Filed On 10/11/00 8:57pm ET ˇ SEC File 1-13081 ˇ Accession Number 930661-0-2531
As Of Filer Filing As/For/On Docs:Pgs Issuer Agent
10/12/00 Travelbyus Inc 10KSB 6/30/00 3:74 Donnelley Rr & So..Co/FA
Document/Exhibit Description Pages Size
1: 10KSB Annual Report -- Small Business 71 296K
2: EX-10.49 Amendment to Management Services Agreement 1 4K
3: EX-27 Financial Data Schedule 2 4K
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
for the fiscal year ended June 30, 2000
[_] Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 (No fee required)
For the transition period from ____________ to ____________
Commission file number: 0-10124
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Aviation Group, Inc.
(Exact name of Small Business Issuer as specified in its charter)
Texas 75-2631373
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
700 North Pearl Street
Suite 2170
Dallas, Texas 75201
(Address of Principal Executive Offices)
214/922-8100
(Issuer's Telephone Number)
Securities registered under Section 12(g) of the Exchange Act:
$.01 par value Common Stock
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(Title of class)
Redeemable Common Stock Warrants
--------------------------------
(Title of class)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
------- ________
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Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrants knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB ________.
State issuer's revenues for its most recent fiscal year. $13,381,000.
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State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days. $6,735,000 at the close on October 3, 2000.
APPLICABLE ONLY TO CORPORATE REGISTRANTS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
4,956,722 shares of Common Stock were outstanding as of October 10, 2000.
Transitional Small Business Disclosure Format (check one):
Yes _______ No X .
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PART I
Item 1. Description of Business
General
Aviation Group, Inc. was organized in December 1995 to serve as a holding
company for businesses beneficially owned by Aviation Group's Chairman of the
Board, Lee Sanders. In August 1997, Aviation Group completed its initial public
offering of shares of its common stock and redeemable common stock purchase
warrants. These shares and warrants are listed and traded on the Nasdaq SmallCap
Market and the Boston Stock Exchange.
Aviation Group provides services and products to airline companies and
other aviation firms primarily in the United States. Aviation Group's business
consists of:
- painting and paint stripping services for commercial and freight
aircraft at facilities located in Portland, Oregon, New Iberia,
Louisiana and Greenville, Mississippi; and
- the manufacture, sale and repair of aircraft batteries and aircraft
and truck weighing scales.
In August 1999, Aviation Group determined to seek to shift its assets and
capital into an industry with significant growth opportunity. In February 2000,
Aviation Group entered into letters of intent with Global Leisure Travel, Inc.
and travelbyus.com ltd. to effect a three-way business combination intended to
effect a shift of its assets and capital into the e-commerce travel industry.
In March 2000, Aviation Group acquired a controlling stock interest in
Global Leisure. Global Leisure is primarily engaged in the wholesale and retail
sale of travel packages for both domestic and Pacific Island and Australian
destinations. Travel packages created by Global Leisure include airline seats,
hotel accommodations, automobile rentals and other land components. Global
Leisure contracts with vendors and primarily markets the packages directly to
retail travel agents. Aviation Group acquired 100% ownership of Global Leisure
in May 2000.
On May 3, 2000, Aviation Group entered into an arrangement agreement under
Ontario, Canada law to acquire travelbyus.com, an e-commerce travel company.
The principal executive offices of Aviation Group are located at 700 North
Pearl Street, Suite 2170, Dallas, Texas 75201, and the telephone number is (214)
922-8100.
History
Aviation Group's historical business objective has been to grow through
acquisition of other aviation-related companies, assets or products or service
lines that would complement or expand its existing businesses. Since 1995,
Aviation Group has purchased five separate companies. Management believed that
acquisitions would enable Aviation Group to leverage its fixed costs of
operations and that Aviation Group would be able to use its common stock as the
major source of its capital to execute its acquisition strategy.
Aviation Group acquired:
- In March 1996, 99% of the outstanding stock of Pride Aviation, Inc.
Pride, now known as Aviation Exteriors Louisiana, Inc., engages in the
aircraft painting and paint stripping business in New Iberia,
Louisiana.
- In August 1997, all of the outstanding stock of Casper Air Service.
Casper operated an aircraft fueling, light maintenance and parts sales
business in Casper, Wyoming.
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- In March 1998, all of the outstanding equity interests in Aero Design,
Inc. and Battery Shop, L.L.C. Aero Design and Battery Shop
manufacture, sell and repair aircraft replacement batteries at their
facilities near Nashville, Tennessee.
- In August 1998, all of the common stock of General Electrodynamics
Corporation. General Electrodynamics, which is based in Arlington,
Texas, manufactures and sells truck scales, aircraft scales and other
aviation components used by the aviation maintenance and
transportation industries.
While management was successful in identifying additional candidates that
met its acquisition criteria, the trading price and volume of Aviation Group's
shares created a significantly negative environment for acquiring aviation
businesses using its stock as consideration. Aviation Group management has
endeavored since 1998 to remedy this condition, while continuing to incur high
corporate overhead costs necessary to properly operate and maintain a larger
aviation service enterprise.
In August 1999, Aviation Group's board of directors approved a management
plan to engage investment advisors and pursue the additional strategy of selling
all or part of Aviation Group's businesses. The major factors influencing this
decision were:
- the board believed that Aviation Group's stock was trading below the
value of its existing underlying companies;
- acquisitions of new companies at then existing share price levels
would be dilutive to existing shareholders; and
- continuation of its historical corporate overhead strategy would erode
shareholder value.
Aviation Group commenced discussions with third parties regarding a sale or
merger of the entire enterprise or the sale of certain remaining segments of
Aviation Group's operations on an individual basis. Various parties interested
in Aviation Group's status as a public company expressed interest in a business
combination, spin-off, or other transaction. While this process was underway,
management cut overhead costs and focused its energies on the maximization of
cashflows from its existing business units.
On December 31, 1999, Aviation Group's subsidiary Tri-Star Airline
Services, Inc. sold all of its ground handling assets and operations, primarily
located at Dallas-Ft. Worth International Airport, to Tri-Star Acquisition
Corp., d/b/a Servisair Texas, Inc. The purchase price was $1,500,000 in cash.
Tri-Star Airline Services retained all accounts payable, accounts receivable and
inventories of the business.
On February 8, 2000, Casper Air Service sold its operations and most of its
assets located in Casper, Wyoming to Casper Jet Center Fueling, L.L.C. The
purchase price was $200,000 in cash and the assumption by Casper Jet Center
Fueling of approximately $600,000 of Casper Air Service's accounts payable.
Casper Air Service retained its inventory of aircraft parts, three aircraft and
all of its accounts receivable. Casper Air Service intends to sell or otherwise
realize on these retained assets before June 30, 2000 and will not continue in
business.
In late February 2000, Aviation Group entered into letters of intent and
publicly announced a proposed three-way business combination with Global Leisure
and travelbyus.com. The business combination contemplated the acquisition by
Aviation Group of the other two companies with financing provided by
travelbyus.com and private investment capital raised by Doerge Capital
Management. Doerge Capital's clients and affiliates had previously invested
significant capital into Global Leisure. Aviation Group acquired a controlling
interest in Global Leisure in March 2000 and completed the acquisition in May
2000 as described below.
Acquisition of Global Leisure Travel, Inc.
On May 10, 2000, Aviation Group completed its acquisition of Global
Leisure. Global Leisure is now a wholly owned subsidiary of Aviation Group. As
consideration for the purchase, Aviation Group issued:
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- $16,500,000 in liquidation preference, represented by 1,650 shares, of
its Series A convertible preferred stock and Series A warrants to
purchase 750,000 shares of its common stock at an exercise price of $5
per share, to the former owners of Global Leisure in exchange for the
transfer or cancellation of the stock and indebtedness owned by them
and their affiliates; and
- Series B warrants to purchase 3,500,000 shares of its common stock at
an exercise price of $3 per share, to the former warrantholders in
Global Leisure in exchange for cancellation of their warrants.
In connection with the acquisition, Aviation Group also invested $20.9
million in Global Leisure. These funds were used primarily to pay debts and
other payables of Global Leisure. The financing for this investment by Aviation
Group in Global Leisure was provided by:
- $5.0 million invested by travelbyus.com through the purchase of 500
shares of Series B preferred stock from Aviation Group at $10,000 per
share;
- $2.0 million invested by private investors in the purchase of 750,000
shares of Aviation Group common stock at $2.667 per share; and
- Approximately $16.5 million invested by private investors in the
purchase of 1,653 units of Aviation Group's Series B preferred stock
and Series C warrants, at a price of $10,000 per unit, each unit
consisting of one share and 750 warrants.
Upon the completion of both the arrangement with travelbyus.com and the
acquisition by Aviation Group of Global Leisure and related financing, Aviation
Group agreed to deliver to the broker/dealer arranging the financing, Doerge
Capital Management, a division of Balis Lewittes & Coleman, Inc., a fee of $1.0
million and warrants to purchase 1.5 million shares of common stock of Aviation
Group at a weighted average exercise price of $4.07 per share.
Aviation Service Businesses
Besides Global Leisure, Aviation Group has two business divisions. These
business divisions are as follows:
- Aircraft Paint Services Division: This division is made up of aircraft
paint services provided by three of Aviation Group's subsidiaries.
Aviation Group's subsidiaries, Aviation Exteriors Louisiana, Inc. and
Aviation Exteriors Portland, Inc., provide painting and paint
stripping services for commercial and freight aircraft at their
facilities located in New Iberia, Louisiana and Portland, Oregon.
Their primary customers are United Parcel Service and Federal Express.
In January 1999, Aviation Group executed a lease and established a new
paint facility at Greenville, Mississippi through a new subsidiary,
Aviation Exteriors Greenville, Inc.
- Aircraft Products Division: Aviation Group manufactures and sells
certain types of aircraft components and equipment through three of
its subsidiaries. Aero Design manufactures and sells aircraft
batteries for the commercial airline industry. Battery Shop repairs
batteries for the aviation industry. General Electrodynamics
Corporation primarily manufactures and sells aircraft and truck
weighing scales.
Business of Global Leisure Travel, Inc.
Global Leisure provides travel related services primarily through retail
travel agencies. Global Leisure is a seller of bulk travel services, maintaining
several wholesale and discount contracts with leading providers of travel in the
industry. Global Leisure maintains non-exclusive contracts with several major
airlines, hotel operators and touring companies, including United Airlines,
Continental Airlines, Delta Airlines, Hawaiian Airlines, Alaskan Airlines,
Outrigger Hotels Hawaii, and Hotel Corporation of the Pacific d/b/a Aston Hotels
& Resorts. These contracts allow Global Leisure to purchase airline tickets,
hotel reservations and travel packages at wholesale prices.
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Airlines enter into contracts with a limited number of wholesalers. Airlines
offer contracts to wholesalers who can enhance their marketing plan and who
perform for them from year to year. Global Leisure competes through its
expertise and marketing in the sectors that the airlines wish to promote and its
ability to sell tickets in a lower profile manner. Because the airline tickets
are sold to Global Leisure on a bulk or net fare basis and advertising of the
fares is prohibited by the airlines, Global Leisure must, and has the ability
to, bundle and sell the airline tickets as part of packages with other travel
products. Although the number of seats available on each flight is limited, the
contracts with the airlines are not exclusive. Global Leisure can enter into a
contract with another carrier for the same destination.
Global Leisure's travel products are resold to the public through retail
travel agents and other sellers. Several tradenames under which Global Leisure
operates are "Sunmakers," "Kailani Hawaii Tours" and "Hawaii Leisure." Global
Leisure has non-exclusive contracts with travel agencies and suppliers of travel
in Washington, Hawaii, Nevada and California. These agencies have designated
Global Leisure as a non-exclusive preferred supplier for all destinations and
products that Global Leisure or its subsidiaries offer in exchange for certain
sales-based commissions.
Effective September 1, 2000, Aviation Group, Global Leisure and
travelbyus.com entered into a management agreement under which travelbyus.com
assumed responsibility for management of Global Leisure's business.
travelbyus.com provides management and support services, including office space,
utilities, office equipment, staff support, bookkeeping, accounting, billing,
collection, contract administration and other overhead services. To the extent
funds are available, Global Leisure is required to pay to travelbyus.com a
servicing fee of $55 per paid passenger and a monthly retainer of $5,000 and to
reimburse travelbyus.com for direct advertising and marketing expenses and long
distance, postage and delivery charges arising from Global Leisure's business.
travelbyus.com also assumed responsibility for Global Leisure's working capital
deficit upon commencement of the agreement. This management agreement expires
September 1, 2001.
Recent Debt Financing
In May 2000, Aviation Group issued to SW Pelham Fund, L.P. a promissory
note in the principal amount of $3.0 million requiring quarterly interest
payments at an annual rate of 12%. In connection with the promissory note,
Aviation Group issued to SW Pelham Series D warrants to purchase 225,000 shares
of its common stock at an exercise price of $2.125 per share, subject to
shareholder approval if required by Nasdaq rules. The Series D warrants expire
on the earlier of May 8, 2005, or two years after the effective date of a
registration statement filed for the resale of the common stock underlying the
Series D warrants. Aviation Group is required to register for resale with the
SEC the shares of common stock purchasable under the warrants. The promissory
note has been unconditionally guaranteed by travelbyus.com. Aviation Group is
also required to use the proceeds from the note to finance acquisitions by
travelbyus.com or Aviation Group. The promissory note is payable in full on
February 28, 2001. SW Pelham will have the option to require Aviation Group to
repay the promissory note early if:
- the closing of the arrangement, the closing of at least one
acquisition and the approval by Aviation Group's shareholders of the
issuance of the Series D warrants, if required by Nasdaq rules, have
not taken place on or before September 30, 2000; or
- William Kerby ceases to be the chief executive officer of Aviation
Group and actively involved in the management and operation of
Aviation Group.
On May 25, 2000, Aviation Group loaned $1,975,000 of these loan proceeds to
travelbyus.com for its acquisition of Epoch Technology Inc. The terms of the
loan were similar to the terms of the loan from SW Pelham. The loan is secured
by a security interest in the stock of Epoch Technology, except that the
security interest is subordinate to a security interest in the stock in favor of
the holders of travelbyus.com's 12.5% senior redeemable debentures.
Advertising and Marketing
Most of Aviation Group's revenues from its aircraft paint and products
businesses come from direct sales and customer referrals. Aviation Group also
utilizes direct mailings and trade journal advertisements as a secondary
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source of advertising and public relations. Aviation Group has a full-time
marketing representative who directly contacts the maintenance and service
executives of airlines and other aviation customers to generate business.
Customers
Aviation Exteriors Louisiana and Aviation Exteriors Portland provide
stripping and painting services to major carriers in the airline industry.
Their past and current customers include United Airlines, Continental Airlines,
Boeing Commercial Aircraft Group, Federal Express, United Parcel Service, Delta
Airlines, Southwest Airlines, Northwest Airlines and Piedmont Airlines.
Aero Design, Battery Shop and General Electrodynamics sell their products
to aircraft parts distributors and airlines around the world. They also sell
their products directly to airlines in certain instances. Since the recent
completion of the FAA approval process for their generic battery product lines,
Aero Design and Battery Shop have increased their marketing activities and hope
to achieve significant revenue growth during the 2000 fiscal year and beyond.
Regulation
Environmental Regulation
Aviation Group must comply with federal, state and local environmental
protection laws and related regulations in its operations and facilities. These
laws and regulations are particularly applicable to the paints and paint
stripping chemicals and solvents used by Aviation Group in its operations and to
the disposal of batteries. Aviation Group could be held liable as a current or
former operator for releases of hazardous substances at its facilities.
Aviation Group could also incur liability for cleanup costs at off-site
facilities to which it ships hazardous substances for treatment, handling,
storage, or disposal. Management of Aviation Group believes that its operations
and facilities are in material compliance with all federal, state and local
environmental laws and regulations and that Aviation Group's hazardous waste
management practices minimize the potential for release of hazardous substances
into the environment. Aviation Group has not experienced any significant
environmental regulatory problems in the past. To date, it has not been subject
to any significant fines, penalties or other liabilities under these laws and
regulations. However, there can be no assurance that these laws or regulations
may not require Aviation Group to make significant expenditures or otherwise may
have a material adverse impact on its future operations or financial condition.
Aviation Regulation
The FAA regulates all aspects of the airline and aircraft industries.
Aviation Group's subsidiaries have certifications from the FAA to operate
aircraft repair stations. These certifications are limited as to the kinds of
repair and maintenance activities that may be performed by Aviation Group's
subsidiaries at their certified facilities. The FAA regularly inspects these
facilities for compliance with FAA regulations and guidelines. Failure to
comply with FAA regulations and guidelines could result in a loss of
certification. A loss of certification for a particular facility would prevent
that facility from performing any aircraft repair or maintenance operations.
Aviation Group believes that its subsidiaries are in compliance in all material
respects with the FAA's regulations and guidelines. Nevertheless, these
regulations and guidelines, or any FAA enforcement actions, could have a
material adverse effect on Aviation Group's future operations and financial
condition.
Competition
Each of Aviation Group's subsidiaries, other than Global Leisure, directly
competes with other companies in the airline services industry. Its Aviation
Exteriors subsidiaries compete primarily with many heavy maintenance facilities
that perform aircraft stripping and painting services as an adjunct to their
maintenance operations. The owners of these heavy maintenance facilities
include Dee Howard Company, Pemco, Tramco, Inc. and Raytheon. Aviation
Exteriors competes through price, reliability of services, flexibility in
scheduling aircraft for painting, availability of aircraft hangars and proven
expertise in painting aircraft.
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Aero Design and Battery Shop compete primarily with SAFT America, Inc. and
Marathon Power Technologies Company, both of which are much larger and have
greater financial resources. As the battery components sold by Aero Design tend
to be generic, Aero Design primarily competes through lower prices and
comparable product reliability. General Electrodynamics competes with InterComp
Company, a privately held miscellaneous scale manufacturer, Load-O-Meter
Corporation and PAT America, Inc., as well as numerous other public and private
manufacturers of other aviation components, many of which are larger and have
greater financial resources. General Electrodynamics competes through pricing,
marketing and product reliability.
Global Leisure competes with other wholesale and retail suppliers of travel
packages. In its primary markets of Pacific Island and Australian destinations,
Global Leisure competes with Pleasant Hawaiian Holidays and All About Travel,
which are larger and have greater financial resources. Global Leisure competes
for airline tickets through its expertise and marketing in the sectors that the
airlines wish to promote and its ability to sell tickets in a lower profile
manner. Global Leisure is able to perform for its vendors from year to year. It
also competes by bundling its products in attractively priced tour packages.
Employees
At September 1, 2000, Aviation Group had approximately 178 employees.
Aviation Exteriors Louisiana and Aviation Exteriors Portland have approximately
150 employees, depending upon seasonality. At September 1, 2000, Aero Design
and Battery Shop had 10 employees, General Electrodynamics Corporation had 36
employees and Global Leisure had one employee. Corporate management has two
employees. Management believes its employee relations are good. No employees
are covered by collective bargaining agreements.
Insurance
Aviation Group carries $200,000,000 of insurance for general aviation
liability and $200,000,000 of hangar keeper insurance, as required by its
customers, and customary coverage for other business insurance. While Aviation
Group believes its insurance is adequate, there can be no assurance that this
coverage will fully protect Aviation Group against all losses which it might
sustain. Aviation Group's insurance for aircraft liability carries a deductible
requiring it to pay $20,000 of any loss or damage.
Risk Factors
Risks Relating to Aviation Group's Business
There is a risk of future losses from Aviation Group's operations.
Aviation Group has a history of net losses. Aviation Group experienced net
losses of $994,000, $1,796,000 and $7,128,000 for the years ended June 30, 1998,
1999 and 2000, respectively. There can be no assurance that Aviation Group will
be profitable or that its businesses will be successful in the future.
Aviation Group's dependence on only a few customers may have a negative impact
on the business of its subsidiaries.
Only two customers accounted for approximately 37% of our revenues for the
year ended June 30, 2000. Aviation Group provides aircraft stripping and
painting services to these customers. Any termination of a contract or material
curtailment of plane deliveries by one of these customers, including reductions
as a result of economic or competitive pressures, would adversely affect
Aviation Group's business, financial condition and results of operation.
Aviation Group may be unable to sell its non-travel businesses on acceptable
terms in the near future.
Aviation Group has had discussions with various parties regarding the sale
of its non-travel businesses. To date, no agreements have been reached on
acceptable terms. Aviation Group intends to continue to investigate the sale of
one or all of these businesses.
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An economic downturn could affect the airline industry and negatively impact
Aviation Group's business.
The airline industry is significantly affected by general economic
conditions. Because a substantial portion of business and personal airline
travel is discretionary, the industry tends to experience adverse financial
results during general economic downturns. Economic and competitive conditions
since deregulation of the airline industry in 1978 have contributed to a number
of bankruptcies and liquidations among airlines. A worsening of current economic
conditions, or an extended period of recession nationally or regionally, could
have a material adverse effect on Aviation Group's operations. Aviation Group
does not have any control over general economic conditions.
The seasonality of the aircraft painting business could negatively affect
Aviation Group's operations.
Aviation Group's aircraft painting business is seasonal, which can
adversely affect Aviation Group's results of operations from quarter to quarter.
Typically, customers will have fewer aircraft painted during the summer months
and the holiday season from approximately November 15 through January 1 of each
year.
The airline services industry is highly competitive, and Aviation Group may not
be able to compete successfully.
Each of Aviation Group's subsidiaries is in direct competition with other
companies. Because many of Aviation Group's competitors have greater resources
than it does, Aviation Group may not be able to compete successfully in
providing its products or services at a competitive but profitable price. See
"Business--Competition."
Failure to comply with environmental, health and safety regulations could
negatively impact Aviation Group's business.
The Environmental Protection Agency and state and local regulatory
authorities regulate Aviation Group's operations primarily in the areas of:
- usage, storage, handling, transportation and disposal of the
substances used in aircraft stripping and painting operations; and
- disposal of batteries.
Operating permits for facilities are subject to revocation or modification and
may not be renewed. Violations of these operating permits may result in
substantial fines and civil or criminal sanctions. The operation of any
facility that handles chemical substances involves risks of adverse
environmental impact and worker exposure to toxic or harmful substances.
Material costs or liabilities may be incurred to minimize these risks or to
rectify any injury or damage. In addition, significant expenditures may be
required to comply with environmental, health and safety laws and regulations
that may be adopted or imposed in the future.
Failure to comply with Federal Aviation Administration regulations could
negatively impact Aviation Group's financial condition.
The FAA regulates most of Aviation Group's business operations. The
painting and stripping business and the battery manufacturing and repair
business must continue to comply with the requirements of the FAA and Aviation
Group must maintain the FAA's certifications of its subsidiaries. These
certifications allow Aviation Group's subsidiaries to perform their services as
well as other repair and maintenance services at their facilities. Loss of any
necessary FAA certifications would have a material adverse effect on Aviation
Group's operations and financial condition.
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Risks Relating to Aviation Group Common Stock
Aviation Group's common stock price could fluctuate significantly, and
shareholders may be unable to resell their shares at a profit.
The trading prices for small capitalization companies often fluctuate
significantly. In addition, if and after the arrangement with travelbyus.com is
completed, Aviation Group may be viewed by investors as an Internet-related
company engaged in electronic commerce. Market prices and trading volume for
stocks of these types of companies have been volatile. If revenue or earnings
are less than expected for any quarter, the market price of Aviation Group's
common stock could significantly decline, even if the decline in consolidated
revenue or earnings is not reflective of any long-term problems with Aviation
Group's business.
Aviation Group might fail to maintain a listing for Aviation Group's common
stock.
Aviation Group common stock is presently listed on the Nasdaq SmallCap
Market and the Boston Stock Exchange. Aviation Group has applied for listing on
the Nasdaq National Market in connection with the arrangement. If Aviation
Group fails to maintain such listing, the market value of Aviation Group's
common stock would likely decline. As a result, holders would likely find it
more difficult to dispose of, or to obtain accurate quotations as to the market
value of, Aviation Group's common stock.
Active trading markets for Aviation Group's common stock may not develop or
continue.
While the listing of Aviation Group's common stock is a condition to the
closing of the arrangement, an active and liquid trading market for Aviation
Group's common stock may not develop or be sustained in the future. In
addition, Aviation Group cannot predict the price at which Aviation Group's
common stock will trade.
Aviation Group's other equity securities may limit the price growth potential of
Aviation Group's common stock.
There are outstanding a substantial number of warrants and options to
purchase shares of common stock. Aviation Group also has outstanding shares of
preferred stock, some of which are convertible into shares of common stock. In
addition to limiting the trading price growth potential of Aviation Group's
common stock, these securities may impair Aviation Group's ability to raise
needed capital by depressing the price at which Aviation Group could sell
Aviation Group's common stock.
Certain provisions in Aviation Group's charter and bylaws and Texas law make a
takeover of Aviation Group more difficult.
Aviation Group's basic corporate documents and Texas law contain provisions
that might enable Aviation Group's management to resist an attempted take over
of Aviation Group. For example, the members of the board of directors are
divided into three classes who serve three-year terms, and each class is up for
reelection in a different year. Aviation Group's board can also issue shares of
common stock and preferred stock without stockholder approval in order to dilute
and adversely affect various rights of a potential acquiror. The board could
use other provisions to discourage, delay or prevent a change of control, a
change of management or an acquisition of Aviation Group that shareholders may
find beneficial. These provisions could also make it more difficult for
shareholders to elect directors and take other corporate action and could
depress the price that investors are willing to pay for Aviation Group's common
stock.
Aviation Group may issue preferred stock that may adversely affect the rights of
holders of common stock.
Aviation Group's articles of incorporation authorize its board of directors
to issue "blank check" preferred stock, the relative rights, powers,
preferences, limitations, and restrictions of which may be fixed or altered from
time to time by the board of directors. Accordingly, the board of directors
may, without shareholder approval, issue preferred stock with dividend,
liquidation, conversion, voting, or other rights that could adversely affect the
voting power and other rights of the holders of common stock. The preferred
stock could be utilized, under certain
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circumstances, as a method of discouraging, delaying, or preventing a change in
ownership and management of the company that shareholders might consider to be
in their best interests. Aviation Group recently designated shares of Series A,
B and C preferred stock in connection with Aviation Group's acquisition of
Global Leisure and its proposed arrangement with travelbyus.com. For a
description of the rights and preferences of the preferred stock, see "Item 5.
Market for Common Equity and Related Stockholder Matters."
No dividends on Aviation Group's common stock may ever be declared.
Dividends will not be paid unless and until they are declared by the board
of directors. Holders of Aviation Group's common stock will have no authority
to compel the board to declare dividends.
Because of the significant number of shares owned by directors, officers and
principal shareholders, other shareholders may not be able to significantly
influence the management of Aviation Group.
Aviation Group's directors, officers, and principal shareholders
beneficially own a substantial portion of Aviation Group's outstanding common
stock. As a result, these persons have a significant influence on the affairs
and management of Aviation Group, as well as all matters requiring shareholder
approval, including election and removal of members of the board of directors,
transactions with directors, officers or affiliated entities, the sale or merger
of Aviation Group, and changes in dividend policy. This concentration of
ownership and control could have the effect of delaying, deferring, or
preventing a change in ownership and management of Aviation Group, even when a
change would be in the best interest of other shareholders.
Risks Relating to the Arrangement with travelbyus.com
The arrangement with travelbyus.com is subject to shareholder and court approval
and may not be completed.
While Aviation Group has entered into an agreement to complete the
arrangement with travelbyus.com, the actual completion of that transaction may
not occur. Aviation Group's shareholders and the shareholders of travelbyus.com
must approve the arrangement. An Ontario court must also approve the terms of
the arrangement after a hearing at which all interested parties may be heard.
While Aviation Group expects these approvals will be obtained, some or all of
them may not be obtained.
Aviation Group, travelbyus.com and Global Leisure have histories of losses, and
the combined business of these three companies may continue to incur substantial
losses even after the arrangement.
Aviation Group has incurred net losses from operations in each fiscal
period since its inception in December 1995. Global Leisure has incurred losses
for each of the three years ending December 31, 1999. travelbyus.com has
incurred losses since focusing its attention on the travel sector in mid-1999.
travelbyus.com previously incurred losses in its discontinued precious metals
exploration business. On a pro forma basis, for the nine months ended June 30,
2000, the combined companies incurred net losses of approximately $41.4 million.
Even after the arrangement, Aviation Group expects a net loss at least through
calendar year 2000.
Significant costs have been expended by travelbyus.com in designing and
implementing its Web site, and additional costs are anticipated to be incurred
to fund increased marketing initiatives, strategic alliances, enhancements to
the Web site, and the consolidation of its operations in Reno, Nevada.
travelbyus.com has incurred operating losses to date. Significant operating
losses are anticipated through at least calendar year 2000 and may occur in
subsequent calendar years. Additionally, travelbyus.com expects to compete with
bigger, more established online travel agents such as Expedia and Travelocity,
neither of which have achieved profitability.
While management believes the travel products of the combined companies
taken together with its Internet platform can permit the combined companies to
generate profits beginning in calendar year 2001, our revenue may not grow as
expected, and the combined companies may be unable to achieve profitability
resulting in continued losses.
Expected benefits from the arrangement between Aviation Group and travelbyus.com
may not be realized.
11
A failure to realize the benefits anticipated from the arrangement could
adversely affect the market value of the combined companies.
The ownership interest of current shareholders of Aviation Group will be
substantially reduced, and a change of control of Aviation Group will occur.
The current shareholders of Aviation Group will lose the ability to control
the outcome of shareholder votes. Former travelbyus.com shareholders will
initially have the power to vote approximately 95% of the outstanding votes at
meetings of shareholders following completion of the arrangement.
Certain directors of Aviation Group and travelbyus.com had potential conflicts
of interest in approving and recommending the arrangement.
Three directors of Aviation Group have been granted certain warrants to
purchase Aviation Group common stock. Their right to exercise these warrants is
conditioned upon completion of the arrangement, as well as approval of Aviation
Group's shareholders. The Aviation Group board authorized these warrants to
reward the directors for past services and to incentivize the directors to
maximize the trading price for Aviation Group's stock and to continue to serve
as directors until completion of the arrangement. These directors had potential
conflicts of interest as a result of these warrants.
Two executive officers, directors and shareholders of travelbyus.com,
William Kerby and John Fenyes, had been recently appointed and were serving as
travelbyus.com's representatives on Aviation Group's board of directors at the
time of the final approval by the boards of directors of travelbyus.com and
Aviation Group of the arrangement in early May 2000. These two directors had
potential conflicts of interest as a result of their fiduciary duties to both
travelbyus.com and Aviation Group.
The risk exists that these directors may have been influenced to approve
and recommend the arrangement by their personal financial interests or the
interests of travelbyus.com. Accordingly, they may not have been making
decisions based solely on the best interests of Aviation Group or its
shareholders. The Aviation Group board believes that neither its decision-
making process nor its shareholders' interests were adversely affected by these
potential conflicts.
Risks Relating to the Travel Business
Adverse changes or interruptions in relationships with travel suppliers,
distribution partners and other third party service providers could reduce
revenue.
If travelbyus.com or Global Leisure is unable to maintain or expand its
relationships with travel suppliers, including airline, hotel, tour and car
rental suppliers, its ability to offer and expand travel service offerings or
lower-priced travel inventory could be reduced. Travel suppliers may not make
their services and products available to travelbyus.com or Global Leisure on
satisfactory terms, or at all. They may choose to provide their products and
services only to competitors of travelbyus.com or Global Leisure. In addition,
these travel suppliers may not continue to sell services and products through
global distribution systems on terms satisfactory to travelbyus.com or Global
Leisure. Any discontinuance or deterioration in the services provided by third
parties, such as global distribution systems providers, could prevent customers
from accessing or purchasing particular travel services through travelbyus.com
or Global Leisure.
The contracts of travelbyus.com or Global Leisure with travel suppliers are
generally renewed on an annual basis and, in some cases, can be canceled at will
by the supplier. If these suppliers cancel or do not renew the contracts,
travelbyus.com or Global Leisure would not have the range or volume of services
it requires to meet demand and its revenue would decline.
12
A decline in commission rates or the elimination of commissions by travel
suppliers would reduce revenues.
We expect that a substantial portion of travelbyus.com's revenue will come
from the commissions paid by travel suppliers, such as hotel chains and
airlines, for bookings made through its online travel service. Consistent with
industry practices, these travel suppliers are not obligated to pay any
specified commission rates for bookings made through it or to pay commissions at
all. Over the last several years, travel suppliers have reduced commission
rates substantially. For example, in October 1999, the major airlines announced
reductions in the commissions they will pay travel agents from approximately 8%
to 5% and a cap of $50.00 per ticket for domestic round trip ticket sales. We
anticipate continued downward pressure on airline commission rates. Future
reductions, if any, in commission rates that are not offset by lower operating
costs from its Internet platform could have a material adverse effect on the
operations of travelbyus.com.
Failure to maintain relationships with traditional travel agents could adversely
affect travelbyus.com's and Global Leisure's business.
Both travelbyus.com and Global Leisure have historically received, and
expect to continue in the foreseeable future to receive, a significant portion
of their revenue through relationships with traditional travel agents.
Maintenance of good relations with these travel agents depends in large part on
continued offerings of travel services in demand, timely payment of commissions
based on sales and Web site support and availability. If travelbyus.com does
not maintain good relations with travel agents, these agents could terminate
their sales and promotion of its products.
Declines or disruptions in the travel industry could reduce travelbyus.com's
revenue.
Potential declines or disruptions in the travel industry include:
- price escalation in the airline industry or other travel-related
industries;
- airline or other travel related strikes;
- political instability and hostilities;
- bad weather;
- fuel price escalation;
- increased occurrence of travel-related accidents; and
- economic downturns and recessions.
travelbyus.com and Aviation Group have only recently focused their businesses on
the travel sector and their recent business experience in unrelated industries
might not carry over into the business of being an Internet-based provider for
travel services.
Prior to 1999, travelbyus.com was a precious metals exploration company
since its incorporation in 1986. Aviation Group has been in the business of
providing services and products to airline companies since its inception in
December 1995. The precious metals exploration and airline services and
products industries are unrelated to the travel industry. Being a provider of
e-commerce-based travel services is a developing business that is inherently
riskier than businesses in the industries where the companies have established
operating histories. Although some of the business experience gained in the
unrelated industries may be beneficial, the lack of industry-specific or related
experience or knowledge may lead to unfavorable operating results.
Other Risks Relating to Both Businesses After the Arrangement
Future acquisitions or investments could negatively affect the operations and
financial results of travelbyus.com and Aviation Group or dilute the ownership
percentage of their shareholders after the completion of the arrangement.
Following completion of the arrangement, Aviation Group and travelbyus.com
expect to review acquisition and investment prospects that would complement or
expand their current services or otherwise offer growth opportunities to the
combined companies. travelbyus.com and Aviation Group have limited experience
in acquisition activities and may have to devote substantial time and resources
in order to complete potential
13
acquisitions. The companies may not identify or complete acquisitions in a
timely manner, on a cost-effective basis or at all. In the event of any future
acquisitions, The companies could:
- issue additional stock that would further dilute current shareholders'
percentage ownership;
- incur debt;
- assume unknown or contingent liabilities; or
- experience negative effects on reported operating results from
acquisition-related charges and amortization of acquired technology,
goodwill and other intangibles.
These transactions involve numerous risks that could harm operating results and
cause the companies' stock prices to decline, including:
- potential loss of key employees of acquired organizations;
- problems integrating the acquired business, including its information
systems and personnel;
- unanticipated costs that may harm operating results;
- diversion of management's attention from business concerns;
- adverse effects on existing business relationships with customers; and
- risks associated with entering an industry in which the companies have
no or limited prior experience.
Any of these risks could harm the businesses and operating results.
Risks Relating to the E-Commerce Travel Business of travelbyus.com
travelbyus.com has a limited operating history in the e-commerce travel business
upon which to evaluate its business and prospects.
Although the various businesses of travelbyus.com have operating experience
in traditional travel services venues, its Web site was launched on January 21,
2000, and is in the early stages of development, and full integration of
travelbyus.com's operations is not complete. For the nine months ended June 30,
2000, travelbyus.com had revenues from its Web site of Cdn $343,563.
travelbyus.com has limited operating history upon which to evaluate its results
in the e-commerce travel market.
It is also difficult to evaluate travelbyus.com's prospective business
because it faces the risks frequently encountered by early stage companies using
new and unproven business models and entering new and rapidly evolving markets,
such as online commerce. These risks include potential failures to:
- attract additional travel suppliers and consumers to its services;
- maintain and enhance its brand;
- expand its service offerings;
- operate, expand and develop its operations and systems efficiently;
- maintain adequate control of its expenses;
- raise additional capital;
- attract and retain qualified personnel;
- respond to technological changes; and
- respond to competitive market conditions.
14
Competition in the on-line travel industry is intense, and travelbyus.com may
not be able to compete successfully.
In recent years, the number of Web sites in the travel industry competing
for customers' attention has increased rapidly. Future competition is expected
to intensify given the relative ease with which new Web sites can be developed.
travelbyus.com believes that the primary competitive factors affecting its
business are brand recognition, Web site content, ease of use, price,
fulfillment speed, customer support and reliability. Other factors that will
affect travelbyus.com's ability to compete include market acceptance of
travelbyus.com's products, its continued ability to attract experienced
marketing, technology, operations and management talent and the success of
travelbyus.com's marketing programs. If travelbyus.com does not compete
successfully for customers in the intensely competitive online travel services
market, particularly in promoting and differentiating its brand name from
competitors, travelbyus.com will lose or be unable to gain customers. Some
competitors have greater brand recognition and greater financial, technological,
marketing and other resources than travelbyus.com. travelbyus.com competes with
a variety of companies with respect to each product or service offered. These
competitors include:
- online travel agents, including Expedia, Travelocity, Trip.com and
American Express Interactive, Inc.;
- local, regional, national and international traditional travel
agencies;
- consolidators and wholesalers of airline tickets, hotels and other
travel products, including online consolidators such as
Cheaptickets.com and Priceline.com and online wholesalers such as
Hotel Reservations Network, Inc.;
- airlines, hotels, rental car companies, cruise operators and other
travel service providers, whether working individually or
collectively, some of which are suppliers to the travelbyus.com
website; and
- operators of travel industry reservations databases.
In addition to the traditional travel agency channel, many travel suppliers
also offer their travel services as well as third-party travel services directly
through their own Web sites and by telephone. These travel suppliers include
many suppliers with which travelbyus and Global Leisure do business. In
particular, five U.S. airlines, American Airlines, Continental Airlines, Delta
Airlines, Northwest Airlines and United Airlines, have announced their intention
to launch a direct-distribution Web site, named "Orbitz" in June 2001. Orbitz
will offer a centralized marketplace for a number of airlines, integrating fare,
scheduling, seating availability and booking data. Orbitz will also offer car,
hotel, cruise and vacation packages. As the market for online travel services
grows, travelbyus.com believes that travel suppliers, traditional travel
agencies, travel industry information providers and other companies will
increase their efforts to sell inventory from a wide variety of suppliers.
travelbyus.com's operations may be unable to compete successfully with any
current or future competitors.
Many of travelbyus.com's competitors have longer operating histories,
larger customer bases, greater brand recognition and significantly greater
financial, marketing and other resources than travelbyus.com has and may enter
into strategic or commercial relationships with larger, more established and
better-financed companies. Some of travelbyus.com's competitors may be able to
secure services and products from travel suppliers on more favorable terms,
devote greater resources to marketing and promotional campaigns and commit more
resources to Web site and systems development than travelbyus.com is able to
devote. In addition, the introduction of new technologies and the expansion of
existing technologies may increase competitive pressures. Increased competition
may result in reduced operating margins. Competitive pressures faced by
travelbyus.com could have a material adverse effect on travelbyus.com's
business, operating results and financial condition.
If the Internet as a medium for commerce does not develop as expected,
travelbyus.com will fail to grow as it expects.
Use of the Internet by consumers is at a relatively early stage of
development. Market acceptance of the Internet as a medium for commerce is
subject to a high level of uncertainty. travelbyus.com's ability to
significantly
15
increase revenue will require the development and widespread acceptance of the
Internet as a medium for commerce. The Internet may not be a successful channel
for selling travel services. Additionally, the Internet may not prove to be a
viable commercial marketplace because of inadequate development for commerce of
the necessary infrastructure, such as reliable network backbones, high speed
modems and security procedures. The viability of the Internet for commerce may
prove uncertain due to delays in the development and adoption of new standards
and protocols to handle increased levels of Internet activity or due to
increased government regulation or taxation. In addition, the nature of the
Internet as an electronic marketplace may render it inherently more competitive
than conventional commerce formats.
Regulation of domain names is evolving and changing, and travelbyus.com may not
be able to maintain its domain name.
travelbyus.com currently holds certain Web domain names, including the
domain name. The acquisition and maintenance of domain names generally is
regulated by governmental agencies and their designees. The regulation of
domain names in the United States and in foreign countries is expected to change
in the near future. Requirements for holding domain names may be affected. As
a result, travelbyus.com may not be able to acquire or maintain relevant domain
names in all countries in which it conducts business. In addition,
travelbyus.com may be unable to prevent third parties from acquiring domain
names that are similar to or otherwise decrease the value of its trademarks and
other proprietary rights. Any such inability would have a material adverse
effect on travelbyus.com's business.
Evolving government regulation could impose taxes or other burdens on
travelbyus.com's e-commerce business which could increase costs or decrease
demand for travelbyus.com's products.
Increased regulation of the Internet or different applications of existing
laws might slow the growth in the use of the Internet and commercial online
services. For example, new laws were passed in the U.S. in 1998 which impose
limitations on the ability of states to tax Internet-based sales. The Internet
Tax Freedom Act exempts specific types of sales transactions conducted over the
Internet from multiple or discriminatory state and local taxation through
October 21, 2001. If this legislation is not renewed, state and local
governments could tax Internet-based sales. These taxes could decrease the
demand for travelbyus.com's products and services or increase travelbyus.com's
costs of operations.
Software licensed from third parties could become unavailable, obsolete or
incompatible with travelbyus.com's operations, Web site or products and
adversely affect sales.
Software licensed from other parties is incorporated into travelbyus.com's
Web site. travelbyus.com intends to increase the capabilities of its operations
and Web site by licensing additional software applications from other parties.
travelbyus.com depends on the abilities of these other parties to deliver and
support reliable software, as well as enhance their current, and develop new,
applications on a timely and cost-effective basis and respond to emerging
industry standards and other technological changes. A decrease in the
availability of any licensed software could adversely affect sales, unless
travelbyus.com can replace this software with other software that performs
similar functions.
Rapid technological changes may render travelbyus.com's Web site technology
obsolete or decrease the attractiveness of travelbyus.com's services to
consumers.
If travelbyus.com fails to continually improve its Web site speed,
functionality and customer service, travelbyus.com could lag behind its
competitors or travelbyus.com's Web site could become obsolete. Competitors may
develop technology to improve the performance of their Web sites or to lower
their costs. travelbyus.com may have to incur substantial expenses to respond
to these developments. If travelbyus.com fails to keep up with technological
changes, it could fail to gain market share or increase revenue.
16
Security breaches in travelbyus.com's systems could damage its reputation and
cause it to lose customers.
The security of customers' confidential transaction data could be
jeopardized by accidental or intentional acts of Internet users, current and
former employees or others, or by computer viruses. travelbyus.com could lose
customers and be liable for damages caused by these security breaches. Security
breaches experienced by other electronic commerce companies could reduce
consumers' confidence in the travelbyus.com Web site. Although travelbyus.com
plans to continue to use encryption and authentication technology, these
measures can be circumvented. The costs required to continually upgrade
security measures could be prohibitively expensive and could result in delays or
interruption of service.
travelbyus.com's computer and telecommunications systems may suffer system
failures, capacity constraints and business interruptions which could increase
operating costs and cause losses of customers.
The interruption, impaired performance or insufficient capacity of
travelbyus.com's computer and telecommunications systems could lead to
interruptions or delays in service, loss of data or inability to process
reservations. travelbyus.com's systems and operations can be damaged or
interrupted by fire, flood, power loss, telecommunications failure, earthquake,
tornado, employee error and similar events. While travelbyus.com continually
reviews and seeks to upgrade its technical infrastructure and provide for
certain system redundancies and back-up power to limit the likelihood of systems
overload or failure, any damage, failure or delay that causes interruptions in
operations could have a material adverse effect on travelbyus.com's business.
travelbyus.com's ability to increase revenue depends substantially on the
continued use and growth of the Internet.
Although travelbyus.com also sells its travel services and products through
travel agents and 1-800 call centers, travelbyus.com's ability to significantly
increase revenues will depend on performance of its Web site. In turn, Web site
revenue will depend in large part on whether consumers will purchase
significantly more travel services online than they do currently and whether the
use of the Internet as a medium of commerce continues to grow or grows at the
expected rate. Rapid growth in the use of the Internet and online services is a
recent development which may not continue.
Other Risks Relating to the Business of travelbyus.com
travelbyus.com may not be able to obtain additional capital on reasonable terms,
or at all, to fund additional cash acquisitions, and this inability may prevent
travelbyus.com from taking advantage of opportunities, hurt its business and
negatively impact its shareholders.
travelbyus.com has historically made most of its acquisitions using all
common shares or a combination of cash and common shares. travelbyus.com does
not at this time have any commitments to make additional acquisitions for cash.
Nevertheless, acquisitions may be undertaken that require cash capital to
consummate. If adequate funds are not available on reasonable terms, or at all,
travelbyus.com may be unable to take advantage of future opportunities to make
additional acquisitions for cash. While travelbyus.com believes that it has
sufficient capital resources from existing reserves, proposed private placements
and on-going operations to satisfy on-going cash requirements for operations,
Web site costs, planned acquisitions and material commitments, if capital
requirements vary from those currently planned, or losses are greater than
expected, additional financing may be required. If additional funds are raised
through the issuance of debt or equity securities, the percentage ownership of
existing shareholders may be diluted, the securities issued may have rights and
preferences senior to those of shareholders, and the terms of the securities may
impose restrictions on operations.
17
travelbyus.com may not be able to protect its intellectual property, causing the
value of its services to decline.
travelbyus.com relies on a combination of trademark, service mark,
copyright and trade secret laws to protect its intellectual property. It also
enters into confidentiality agreements with its suppliers, strategic partners
and key employees and consultants. Unauthorized parties may copy or infringe
upon aspects of travelbyus.com methodologies, copyrights, service marks or
trademarks. Existing trade secret, copyright and trademark laws offer only
limited protection. Effective trade secret, copyright and trademark protection
may not be available in every country in which travelbyus.com may offer its
services. Policing unauthorized use of its intellectual property is difficult.
Competitors of travelbyus.com may independently develop similar methodologies
and expertise, and travelbyus.com would have no claim against them. If
travelbyus.com resorts to legal proceedings to enforce its intellectual property
rights, the proceedings could be burdensome and expensive, and the outcome could
be uncertain.
Claims against travelbyus.com alleging intellectual property infringement could
result in litigation costs, monetary damages and the loss of valuable assets.
Infringement claims, even if not true, could result in significant legal
and other costs and may be a distraction to management. If any of these claims
were to prevail, travelbyus.com could be forced to pay damages, comply with
injunctions or stop providing certain of its services. Any of these events could
harm the operating results of travelbyus.com.
If travelbyus.com does not manage its growth effectively, the quality of its
services may suffer.
travelbyus.com is growing rapidly and is subject to related risks,
including capacity constraints and pressure on its internal systems and
controls. The ability of travelbyus.com to manage its growth effectively
requires it to continue to implement and improve its operational and financial
systems and to expand, train and manage its employee base. The inability of
travelbyus.com to manage this growth would have a material adverse effect on its
business, operations and prospects.
Because travelbyus.com depends on key personnel, their loss could harm its
business.
travelbyus.com's key personnel are: William Kerby, Jon Snyder, John Fenyes,
Michael London, Gary Saner and Peter Rooney. travelbyus.com may not be able to
retain the services of these key personnel as no employment contract exists with
Mr. Kerby or Mr. Rooney and only 17 months remain on the employment agreements
with Messrs. Snyder and Fenyes. The employment agreements for the other key
personnel expire in 2003. These personnel would be difficult to replace.
travelbyus.com does not carry any insurance covering the loss of any of these
key personnel.
travelbyus.com may or may not merge with a German Internet company, Travel24.com
AG.
In June 2000, travelbyus.com entered into an agreement with Travel24.com AG
to create a strategic partnership through a cross shareholding arrangement. The
companies intend to negotiate a full merger proposal between them, to be
completed no later than December 31, 2000. The terms of the proposed merger have
not been negotiated. The companies may be unable to reach an agreement as to the
terms of the merger, so the merger may never occur. It is expected that any
merger will require shareholder approval.
18
Item 2. Description of Properties
Hangar Facilities for Paint Operations
Aviation Exteriors Louisiana leases four aircraft hangars and office space
at Acadiana Regional Airport from the Iberia Parish Authority in New Iberia,
Louisiana. One lease having an annual rent of $120,000 expires August 1, 2000.
An adjacent hangar has a term expiring in October 2023 and requires annual rent
of $158,000. The third lease expires on February 1, 2001 and has an annual rent
of $60,000. Each of the three leases allows the Iberia Parish Authority and
Aviation Exteriors Louisiana to agree to extend the lease terms and provides for
10% rent increases every five years.
Aviation Exteriors Louisiana has also executed a 30-year operating lease
with the Iberia Parish Authority to obtain funds from the State of Louisiana to
build a larger hangar for the housing and maintenance of Boeing 747 aircraft.
The State of Louisiana and the U.S. government have approved grants totaling
$4.5 million to pay part of the cost of construction of a hangar at Acadiana
Regional Airport. Iberia Parish Authority financed the remaining cost of the
hangar construction through a bond issuance. This project was completed in the
summer of 2000, and the annual rent is $420,000. The approximate total cost to
build the hangar was $9,500,000.
Aviation Exteriors Portland leases two hangars and office space at the
Airtrans Center at Portland International Airport in Portland, Oregon. The
facility is presently being used to paint aircraft for Federal Express. Rent
under the lease is equal to 10% of the revenues of Aviation Exteriors Portland
earned from its Portland painting activities.
Aviation Exteriors Greenville leases one hangar at the Mid Delta Regional
Airport in Greenville, Mississippi. This lease expires in 2009. Aviation
Exteriors Greenville pays rent in the amount of $9,000 per month for the
facility.
Nashville, Tennessee Facilities
Aero Design utilizes approximately 3,000 square feet of manufacturing and
office space in Nashville, Tennessee under a two-year lease at the monthly rate
of $1,500, plus expenses. Aviation Group believes that there are suitable
facilities in the area sufficient to support additional growth.
Arlington, Texas Facilities
General Electrodynamics Corporation operates an approximately 20,000
square-foot manufacturing and operating facility in Arlington, Texas under a
short term lease. Rent payments are $5,000 per month plus all utilities and
taxes.
Dallas, Texas Office Space
Aviation Group also occupies 5,900 square feet of office space at 700 North
Pearl Street, Suite 2170, Dallas, Texas, pursuant to a lease that expires in
September 2003. Aviation Group pays rent in the amount of $7,120 per month for
this office space. It has subleased 4,500 square feet of this space to third
parties for $5,000 per month.
Item 3. Legal Proceedings
Aviation Group is not involved in any material pending legal proceeding
other than ordinary routine litigation considered to be incidental to its
business.
Item 4. Submission of Matters to a Vote of Securities Holders.
No matter was submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders, through the solicitation
of proxies or otherwise.
19
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
On August 19,1997, Aviation Group closed an initial public offering (the
"IPO") of its $.01 par value common stock (symbol: AVGP) and redeemable common
stock warrants (symbol: AVGPW). Aviation Group sold 1,150,000 shares of common
stock, and 1,150,000 common stock purchase warrants. These securities have been
listed with and trade on the Nasdaq SmallCap Market and the Boston Stock
Exchange since completion of the IPO. There was no public trading market for
Aviation Group's securities prior to that time.
As of September 1, 2000, Aviation Group had 69 holders of record of common
stock and seven holders of record of redeemable common stock warrants.
The following table sets forth, for the fiscal quarters indicated, the high
and low closing sales prices of Aviation Group's Common Stock based on
information published by the Nasdaq SmallCap Market.
Aviation Group
Common Stock
----------------
High Low
---- ----
Fiscal Year 1999
----------------
First Quarter $3.875 $2.250
Second Quarter 3.250 1.625
Third Quarter 2.938 1.781
Fourth Quarter 2.250 1.250
Fiscal Year 2000
----------------
First Quarter 2.500 1.563
Second Quarter 2.375 1.125
Third Quarter 4.750 1.000
Fourth Quarter 3.438 1.500
On October 5, 2000, the closing trading price for Aviation Group's common
stock as reported by the Nasdaq SmallCap Market was $1.219.
During the fiscal year ended June 30, 2000, Aviation Group created three
new series of its preferred stock and issued shares of two of these series of
shares. The following summary describes the rights and preferences of these
series of preferred stock, as compared to Aviation Group's common stock and to
each other series of preferred stock .
Series A Convertible Preferred Stock.
Aviation Group has designated 2,000 shares of Series A convertible
preferred stock, par value $0.01 per share. As of September 1, 2000, 1,650
shares of Series A convertible preferred stock were issued and outstanding.
Ranking. The Series A convertible preferred stock ranks junior to Series
B preferred stock and Series C convertible preferred stock but senior to the
common stock and any other series of preferred stock as to dividends and
liquidation preference.
Dividends. If declared by the board of directors of Aviation Group,
dividends on each share of the Series A convertible preferred stock will be paid
each month at an annual rate of 9% of the liquidation preference per share.
Dividends must be paid prior to payment of any dividends on the common stock or
any series of preferred stock other than Series B preferred stock and Series C
convertible preferred stock. Any unpaid dividends accrue and are cumulative.
20
Liquidation Preference. Upon liquidation, dissolution or winding up of
Aviation Group, and after the payment of the liquidation preferences of the
Series B preferred stock and the Series C convertible preferred stock but before
payment of any amount to any other class or series of capital stock of Aviation
Group, each share of Series A convertible preferred stock will be entitled to be
paid out of assets available for distribution $10,000 plus all accrued unpaid
dividends, calculated through the date of liquidation.
Voting Rights. The holders of Series A convertible preferred stock will be
entitled to vote as shareholders of Aviation Group on any matters after the
earlier of September 30, 2000 or the completion of the arrangement. Each share
will be entitled to one vote and will vote together as a single class with the
holders of common stock. The holders of the Series A convertible preferred stock
will have the right to vote as a separate class if required by the Texas
Business Corporation Act or on matters that adversely affect that series.
Redemption. Aviation Group has the right to redeem all or part of the
outstanding Series A convertible preferred stock at any time on or before
September 30, 2000. The redemption price per share will be $10,000 plus all
accrued unpaid dividends, calculated through the date of redemption. After
receiving notice of a redemption, holders of Series A convertible preferred
stock will have the right to convert their shares of Series A convertible
preferred stock into shares of common stock.
Conversion. Holders of Series A convertible preferred stock have the right
to convert their stock into shares of common stock at any time after October 31,
2000, or earlier if Aviation Group has exercised its right to redeem the stock.
In addition, Aviation Group has the right to require conversion of the Series A
convertible preferred stock into shares of common stock at any time. This right
of Aviation Group terminates when Aviation Group completes a new common stock,
preferred stock or debt financing after consummation of the arrangement that
provides new gross cash proceeds to Aviation Group of at least $25.0 million.
The conversion price is the greater of $6 or the arithmetic mean of the
closing bid prices of the common stock as reported by Bloomberg, L.P. for the 21
trading days preceding the date of conversion. The number of shares of common
stock into which each share of Series A preferred stock is converted equals (A)
$10,000 plus all accrued unpaid dividends calculated through the date of
conversion, divided by (B) the conversion price.
No fractional shares will be issued upon conversion of the Series A
convertible preferred stock. Aviation Group will pay a cash amount to any holder
of Series A convertible preferred stock who otherwise would be entitled to a
fractional share.
Series B Preferred Stock
Aviation Group has designated 3,000 shares of Series B preferred stock, par
value $0.01 per share. As of September 1, 2000, 2,153 shares of Series B
preferred stock were issued and outstanding.
Ranking. The Series B preferred stock ranks on parity with the Series C
convertible preferred stock and senior to common stock and any other series of
preferred stock as to dividends and liquidation preference.
Dividends. Dividends on the Series B preferred stock, if declared by the
board of directors of Aviation Group, will be paid quarterly at an annual rate
of 12% of liquidation preference per share. Dividends will be paid prior to
payment of any dividends on the common stock or any series of preferred stock
other than the Series C convertible preferred stock. Any unpaid dividends accrue
and are cumulative.
Liquidation Preference. Upon liquidation, dissolution or winding up of
Aviation Group, and before payment of any amount to any other class or series of
capital stock of Aviation Group, each share of Series B preferred stock and
Series C convertible preferred stock will be entitled to be paid out of assets
available for distribution $10,000, plus all accrued unpaid dividends calculated
through the date of liquidation.
Voting Rights. No holder of Series B preferred stock will be entitled to
vote as a shareholder of Aviation Group except to the extent required by the
Texas Business Corporation Act or on matters that adversely affect that series.
21
Redemption. Aviation Group has the right to redeem all or part of the
outstanding Series B preferred stock at any time after February 28, 2001.
Additionally, Aviation Group is required to redeem shares of the outstanding
Series B preferred stock from and to the extent of the net cash proceeds from
the sale of any assets of Aviation Group other than in the ordinary course of
business or any public debt or equity securities after completion of the
arrangement. The Series B preferred stock will be redeemed at a price per share
equal to $10,000, plus all accrued unpaid dividends, calculated through the date
of redemption.
Conversion. Holders of Series B preferred stock do not have the right to
convert their stock to shares of common stock.
Series C Convertible Preferred Stock
Aviation Group has designated 3,000 shares of Series C convertible
preferred stock, par value $0.01 per share. No shares of Series C convertible
preferred stock are outstanding.
Ranking. The Series C preferred stock ranks on parity with Series B
preferred stock and senior to common stock and any other series of preferred
stock as to dividends and liquidation preference.
Dividends. If declared by the board of directors of Aviation Group,
dividends on each share of the Series C convertible preferred stock will be paid
each month at an annual rate of 9% of the liquidation preference per share.
Dividends will be paid prior to payment of any dividends on the common stock or
any series of preferred stock other than the Series B preferred stock. Any
unpaid dividends will accrue and are cumulative.
Liquidation Preference. Upon liquidation, dissolution or winding up of
Aviation Group, and before payment of any amount to any other class or series of
capital stock of Aviation Group, each share of Series B preferred stock and
Series C convertible preferred stock will be entitled to be paid out of assets
available for distribution $10,000, plus all accrued unpaid dividends calculated
through the date of liquidation.
Voting Rights. The holders of Series C convertible preferred stock will be
entitled to vote as shareholders of Aviation Group after the earlier of
September 30, 2000, or the completion of the arrangement. Each share of Series A
convertible preferred stock will be entitled to one vote per share and will vote
together as a single class with the holders of common stock. The holders of
Series C convertible preferred stock will have the right to vote as a separate
class if required by the Texas Business Corporation Act or on matters that
adversely affect that series.
Redemption. Aviation Group has the right to redeem all or part of the
outstanding Series C convertible preferred stock at any time on or before
September 30, 2000. The redemption price per share will be $10,000, plus all
accrued but unpaid dividends calculated through the date of redemption. After
receiving notice of redemption, holders of Series C convertible preferred stock
will have the right to convert their shares of Series C convertible preferred
stock into shares of common stock.
Conversion. Holders of Series C convertible preferred stock have the right
to convert their stock into shares of common stock, at any time after October
31, 2000, or earlier if Aviation Group has elected to exercise its right to
redeem the stock. In addition, the Company has the right to require conversion
of the Series C convertible preferred stock into shares of common stock at any
time after February 28, 2001.
The conversion price is the greater of $6 or the arithmetic mean of the
closing bid prices of the common stock as reported by Bloomberg, L.P. for the 21
trading days preceding the date of conversion. The number of shares of common
stock into which each share of Series C convertible preferred stock is converted
equals (A) $10,000 plus all accrued unpaid dividends calculated through the date
of conversion, divided by (B) the conversion price.
No fractional shares will be issued upon conversion of the Series C
convertible preferred stock. Aviation Group will pay a cash amount to any holder
of Series C convertible preferred stock who otherwise would be entitled to a
fractional share.
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Dividends
During the last two fiscal years, Aviation Group has not paid any dividends
on its common stock. Aviation Group does not anticipate payment of any dividends
on its common stock in the near future because Aviation Group intends to retain
earnings to fund growth of its operations.
Issuance of Unregistered Securities
The following table and discussion contains details of the prior issuances
of unregistered securities of Aviation Group for the fiscal year ended June 30,
2000:
[Enlarge/Download Table]
Number of Number of Shares Number of Shares
Shares of of Series A Convertible of Series B Aggregate
Date of Issue Common Stock Preferred Stock Preferred Stock Proceeds
------------- ------------ --------------- --------------- --------
July 7, 1999/(1)/ 40,000 $ 0
August 19, 1999/(2)/ 10,410 46,845
September 29, 1999/(3)/ 155,250 297,600
January 6, 2000/(2)/ 11,849 53,320
January 20, 2000/(4)/ 58,500 40,073
March 17, 2000/(5)/ 450 4,500,000
April 19, 2000/(2)/ 78,864 337,526
May 10, 2000/(6)/ 1,650 16,500,000
May 10, 2000/(5)/ 50 500,000
May 10, 2000/(7)/ 750,000 2,000,000
May 10, 2000/(5)/ 1,653 16,530,000
May 25, 2000/(8)/ 112,000 200,000
August 18, 2000/(9)/ 165,921 269,621
____________________________________
(1) Aviation Group issued 40,000 shares of common stock as a finder's fee to
one of its directors in connection with a loan of $600,000 made by third
parties to Aviation Group. Aviation Group did not register these shares in
reliance on no sale having occurred.
(2) In August 1999, Aviation Group issued 10,410 shares of common stock on
conversion of a portion of Convertible Notes due March 31, 2001 at a
conversion price of $4.50 per share. In January 2000, Aviation Group issued
11,849 common shares on conversion of Convertible Notes due March 31, 2001
at a conversion price of $4.50 per share. In April 2000, Aviation Group
issued 11,575 shares on conversion of a Convertible Note at $3.00 per share
and 67,089 shares on conversion of Convertible Notes at $4.50 per share.
Aviation Group relied on the exemption from registration provided by
Section 4(2) or 3(a)(9) of the Securities Act of 1933, as amended.
(3) I