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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
COMMISSION FILE NUMBER 33-4734-D
GRAND ADVENTURES TOUR & TRAVEL PUBLISHING CORPORATION
(Exact name of registrant as specified in charter)
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OREGON 93-0950786
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
211 EAST 7TH STREET, 11TH FLOOR, AUSTIN, TEXAS 78701
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (512) 391-2000
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Securities registered pursuant to section 12(b) of the Act:
TITLE OF CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
NONE NONE
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
(TITLE OF CLASS)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy of information
statements incorporated by reference in Part 10-KSB or any amendment to this
Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year: $ 27,914,626.
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock as of a specified date within the past 60
days: As of April 13, 2000, the aggregate market price of the voting stock held
by non-affiliates was approximately $8,008,000.
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of April 13, 2000, the Company had
outstanding 3,024,883 shares of its common stock, par value $0.0001.
Transitional Small Business Disclosure
Format (Check one): Yes No X
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Page 1 of 43 consecutively numbered pages.
Exhibit index appears on page 42.
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TABLE OF CONTENTS
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ITEM NUMBER AND CAPTION PAGE
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PART I
ITEM 1. DESCRIPTION OF BUSINESS 3
ITEM 2. DESCRIPTION OF PROPERTY 8
ITEM 3. LEGAL PROCEEDINGS 9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS 9
PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS 10
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION OR PLAN OF OPERATION 11
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 16
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE 33
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS: COMPLIANCE WITH SECTION 16(a)
OF THE EXCHANGE ACT 33
ITEM 10. EXECUTIVE COMPENSATION 34
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT 36
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 36
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K 37
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
THE OFFERING
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 investor relations telephone
number is (512) 391-2031.
BUSINESS OF ISSUER
The Company publishes magazines, manages web sites and sells travel products to
certain niche markets.
As of December 31, 1999, the Company serves three niche markets, as follows:
1. Interliners - Interliners are the active employees and retirees
of the airline industry, who may fly on many carriers for free or
at a significantly reduced fare, as well as their families and
friends to whom they pass along their allotments of no-cost or
low-cost flying privileges.
2. Travel agents - Travel agents are those individuals recognized by
a travel industry association, such as The International Airlines
Travel Agent Network (IATAN) or the Cruise Line Industry
Association (CLIA), as a seller of travel products or packages.
3. Destination weddings and honeymoons - A "destination wedding" is
any wedding performed at a location other than the home area of
the bride or groom. Honeymoon travel includes any travel by a
newly married couple within one year of their wedding.
The Company promotes travel sales by publishing the following Publications:
1. Interline Adventures - A 30 year-old, four-color, bi-monthly magazine,
Interline Adventures provides general travel editorial coverage and,
in a section known as the Interline Vacation Guide, a significant
focus on hotel, resort, cruise and tour opportunities for interliners.
Approximately 185,000 copies of the magazine are mailed to the homes
of subscribers, requesters, current and past customers, and airline
representatives. Copies of Interline Adventures not otherwise
delivered, as well as Updates and other Company publications, are
placed in airport areas and rooms reserved for and frequented by
airline employees. Among these areas and rooms are employee break
rooms, reservation and office areas, and pass bureaus. "Pass bureaus"
are offices maintained by airlines 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."
2. Interline Update - A monthly 16-page brochure directed to interliners.
Approximately 400,000 copies are distributed by hand without charge in
airport areas and rooms reserved for and frequented by airline
employees including airline lounges, locker rooms, cafeterias and pass
bureaus.
3. Destination Weddings & Honeymoons - A quarterly magazine directed to
newly engaged couples. Approximately 200,000 copies are distributed
through newsstand sales, bridal salons, bridal consultants, and
mailings to subscribers and newly engaged couples. The premier issue
of the magazine was published in December, 1999. The magazine features
articles and editorial on various wedding and honeymoon topics.
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The Company also promotes travel sales over the Internet through its four web
sites:
www.Perx.com
www.DWHMagazine.com
www.DestinationWeddings.com
www.AgentPerx.com
SOURCES OF REVENUE
The Company receives revenue from various sources including advertising sales,
travel sales, publication sales and subscriptions, airline ticket sales and
wedding planning fees. Each of these revenue sources is described in further
detail in the following sections.
Advertising Sales - The Company solicits advertising from various travel
suppliers including hotels, resorts and cruise lines. Cruise lines and
non-travel suppliers pay for advertising in cash. Hotels and resorts pay for
advertising with room nights at their properties. The Company holds these room
nights in inventory for resale to its markets through its call centers. At the
time of sale, the Company records revenue from advertising and records the room
nights received as inventory. Ad sales and inventory are booked at the lower of
cost or market, with cost being equal to the net rate at which the Company could
purchase the rooms from the advertiser and market being the expected sale price
less the cost of sale.
Travel Sales - The Company operates two reservation call centers - one that
sells travel primarily to the Interline market and another that sells primarily
to the destination wedding and honeymoon markets. The Company's travel products
are supplied from three primary sources:
1. Room nights received in exchange for publication and web site
advertising. These room nights are sold from inventory. The Company
has advertising arrangements with approximately 280 resorts and
hotels.
2. Room nights purchased under net rate agreements negotiated with hotels
and resorts. These agreements provide for the purchase of rooms at a
fixed cost. These net rates are then marked up for sale to customers
through the Company's call centers. The Company has net rate
agreements with approximately 1,500 hotels and resorts.
3. Room nights and cruises sold on a commissionable basis. The Company
sells these room nights and cruises to its markets and receives a
commission from the hotel, resort or cruise line. These commissions
range from 10% to 20% of selling price. The Company sells travel
products from approximately 40 cruise lines and approximately 5,000
hotels and resorts.
Magazine Sales and Subscriptions - The Company receives subscription revenue
from the sale of Interline Adventures and Destination Weddings and Honeymoons
magazines. In addition, the Company sells the Destination Weddings and
Honeymoons magazine through newsstands.
Airline Ticket Sales - The Company sells commercial airline tickets as an
accommodation to its customers and to supplement its wedding and honeymoon
packages. The Company receives a commission from the airlines for such sales.
Currently, the commissions on domestic airline tickets are approximately 5% of
the selling price with a maximum commission of $50 for a round trip ticket.
International tickets are commissionable at the rate of 5% with a maximum
commission of $100 for a round trip ticket. Airline ticket sales are not
currently a significant source of revenue for the Company.
Wedding Planning Fees - In certain circumstances, the Company receives a fee for
the planning and coordination of wedding trips and plans. Although the Company
is developing this market, as of December 31, 1999, these fees did not
constitute a significant source of revenue for the Company.
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ORGANIZATIONAL STRUCTURE OF ISSUER
The Company is organized into two major divisions: Publishing and Marketing.
The Publishing Division
The Publishing Division produces, publishes and distributes Interline
Adventures, Destination Weddings & Honeymoons (the "Publications") and Interline
Update (the "Update"). The Magazines, the Update and all other Company marketing
material are hereinafter referred to as the "Publications."
The Publications serve as the primary marketing channel for the company, which
advertises its products and services therein. In addition, the Publications
provide an advertising outlet for the cruise lines, hotels and resorts
frequented by the Company's clients. In 1999, the Company also launched a web
site, "AgentPerx.com", to market to travel agents for their personal travel.
Advertising space within the Publications is marketed to hotels, resorts, cruise
lines and tour operators through direct sales, telemarketing and distribution of
media kits to the advertisers and, on a selective basis, to agencies
representing the advertisers. Although many of the advertisers are hotels,
resorts, cruise lines, and tour operators who have net rate agreements with the
Company, the Magazines also sell advertising space to travel suppliers who do
not have a net rate agreement or arrangement with the Company. The Company
offers advertisers the opportunity to purchase advertising space within the
Publications in exchange for room nights in hotels, resorts and cruise cabins,
which the Company then re-markets at an additional profit.
The Marketing Division
The Marketing Division operates under the names "Interline TravelReps" and
"WeddingTrips."
"Interline TravelReps," provides hotel and resort accommodations (comprised of
rooms or vacation packages), cabins on cruises, and seats on escorted tours.
"Interline TravelReps" offers hotel and resort accommodations throughout the
world with a particular focus on Mexico and the Caribbean. The Company offers
cruises on over 30 cruise 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 and is
subject to the continued satisfaction of the cruise lines with the Company's
service.
The Company markets its hotel and resort rooms and packages, cruises, and
escorted tour products through advertisements within the Company's Publications
and also advertises in the publications and newsletters published by airlines
for their employees. In addition, the Company has a network of more than 2,000
current and former airline employees who distribute the Update, brochures and
flyers into airline "Employee Areas" throughout the United States, Canada, the
United Kingdom and western Europe. The Marketing Division's other significant
marketing tools include its reservation center and the reservation agents who
answer phone calls and sell travel to interliners in response to the Company's
promotional activities.
The amount charged to the interline customer is established and published in the
Company's Publications and is quoted over the phone by the company's
reservationists. The Company believes that the market for interline products is
price sensitive and determines prices accordingly.
Under the name "WeddingTrips" the Company provides hotel and resort
accommodations (comprised of rooms or vacation packages), cabins on cruises, and
wedding planning services. "WeddingTrips" offers hotel and resort accommodations
throughout the world with a particular focus on Mexico and the Caribbean.
"WeddingTrips" offers
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cruises on over 30 cruise lines with over 100 ships in various worldwide
destinations and a wide variety of escorted tours, primarily to England, Europe
and Africa.
The Company markets its hotel and resort rooms and packages, cruises, and
wedding planning services through advertisements within Destination Weddings &
Honeymoons magazine and also advertises in the Company's other publications.
"WeddingTrips" manages a reservation center that is staffed by travel agents and
Certified Wedding Consultants.
COMPETITION
Particularly the Magazines compete with other publications for readership and
for advertisers' patronage.
Interline Adventures is the only four-color publication available which is
updated and published six times annually. Within the interline segment,
Interline Adventures has one primary competitor, the ASU Travel Guide -- a
400-page guide, published quarterly, with the look and feel of a paperback
novel. The ASU Travel Guide, which has been published successfully for a number
of years and enjoys widespread circulation, competes with Interline Adventures
for advertisements targeting interliners.
Destination Weddings & Honeymoons magazine competes on the newsstand with
several bridal magazines, such as Brides, Modern Bride and Martha Stewart's
Weddings. In addition, the magazine competes with a variety of niche and popular
publications for advertising and readership.
MARKETING
Management believes that competition within the interline travel industry is
based on price, 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 competitive advantage. Although, there are several competitors in the
interline travel industry, none are publicly held, and reliable sales
information is not available. Much of the Company's competition appears to be
smaller organizations established 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). A few,
like the Company, offer a more complete range of interline travel products and
services
The Company is not aware of any other company that is engaged in direct
competition for travel sales specifically to the destination wedding and
honeymoon market. The primary competition for travel sales in this market is
from traditional travel agencies and from hotels, resorts and cruise lines that
market wedding packages directly to the customers.
SOURCES OF MATERIALS
The Publications are printed and distributed by contract printing operations at
prices negotiated from time to time between the Company and printers. There are
a number of printers who could print and distribute the Publications. One of the
significant factors influencing the Company's expenses in printing and
distributing the Publications 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 Publications and the
profitability of the Company.
The company obtains hotel and resort accommodations, cruise ship cabins, and
tour reservations directly from the operators of those businesses. The company
negotiates prices, terms and availability of hotel and resort accommodations in
person, over the telephone, via fax and at industry conferences. With the
exception of instances where the Company is able to negotiate a better rate, the
Company obtains the rate quoted by a given hotel or resort to all interline
travel sellers. In contrast to hotel and resort operators, most cruise lines and
tour operators pay a
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commission based on a pre-determined price to the interline customer. Wedding
and honeymoon travel is not normally eligible for interline rates and is sold to
customers at retail rates.
SEASONALITY
When airlines operate at nearly full capacity, interline travel decreases. 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. Since very few interline customers
travel during this period, the Company's income during this eight-week period is
substantially lower than the income during the remainder of the year.
While the Company believes that wedding and honeymoon travel is not subject to
the same seasonal factors, we do not yet have enough experience in this niche to
precisely predict seasonality.
RISK FACTORS
Recent Operating Losses - The Company had net operating losses for 4 of the last
5 fiscal years (since its inception). See, "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
Risks Associated with the Travel Industry; General Economic Conditions - The
Company's results of operations are 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 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 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.
Reliance on Suppliers - Although the Company sells all of the major cruise
lines, 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 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. During
the Company's operations within the interline industry, no major cruise line
operator has failed, making it difficult to estimate the impact such failure
would have on the Company's operation.
Dependence on Technology - The Company's business is dependent upon a number of
different state-of-the-art information and telecommunication technologies for
its access to information and to manage a high volume of inbound and outbound
calls. Any failure of this technology could 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
could have a material adverse effect on the Company's business, financial
condition and results of operations. See, "ITEM 2. DESCRIPTION OF PROPERTY."
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. Approximately 3,024,883 shares of
Common Stock are outstanding. Of the outstanding shares, approximately 2,197,000
shares held by existing stockholders are tradable without restriction. The
remaining shares of Common Stock 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
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registration, including that provided by Rule 144 promulgated under the
Securities Act. Approximately 27% of the outstanding shares of Common Stock, in
addition to being Restricted Securities, are subject to agreements to not sell
such Restricted Shares for a 48-month period beginning on February 5, 1998,
except under agreed upon limited restrictions. 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.
In addition to the outstanding shares of Common Stock, there are 159,932 shares
subject to outstanding warrants and options at a weighted average exercise price
of $6.49 per share. See, "MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERS
MATTERS". There are also 450,000 shares of Common Stock reserved for issuance
under the Company's stock option plans, of which 323,409 shares are subject to
outstanding options at a weighted average exercise price of $4.31 per share. See
"EXECUTIVE COMPENSATION - Long-term Incentive Plan". During the year, the
Company issued 22,500 non-qualified stock options to directors. These options
vest over two years with an exercise price of $1.75 per share. These options
expire July 1, 2008. The Company has a total of 162,500 non-qualified options
outstanding at a weighted average exercise price of $4.55.
During the fourth quarter of 1999, the Company issued $1,500,000 of convertible
debentures. The debentures, which bear interest at 10% per annum, payable
quarterly, are due on September 30, 2003. At the option of the holders, the
debentures are convertible into the Company's Common Stock. If the conversion
occurs before September 21, 2000, the debentures are convertible into one share
of Common Stock for each $2.625 of debenture face value. If the conversion
occurs after September 20, 2000, the debentures are convertible into one share
of Common Stock for each $2.50 of debenture face value.
Registration statements are expected to be filed to permit the resale of shares
issuable upon exercise of warrants or the conversion of debentures. The resale
of such shares could adversely affect the prevailing market price of the Common
Stock.
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 beneficially
own shares of Common Stock representing more than 29% of the total voting power
of the Common Stock. 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.
ITEM 2. DESCRIPTION OF PROPERTY
The Company maintains an extensive phone and computer system with which it
handles the telephone 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 Company's
marketing efforts. The Company believes the phone system and computer network is
capable of handling the Marketing Division's needs for the foreseeable future.
However, the Company is constantly evaluating new technologies, upgrades or
product enhancements which would serve to enhance the Company's operations. 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 17,000 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 currently employs 105 full time people. 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
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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 the Company has not suffered any work stoppages or labor unrest.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings, and no material
legal proceedings have been threatened by or, to the best of the Company's
knowledge, against the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual Shareholders' meeting was held at the Company's corporate offices in
Austin, Texas on June 22, 1999. The number of qualified shareholder votes
attending the meeting either in person or by proxy totaled 1,264,552 shares. The
total outstanding number of common shares of the Company as of April 9, 1999,
the date of record for the Shareholder meeting totaled 3,024,883 shares.
Therefore, a quorum was present.
The Shareholders elected the following individuals to the Board of Directors to
serve until the next annual meeting:
Matthew O'Hayer, Chairman of the Board
Robert Sandner, Director
Robert G. Rader, Director
Duane K. Boyd, Director
Mr. O'Hayer received 1,262,552 votes for, 2,000 votes abstaining, and
no votes against
Mr. Sandner received 1,262,552 votes for, 2,000 votes abstaining, and
no votes against
Mr. Rader received 1,262,552 votes for, 2,000 votes abstaining, and no
votes against
Mr. Boyd received 1,262,552 votes for, 2,000 votes abstaining, and no
votes against
There being no further business, the Shareholder meeting was adjourned.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET FOR COMMON STOCK
The Common Stock is currently traded in the NASDAQ SmallCap(R) Market under the
symbol "GATT." Prior to the Offering and the inclusion of the Common Stock in
the NASDAQ SmallCap(R) Market, the Common Stock was traded irregularly and
infrequently in the over-the-counter market and quoted on OTC EBB under the same
symbol and quoted in the pink sheets published by the National Quotations
Bureau. Prior to the Company's February, 1998, public offering, 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
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 of the Company last eight fiscal quarters, the high and low bid and ask
prices for the Common Stock. All of the 1997 transactions were effected prior to
the 1-for-7 reverse stock split effected in December, 1997:
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BID ASK
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QUARTER ENDED HIGH LOW HIGH LOW
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December 31, 1999..................... 3 1/2 2 3/8 3 15/16 2 3/8
September 30, 1999.................... 2 3/4 2 9/16 3 7/32 2 1/4
June 30, 1999......................... 2 1 13/16 2 1 3/8
March 31, 1999........................ 1 13/16 1 3/8 2 1/2 1
December 31, 1998..................... 2 15/16 1 1/4 3 1 9/16
September 30, 1998.................... 3 5/8 1 9/16 3 7/8 1 3/4
June 30, 1998......................... 4 7/8 3 1/4 5 1/8 3 1/2
March 31, 1998........................ 4 13/16 3 5/16 4 15/16 3 7/16
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offering, the Common Stock was traded on the National Association
of Security Dealers, Inc.'s electronic bulletin board. Trading actively was
infrequent. Sales of substantial amounts of Common Stock in the public market
could adversely affect the market price of the Common Stock.
As of March 31, 1999, the Company had approximately 3,024,883 shares of Common
Stock outstanding. Of these shares, approximately 2,197,000 shares are
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. All of the remaining shares,
which total approximately 829,000 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 Rule 144, and are subject to 48-month "lock-up"
agreements. Small portions of these 48-month Lock-up Shares may be sold by the
holders thereof after the second and third anniversaries of the Offering and the
remainder may be sold after the fourth anniversary.
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 159,932
shares of Common Stock subject to outstanding warrants and options at a weighted
average exercise price of $6.49 per share (as adjusted for the Reverse Stock
Split). Such warrants are exercisable for periods expiring at various dates
between 1999 and 2002. 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.
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
10
<PAGE> 11
the ability of the Company to raise capital through the issuance of additional
equity securities. Prior to the Offering, there was no viable 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.
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
323,409 shares at an average exercise price of $4.39 per share were outstanding
on December 31, 1999. The Company also issued non-qualified stock options to
acquire 162,500 shares of common stock to members of the Board of Directors, one
member of management and one outside consultant as of July 1, 1998 at an
exercise price of $5.00 per share. These options expire July 1, 2008. The
Company intends to file a registration statement under the Securities Act to
register shares of Common Stock reserved for issuance under such plans in the
near future. See "EXECUTIVE COMPENSATION - Long-term Incentive Plan."
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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.
GENERAL
The Company made significant advances in 1999. Among the most significant
advances are:
o The Company finished the year with a pre-tax profit of $402 thousand.
o The implementation of the "World Wide Marketing Program" (WWMP). The
WWMP was an initiative to increase Publication advertising by
aggressively promoting the Company's "room nights for advertising"
approach. As a result of this initiative the Company increased its
advertising in Interline Adventures and Interline Update from
approximately $765,000 in 1998 to $2,425,500 in 1999. This program
increased the Company's room and cabin inventory from $254,000 at
December 31, 1998 to $2,030,000 at December 31, 1999. The Company
anticipates significant continued growth from this program in future
years.
o The Company started operating in the wedding and honeymoon markets. In
December, 1999, the Company published the premier issue of Destination
Weddings & Honeymoons magazine. Approximately 200,000 copies of the
magazine were distributed through a combination of direct mailings to
engaged couples, mailings to bridal salons and wedding consultants and
newsstand sales. In conjunction with this magazine launch, the Company
also established the WeddingTrips division to arrange travel and
provide wedding planning services. WeddingTrips is staffed by
experienced travel agents and Certified Wedding Consultants. The
Company also established two web sites to support its marketing
efforts in this business.
The Destination Weddings & Honeymoons magazine is published quarterly.
Management expects the magazine circulation and advertising revenue to
increase with each issue in the year 2000. The growth in circulation
and advertising revenue should increase the volume of travel sales
processed by the WeddingTrips staff.
o The establishment of AgentPerx.com, a web site directed to the sale of
travel to travel agents for their own personal travel. Through this
site, the company markets its World Wide Marketing Plan inventory to
travel agents at prices that are lower than the agents can obtain
directly from the hotel or resort. The Company believes that this
business unit has significant growth potential in the next several
years.
o The Company increased circulation of Interline Adventures to 185,000
during the year. This increase in circulation was due to the efforts
of the Company's marketing division and field marketing
representatives. At the same time, the Company completed a thorough
review of the distribution lists and eliminated those names and
addresses that were outdated, no longer interliners or that were not
active customers. These
11
<PAGE> 12
efforts have provided a larger and better quality mailing list. The
Company believes that these efforts will continue to pay off for many
years.
o On November 8, 1999, the Company acquired the interline related assets
of Weissman Sales & Marketing, Inc., a privately held travel company
offering cruises and tours to the retail and interline markets. The
purchase consideration was paid in cash and accounted for using the
purchase method of accounting. This acquisition is expected to
generate in excess of $2 million in annual revenues with no material
increase in related operating expenses. Among the assets acquired were
the trade name "Ventures Extraordinaire and Holidays by Sea " and a
client list with over 20,000 airline employee names.
o In December, 1999, the Company entered into a definitive purchase
agreement to acquire the interline related assets of Non Rev Travel
International, a privately held travel company in Atlanta, Georgia
offering hotels, cruises and resorts to the interline market. This
acquisition is expected to generate in excess of $2 million in sales
annually. The acquisition closed on February 1, 2000.
o The Company completed the private placement of $1,500,000 of
convertible debentures in September and October, 1999. The debentures
bear interest at 10%, payable quarterly, are due on September 30, 2003
and are convertible, at the holders option, into shares of the
Company's common stock. If the debentures are converted before
September 30, 2000, the debentures holders will receive one share of
common stock for each $2.625 of debenture face value. If conversion
occurs after September 30, 2000, the conversion rate will be one share
of common stock for each $2.50 of debenture face value.
The Company believes that it will continue to increase sales and profitability
in the year 2000 and future years.
FINANCIAL CONDITION AND CHANGES IN FINANCIAL CONDITION
The Company had a positive working capital of $3.0 million as of December 31,
1999, as compared to $1.4 million at December 31, 1998. The significant increase
in working capital between years was primarily the result of an increase in
inventory from advertising. Total current assets increased 36.9% between years
to $4.9 million with the largest increase being in inventory. Current
liabilities increased 10.9% between years. The slight increase in current
liabilities was resulted from an increase in accounts payable as it relates to
Publication distribution costs during the year and accrued interest from the
private offering in September, 1999. The "travel" revenue benefits will not be
recognized as revenue until future periods.
Deferred revenue for hotels and cruises represent money received from passengers
that are deferred for revenue recognition purposes until the passenger has
completed travel. These deferred liabilities are short-term in nature due to the
short time frame between the date the reservations are booked and the travel
date. Deferred subscription revenue represents subscription money received but
not earned at year end. Publication subscriptions are normally paid in full in
advance for the one- or two-year subscription period. Subscription revenue is
earned on a pro rata basis as the Publications are printed and shipped to the
subscribers. It is anticipated that subscription revenue will continue to
decrease as the Company focuses on controlled (complementary) distribution of
the Publications that will put more emphasis on advertising revenue as opposed
to a subscription base.
During the last quarter of 1998 and through the third quarter of 1999, the
Company borrowed funds against its investment accounts on a short-term basis in
order to fund the acquisition and the publications mentioned above.
Total assets increased 60% totaling $6.8 million at December 31, 1999. $2.1
million, or 85% of the total increase, is room and cabin inventory resulting
from the Company's aggressive marketing programs and new Publications. Cash and
cash equivalents amounted to $1.6 million at the end of the 1999. The restricted
cash balance of $222 thousand represents a portion of the Company's certificates
of deposit pledged as a reserve for charge backs against the Company's
Visa/MasterCard credit card processing and also pledged against various letters
of credit to hotel/cruise vendors. The letters of credit serve as security for
the vendors to allow the Company to make last minute bookings
12
<PAGE> 13
with these vendors without having to pay in advance of travel. None of these
letters of credit have been drawn on to date.
The accounts receivable balance is comprised primarily of cash advertising
revenue due from vendors that advertised in the Publications. Prepaid hotel cost
and prepaid cruise cost represent funds paid to hotels and cruise lines as of
December 31, 1999, for travel dates that occur after that date. These prepaid
items relate directly to the previously discussed deferred revenues and are also
very short-term in nature. Room/cabins held for sale arises out of advertising
agreements where hotels and cruises allot rooms in exchange for advertising in
the Company's Publications. These rooms/cabins are recorded in inventory at a
value based on the Company's resale agreements with the advertising hotels,
resorts and cruise lines. At the time that the Company resells the room/cabin to
its customers, the Company relieves the inventory account by the appropriate
value and recognizes the corresponding cost of travel sale. As a result, the
Company realizes the cash flow benefit of both the advertising sale and the
travel sale at the time it receives payment from the customer. The cash flow
benefit may be realized in a period subsequent to the period in which the
advertising revenue is recognized. There was also a balance due from affiliates
(BEI/IMS) which is secured by a short term promissory note bearing interest and
collateralized by shares in a publicly traded company. The agreement calls for
the shares to be sold on the open market over time with the proceeds being used
to pay off the balance due the Company. The Company set up a reserve for
uncollectible accounts of $128 thousand at December 31, 1999 against this
affiliate balance based on the approximate fair market value of the collateral.
RESULTS OF OPERATIONS
Overall Operating Results - The Company's net income for the year ended December
31, 1999 was $402 thousand, as compared to a loss of $1.6 million for the prior
year. The current year profitability is primarily a result of increased
advertising revenue resulting from more aggressive marketing plans.
Revenue - Gross revenue for the year ended December 31, 1999 increased 70.5% to
$27.9 million from $16.3 million in 1998. Hotel and resort sales increased
102.5% while cruise and tour sales increased 33.1% over 1998. Advertising and
subscription revenue increased 281.4% over this same time frame. Management
anticipates that both travel and advertising sales should continue to grow with
the aid of a stronger distribution network for its publications and a consistent
and increased publishing schedule. Management believes that the revenues from
the publishing and travel portions of its business are integrally tied to one
another - improved hotel sales facilitate advertising sales and, increased hotel
advertising improves the likelihood of room sales within the advertising hotels.
The Company recognizes hotel and cruise revenue on a "booked, paid, traveled"
basis (i.e. revenue is not earned until the passenger has traveled). The Company
sells advertising over a given number of issues and advertising revenue is
recognized as the applicable publications are printed and distributed.
Cost of Goods Sold - The typical gross margin for hotel and resort sales ranges
from 20% to 23%. Typical cruise and tour gross margins range from 11% to 13%.
For the year ended December 13, 1999, hotel and cruise gross margins were 23.4%
and 13%, respectively. Margins for both hotels and cruises can fluctuate
depending on a number of factors relative to the properties being sold
(competition, location, and availability of supply and others). Publishing cost
increased due to a large increase in the number of publications being
distributed for Interline Adventures and the premier publication of Destination
Weddings & Honeymoons. The Company anticipates that the number of Publications
issued in the future will continue to increase as the Company increases its
airline employee database through its marketing efforts as well as possible
future acquisitions of interline related companies.
Operating Expenses - Operating expenses for the year increased 35.9%. The
primary increases in expenses relate to staffing at both the support and
reservation personnel levels. The Company added reservation, marketing,
accounting, CFO, and management information services personnel in order to
service both the increase in telephone and web site inquiries.
There were also increases in depreciation and goodwill amortization due to the
aforementioned furniture and equipment purchases and acquisitions.
13
<PAGE> 14
Because of the increase in new bookings, the Company also experienced a
significant increase in credit card fees, telephone and postage and delivery
charges. The revenue associated with these expenditures will be recognized when
travel has occurred which may or may not be in the same quarter as the expense.
The Company is currently undergoing a postal rate audit on the distribution of
the Publications which, if successful, should result in substantial on-going
savings in that area as well.
As already noted, the Company anticipates experiencing increased travel and
advertising sales in 2000. The Company believes that the following types of
operating expenses will vary with travel sales and generally increase as travel
sales increase: reservation personnel costs, credit card fees, telephone expense
and postage and delivery expenses. The actual levels of these expenses will be a
function of numerous factors including but not limited to the experience,
closing capabilities and product knowledge of the reservation staff. The Company
believes that advertising sales can increase substantially without proportionate
increases in operating expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company has an accumulated deficit of $3.7 million ($544,000 of this deficit
is attributable to periods prior to the Company's commencement of operations
within the interline travel industry).
As discussed in "Financial Condition and Changes in Financial Condition", the
Company has increased its inventory of rooms/cabins by approximately $2.1
million from 1998 to 1999. This increase has required the Company to utilize its
cash resources to finance growth. The Company believes that the ongoing sale of
this inventory will produce sufficient liquidity to meet its operating and
growth plans.
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.
FOREIGN CURRENCY RISK
The Company has recently entered into contracts with certain hotels/resorts
located primarily in Europe which stipulate conversion of U.S. dollars into
different European currencies at time of travel. The Company is currently
evaluating its foreign currency risk in regard to these contracts. To date, the
amount of Company sales of these properties has been immaterial to the Company's
financial operations and the Company has not experienced any erosion of margins
on sales of these properties due to currency conversion rates.
FORWARD-LOOKING INFORMATION
From time to time, the Company or its representatives have made or may make
forward-looking statements, orally or in writing. Such forward-looking
statements may be included in, but not limited to, press releases, oral
statements made with the approval of an authorized executive officer or in
various filings made by the Company with the Securities and Exchange Commission.
Words or phases "will likely result", "are expected to", "will continue", "is
anticipated", "estimate", "project or projected", or similar expressions are
intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995 (the "Reform Act"). The Company
wishes to ensure that such statements are accompanied by meaningful cautionary
statements, so as to maximize to the fullest extent possible the protections of
the safe harbor established in the Reform Act. Accordingly, such statements are
qualified in their entirety by reference to and are accompanied by the following
discussion of certain important factors that could cause actual results to
differ materially from such forward-looking statements.
Management is currently unaware of any trends or conditions other than those
previously mentioned in this management's discussion and analysis that could
have a material adverse effect on the Company's 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 Publication
14
<PAGE> 15
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.
15
<PAGE> 16
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
16
<PAGE> 17
GRAND ADVENTURES TOUR & TRAVEL PUBLISHING
CORPORATION
FINANCIAL STATEMENTS
AND REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
DECEMBER 31, 1999 AND 1998
17
<PAGE> 18
To The Board of Directors
of Grand Adventures Tour & Travel Publishing Corporation
Austin, Texas
We have audited the accompanying balance sheets of Grand Adventures Tour &
Travel Publishing Corporation as of December 31, 1999 and 1998, and the related
statements of operations, stockholders' equity and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Grand Adventures Tour & Travel
Publishing Corporation as of December 31, 1999 and 1998, and the results of its
operations and cash flows for the years referred to above, in conformity with
generally accepted accounting principles.
ANDERSEN ANDERSEN & STRONG, L.C.
April 13, 2000
Salt Lake City, Utah
18
<PAGE> 19
GRAND ADVENTURES TOUR AND TRAVEL PUBLISHING
CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 273,189 $ 236,452
Available for sale securities 1,123,037 1,868,469
Cash-restricted 221,500 175,500
Accounts receivable, net of allowance for doubtful accounts
of $29,108 in 1999 and $43,163 in 1998 563,755 191,226
Due from affiliate, net of allowance for reserve for
impairment of $163,130 and $128,046 in 1999 and 1998, 128,405 80,065
respectively
Accrued investment income 5,206 17,850
Other prepaid expenses 43,833 96,613
Rooms/cabins held for sale 2,425,525 253,901
Prepaid hotel cost 47,576 135,252
Prepaid cruise and tour cost 92,835 78,943
------------ ------------
Total Current Assets 4,924,861 3,134,271
------------ ------------
PROPERTY AND EQUIPMENT, at cost,
net of accumulated depreciation 1,240,418 410,505
OTHER ASSETS
Other assets 11,680 11,680
Intangible assets, net of accumulated amortization 615,687 680,543
------------ ------------
$ 6,792,647 $ 4,236,999
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 532,595 $ 277,802
Other current liabilities 125,224 196,908
Current portion of long-term debt 783,675 616,500
Deferred hotel revenue 445,808 471,034
Deferred cruise and tour revenue 102,774 92,209
Deferred subscription revenue 13,112 48,706
------------ ------------
Total Current Liabilities 2,003,188 1,703,159
------------ ------------
OTHER LIABILITIES
Long-term debt 1,852,634 --
------------ ------------
TOTAL LIABILITIES 3,855,822 1,703,159
------------ ------------
STOCKHOLDERS' EQUITY
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 3,024,883 and 3,024,883 in 1999 and
1998, respectively 302 302
Additional paid-in capital 6,610,474 6,610,474
Accumulated deficit (3,673,951) (4,076,936)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 2,936,825 2,533,840
------------ ------------
$ 6,792,647 $ 4,236,999
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
19
<PAGE> 20
GRAND ADVENTURES TOUR AND TRAVEL PUBLISHING
CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
REVENUES
Hotel revenue $ 11,492,997 $ 5,675,904
Cruise and tour revenue 13,011,681 9,752,847
Advertising revenue 2,919,556 765,579
Investment and other revenue 490,392 162,344
------------ ------------
TOTAL REVENUES 27,914,626 16,356,674
------------ ------------
COST OF GOODS SOLD
Hotel cost 8,804,638 4,405,837
Cruise and tour cost 11,352,001 8,629,259
Publishing cost 1,809,473 1,109,238
Merchandise cost 251,651 --
------------ ------------
TOTAL COST OF GOODS SOLD 22,217,764 14,144,334
------------ ------------
GROSS PROFIT 5,696,862 2,212,340
OPERATING EXPENSES
Selling, general and administrative expenses 2,322,086 1,605,349
Wages 2,766,471 2,202,622
Depreciation and amortization 205,319 90,004
------------ ------------
TOTAL OPERATING EXPENSES 5,293,877 3,897,975
------------ ------------
Net Income (Loss) before Income Taxes 402,985 (1,685,635)
Income Tax Expense -- --
NET INCOME (LOSS) $ 402,985 $ (1,685,635)
============ ============
Average Common Equivalent Shares
Basic 3,024,883 3,024,883
============ ============
Diluted 3,624,883 3,024,883
============ ============
Net Income (Loss) per Common Share
Basic $ 0.13 $ (0.56)
============ ============
Diluted $ 0.11 $ (0.56)
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
20
<PAGE> 21
GRAND ADVENTURES TOUR AND TRAVEL PUBLISHING
CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON COMMON ADDITIONAL
STOCK STOCK PAID-IN RETAINED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1997 1,431,858 143 $ 959,447 $(2,391,302) $(1,431,712)
Issuance of common shares
($5,00 per share less offering 1,200,000 120 4,787,678 -- 4,787,798
costs)
Conversion of notes payable into
Common shares ($2.20 per share) 393,025 39 863,349 -- 863,388
Net loss -- -- -- (1,685,635) (1,685,635)
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1998 3,024,883 302 6,610,474 (4,076,937) 2,533,840
Net income -- -- -- 402,985 402,985
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1999 3,024,883 302 $ 6,610,474 $(3,673,952) $ 2,936,825
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
21
<PAGE> 22
GRAND ADVENTURES TOUR AND TRAVEL PUBLISHING
CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income/(Loss) $ 402,985 $ (1,685,635)
Adjustments to reconcile net income/(loss)
to cash provided by operating activities:
Depreciation and amortization 205,319 90,004
Provision for losses on accounts receivable -- 159,189
Changes in operating assets and liabilities:
Restricted cash (46,000) 5,875
Accounts receivable (372,529) (119,059)
Rooms/cabins held for sale (2,171,624) (70,923)
Prepaid offering expenses -- 113,508
Other prepaid expenses 52,780 (17,850)
Accrued investment income 12,644 (96,613)
Prepaid hotel cost 87,676 (82,225)
Prepaid cruise and tour cost (13,892) 1,539
Other assets (35,542) 25,499
Accounts payable 254,793 (142,501)
Accrued expenses (71,684) (138,386)
Receivable from affiliates and other (48,340) 47,250
Deferred hotel revenue (25,226) 186,095
Deferred cruise and tour revenue 10,565 (60,847)
Deferred subscription revenue (35,594) (31,935)
------------ ------------
Net Cash Used by Operating Activities (1,793,669) (1,817,015)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of marketable short-term investments 745,432 (1,868,469)
Business acquisitions (20,287) (329,731)
Purchase of property and equipment (914,547) (416,550)
------------ ------------
Net Cash Used by Investing Activities (189,403) (2,614,750)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock -- 5,651,186
Proceeds from convertible debentures 1,500,000 636,500
Proceeds from leases payable 449,725 --
Net proceeds from notes payable 70,084 (1,593,374)
------------ ------------
Net Cash Provided by Financing Activities 2,019,809 4,694,312
------------ ------------
Net Increase in Cash 36,737 262,547
Cash at Beginning of Period 236,452 (26,095)
------------ ------------
Cash at End of Period $ 273,189 $ 236,452
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for interest 78,041 53,892
</TABLE>
The accompanying notes are an integral part of these financial statements.
22
<PAGE> 23
GRAND ADVENTURES TOUR AND TRAVEL PUBLISHING
CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
1. BUSINESS ACTIVITIES
The Company publishes magazines, manages web sites and sells travel products to
certain niche markets in the travel industry. The three niche markets the
Company served as of December 31, 1999, include (1) interliners, active
employees and retirees of the airline industry who may fly on many carriers for
free or at a significantly reduced fare, as well as their families and friends
to whom they pass along their allotments of no-cost or low-cost flying
privileges, (2) travel agents, those individuals recognized by a travel industry
association such as The International Airlines Travel Agent Network (IATAN), as
a seller of travel products, and (3) destination weddings and honeymoons. A
destination wedding is any wedding performed at a location other than the home
area of the bride or groom. Honeymoon travel includes any travel by a newly
married couple within one year of their wedding.
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.
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 charged to operations as incurred.
The assets "Prepaid Hotel Cost", "Prepaid Cruise and Tour Cost" and
"Rooms/Cabins Held for Sale" 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 balances in the cash and short-term investment accounts
consist of operating accounts and investments in commercial paper funds.
Restricted cash represents certificates of deposits pledged against as a reserve
for credit card processing and against letters of credit issued to various
hotels and cruise lines which allows the Company to process last minute
bookings.
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.
23
<PAGE> 24
GRAND ADVENTURES TOUR AND TRAVEL PUBLISHING
CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
Basic and Diluted Net Income (Loss) per Share
Basic net income (loss) per share is computed using the weighted average number
of shares outstanding during the period. Diluted net income (loss) per share is
computed using the weighted average number of common shares and common
equivalent shares outstanding during the period. Common equivalent shares
consist of shares issuable upon the exercise of stock options, stock warrants
and debentures.
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, 5-year, and 3-year periods.
Income Taxes
Income taxes are computed using the asset and liability method. Under this
method, deferred income tax assets and liabilities are determined based on the
differences between the financial reporting and tax bases of assets and
liabilities and are measured using the currently enacted tax rates and laws.
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes", requires a valuation allowance against deferred tax assets if, based on
the weight of available evidence, it is more likely than not that some or all of
its deferred tax assets will not be realized.
Stock-Based Compensation
The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board Opinion (APB) No.
25, "Accounting for Stock Issued to Employees", and complies with the disclosure
provisions of SFAS No.123, "Accounting for Stock-Based Compensation". The
Company accounts for stock-based compensation to employees and directors using
the intrinsic value method, whereby, compensation cost is recognized when the
exercise price at the date of grant is less than fair market value of the
Company's common stock. The Company discloses the pro forma effect of
compensation cost based on the fair value method for determining compensation
cost. Stock-based compensation awarded to non-employees is determined using the
fair value method. Compensation cost is recognized over the service or vesting
period. (See Note 11.)
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
The Company evaluates the recoverability of long-lived assets in accordance with
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets to be Disposed
of". SFAS No. 121 requires recognition of impairment of long-lived assets in the
event the net book value of such assets exceeds the future undiscounted cash
flows attributable to such assets.
24
<PAGE> 25
GRAND ADVENTURES TOUR AND TRAVEL PUBLISHING
CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
Marketing and Advertising Costs
The Company recognizes advertising expenses in accordance with Statement of
Position 93-7, "Reporting on Advertising Costs". As such, the Company expenses
the cost of communicating advertising in the period in which the advertising
space or airtime is used. Advertising expenses amounted to $165,728 and $108,332
for the years ended December 31, 1999 and 1998, respectively.
Investments
The Company classifies its marketable debt securities as "held to maturity" if
it has the positive intent and ability to hold the securities to maturity. All
other marketable securities are classified as "available for sale." Securities
classified as "available for sale" are carried in the financial statements at
fair value. Realized gains and losses, determined using the first-in, first-out
(FIFO) method, are included in earnings; unrealized holding gains and losses are
reported in other comprehensive income. Securities classified as held to
maturity are carried at amortized cost. Unrealized gains were immaterial for the
years ended December 31, 1999 and 1998.
Concentrations of Credit Risk Arising from Cash Deposits in Excess of Insured
Limits
The Company maintains cash balances at several financial institutions located in
Texas. Accounts at each institution are insured by the Federal Deposit Insurance
Corporation up to $100,000. At December 31, 1999, the Company's uninsured cash
balances total $67,062.
Recent Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1 (SOP 98-1), "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use". This standard requires
companies to capitalize qualifying computer software costs, which are incurred
during the application development stage and amortize them over the software's
estimated useful life. SOP 98-1 is effective for fiscal years beginning after
December 15, 1998. The Company does not expect that the adoption of SOP 98-1
will have a material impact on its consolidated financial statements.
In April 1998, the American Institute of Certified Public Accountants issued SOP
98-5, "Reporting on the Costs of Start-Up Activities". SOP 98-5 is effective for
the Company's fiscal year ending March 31, 2000. SOP 98-5 requires costs of
start-up activities and organization costs to be expensed as incurred. Adoption
is not expected to have a material effect on the Company's financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 is effective for fiscal years
beginning after June 15, 1999. SFAS No. 133 requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in the
fair value of derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designed as part of a
hedge transaction and, if it is, the type of hedge transaction. The Company does
not expect that the adoption of SFAS No. 133 will have a material impact on its
financial statements because the Company does not currently hold any derivative
instruments.
In January 2000, the FASB issued EITF 99-17, "Accounting for Advertising Barter
Transactions". EITF 99-17 is effective for transactions occurring after January
20, 2000. This pronouncement requires that revenues and expenses should be
recognized from advertising barter transactions at the fair value of the
advertising surrendered or received only when an entity has a historical
practice of receiving or paying cash for similar advertising transactions. It
has not been determined whether EITF 99-17 will apply to the Company. If the
provisions of EITF 99-17 had applied to the Company during fiscal 1999, it would
have reduced its revenues by approximately $1.7 million.
25
<PAGE> 26
GRAND ADVENTURES TOUR AND TRAVEL PUBLISHING
CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
3. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Property and equipment $ 1,428,385 $ 524,856
Leasehold improvements 44,763 --
Less: accumulated depreciation and amortization (232,730) (114,351)
------------ ------------
Net property and equipment 1,240,418 410,505
============ ============
</TABLE>
Depreciation and amortization expense for the years ending December 31, 1999 and
1998 was $205,319 and $90,004, respectively.
4. ACQUISITIONS
On November 8, 1999, the Company acquired the interline related assets of
Weissman Sales & Marketing, Inc., a privately held travel company offering
cruises and tours to the retail and interline markets. The purchase
consideration of $10,500 was paid in cash. The Company acquired intangible
assets in the form of customer names, addresses, phone numbers, e-mail
addresses, fax numbers, company telephone numbers, 800 sales numbers, existing
vendor contracts, distribution addresses, non-compete agreements and all
internet web addresses and the trade name "Ventures Extraordinaire". In addition
to the purchase agreement, the Company entered into a five year consulting
agreement with the seller. The consulting agreement provides for payments of
$3,500 per month in exchange for services related to interline product and
marketing development.
Subsequent to year-end, the Company acquired the interline related assets of
Non-Rev International, LLC. The transaction occurred on February 1, 2000. The
purchase consideration of $50,000 was paid in cash. The Company acquired
intangible assets in the form of customer names, addresses, phone numbers, fax
numbers and 800 sales numbers.
On November 5, 1998, the Company acquired the interline related assets of
Exclusively Cruises, Atlanta Inc. a privately held travel company offering
cruises and tours to the interline market. The purchase consideration was in the
form of cash of $12,500 and a non-interest bearing note payable with a balloon
payment of $20,000 due on December 4, 1999. The assets acquired included the
trade name "Exclusively Interline," client lists and telephone numbers. No
liabilities were assumed in the acquisition.
Assets acquired from Exclusively Interline consist of the following:
Excess of cost over net assets acquired $32,836
-------
Total assets acquired 32,836
=======
The purchase method of accounting was used to account for the above transaction
and the excess of cost over net assets acquired is being amortized over 5 years.
26
<PAGE> 27
GRAND ADVENTURES TOUR AND TRAVEL PUBLISHING
CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
On December 11, 1998, the Company acquired certain assets and liabilities of Sun
Central Reservations, Inc. and The Pass Bureau, Inc., two privately held travel
companies offering hotel, resorts and cruises to the interline market. The
purchase consideration was in the form of cash. In addition to assets listed
below, the Company acquired intangible assets in the form of customer names,
addresses, phone numbers, e-mail addresses, fax numbers, company telephone
numbers, 800 sales numbers, existing vendor contracts, distribution addresses,
non-compete agreements and all internet web addresses and the trade names "The
Pass Bureau" and "Sun Central Reservations."
Assets acquired from Sun Central/Pass Bureau consist of the following:
<TABLE>
<S> <C>
Certificate of deposit $ 21,079
Furniture and equipment 35,277
Receivables due from hotels and clients 81,882
Excess of cost over net assets acquired 296,896
------------
Total assets acquired $ 435,134
============
</TABLE>
Liabilities assumed from Sun Central/Pass Bureau consist of the following:
<TABLE>
<S> <C>
Client refunds due $ 39,072
Client credit vouchers 23,903
Payables due hotels 81,012
Payables due trade vendors and payroll 274,147
Note payable 17,000
------------
Total liabilities assumed $ 435,134
============
</TABLE>
The purchase method of accounting was used to account for the above transaction
and the excess of cost over net assets acquired is being amortized over 5 years.
5. INTANGIBLE ASSETS
Intangible assets at December 31, 1999 and 1998 are as follows:
At December 31, 1999 and 1998, the unamortized cost consists of the following:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Cost $ 691,043 $ 754,175
Less accumulated depreciation (75,356) (73,632)
------------ ------------
Net $ 615,687 $ 680,543
============ ============
</TABLE>
Amortization expense for the years ended December 31, 1999 and 1998, was $92,745
and $25,108, respectively.
6. DUE TO AFFILIATE
The Company and IMS 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. This
agreement was cancelled as of January 31, 1998.
27
<PAGE> 28
GRAND ADVENTURES TOUR AND TRAVEL PUBLISHING
CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
At December 31, 1999 and 1998, BEI owed the Company $291,451 and $208,111
respectively. The receivable at December 31, 1999 is collateralized by
investment securities held by BEI. The terms of the note receivable dated
December 31, 1999 are 10% annual interest with principle and interest due on
demand. The Company has not included any accrued interest in the financial
statements. The Company set up a reserve for impairment of $128,046 at December
31, 1999, based upon the fair market value of collateralized securities.
7. LONG-TERM DEBT
At December 31, 1999 and 1998, long-term debt consisted of the following:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Margin loan, 8% annual interest, secured by marketable $ 541,584 $ 250,000
securities
Norwest line of credit, interest at prime + 1% payable 125,000 346,500
monthly
Secured by certificates of deposit - Exclusively
Interline acquisition 20,000 20,000
Capital leases 449,725
Convertible debentures issued, 10% annual interest 1,500,000 --
------------ ------------
2,636,309 616,500
Less current portion (783,675) (616,500)
------------ ------------
TOTAL $ 1,852,634 --
============ ============
</TABLE>
Maturities of long-term obligations for future years ending December 31:
<TABLE>
<CAPTION>
CAPITAL
PRINCIPAL LEASE
PAYMENTS OBLIGATIONS TOTAL
-------------- -------------- -------------
<S> <C> <C> <C>
2000 $ 686,584 $ 139,338 $ 825,922
2001 139,338 139,338
2002 126,228 126,228
2003 1,500,000 86,898 1,586,898
2004 63,470 63,470
----------- --------- ----------
2,186,584 555,272 2,741,856
----------- --------- ----------
Amount representing interest - (105,547) (105,547)
----------- --------- ----------
Total $ 2,186,584 $ 449,725 $2,636,309
=========== ========= ==========
</TABLE>
During September 1999, the Company raised $1,500,000 in the form of Convertible
Debentures. The Debentures earn interest at 10% per year and the interest is
paid quarterly. The holders of the Debentures have the right, at their option,
at any time and from time to time prior to the Maturity Date, to convert all or
any portion of the outstanding principal amount of the Debentures into fully
paid and non-assessable shares of Common Stock at the conversion price of $2.50
of such outstanding principal amount for each share of Common Stock subject to
adjustments. However, if any portion of the Debentures are converted prior to
September 21, 2000, the Conversion Price as to such converted portion will be
$2.625, subject to the same adjustments as would have been effected had such
price been established at the Conversion Price at the date of execution of the
Debentures.
28
<PAGE> 29
GRAND ADVENTURES TOUR AND TRAVEL PUBLISHING
CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
8. INCOME TAXES
The components of the provision for income taxes at December 31, 1999 and 1998
are as follows:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Current-Federal $ -- $ --
Deferred-Federal
------------ ------------
INCOME TAX PROVISION $ -- $ --
============ ============
</TABLE>
A reconciliation of the income tax provision to the amount expected using the
U.S. federal statutory rate follows:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Expected amount using:
U.S. Federal statutory rate $ -- $ --
Non-deductible expenses
Depreciation and amortization allowance
------------ ------------
Effective tax $ -- $ --
============ ============
</TABLE>
Deferred tax assets (liabilities) consisted of the following at December 31,
1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Deferred tax assets:
Bad debt allowance $ 9,897 $ 14,674
Intangible assets 2,120 --
Net operating loss carryforward 474,594 770,136
Valuation allowance (420,451) (762,058)
------------ ------------
66,160 22,752
Deferred tax liabilities:
Fixed assets (66,160) (6,217)
Intangible assets -- (16,535)
------------ ------------
(66,160) (22,752)
------------ ------------
$ -- $ --
============ ============
</TABLE>
At December 31, 1999, the Company has a net operating loss carryforward totaling
approximately $1,400,000 that may be offset against future taxable income. If
not used, the carryforward will expire in 2012. Under certain circumstances,
Section 382 of the Internal Revenue Coded of 1986 restricts a corporation's use
of its net operating loss carryforward. Due to the Company's issuance of
additional stock, the Company's use of its existing net operating loss
carryforward could be limited, therefore, the Company may have to pay federal
income taxes sooner than if the use of its net operating loss carryforward were
not restricted.
9. COMMON STOCK
In February of 1998, the Company issued 1,200,000 shares of its Common stock at
$5.00 per share, pursuant to a public offering, for net proceeds (after offering
costs) of $4,787,798. Also, in February of 1998, the Company issued 393,025
common shares valued at $2.20 per share to holders of $863,388 of convertible
debentures. There were no issuances of common stock during 1999.
29
<PAGE> 30
GRAND ADVENTURES TOUR AND TRAVEL PUBLISHING
CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
10. LEASING ARRANGEMENTS
On December 1, 1997, the Company entered into a 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 $12,328 from March 1, 2000 to February 28, 2001 and $12,478 from March 1,
2001 to February 28, 2003. The option year rates will be based on market
conditions upon the renewal date.
On August 15, 1999, the Company entered into a month-to-month lease on
approximately 3,310 square feet in the same building. The lease provides for
monthly payments of $4,138 and is cancelable upon 30 days notice. On March 15,
2000, the Company canceled the lease effective April 18, 2000.
On January 24, 2000, the Company entered into a lease agreement for office space
on approximately 6,375 square feet in the same building. Monthly rent payments
over the initial term of the lease are $7,437 from April 1, 2000 through
February 28, 2001, and $7,528 from March 1, 2001 through February 28, 2003.
The following is a schedule of future minimum rentals under the non-cancelable
lease agreement at December 31, 1999.
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31: AMOUNT
---------
<S> <C>
1999 $ 135,614
2000 146,176
2001 149,436
2002 149,736
2003 24,956
---------
$ 606,218
=========
</TABLE>
11. STOCK OPTION PLAN
The Company has a stock option plan under which employees may be awarded
incentive stock options. The plan authorizes the grant of options for the
purchase of up to 450,000 shares of common stock. At December 31, 1999, there
are 323,409 incentive stock options outstanding. Under the plan, the option
exercise price for incentive stock options may not be less than the fair market
value of the Company's common stock at the date of grant as determined by the
Board of Directors. Options expire no later than five years from the date of
grant and vest over three to four years.
The Company also has a stock option plan under which officers, directors, and
consultants may be awarded nonqualified stock options. The plan authorizes the
grant of options for the purchase of up to 250,000 shares of common stock. At
December 31, 1999, there are 162,500 nonqualified stock options outstanding.
Options expire no later than five years from the date of grant, and vesting
established at the time of grant, which is generally one year.
30
<PAGE> 31
GRAND ADVENTURES TOUR AND TRAVEL PUBLISHING
CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
Stock option activity is as follows:
<TABLE>
<CAPTION>
Common Common Weighted
Shares Shares Average
Available Options Exercise Options
for Grant Outstanding Price Exercisable
---------------- -------------- ------------ ------------
<S> <C> <C> <C> <C>
Balance, December 31, 1997 351,925 98,075 $ 7.00 38,450
===========
Authorized 250,000 --
Granted (354,000) 354,000 $ 5.00
Forfeited 34,091 (34,091) $ 7.00
--------------- ------------- -----------
Balance, December 31, 1998 282,016 417,984 $ 5.46 141,991
===========
Granted (128,000) 128,000 $ 1.99
Forfeited 60,075 (60,075) $ 6.25
--------------- ------------- -----------
Balance, December 31, 1999 214,091 485,909 $ 4.39 269,263
=============== ============= =========== ===========
</TABLE>
The following summarizes options outstanding at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------- ---------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Price Outstanding Life Price Exercisable Price
- ---------------- -------------- ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
$1.75 to $2.50 128,000 4.52 $ 1.99 11,250 $ 1.75
$5.00 313,750 2.67 $ 5.00 222,000 $ 5.00
$7.00 44,159 2.54 $ 7.00 36,013 $ 7.00
</TABLE>
All options were granted with the exercise price at an amount equal to or
greater than the per-unit fair market value of the Company's Common stock on the
date of grant. Accordingly, no compensation cost was recorded in 1999 and 1998.
Had compensation cost for stock option plan been determined based on the fair
value of the options at the grant dates consistent with the method prescribed in
the SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's
operating results would have been different as indicated in the pro forma
amounts below:
<TABLE>
<CAPTION>
1999 1998
----------- -------------
<S> <C> <C>
Net income (loss), as reported $ 402,985 $ (1,685,635)
Net income (loss), pro forma $ 346,541 $ (1,720,726)
Net income (loss) per common share, as reported $ 0.13 $ (0.58)
Net income (loss) per common share, pro forma $ 0.11 $ (0.59)
</TABLE>
31
<PAGE> 32
GRAND ADVENTURES TOUR AND TRAVEL PUBLISHING
CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
In 1999, options were granted at an exercise price equal to the underlying fair
value of the Company's Common stock. In 1998, the options were granted at an
exercise price greater than the underlying fair value of the Company's Common
stock. The weighted average fair value of the options granted was estimated to
be $1.45 in 1999 and $0.23 in 1998 using Black-Scholes option-pricing model with
the following assumptions on the date of grant: 0% dividend yield, volatility of
41% to 95.5%, 5% forfeitures per year, risk-free interest rate of 6.00% to
6.20%, expected life of four to five years.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reflected in the consolidated balance sheets for restricted
cash, accounts receivable, accounts payable and notes payable approximate the
respective values due to 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 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 $ 221,500 $ 221,500
Accounts receivable -- --
Due from affiliate 291,451 291,451
Liabilities:
Accounts payable and other liabilities 657,819 657,819
Short-term debt 686,584 686,584
</TABLE>
Restricted cash, accounts receivable and accounts payable: The carrying value of
such items approximates their fair value at December 31, 1999.
Short-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.
32
<PAGE> 33
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes or disagreements with the Company's independent
accountant during the last 2 fiscal years.
No consultations occurred between the Company and Andersen Andersen & Strong,
L.C.'s appointment regarding the application of accounting principles to a
specific completed or contemplated transaction, the type of audit opinion, or
other information considered by the Company in reaching a decision as to an
accounting, auditing, or financial reporting issue.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
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................. 45 Chairman, Chief Executive Officer
Joseph S. ("Jay") Juba.......... 36 President, Chief Operating Officer, Secretary
Robert R. Roe................... 52 Chief Financial Officer, Vice President
Fernando Cruz Silva............. 38 Senior Vice President of Sales & Marketing
Patti Macchi.................... 54 Vice President of Cruise Sales & Marketing
Robert Sandner.................. 44 Director
Robert G. Rader................. 63 Director
Duane K. Boyd, Jr............... 54 Director
</TABLE>
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. 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.
Robert Roe, a Certified Public Accountant, has served as Chief Financial Officer
of the Company since December, 1999. Mr. Roe provided consulting services with
respect to accounting and financial management from August, October 1999 through
November, 1999. From August, 1997 Mr. Roe operated as an independent consultant
to several companies in the Austin, Texas area. From April, 1991 through August,
1997 Mr. Roe was employed Uniglobe Travel in several different capacities
including Chief Financial Officer and Regional President. Prior to April, 1991,
Mr. Roe practiced public accounting for approximately 20 years.
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.
Patricia H. Macchi is Vice President of Sales for the Company but also
contributes editing and marketing expertise to the Publications. Ms. Macchi
joined the Company in 1990 after working for six years with Norwegian Caribbean
33
<PAGE> 34
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.
Robert G. Rader became a director of the Company as of February 3, 1998. 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
served as the managing underwriter of the Offering.
Duane K. Boyd, Jr. became a director of the Company as of July 8, 1998. Mr.
Boyd, a Certified Public Accountant, has served as Senior Vice President of
American Physicians Service Group, Inc. ("APS") since July 1991. APS through its
affiliates and subsidiaries provides health care and financial related services
to individuals and institutions. From 1974 to 1991, Mr. Boyd was with KPMG Peat
Marwick. He was a partner with that firm from 1982.
Messrs. Boyd, Rader and Sandner serve as Audit Committee members with Mr. Boyd
serving as chairman. These same gentlemen also serve as members of the Company's
Compensation Committee.
ITEM 10. EXECUTIVE COMPENSATION
The following table reflects compensation paid to the two mostly highly
compensated executive officers of the Company.
<TABLE>
<CAPTION>
LONG TERM COMPENSATION AWARDS
------------------------------------------------------
ANNUAL COMPENSATION RESTRICTED SECURITIES ALL
------------------------------- STOCK UNDERLYING LTIP OTHER
SALARY BONUS OTHER AWARD OPTIONS/SARS PAYOUT COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) ($) ($) ($) ($)
- --------------------------------------------------------------------- --------------------------- ------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Matthew O'Hayer
Chairman & CEO 1999 $ 133,865 $ - $ - $ - - $ - $ -
Joseph S. ("Jay") Juba
President, COO & Secretary 1999 $ 89,560 $ - $ - $ - - $ - $ -
</TABLE>
The following table reflects option grants issued to the two mostly highly
compensated executive officers of the Company.
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES PERCENTAGE OF
UNDERLYING TOTAL OPTIONS/ EXERCISE OR EXPIRATION
OPTIONS SARS GRANTED BASE PRICE DATE IN
NAME SARS GRANTED TO EMPLOYEES ($/SHARE) FISCAL YEAR
QUALIFIED PLAN:
<S> <C> <C> <C> <C>
Matthew O'Hayer
Chairman & CEO 13,500 13.8% $ 2.00 1-Jul-02
Joseph S. ("Jay") Juba
President, COO & Secretary 11,000 11.2% $ 2.00 1-Jul-02
</TABLE>
34
<PAGE> 35
COMPENSATION OF DIRECTORS
The Company does not currently compensate directors in cash for any services
provided as a director. Directors were granted a total of 135,000 of
non-qualified stock options on July 1, 1998 at an exercise price of $5.00 per
share. These options vest over 2 years with 1/2 of the options vesting on July
1, 1998 and the remaining 1/2 vesting on July 1, 1999. The directors were also
granted 22,500 options on July 1, 1999 at an exercise price of $1.75 per share.
These options vest over 2 years with 1/2 of the options vesting on July 1, 1999
and the remaining 1/2 vesting on July 1, 2000.
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.
Joseph S. Juba, the President and Chief Operating Officer of the Company has
signed an employment agreement with BEI Holdings, Inc., together with Airfair
and BEI, the "Employers. 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 was
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.
LONG-TERM INCENTIVE PLAN
The Company has a long-term stock incentive plan (LTSIP) that reserves 450,000
shares of Common Stock for grants to employees and others who are determined to
be key to the future operational success of the Company.
An option's maximum term is five years. Employee options were granted on August
1, 1996 and vest in three years. Options were also granted on February 1, 1997,
July 1, 1998 and July 1, 1999 and vest over 4 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.
The Company has a non-qualifying stock incentive plan that reserves 300,000
shares of common stock for grants to officers, directors, consultants and
contractors who are determined to be key to the operational success of the
Company (See "Exhibit 10.05 - 1998 Non-qualifying Incentive Plan"). An option's
maximum term is ten years. Options were granted July 1, 1998 and vest over two
years. The Board of Directors has approved this plan.
35
<PAGE> 36
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of December 31, 1998, 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>
NATURE OF NUMBER OF PERCENTAGE
NAME OF PERSON OR GROUP OWNERSHIP SHARES OWNED OF OWNERSHIP
- ------------------------------------ ----------- ---------------- ---------------
<S> <C> <C> <C>
Matthew O'Hayer Direct 559,144 18.5%
Joseph S. "Jay" Juba Direct 157,142 5.2%
Fernando Cruz Silva Direct 44,286 1.5%
Robert Sandner Direct 111,786 3.7%
Duane K. Boyd Jr. Direct 24,000 0.8%
All executive officers and
directors as a group (seven Direct 896,358 29.6%
persons)
Options 244,286 8.1%
------------ --------
1,140,644 37.7%
============ ========
</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.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Prior to the Offering, the Company 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 the Offering, the Company will have at least
two directors who are independent and capable of exercising independent
judgment. Currently the Company has four directors, three of whom are
independent. 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.
36
<PAGE> 37
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
The following exhibits are filed electronically herewith:
10.05 1998 Non-qualifying Incentive Plan
27.01 Financial Data Schedule
2. Employment Contracts are set out in Item 10 herein.
3. 1998 Non-qualifying Incentive Plan:
Exhibit 10.05 1998 Non-qualifying Incentive Plan
The following exhibits are incorporated by reference from Form 8-K filed
October 15, 1996:
Exhibits
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
10.01 Advisory Services Agreement effective October 10, 1996 by and between
Riley Investments, Inc. to 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
The following exhibits are incorporated by reference from the Registration
Statement on Form SB-2 filed October 24, 1997:
3.02 Bylaws
21.1 Subsidiaries of the Registrant
10.05 Employment Agreement with Joseph S. Juba
b) Reports on Form 8-K
The Company filed a Form 8-K in October 1999 regarding the private
placement of $1,500,000 in Convertible Debentures. No financial
statements were filed with Form 8-K
37
<PAGE> 38
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
(Registrant) Grand Adventures Tour & Travel Publishing Corporation
------------------------------------------------------
By /s/ Joseph S. Juba
------------------------------------------------------
Joseph S. Juba, President/Chief Operating Officer
Date April 14, 2000
--------------
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By /s/ Robert R. Roe
-----------------------------------------------------------
Robert R. Roe, Chief Financial Officer
Date April 14, 2000
--------------
By /s/ Matthew O'Hayer
-----------------------------------------------------------
Matthew O'Hayer, Chairman of the Board and Chief
Executive Officer
Date April 14, 2000
--------------
By /s/ Robert Sandner
-----------------------------------------------------------
Robert Sandner, Director
Date April 14, 2000
--------------
By /s/ Robert Rader
-----------------------------------------------------------
Robert Rader, Director
Date April 14, 2000
--------------
By /s/ Duane K. Boyd, Jr.
-----------------------------------------------------------
Date April 14, 2000
--------------
38
<PAGE> 39
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
10.05 1998 Non-qualifying Incentive Plan
27.1 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10.05
GRAND ADVENTURES TOUR & TRAVEL PUBLISHING CORPORATION
1998 NON-QUALIFYING INCENTIVE PLAN
Capitalized terms used herein and not otherwise defined shall be used
with the meanings given them in Article II below.
I. PURPOSE
The purpose of the GATT 1998 Long-Term Non-Qualifying Incentive Plan
(the "Plan") is to provide a means whereby GATT, an Oregon corporation (the
"Company"), and its Subsidiaries may attract able persons to serve and remain as
officers, directors, consultants or contractors of the Company and to provide a
means whereby those individuals, whose present and potential contributions to
the welfare of the Company are of importance, can acquire and maintain stock
ownership, thereby strengthening their concern for the long-term welfare of the
Company and their desire to remain in its service. A further purpose of the Plan
is to provide such key individuals with additional incentive and reward
opportunities designed to enhance the profitable growth of the Company over the
long term.
II. DEFINITIONS
The following definitions shall be applicable during the term of the
Plan unless specifically modified by any paragraph:
a. "Administrator" shall mean the Board or, if a committee has been
appointed pursuant to Section IV (a), such committee.
b. "Board" means the board of directors of the Company.
c. "Change of Control Value" means the amount determined in clause (i),
(ii) or (iii), whichever is applicable, as follows: (i) the per share price
offered to stockholders of the Company in any merger, consolidation, sale
of assets or dissolution transaction, (ii) the price per share offered to
stockholders of the Company in any tender offer or exchange offer whereby a
Corporate Change takes place or (iii) if a Corporate Change occurs other
than as described in clause (i) or clause (ii), the fair market value per
share determined by the Committee as of the date determined by the
Committee to be the date of cancellation and surrender of an Option. If the
consideration offered to stockholders of the Company in any transaction
described in this Paragraph or Paragraph (e) of Article VIII consists of
anything other than cash, the Committee shall determine the fair cash
equivalent of the portion of the consideration offered which is other than
cash.
d. "Code" means the Internal Revenue Code of 1986, as amended.
Reference in the Plan to any Section of the Code shall be deemed to include
any amendments or successor provisions to such Section and any regulations
under such Section.
e. "Common Stock" means the common stock, .0001 par value, of the
Company.
f. "Company" means Grand Adventures Tour & Travel Publishing
Corporation.
g. "Corporate Change" means one of the following events: (i) the
merger, consolidation or other reorganization of the Company in which the
outstanding Common Stock is converted into or exchanged for a different
class of securities of the Company, a class of securities of any other
issuer (except a direct or indirect wholly-owned subsidiary of the
Company), cash or other property; (ii) the sale, lease or exchange of all
or substantially all of the assets of the Company to any other corporation
or entity (except a direct or indirect wholly-owned subsidiary of the
Company); (iii) the adoption by the stockholders of the Company of a plan
of liquidation and dissolution; (iv) the acquisition (other than
acquisition pursuant to any other clause of this definition) by any person
or entity, including without limitation a "group" as contemplated by
Section 13(d)(3)
1
<PAGE> 2
of the Exchange Act, of beneficial ownership, as contemplated by such
Section, of more than twenty percent (based on voting power) of the
Company's outstanding capital stock; or (v) as a result of or in connection
with a contested election of directors, the persons who were directors of
the Company before such election shall cease to constitute a majority of
the Board.
h. "Eligible Individual" shall mean those officers, directors,
consultants and independent contractors of the Company whom the
Administrator designates as making or having the potential to make
important contributions to the Company's welfare.
i. "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
j. "Fair Market Value" means, as of any specified date, the average
between the reported high and low sales prices of Common Stock on the most
recent date on which Common Stock was publicly traded on the Nasdaq
SmallCap Market. If the Common Stock is not then included for listing in
the Nasdaq SmallCap Market, its Fair Market Value shall be deemed to be the
closing price of the Common Stock on the New York Stock Exchange (or, if
the Common Stock is not listed on such exchange, such other national
securities exchange on which the Common Stock is then listed) on that date,
or if no prices are reported on that date, on the last preceding date on
which such prices of the Common Stock are so reported. If the Common Stock
is neither then included for listing in the Nasdaq SmallCap Market nor
listed on any national securities exchange but is traded over the counter
at the time a determination of its Fair Market Value is required to be made
hereunder, its Fair Market Value shall be deemed to be equal to the average
between the reported high and low sales prices of Common Stock on the most
recent date on which Common Stock was publicly traded. If the Common Stock
is not publicly traded at the time a determination of its value is required
to be made hereunder, the determination of its Fair Market Value shall be
made by the Committee in such manner as it deems appropriate.
k. "Holder" means an Eligible Individual who has been granted an
Option.
l. "Option" means an Option granted under Article VII of the Plan.
m. "Option Agreement" means a written agreement between the Company and
an Eligible Individual with respect to an Option.
n. "Optionee" means an Eligible Individual who has been granted an
option.
o. "Parent Corporation" shall have the meaning set forth in Section
424(e) of the Code.
p. "Plan" means this Grand Adventures Tour & Travel Publishing
Corporation 1998 Non-Qualifying Incentive Plan.
q. "Rule 16b-3" means Rule 16b-3 of the general Rules and Regulations
of the Securities and Exchange Commission under the Exchange Act, as such
rule is currently in effect or as hereafter modified or amended.
r. "Subsidiary" means a company (whether a corporation, partnership,
joint venture or other form of entity) in which the Company, or a
corporation in which the Company owns a majority of the shares of capital
stock, directly or indirectly, owns a greater than twenty percent equity
interest.
III. EFFECTIVE DATE AND DURATION OF THE PLAN
The Plan shall be effective upon the date of its adoption by the Board.
Notwithstanding any provision of the Plan or of any Option Agreement, no Option
shall be exercisable prior to the filing by the Company of a registration
statement on Form S-8 relative to the shares of common stock to be required
pursuant to the terms of such option. No further Options may be granted under
the Plan after ten years from the date the Plan is adopted by the Board. Subject
to the provisions of Article X, the Plan shall remain in effect until all
Options granted under the Plan have been exercised or have expired by reason of
lapse of time.
2
<PAGE> 3
IV. ADMINISTRATION
a. General. The Board of Directors shall administer the Plan unless the
Board approves a Committee composed of members of the Board.
b. Powers. The Administrator shall have sole authority, in its
discretion, to determine which Eligible Individuals shall receive Options and
the number of shares of Common Stock, which may be issued under each Option, and
the value of each Option. In making such determinations the Administrator may
take into account the nature of the services rendered by the respective Eligible
Individuals, their present and potential contribution to the Company's success
and such other factors as the Administrator in its discretion shall deem
relevant.
c. Additional Powers. The Committee shall have such additional powers
as are delegated to it by the other provisions of the Plan. Subject to the
express provisions of the Plan, the Committee is authorized to construe the Plan
and the respective agreements executed thereunder, to prescribe such rules and
regulations relating to the Plan as it may deem advisable to carry out the Plan,
and to determine the terms, restrictions and provisions of each Option, and to
make all other determinations necessary or advisable for administering the Plan.
The Committee may correct any defect or supply any omission or reconcile any
inconsistency in any agreement relating to an Option in the manner and to the
extent it shall deem expedient to carry it into effect. The determinations of
the Committee on the matters referred to in this Article IV shall be conclusive.
V. GRANT OF OPTIONS SUBJECT TO THE PLAN
(a) Option Limits. The Committee may from time to time grant Options to
one or more Eligible Individuals determined by it to be eligible for
participation in the Plan in accordance with the provisions of Article VI. The
aggregate number of shares of Common Stock that may be issued under the Plan
shall not exceed 300,000 shares. Any of such shares which remain unissued and
which are not subject to outstanding Options at the termination of the Plan
shall cease to be subject to the Plan but, until termination of the Plan, the
Company shall at all times reserve a sufficient number of shares to meet the
requirements of the Plan. Shares shall be deemed to have been issued under the
Plan only to the extent actually issued and delivered pursuant to an Option. To
the extent that an Option lapses or the rights of its Holder terminate or the
Option is paid in cash, any shares of Common Stock subject to such Option shall
again be available for the grant of an Option. The aggregate number of shares,
which may be issued under the Plan, shall be subject to adjustment in the same
manner as provided in Article XI with respect to shares of Common Stock subject
to Options then outstanding. The Company shall issue separate stock certificates
for those shares acquired pursuant to the exercise of an Option.
(b) Stock Offered. The stock to be offered pursuant to the grant of an
Option may be authorized but unissued Common Stock or Common Stock previously
issued and outstanding and reacquired by the Company.
VI. ELIGIBILITY
Options made pursuant to the Plan may be granted only to individuals
who, at the time of grant, are Eligible Individuals of the Company or any
Subsidiary. An Option made pursuant to the Plan may be granted on more than one
occasion to the same person.
VII. STOCK OPTIONS
(a) Stock Option Agreement. Each Option shall be evidenced by an Option
Agreement between the Company and the Optionee, which shall contain such terms
and conditions as may be approved by the Committee, and agreed upon by the
Eligible Individual. The terms and conditions of the respective Option
Agreements need not be identical. Specifically, an Option Agreement may provide
for the payment of the option price, in whole or in part, by the delivery of a
number of shares of Common Stock (plus cash if necessary) having a Fair Market
Value equal to such option price. Each Option Agreement shall provide that the
Option may not be exercised earlier than six months from the date of grant and
shall specify the effect of termination of employment on the exercisability of
the Option.
3
<PAGE> 4
(b) Option Period. The term of each Option shall be as specified by the
Committee at the date of grant and shall be stated in the Option Agreement.
(c) Limitations on Exercise of Option. An Option shall be exercisable
in whole or in such installments and at such times as determined by the
Committee and the applicable term relating to the exercise of the option shall
be stated in the Option Agreement.
(d) Option Price. The purchase price of Common Stock issued under each
Option shall be determined by the Committee and shall be stated in the Option
Agreement, but such purchase price shall not be less than the Fair Market Value
of Common Stock subject to the Option on the date the Option is granted.
(f) Options and Rights in Substitution for Stock Options Granted by
Other Corporations. Options may be granted under the Plan from time to time in
substitution for stock options held by employees of corporations who become, or
who became prior to the effective date of the Plan, key Eligible Individuals of
the Company or of any Subsidiary as a result of a merger or consolidation of the
employing corporation with the Company or such Subsidiary, or the acquisition by
the Company or a Subsidiary of all or a portion of the assets of the employing
corporation, or the acquisition by the Company or a Subsidiary of stock of the
employing corporation with the result that such employing corporation becomes a
Subsidiary.
VIII. RECAPITALIZATION OR REORGANIZATION
(a) Except as hereinafter otherwise provided, Options shall be subject
to adjustment by the Committee at its discretion as to the number and price of
shares of Common Stock or other consideration subject to such Options in the
event of changes in the outstanding Common Stock by reason of stock dividends,
stock splits, recapitalizations, reorganizations, mergers, consolidations,
combinations, exchanges or other relevant changes in capitalization occurring
after the date of the grant of any such Options.
(b) The existence of the Plan and the Options granted hereunder shall
not affect in any way the right or power of the Board or the stockholders of the
Company to make or authorize any adjustment, recapitalization, reorganization or
other change in the Company's capital structure or its business, any merger or
consolidation of the Company, any issue of debt or equity securities having any
priority or preference with respect to or affecting Common Stock or the rights
thereof, the dissolution or liquidation of the Company or any sale, lease,
exchange or other disposition of all or any part of its assets or business or
any other corporate act or proceeding.
(c) The shares with respect to which Options may be granted are shares
of Common Stock as presently constituted but if, and whenever, prior to the
expiration of an Option theretofore granted, the Company shall effect a
subdivision or consolidation of shares of Common Stock or the payment of a stock
dividend on Common Stock without receipt of consideration by the Company, the
number of shares of Common Stock with respect to which such Option may
thereafter be exercised (i) in the event of an increase in the number of
outstanding shares shall be proportionately increased, and the purchase price
per share shall be proportionately reduced, and (ii) in the event of a reduction
in the number of outstanding shares shall be proportionately reduced, and the
purchase price per share shall be proportionately increased.
(d) If the Company recapitalizes or otherwise changes its capital
structure, thereafter upon any exercise of an Option theretofore granted the
Optionee shall be entitled to purchase under such Option, in lieu of the number
of shares of Common Stock as to which such Option shall then be exercisable, the
number and class of shares of stock and securities, and the cash and other
property to which the Optionee would have been entitled pursuant to the terms of
the recapitalization if, immediately prior to such recapitalization, the
Optionee had been the holder of such record of the number of shares of Common
Stock then covered by such Option.
(e) In the event of a Corporate Change, then no later than (i) two
business days prior to any Corporate Change referenced in clause (i), (ii),
(iii) or (v) of the definition thereof or (ii) ten business days after any
Corporate Change referenced in clause (iv) of the definition thereof, the
Committee, acting in its sole discretion without the
4
<PAGE> 5
consent or approval of any Optionee, shall act to effect one or more of the
following alternatives with respect to outstanding Options which acts may vary
among individual Optionees and, with respect to acts taken pursuant to clause
(i) above, may be contingent upon effectuation of the Corporate Change: (A)
accelerate the time at which Options then outstanding may be exercised so that
such Options may be exercised in full for a limited period of time on or before
a specified date (before or after such Corporate Change) fixed by the Committee,
after which specified date all unexercised Options and all rights of Optionees
thereunder shall terminate, (B) require the mandatory surrender to the Company
by selected Optionees of some or all of the outstanding Options held by such
Optionees (irrespective of whether such Options are then exercisable under the
provisions of the Plan) as of a date (before or after such Corporate Change)
specified by the Committee, in which event the Committee shall thereupon cancel
such Options and pay to each Optionee an amount of cash per share equal to the
excess, if any, of the Change of Control Value of the shares subject to such
Option over the exercise price(s) under such Options for such shares, (C) make
such adjustments to Options then outstanding as the Committee deems appropriate
to reflect such Corporate Change (provided, however, that the Committee may
determine in its sole discretion that no adjustment is necessary to Options then
outstanding) or (D) provide that thereafter upon any exercise of an Option
theretofore granted the Optionee shall be entitled to purchase under such
Option, in lieu of the number of shares of Common Stock as to which such Option
shall then be exercisable, the number and class of shares of stock or other
securities or property (including, without limitation, cash) to which the
Optionee would have been entitled pursuant to the terms of the agreement of
merger, consolidation or sale of assets or plan of liquidation and dissolution
if, immediately prior to such merger, consolidation or sale of assets or any
distribution in liquidation and dissolution of the Company, the Optionee had
been the holder of record of the number of shares of Common Stock then covered
by such Option.
(f) Except as hereinbefore expressly provided, the issuance by the
Company of shares of stock of any class or securities convertible into shares of
stock of any class, for cash, property, labor or services, upon direct sale,
upon the exercise of rights or warrants to subscribe therefore, or upon
conversion of shares or obligations of the Company convertible into such shares
or other securities, and in any case whether or not for fair value, shall not
affect, and no adjustment by reason thereof shall be made with respect to, the
number of shares of Common Stock subject to Options theretofore granted or the
purchase price per share of Common Stock subject to Options.
IX. AMENDMENT OR TERMINATION OF THE PLAN
The Board in its discretion may terminate the Plan or alter or amend
the Plan or any part thereof from time to time; provided that no change in any
Option previously granted may be made which would impair the rights of the
Holder without the consent of the Holder, and provided further, that the Board
may not, without approval of the Stockholders, amend the Plan:
(a) to increase the aggregate number of shares, which may be
issued pursuant to the provisions of the Plan on exercise or surrender of
Options, except as provided in Article VIII;
(b) to change the minimum Option price;
(c) to change the class of individuals eligible to receive
Options or increase materially the benefits accruing to Eligible Individuals
under the Plan;
(d) to extend the maximum period during which Options may be
granted under the Plan;
(e) to modify materially the requirements as to eligibility
for participation in the Plan; or
(f) to decrease any authority granted to the Committee
hereunder in contravention of Rule 16b-3.
X. OTHER
(a) No Right to an Option. Neither the adoption of the Plan nor any
action of the Board or of the Committee shall be deemed to give an employee any
right to be granted an Option to purchase Common Stock or any other rights
hereunder except as may be evidenced by an Option or by an Option Agreement duly
executed on
5
<PAGE> 6
behalf of the Company, and then only to the extent of and on the terms and
conditions expressly set forth therein. The Plan shall be unfunded. The Company
shall not be required to establish any special or separate fund or to make any
other segregation of funds or assets to assure the payment of any Option.
(b) No Employment Rights Conferred. Nothing contained in the Plan or in
any Option made hereunder shall (i) confer upon any Eligible Individual any
right with respect to continuation of employment with the Company or any
Subsidiary or (ii) interfere in any way with the right of the Company or any
Subsidiary to terminate his or her employment at any time.
(c) Other Laws; Withholding. The Company shall not be obligated to
issue any Common Stock pursuant to any Option granted under the Plan at any time
when the offering of the shares covered by such Option has not been registered
under the Securities Act of 1933 and such other state and federal laws, rules or
regulations as the Company or the Committee deems applicable and, in the opinion
of legal counsel for the Company, there is no exemption from the registration
requirements of such laws, rules or regulations available for the issuance and
sale of such shares. No fractional shares of Common Stock shall be delivered,
nor shall any cash in lieu of fractional shares be paid. The Company shall have
the right to deduct in connection with all Options any taxes required by law to
be withheld and to require any payments necessary to enable it to satisfy its
withholding obligations. The Committee may permit the Holder of an Option to
elect to surrender, or authorize the Company to withhold, shares of Common Stock
(valued at their Fair Market Value on the date of surrender or withholding of
such shares) in satisfaction of the Company's withholding obligation, subject to
such restrictions as the Committee deems necessary to satisfy the requirements
of Rule 16b-3.
(d) No Restriction of Corporate Action. Nothing contained in the Plan
shall be construed to prevent the Company or any Subsidiary from taking any
corporate action which is deemed by the Company or such Subsidiary to be
appropriate or in its best interest, whether or not such action would have an
adverse effect on the Plan or any Option made under the Plan. No employee,
beneficiary or other person shall have any claim against the Company or any
Subsidiary as a result of such action.
(e) Restrictions on Transfer. An Option shall not be transferable
otherwise than by will or the laws of descent and distribution and shall be
exercisable during the lifetime of the Holder only by such Holder or the
Holder's guardian or legal representative. The Option Agreement or other written
instrument evidencing an Option shall specify the effect of the death of the
Holder on the Option.
(f) Rule 16b-3. It is intended that the Plan and any grant of an Option
made to a person subject to Section 16 of the Exchange Act meet all of the
requirements of Rule 16b-3. If any provisions of the Plan or any such Option
would disqualify the Plan or such Option hereunder, or would otherwise not
comply with Rule 16b-3, such provision or Option shall be construed or deemed
amended to conform to Rule 16b-3.
(g) Governing Law. This Plan shall be construed in accordance with the
laws of the State of Texas.
6
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 494,689
<SECURITIES> 1,123,037
<RECEIVABLES> 820,206
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0
0
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<SALES> 27,914,626
<TOTAL-REVENUES> 27,914,626
<CGS> 22,217,764
<TOTAL-COSTS> 22,217,764
<OTHER-EXPENSES> 5,293,877
<LOSS-PROVISION> 0
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<INCOME-PRETAX> 402,985
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<NET-INCOME> 402,985
<EPS-BASIC> 0.13
<EPS-DILUTED> 0.11
</TABLE>
