that adequate disclosure is
made in the Registration Statement and Prospectus as required by the Act and
the Exchange Act. The parties are advised that Federal or state public policy,
as interpreted by the courts in certain jurisdictions, may be contrary to
certain of the provisions of this Section 8, and the parties hereto hereby
expressly waive and relinquish any right or ability to assert such public
policy as a defense to a claim under this Section 8 and further agree not to
attempt to assert any such defense.
9. REPRESENTATIONS, WARRANTIES AND AGREEMENTS TO SURVIVE
DELIVERY. All representations, warranties, covenants and agreements of the
Company contained in this Agreement (including, without limitation, the
agreements of the Company set forth in Sections 4(i)-(n)), or
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<PAGE> 28
contained in certificates of officers of the Company submitted pursuant hereto,
and the indemnity and contribution agreements contained in Section 8 hereof,
shall remain operative and in full force and effect, regardless of any
investigation made by or on behalf of any Underwriter or controlling person, or
by or on behalf of the Company, or any of its officers, controlling persons or
directors and shall survive delivery of the Shares to the several Underwriters
hereunder or termination of this Agreement.
10. SUBSTITUTION OF UNDERWRITER. If any Underwriter or
Underwriters shall fail to take up and pay for the number of Firm Shares agreed
by such Underwriter or Underwriters to be purchased hereunder upon tender of
such Firm Shares in accordance with the terms hereof, and if the aggregate
number of Firm Shares which such defaulting Underwriter or Underwriters so
agreed but failed to purchase does not exceed 10% of the Firm Shares, the
remaining Underwriters shall be obligated, severally in proportion to their
respective commitments hereunder, to take up and pay for the Firm Shares of
such defaulting Underwriter or Underwriters.
If any Underwriter or Underwriters so defaults and the aggregate
number of Firm Shares which such defaulting Underwriter or Underwriters agreed
but failed to take up and pay for exceeds 10% of the Firm Shares, the remaining
Underwriters shall have the right, but shall not be obligated, to take up and
pay for (in such proportions as may be agreed upon among them) the Firm Shares
which the defaulting Underwriter or Underwriters so agreed but failed to
purchase. If such remaining Underwriters do not, at the Closing Date, take up
and pay for the Firm Shares which the defaulting Underwriter or Underwriters so
agreed but failed to purchase, the Closing Date shall be postponed for
twenty-four hours to allow the several Underwriters the privilege of
substituting within twenty-four hours (including non-business hours) another
underwriter or underwriters (which may include any non-defaulting Underwriter)
satisfactory to the Company. If no such underwriter or underwriters shall have
been substituted as aforesaid by such postponed Closing Date, the Closing Date
may, at the option of the Company, be postponed for a further twenty-four
hours, if necessary to allow the Company the privilege of finding another
underwriter or underwriters, satisfactory to you, to purchase the Firm Shares
which the defaulting Underwriter or Underwriters so agreed but failed to
purchase. If it shall be arranged for the remaining Underwriters or
substituted underwriters to take up the Firm Shares of the defaulting
Underwriter or Underwriters as provided in this Section, (i) the Company shall
have the right to postpone the time of delivery for a period of not more than
seven full business days, in order to effect whatever changes may thereby be
made necessary in the Registration Statement or the Prospectus, or in any other
documents or arrangements, and the Company agrees promptly to file any
amendments to the Registration Statement or supplements to the Prospectus which
may thereby be made necessary, and (ii) the respective number of Firm Shares to
be purchased by the remaining Underwriters and substitute underwriters shall be
taken as the basis of their underwriting obligation. If the remaining
Underwriters shall not take up and pay for all such Firm Shares so agreed to be
purchased by the defaulting Underwriter or Underwriters or substitute another
underwriter or underwriters as aforesaid and the Company shall not find or
shall not elect to seek another underwriter or underwriters for such Firm
Shares as aforesaid, then this Agreement shall terminate.
In the event of any termination of this Agreement pursuant to the
preceding paragraph of this Section, neither the Company shall be liable to any
Underwriter (except as provided in Sections 5
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<PAGE> 29
and 8 hereof )nor shall any Underwriter (other than an Underwriter who shall
have failed, otherwise than for some reason permitted under this Agreement, to
purchase the number of Firm Shares agreed by such Underwriter to be purchased
hereunder, which Underwriter shall remain liable to the Company and the other
Underwriters for damages, if any, resulting from such default) be liable to the
Company (except to the extent provided in Sections 5 and 8 hereof).
The term "Underwriter" in this Agreement shall include any person
substituted for an Underwriter under this Section.
11. EFFECTIVE DATE OF THIS AGREEMENT AND TERMINATION.
(a) This Agreement shall become effective at the later of
(i) execution of this Agreement, or (ii) when notification of the effectiveness
of the Registration Statement has been released by the Commission.
(b) You shall have the right to terminate this Agreement
by giving notice as hereinafter specified at any time at or prior to the
Closing Date (i) if the Company shall have failed, refused or been unable, to
perform any agreement on its part to be performed, or because any other
condition of the Underwriters' obligations hereunder required to be fulfilled
by the Company is not fulfilled including, without limitation, any change in
the financial condition, earnings, operations, business, management, technical
staff, or business prospects of the Company from that set forth in the
Registration Statement or Prospectus which, in your sole judgment, is material
and adverse, or (ii) if trading on the New York Stock Exchange or the Nasdaq
Stock Market shall have been suspended, or minimum or maximum prices for
trading shall have been fixed, or maximum ranges for prices for securities
shall have been required on the New York Stock Exchange or the Nasdaq Stock
Market, by the New York Stock Exchange, the Nasdaq Stock Market or by order of
the Commission or any other governmental authority having jurisdiction, or if a
banking moratorium shall have been declared by Federal, New York, Oklahoma or
Texas authorities, or (iii) if on or prior to the Closing Date, or on or prior
to any later date on which Option Shares are to be purchased, as the case may
be, the Company shall have sustained a loss by strike, fire, flood, earthquake,
accident or other calamity of such character as to interfere materially and
adversely with the conduct of the business and operations of the Company
regardless of whether or not such loss shall have been insured, or (iv) if
there shall have been a material adverse change in the general political or
economic conditions or financial markets in the United States as in your
reasonable judgment makes it inadvisable or impracticable to proceed with the
offering, sale and delivery of the Shares, or (v) if on or prior to the Closing
Date, or on or prior to any later date on which Option Shares are to be
purchased, as the case may be, there shall have been an outbreak or escalation
of hostilities or other international or domestic calamity, crises or material
adverse change in political, financial or economic conditions, the effect of
which on the financial markets of the United States is such as to make it in
your reasonable judgment, inadvisable to proceed with the marketing of the
Shares. In the event of termination pursuant to this Section 11(b), the
Company shall remain obligated to pay costs and expenses pursuant to Section
4(k), 5 and 8 hereof.
If you elect to prevent this Agreement from becoming effective
or to terminate this Agreement as provided in this Section 11, you shall
promptly notify the Company by telephone or
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<PAGE> 30
telecopy, in each case confirmed by letter. If the Company shall elect to
prevent this Agreement from becoming effective, the Company shall promptly
notify you by telephone or telecopy, in each case, confirmed by letter.
12. NOTICES. All notices and other communications hereunder shall
be in writing and shall be deemed to have been given if mailed or transmitted
by any standard form of telecommunication. Notices to the Underwriters shall be
directed to the Underwriters in care of Capital West Securities, Inc., 211 N.
Robinson, 16th Floor, One Leadership Square, Oklahoma City, Oklahoma 73102,
attention of Robert O. MacDonald; notices to the Company shall be directed to
it at 211 East 7th Street, 11th Floor, Austin, Texas 78701, attention of
Matthew O'Hayer.
13. PARTIES. This Agreement shall inure to the benefit of and be
binding upon the several Underwriters and the Company and their respective
executors, administrators, successors, and assigns. Nothing expressed or
mentioned in this Agreement is intended or shall be construed to give any
person or corporation, other than the parties hereto and their respective
executors, administrators, successors, and assigns and the controlling persons
and officers and directors referred to in Section 8 hereof any legal or
equitable right, remedy or claim under or in respect of this Agreement or any
provisions herein contained. This Agreement and all conditions and provisions
hereof are intended to be for the sole and exclusive benefit of the parties
hereto and their respective executors, administrators, successors, and assigns
and said controlling persons and said officers and directors, and for the
benefit of no other person or corporation. No purchaser of the Shares from any
Underwriter shall be construed to be a successor by reason merely of such
purchase.
14. GOVERNING LAW. This Agreement and the Pricing Agreement shall
be governed by and construed in accordance with the laws of the State of
Oklahoma applicable to agreements made and to be performed in said State.
Specified times of day refer to Central time.
15. COUNTERPARTS. This Agreement may be signed in several
counterparts, each of which will constitute an original.
* * * * * * *
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<PAGE> 31
If the foregoing correctly sets forth your understanding of our
agreement, please sign in the space provided below for that purpose, whereupon
this instrument, along with all counterparts, will become a binding agreement
between the Underwriter and the Company in accordance with its terms.
GRAND ADVENTURES TOUR & TRAVEL PUBLISHING
CORPORATION
By:________________________________________
Matthew O'Hayer, Chairman and CEO
CONFIRMED AND ACCEPTED, as of the date first above written:
CAPITAL WEST SECURITIES, INC.
By:________________________________________
Robert O. McDonald, Chairman
Draft Date: February 3, 1998
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<PAGE> 32
SCHEDULE A
<TABLE>
<CAPTION>
UNDERWRITER SHARES PURCHASED
----------- ----------------
<S> <C>
Capital West Securities, Inc.
</TABLE>
<PAGE> 1
WARRANT AGREEMENT
__________________, 1998
CAPITAL WEST SECURITIES, INC.
c/o Capital West Securities, Inc.
211 N. Robinson
16th Floor, One Leadership Square
Oklahoma City, Oklahoma 73102
Ladies and Gentlemen:
Grand Adventure Tour & Travel Publishing Corporation (the "Company"),
agrees to issue and sell to you warrants (the "Warrants") to purchase the
number of shares of common stock, no par value per share (the "Common Stock"),
of the Company set forth herein, subject to the terms and conditions contained
herein.
1. ISSUANCE OF WARRANTS; EXERCISE PRICE. The Warrants, which shall
be in the form attached hereto as Exhibit A, shall be issued to you
concurrently with the execution hereof in consideration of the payment by you
to the Company of the sum of $.001 cash per share of Common Stock subject to
the Warrants, the receipt and sufficiency of which are hereby acknowledged. The
Warrant shall provide that you, or such other holder or holders of the Warrants
to whom transfer is authorized in accordance with the terms of this Agreement,
shall have the right to purchase an aggregate of 120,000 shares of Common
Stock for an exercise price equal to $6.00 per share (the "Exercise Price") or
$720,000 in the aggregate. The number, character and Exercise Price of such
shares of Common Stock are subject to adjustment as hereinafter provided, and
the term "Common Stock" shall mean, unless the context otherwise requires, the
stock and other securities and property receivable upon exercise of the
Warrants. The term "Exercise Price" shall mean, unless the context otherwise
requires, the price per share of the Common Stock purchasable under the
Warrants as set forth in this Section 1, as adjusted from time to time pursuant
to Section 6.
2. REPRESENTATIONS AND WARRANTIES. The Company represents and
warrants to you and to each subsequent holder of Warrants and agrees that:
(a) This Agreement has been duly authorized, executed and delivered
by the Company and constitutes the valid and binding obligation of the Company
enforceable in accordance with its terms; and neither the issuance of the
Warrants nor the issuance of the shares of Common Stock issuable upon exercise
of the Warrants will result in a breach or violation of any terms or provisions
of, or constitute a default under, any contract, indenture, mortgage, deed of
trust, loan agreement or other agreement or instrument to which the Company is
a party or by which the Company is bound, the Certificate of Incorporation or
Bylaws of the Company, or any law, order, rule, regulation or decree of any
government, governmental instrumentality or court, domestic or foreign, or
result in the creation or imposition of any lien, charge or encumbrance upon
any property or assets of the Company.
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<PAGE> 2
(b) No consent, approval, authorization or order of any court or
governmental agency or body is required for the sale and issuance of the
Warrants or the sale and issuance of the shares of Common Stock issuable upon
exercise of the Warrants, except such as have been obtained or may be required
under the Securities Act of 1933, as amended (the "Act"), and such as may be
required under state securities or blue sky laws in connection with the
issuance of the Warrants and the shares of Common Stock issuable upon exercise
of the Warrants. Upon exercise of the Warrants by the holder thereof, the
shares of Common Stock with respect to which the Warrants are exercised will be
validly issued, fully paid, and non-assessable, and good and marketable title
to such shares of Common Stock shall be delivered to such holder free and clear
of all liens, encumbrances, equities, claims or preemptive or similar rights.
(c) During the term of this Agreement, the Company shall make timely
filings of all periodic and other reports and forms and other materials
required (but only to the extent required) to be filed with the Securities and
Exchange Commission (the "Commission") pursuant to the Act or the Securities
Exchange Act of 1934, as amended, and with any national securities exchange or
quotation system upon which any of the securities of the Company may be listed.
3. NOTICES OF RECORD DATE; ETC. In the event of (i) any taking by
the Company of a record date with respect to the holders of any class of
securities of the Company for purposes of determining which of such holders are
entitled to dividends or other distributions (other than regular quarterly
dividends), or any right to subscribe for, purchase or otherwise acquire shares
of stock of any class or any other securities or property, or to receive any
other right, (ii) any capital reorganization of the Company, or
reclassification or recapitalization of capital stock of the Company or any
transfer in one or more related transactions of all or a majority of the assets
or revenue or income generating capacity of the Company to, or consolidation or
merger of the Company with or into, any other entity or person, or (iii) any
voluntary or involuntary dissolution or winding up of the Company, then and in
each such event the Company will mail or cause to be mailed to each holder of a
Warrant at the time outstanding a notice specifying, as the case may be, (A)
the date on which any such record is to be taken for the purpose of such
dividend, distribution or right, and stating the amount and character of such
dividend, distribution or right; or (B) the date on which any such
reorganization, reclassification, recapitalization, transfer, consolidation,
merger, conveyance, dissolution, liquidation or winding-up is to take place and
the time, if any is to be fixed, as of which the holders of record of Common
Stock (or any other class of stock or securities of the Company, or another
issuer pursuant to Section 6, receivable upon the exercise of the Warrants)
shall be entitled to exchange their shares of Common Stock (or such other stock
or securities) for securities or other property deliverable upon such event.
Any such notice shall be deposited in the United States mail, postage prepaid,
at least ten (10) days prior to the date therein specified, and the holders(s)
of the Warrant(s) may exercise the Warrant(s) and participate in such event as
a registered holder of Common Stock, upon exercise of the Warrant(s) so held,
within the ten (10) day period from the date of mailing of such notice.
4. NO IMPAIRMENT. The Company shall not, by amendment of its
organizational documents or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities, or any other
action, avoid or seek to avoid the observance or performance of any
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of the terms of this Agreement or of the Warrants, but will at all times in
good faith take any and all action as may be necessary in order to protect the
rights of the holders of the Warrants against impairment. Without limiting the
generality of the foregoing, the Company (a) will at all times reserve and keep
available, solely for issuance and delivery upon exercise of the Warrants,
shares of Common Stock issuable from time to time upon exercise of the
Warrants, (b) will not increase the par value of any shares of stock receivable
upon exercise of the Warrants above the amount payable in respect thereof upon
such exercise, and (c) will take all such action as may be necessary or
appropriate in order that the Company may validly and legally issue fully paid
and non-assessable stock upon the exercise of the Warrants, or any of them.
5. EXERCISE OF WARRANTS. At any time and from time to time on and
after the first anniversary of the date hereof and expiring on the fifth
anniversary of the effective date of the public offering of the Common Stock at
5:00 p.m., Oklahoma City, Oklahoma time, Warrants may be exercised as to all or
any portion of the whole number of shares of Common Stock covered by the
Warrants by the holder thereof by surrender of the Warrants, accompanied by a
subscription for shares to be purchased in the form attached hereto as Exhibit
B and by a check payable to the order of the Company in the amount required for
purchase of the shares as to which the Warrant is being exercised, delivered to
the Company at its principal office at 211 East 7th Street, 11th Floor, Austin,
Texas 78701, Attention: Matthew O'Hayer. Warrants may also be exercised from
time to time, without any payment required for the purchase of the shares as to
which the Warrant is being exercised, as to all or any portion of the number of
shares of Common Stock covered by the Warrant(s) by the holder thereof by
surrender of the Warrants, accompanied by a subscription for shares in the form
attached as Exhibit C, pursuant to which the holder thereof will be entitled to
receive upon such surrender of the Warrant(s) (and without any further payment)
that number of shares of Common Stock equal to the product of the number of
shares of Common Stock obtainable upon exercise of the Warrant(s) (or the
portion thereof as to which the exercise relates) multiplied by a fraction: (i)
the numerator of which shall be the difference between the then Current Value
(as defined in this Section 5 and Section 7(d)) of one full share of Common
Stock on the date of exercise and the Exercise Price, and (ii) the denominator
of which shall be the Current Value of one full share of Common Stock on the
date of exercise. Upon the exercise of a Warrant in whole or in part, the
Company will within five (5) days thereafter, at its expense (including the
payment by the Company of any applicable issue or transfer taxes), cause to be
issued in the name of and delivered to the Warrant holder a certificate or
certificates for the number of fully paid and non-assessable shares of Common
Stock to which such holder is entitled upon exercise of the Warrant. In the
event such holder is entitled to a fractional share, in lieu thereof such
holder shall be paid a cash amount equal to such fraction, multiplied by the
Current Value of one full shares of Common Stock on the date of exercise.
Certificates for shares of Common Stock issuable by reason of the exercise of
the Warrant or Warrants shall be dated and shall be effective as of the date of
the surrendering of the Warrant for exercise, notwithstanding any delays in the
actual execution, issuance or delivery of the certificates for the shares so
purchased. In the event a Warrant or Warrants is exercised as to less than the
aggregate amount of all shares of Common Stock issuable upon exercise of all
Warrants held by such person, the Company shall issue a new Warrant to the
holder of the Warrant so exercised covering the aggregate number of shares of
Common Stock as to which Warrants remain unexercised.
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For purposes of this section, Current Value is defined (i) in the case
for which a public market exists for the Common Stock at the time of such
exercise, according to Section 7(d), and (ii) in the case no public market
exists at the time of such exercise, at the Appraised Value. For the purposes
of this Agreement, "Appraised Value" is the value determined in accordance with
the following procedures. For a period of five (5) days after the date of an
event (a "Valuation Event") requiring determination of Current Value at a time
when no public market exists for the Common Stock (the "Negotiation Period"),
each party to this Agreement agrees to negotiate in good faith to reach
agreement upon the Appraised Value of the securities or property at issue, as
of the date of the Valuation Event, which will be the fair market value of such
securities or property, without premium for control or discount for minority
interests, illiquidity or restrictions on transfer. In the event that the
parties are unable to agree upon the Appraised Value of such securities or
other property by the end of the Negotiation Period, then the Appraised Value
of such securities or property will be determined for purposes of this
Agreement by a recognized appraisal or investment banking firm mutually
agreeable to the holders of the Warrants and the Company (the "Appraiser"). If
the holders of the Warrants and the Company cannot agree on an Appraiser within
two (2) business days after the end of the Negotiation Period, the company, on
the one hand, and the holders of the warrants, on the other hand, will each
select an appraiser within ten (10) business days after the end of the
negotiation period and those two appraisers will select ten (10) days after the
end of the negotiation period an independent appraiser to determine the fair
market value of such securities or property, without premium for control or
discount for minority interests. such independent appraiser will be directed
to determine fair market value of such securities or property as soon as
practicable, but in no event later than thirty (30) days from the date of its
selection. the determination by an Appraiser of the fair market value will be
conclusive and binding on all parties to this Agreement. Appraised Value of
each share of Common Stock at a time when (i) the Company is not a reporting
company under the Exchange Act and (ii) the Common Stock is not traded in the
organized securities markets, will, in all cases, be calculated by determining
the Appraised Value of the entire Company taken as a whole and dividing that
value by the number of shares of Common Stock then outstanding, without premium
for control or discount for minority interests, illiquidity or restrictions on
transfer. The costs of the Appraiser will be borne by the Company. In no
event will the Appraised Value of the Common Stock be less than the per share
consideration received or receivable with respect to the Common Stock or
securities or property of the same class in connection with a pending
transaction involving a sale, merger, recapitalization, reorganization,
consolidation, or share exchange, dissolution of the Company, sale or transfer
of all or a majority of its assets or revenue or income generating capacity, or
similar transaction.
6. PROTECTION AGAINST DILUTION. The Exercise Price for the shares
of Common Stock and number of shares of Common Stock issuable upon exercise of
the Warrants is subject to adjustment from time to time as follows:
(a) STOCK DIVIDENDS, SUBDIVISIONS, RECLASSIFICATIONS, ETC.. In case
at any time or from time to time after the date of execution of this Agreement,
the Company shall (i) take a record of the holders of Common Stock for the
purpose of entitling them to receive a dividend or a distribution on shares of
Common Stock payable in shares of Common Stock or other class of securities,
(ii) subdivide or reclassify its outstanding shares of Common Stock into a
greater number of shares, or (iii) combine or reclassify its outstanding Common
Stock into a smaller number of
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<PAGE> 5
shares, then, and in each such case, the Exercise Price in effect at the time
of the record date for such dividend or distribution or the effective date of
such subdivision, combination or reclassification shall be adjusted in such a
manner that the Exercise Price for the shares issuable upon exercise of the
Warrants immediately after such event shall bear the same ratio to the Exercise
Price in effect immediately prior to any such event as the total number of
shares of Common Stock outstanding immediately prior to such event shall bear
to the total number of shares of Common Stock outstanding immediately after
such event.
(b) ADJUSTMENT OF NUMBER OF SHARES PURCHASABLE. When any adjustment
is required to be made in the exercise Price under this Section 6, (i) the
number of shares of Common Stock issuable upon exercise of the Warrants shall
be changed (upward to the nearest full share) to the number of shares
determined by dividing (x) an amount equal to the number of shares issuable
pursuant to the exercise of the Warrants immediately prior to the adjustment,
multiplied by the Exercise Price in effect immediately prior to the adjustment,
by (y) the Exercise Price in effect immediately after such adjustment, and (ii)
upon exercise of the Warrant, the holder will be entitled to receive the number
of shares or other securities referred to in Section 6(a) that such holder
would have received had the Warrant been exercised prior to the events referred
to in Section 6(a).
(c) ADJUSTMENT FOR REORGANIZATION, CONSOLIDATION, MERGER, ETC. In
case of any reorganization or consolidation of the Company with, or any merger
of the Company with or into, another entity (other than a consolidation or
merger in which the Company is the surviving corporation) or in case of any
sale or transfer to another entity of the majority of assets of the Company,
the entity resulting from such reorganization or consolidation or surviving
such merger or to which such sale or transfer shall be made, as the case may
be, shall make suitable provision (which shall be fair and equitable to the
holders of Warrants) and shall assume the obligations of the Company hereunder
(by written instrument executed and mailed to each holder of the Warrants then
outstanding) pursuant to which, upon exercise of the Warrants, at any time
after the consummation of such reorganization, consolidation, merger or
conveyance, the holder shall be entitled to receive the stock or other
securities or property that such holder would have been entitled to upon
consummation if such holder had exercised the Warrants immediately prior
thereto, all subject to further adjustment as provided in this Section 6.
(d) CERTIFICATE AS TO ADJUSTMENTS. In the event of adjustment as
herein provided in paragraphs of this Section 6, the Company shall promptly
mail to each Warrant holder a certificate setting forth the Exercise Price and
number of shares of Common Stock issuable upon exercise after such adjustment
and setting forth a brief statement of facts requiring such adjustment. Such
certificate shall also set forth a brief statement of facts requiring such
adjustment. Such certificate shall also set forth the kind and amount of stock
or other securities or property into which the Warrants shall be exercisable
after any adjustment of the Exercise Price as provided in this Agreement.
(e) MINIMUM ADJUSTMENT. Notwithstanding the foregoing, no
certificate as to adjustment of the Exercise Price hereunder shall be made if
such adjustment results in a change in the Exercise Price then in effect of
less than ten cents ($0.10) and any adjustment of less than ten cents ($0.10)
of any Exercise Price shall be carried forward and shall be made at the time of
and
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together with any subsequent adjustment that, together with the adjustment or
adjustments so carried forward, amounts to ten cents ($0.10) or more; provided
however, that upon the exercise of a Warrant, the Company shall have made all
necessary adjustments (to the nearest cent) not theretofore made to the
Exercise Price up to and including the date upon which such Warrant is
exercised.
7. REGISTRATION RIGHTS.
(a) The Company agrees that upon written notice given to the Company
at any time on or after the first anniversary of the effective date of the
public offering of the Common Stock but before the fifth anniversary of the
effective date of the public offering, from the holder or holders of not less
than fifty-one percent (51%) of the shares issued and issuable upon exercise of
the Warrants, of a proposed distribution by such holder or holders of Common
Stock issued or issuable upon exercise of Warrants, the Company will, within 45
days after receipt of such notice, promptly prepare, file and diligently
prosecute to effectiveness, an appropriate filing with the Commission of a
registration statement covering the proposed sale or distribution of all or any
part of such shares under the Securities Act of 1933, as amended (the "Act"),
and the appropriate registration statements or applications under the
securities laws of such states as such holders, in their discretion, shall
determine, and will use its reasonable best efforts to have such registration
and application (including both the registration under the Act and the
registration or application made under the various state securities laws)
declared effective as soon as practicable after the filing thereof and to
remain effective for such period that may be reasonably necessary to complete
the distribution of securities so registered or qualified. At least 15 days
prior to such filing, the Company shall give written notice of such proposed
filing to each registered holder of any Warrants at the holders' addresses
appearing on the records of the Company and to each registered holder of Common
Stock purchased from the exercise of any Warrants at such holder's address
appearing on the Company records, and shall offer to include in such
registration statement any proposed distribution of such Common Stock held or
to be held by each such registered holder; provided, however, that except as
provided in Section 7(e), the Company need not effect the registration of the
sale or distribution of Common Stock purchased upon exercise of Warrants more
than once. All expenses, disbursements and fees (including fees and expenses
of counsel for the Company, special auditing fees specifically attributable to
the sale by the selling holder or holders of Common Stock, printing expenses
(including all necessary copies of the registration statement and prospectuses
contained therein), registration and filing fees and blue sky fees and
expenses, and fees and charges of the Company's transfer agent and registrar
for services rendered in connection therewith) shall be borne by the Company;
provided, however, that the Company shall not be required to pay for any
expenses of any registration proceeding begun (in which case holders shall bear
such expenses), if the registration request is subsequently withdrawn at any
time at the request of the holder or holders of not less than 51% of the shares
issued and issuable upon exercise of the Warrants, unless such withdrawal is
due to the misconduct of the Company or due to an unforeseen material adverse
change in the business, properties, prospects or financial condition of the
Company occurring prior to the effectiveness of the registration statement, in
which case the Company will continue to bear such expenses.
(b) In connection with any registration under the Act and specified
state securities law pursuant to this Agreement, the Company will, without
charge, furnish each holder whose shares are registered thereunder with copies
of the registration statement and all amendments thereto and will,
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<PAGE> 7
without charge, supply each such holder with copies of any preliminary and
final prospectus included therein in such quantities as may be necessary for
the purposes of such proposed sale or distribution that the holder or holders
may reasonably request.
(c) In connection with any registration of shares pursuant to this
Section 7, the holders whose shares are being registered shall furnish the
Company with such information concerning such holders and the proposed sale or
distribution as shall be required for use in the preparation of such
registration statement and applications.
(d) Notwithstanding the foregoing provisions of this Section 7, upon
receipt of such written notice from the holder or holders of not less than
fifty one percent (51%) of the shares issued and issuable upon exercise of the
Warrants requesting that the Company effect registration of the sale or
distribution of Common Stock as provided in Section 7(a) or upon election by
holders of Warrants or Common Stock to participate in a registration pursuant
to Section 7(e), the Company shall have the option, for a period of ten (10)
days thereafter, to purchase all or any such Warrants and all or any such
shares of Common Stock acquired pursuant to the exercise of the Warrants and
held by holders providing the request for registration under Section 7(a)
and/or 7(e) and held by any other holder of Warrants or shares issued and will
exercise its option if it so elects as follows:
(i) as to such Warrants, at a price per Warrant equal to the
difference between (A) the average of the means between the closing bid and
asked prices of the Common Stock in the over-the-counter market for 20
consecutive business days commencing 30 business days before the date of
receipt of such notice, (B) if the Common Stock is quoted on the Nasdaq
SmallCap Market, at the average of the means of the daily closing bid and asked
prices of the Common Stock for 20 consecutive business days commencing 30
business days before the date of such notice, or (C) if the Common Stock is
listed on any national securities exchange or quoted on the Nasdaq National
Market System, at the average of the daily closing prices of the Common Stock
for 20 consecutive business days commencing 30 business days before the date of
such notice and the Exercise Price of the Warrant at the time of receipt of
such notice; and
(ii) as to shares of Common Stock previously purchased pursuant to the
exercise of Warrants, at a price per share equal to (A) the average of the
means between the closing bid and asked prices of the Common Stock in the
over-the-counter market for 20 consecutive business days commencing 30 business
days before the date of such notice, (b) if the Common Stock is quoted on the
Nasdaq SmallCap Market, at the average of the means of the daily closing bid
and asked prices of the Common Stock for 20 consecutive business days
commencing 30 business days before the date of such notice or (C) if the Common
Stock is listed on any national securities exchange or the Nasdaq National
Market System, at the average of the daily closing prices of the Common Stock
for 20 consecutive business days commencing 30 business days before the date of
such notice (such value of shares so determined in this Section 7(d)(ii), as
the case may be, is referred to herein as the "Current Value").
(e) If any time on or after the first anniversary of the date hereof
but before the fifth anniversary of the date hereof the Company proposes to
file a registration statement under the Act covering a proposed sale of shares
of Common Stock, it shall give to each holder who then owns any
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<PAGE> 8
Warrants or any shares of Common Stock acquired pursuant to the exercise of the
Warrants notice of such proposed registration at least 30 days prior to the
filing of the registration statement and shall afford each such holder who then
proposed to sell or distribute publicly any of the shares subject to the
Warrants upon giving not less than 10 days notice prior to such filing, the
opportunity to have such shares included in the securities registered under the
registration statement. All expenses, disbursements and fees (including, but
without limitation, fees and expenses of counsel, auditing fees, printing
expenses, SEC filing fees and expenses, but excluding any underwriting
discounts or commissions) incurred in connection with the registration by the
Company of the sale of any shares for any such holder under this Section 7(e)
shall be borne by the Company.
8. INDEMNIFICATION; CONTRIBUTION.
(a) The Company will indemnify and hold harmless each holder and each
affiliate thereof of Common Stock registered pursuant to this Agreement with
the Commission, or under any Blue Sky Law or regulation against any losses,
claims, damages, or liabilities, joint or several, to which such holder may
become subject under the Act or otherwise, insofar as such losses, claims,
damages, or liabilities (or actions in respect thereof) arise out of or are
based upon an untrue statement or alleged untrue statement of a material fact
contained in any preliminary prospectus, registration statement, prospectus, or
any amendment or supplement thereto, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, and
will reimburse each such holder and affiliate for any legal or other expenses
reasonably incurred by such holder in connection with investigating or
defending any such action or claim regardless of the negligence of any such
holder or affiliate; provided, however, that the Company shall not be liable in
any such case to the extent that any such loss, claim, damage, or liability
arises out of or is based upon an untrue statement or alleged untrue statement
or omission or alleged omission made in any preliminary prospectus,
registration statement or prospectus, or any such amendment or supplement
thereto, in reliance upon and in conformity with written information furnished
to the Company by any such holder expressly for use therein.
(b) Each holder of Common Stock registered pursuant to this Agreement
will indemnify and hold harmless the Company against any losses, claims,
damages, or liabilities to which the Company may become subject, under the Act
or otherwise, insofar as such losses, claims, damages, or liabilities (or
actions in respect thereof) arise out of or are based upon an untrue statement
or alleged untrue statement of a material fact contained in any preliminary
prospectus, registration statement or prospectus, or any amendment or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in any preliminary
prospectus, registration statement or prospectus, or any amendment or
supplement thereto, in reliance upon and in conformity with written information
furnished to the Company by such holder expressly for use therein.
(c) Promptly after receipt by an indemnified party under Sections
8(a) or (b) above of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be
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<PAGE> 9
made against the indemnifying party under either such subsection, notify the
indemnifying party in writing of the commencement thereof; but the omission so
to notify the indemnifying party shall not relieve it from any liability that
it may otherwise have to any indemnified party. In case any such action shall
be brought against any indemnified party and it shall notify the indemnifying
party of the commencement thereof the indemnifying party shall be entitled to
assume the defense thereof by notice in writing to the indemnified party.
After notice from the indemnifying party to such indemnified party of its
election to assume the defense thereof, the indemnifying party shall not be
liable to such indemnified party under either of such subsections for any legal
expenses of other counsel or any other expense, in each case subsequently
incurred by such indemnified party, in connection with the defense thereof
other than reasonable costs of investigation incurred prior to the assumption
by the indemnifying party, unless such expenses have been specifically
authorized in writing by the indemnifying party, the indemnifying party has
failed to assume the defense and employ counsel, or the named parties to any
such action include both the indemnified party and the indemnifying party, as
appropriate, and such indemnified party has been advised by counsel that the
representation of such indemnified party and the indemnifying party by the same
counsel would be inappropriate due to actual or potential differing interests
between them, in each of which cases the fees of counsel for the indemnified
party will be paid by the indemnifying party.
(d) If the indemnification provided for in this Section 8 is
unavailable or insufficient to hold harmless an indemnified party under Section
8(a) or 8(b) in respect of any losses, claims, damages, or liabilities (or
action in respect thereof) referred to therein, then each indemnifying party
shall contribute to the amount paid or payable by such indemnified party as a
result of such losses, claims, damages, or liabilities (or actions in respect
thereof) in such proportion as is appropriate to reflect the relative benefits
received by the Company and the holder or holders from this Agreement and from
the offering of the shares of Common Stock. If, however, the allocation
provided by the immediately preceding sentence is not permitted by applicable
law, then each indemnifying party shall contribute to such amount paid or
payable by such indemnified party in such proportion as is appropriate to
reflect not only such relative benefits but also the relative fault of the
Company and the holders in connection with the statement or omissions that
resulted in such losses, claims, damages, or liabilities (or actions in respect
thereof), as well as any other relevant equitable considerations. The relative
fault shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by
the Company or the holder and the parties' relative intent, knowledge, access
to information and opportunity to correct or prevent such statement or
omission. The Company and the holders agree that it would not be just and
equitable if contribution pursuant to this Section 8(d) were determined by pro
rata allocation (even if the holders were treated as one entity for such
purpose) or by any other method of allocation that does not take into account
the equitable considerations referred to above in this subsection (e). Except
as provided in Section 8(c), the amount paid or payable by an indemnified party
as a result of the losses, claims, damages, or liabilities (or actions in
respect thereof) referred to above in this Section 8(d) shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in connection with investigation or defending any such action or claim.
No person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. Notwithstanding any provision in
this Section 8(d) to the contrary, no holder shall be liable for any amount, in
the
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aggregate, in excess of the net proceeds to such holder from the sale of such
holder's shares (obtained upon exercise of Warrants) giving rise to such
losses, claims, damages, or liabilities.
(e) The obligations of the Company under this Section 8 shall be in
addition to any liability that the Company may otherwise have and shall extend,
upon the same terms and conditions, to each person, if any, who controls any
holder of Warrants within the meaning of the Act. The obligations of the
holders of Common Stock under this Section 8 shall be in addition to any
liability that such holders may otherwise have and shall extend, upon the same
terms and conditions to each person, if any, who controls the Company within
the meaning of the Act.
9. STOCK EXCHANGE LISTING. In the event the Company lists its
Common Stock on any national securities exchange, the Company will, at its
expense, also list on such exchange, upon exercise of a Warrant, all shares of
Common Stock issuable pursuant to such Warrant.
10. SPECIFIC PERFORMANCE. The Company stipulates that remedies at
law, in money damages, available to the holder of a Warrant, or of a holder of
Common Stock issued pursuant to exercise of a Warrant, in the event of any
default or threatened default by the Company in the performance of or
compliance with any of the terms of this Agreement are not and will not be
adequate. Therefore, the Company agrees that the terms of this Agreement may be
specifically enforced by a decree for the specific performance of any agreement
contained herein or by an injunction against a violation of any of the terms
hereof or otherwise.
11. SUCCESSORS AND ASSIGNS; BINDING EFFECT. This Agreement shall be
binding upon and inure to the benefit of you and the Company and their
respective successors and permitted assigns.
12. NOTICES. Any notice hereunder shall be given by registered or
certified mail, if to the Company, at its principal office referred to in
Section 5 and, if to the holders, to their respective addresses shown in the
Warrant ledger of the Company, provided that any holder may at any time on
three (3) days' written notice to the Company designate or substitute another
address where notice is to be given. Notice shall be deemed given and received
after a certified or registered letter, properly addressed with postage
prepaid, is deposited in the U.S. mail.
13. SEVERABILITY. Every provision of this Agreement is intended to
be severable. If any term or provision hereof is illegal or invalid for any
reason whatsoever, such illegality or invalidity shall not affect the remainder
of this Agreement.
14. ASSIGNMENT; REPLACEMENT OF WARRANTS. If the Warrant or Warrants
are assigned, in whole or in part, the Warrants shall be surrendered at the
principal office of the Company, and thereupon, in the case of a partial
assignment, a new Warrant shall be issued to the holder thereof covering the
number of shares not assigned, and the assignee shall be entitled to receive a
new Warrant covering the number of shares so assigned. Upon receipt of
evidence reasonably satisfactory to the Company of the loss, theft,
destruction, or mutilation of any Warrant and appropriate bond or
indemnification protection, the Company shall issue a new Warrant of like
tenor. Except as contemplated by Section 7 of this Agreement, the Warrants
will not be transferred,
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sold, or otherwise hypothecated by you or any other person and the Warrants
will be nontransferable, except to (i) one or more persons, each of which on
the date of transfer is an officer, or partner of you; (ii) a partnership or
partnerships, the partners of which are you and one or more persons, each of
whom on the date of transfer is an officer to you; (iii) a successor to you in
merger or consolidation; (iv) a purchaser of all or substantially all of your
assets; or (v) a person that receives a Warrant upon death of a Holder pursuant
to will, trust, or the laws of intestate succession.
15. GOVERNING LAW. This Agreement shall be governed and construed in
accordance with the laws of the State of Oklahoma without giving effect to the
principles of choice of laws thereof.
16. DEFINITION. All references to the word "you", and to "Capital
West Securities, Inc." in this Agreement shall be deemed to apply with equal
effect to any persons or entities to whom Warrants have been transferred in
accordance with the terms hereof, and, where appropriate, to any persons or
entities holding shares of Common Stock issuable upon exercise of Warrants.
17. HEADINGS. The headings herein are for purposes of reference only
and shall not limit or otherwise affect the meaning of any of the provisions
hereof.
Very truly yours,
Grand Adventure Tour & Travel Publishing Corporation
By:
--------------------------
Matthew O'Hayer, President
Accepted as of ___________________, 1998.
CAPITAL WEST SECURITIES, INC.
By:
--------------------------------------
Draft Date: February 3, 1998
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EXHIBIT 23.01
Consent of Counsel
Kuperman, Orr, Mouer & Albers, a professional corporation, hereby
consents to the use of its name under the heading "Legal Matters" in the
Prospectus constituting a part of Amendment No. 3 to Form SB-2 Registration
Statement of Grand Adventures Tour & Travel Publishing Corporation ("GATT") for
the registration of 700,000 shares of GATT common stock (805,000 shares
assuming the exercise in full of the overallotment option).
/s/ KUPERMAN, ORR, MOUER & ALBERS
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Kuperman, Orr, Mouer & Albers, a professional corporation
Austin, Texas
February 3, 1998
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EXHIBIT 23.02
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the use in this Amendment No. 3 to Registration Statement on Form
SB-2 of our report included herein dated April 4, 1997 (except for Note 15, as
to which the date is May 1, 1997 and Note 11, as to which the date is November
14, 1997), relating to the consolidated financial statements of Grand Adventures
Tour & Travel Publishing Corporation and subsidiary, to the incorporation by
reference of such report included in the Company's 1996 annual report on Form
10-K, and to our Firm under the caption "Experts" in the Prospectus.
Andersen Andersen & Strong L.C.
Salt Lake City, Utah
February 3, 1998
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EXHIBIT 23.03
Consent of Robert G. Rader
Robert G. Rader hereby consents to the use of his name under the heading
"Management" and his designation as a "director nominee" in the Prospectus
constituting a part of Amendment No. 3 to Form SB-2 Registration Statement of
Grand Adventures Tour & Travel Publishing Corporation ("GATT") relating to the
registration of 700,000 shares of GATT common stock (805,000 shares assuming the
exercise in full of the overallotment option).
/s/ Robert G. Rader
-----------------------
Robert G. Rader
Oklahoma City, Oklahoma
February 3, 1998
