SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number: 0-10124
travelbyus, Inc.
(Exact name of registrant as specified in its charter)
Texas 75-2631373
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
3237 King George Hwy, Suite 204
White Rock, British Columbia Canada V4P
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (604) 541-2400
700 North Pearl Street, Suite 2170 Dallas, Texas 75201
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Former name, former address and former fiscal year, if changed since last report
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 preceding 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 __
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
29,281,896 shares of common stock were outstanding as of August 27, 2001.
Transitional Small Business Disclosure Format (check one):
Yes No X
2
INDEX
PART I FINANCIAL INFORMATION...........................................3
Item 1. Financial Statements............................................3
Consolidated Balance Sheet at June 30, 2001 (unaudited) ......3
Consolidated Statements of Operations for the three and nine
months ended June 30, 2001 and June 30, 2000 (unaudited)....5
Consolidated Statements of Cash Flows for the nine months
ended June 30, 2001 and June 30, 2000 (unaudited)...........6
Notes to Unaudited Consolidated Financial Statements............7
Item 2. Management's Discussion and Analysis or Plan
of Operation................................................20
PART II OTHER INFORMATION..............................................26
Item 1. Legal Proceedings..............................................26
Item 2. Changes in Securities and Use of Proceeds......................27
Item 3. Defaults Upon Senior Securities (not applicable)...............29
Item 4. Submission of Matters to a Vote of Security Holders
(not applicable).............................................29
Item 5. Other Information..............................................29
Item 6. Exhibits and Reports on Form 8-K ............................29
SIGNATURES
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
travelbyus, Inc. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in thousands except per share amounts)
(unaudited)
June 30, 2001
--------------
ASSETS:
Current assets:
Cash and cash equivalents 591
Accounts receivable, net 2,542
Inventory and barter credits 608
Prepaid expenses and other current assets 893
Marketable securities 178
Receivable from AVR 1,500
Assets of discontinued operations 2,499
--------------
Total current assets 8,811
Goodwill, net 17,000
Assets of discontinued operations 2,151
Software, contracts and other intangible assets 16,106
Deposits and restricted cash 4,109
Property, plant and equipment, net 4,277
Other assets 576
--------------
Total assets 53,030
==============
3
TRAVELBYUS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in thousands except per share amounts)
(unaudited)
LIABILITIES AND STOCKHOLDERS' DEFICIT:
June 30, 2001
--------------
Current liabilities:
Bank indebtedness 568
Accounts payable and accrued liabilities 9,288
Notes payable and current portion of long-term debt 30,391
Deferred tax liability 892
Preferred dividends payable 480
Other current liabilities 1,482
Liabilities of discontinued operations 5,782
--------------
Total current liabilities 48,883
Long-term debt, net of current maturities 4,799
Due to related parties 222
--------------
Total liabilities 53,904
Stockholders' deficit:
Series B 12% cumulative preferred stock, $10,000 16,000
Liquidation preference
Common stock, $.01 par value; 250,000,000 shares 153,064
Authorized; 28,646,158 shares issued and outstanding
Additional paid-in capital 47,895
Accumulated deficit (217,833)
--------------
Total stockholders' deficit (874)
--------------
Total liabilities and stockholders' deficit 53,030
==============
The accompanying notes are an integral part of the unaudited
consolidated financial statements.
4
TRAVELBYUS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share amounts)
(unaudited)
Three months ended Nine months ended
June 30, June 30,
2001 2000 2001 2000
---- ---- ---- ----
Net sales 3,653 2,981 9,466 7,864
----------- ------------ ----------- ------------
Costs and expenses:
Cost of net sales 992 1,169 2,730 3,568
Selling, general and administrative 7,359 6,268 21,973 13,572
Depreciation and amortization 3,629 3,121 13,570 4,316
----------- ------------ ----------- ------------
Total costs and expenses 11,980 10,558 38,273 21,456
----------- ------------ ----------- ------------
Operating loss (8,327) (7,577) (28,807) (13,592)
Other expense:
Interest expense, net 3,718 208 6,057 1,670
Adjustment of Global Leisure goodwill 21,123 21,123
Write-off of programming library Advances 1,500
Employment Contract Settlement 680
----------- ------------ ----------- ------------
Pretax loss (33,168) (7,785) (58,167) (15,262)
Income tax (provision) recovery 2 286 3,196 286
----------- ------------ ----------- ------------
Loss from continuing operations (33,166) (7,499) (54,971) (14,976)
Loss from discontinued operations (91) (20)
----------- ------------ ----------- ------------
Loss before extraordinary item (33,257) (7,499) (54,991) (14,976)
Loss on repayment of debentures (699)
----------- ------------ ----------- ------------
Net loss (33,257) (7,499) (54,991) (15,675)
=========== ============ =========== ============
Loss per common share:
Loss from continuing operations ($1.33) ($0.60) ($2.33) ($1.20)
Loss from discontinued operations
and extraordinary items (0.06)
----------- ------------ ----------- ------------
Net loss per share (basic and diluted) ($1.33) ($0.60) ($2.33) ($1.26)
=========== ============ =========== ============
Weighted average shares outstanding (basic and diluted) 24,945,450 12,445,530 23,629,135 12,445,530
The accompanying notes are an integral part of the unaudited consolidated
financial statements.
5
TRAVELBYUS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months ended June 30,
---------------------------
2001 2000
---- ----
Cash flow from operating activities:
Net Loss for the period (54,991) (15,675)
Items not affecting cash:
Writedown of marketable securities 51
Depreciation and amortization 13,570 4,378
Reduction of deferred income tax credit (3,200) (201)
Valuation adjustments- goodwill 19,115
Valuation adjustments- intangibles & other assets 3,742
Net change in non-cash working capital items:
Increase in security deposits 192
Accounts receivable and prepaid expenses (869)
Inventory and barter credits (107)
Accounts payable, accrued liabilities, customer
deposits and other current liabilities 3,191 3,554
--------------------- -----------------------
Cash used by operations (19,306) (7,944)
--------------------- -----------------------
Cash flow from investing activities:
Cash paid for acquisitions (12,297)
Receivable from AVR (1,500)
Purchase of property and equipment (1,111) (1,771)
Investments (4,523)
Deposits and restricted cash (1,032)
Acquisition of Aviation Group and related valuation
Adjustments (8,732)
--------------------- -----------------------
Cash used by investing activities (11,343) (19,623)
--------------------- -----------------------
Cash flow from financing activities:
Bank borrowings 290
Non-bank borrowings 27,455
Issuance of notes payable 3,190
Share issue costs (2,050)
Issue of special warrants 13,512
Private placement 11,753
Exercise of options and warrants 3,781
Subscriptions received 707 1,973
Repayments to related parties (366)
--------------------- -----------------------
Cash provided by financing activities 28,086 32,159
Foreign exchange effect on cash 1,152 1,482
--------------------- -----------------------
Increase (decrease) in cash and cash equivalents (1,411) 6,074
Cash and cash equivalents, beginning of period 2,002 2,200
--------------------- -----------------------
Cash and cash equivalents, end of period 591 8,274
===================== =======================
The accompanying notes are an integral part of the unaudited
consolidated financial statements.
6
1. Nature of operations and going concern
(a) Nature of operations
travelbyus, Inc. (the "Company") is in the business of providing
travel-related products and services targeted primarily at the leisure
customer, including airline tickets and tour, cruise and group packages.
The Company seeks to become a fully integrated travel network.
On January 25, 2001, Aviation Group, Inc., a Texas corporation, completed
an arrangement (the "Arrangement") with travelbyus.com, Ltd., an Ontario
corporation. Immediately prior to completion of the Arrangement, Aviation
Group, Inc. changed its name to travelbyus, Inc. Under the terms of the
Arrangement, Aviation Group, Inc. was the legal acquirer of travelbyus.com,
Ltd. and travelbyus.com, Ltd. was the accounting acquirer. Accordingly, the
historical financial information set forth herein is that of the accounting
acquirer, travelbyus.com., Ltd. Current period financial results presented
for the three and nine-month periods ended June 30, 2001 include only the
results of travelbyus.com through January 25, 2001, the date the
Arrangement was effectuated. For the balance of the three and nine-month
periods ended June 30, 2001, the results of both constituent companies to
the Arrangement are included.
The Company has disposed or is currently seeking to dispose of its assets
that are unrelated to its travel businesses, principally those that were
historically a part of Aviation Group, Inc. These non-travel related
assets, liabilities and operations are presented as held for sale or
discontinued at their estimated liquidation value. See also Note 13.
As used herein, the term the "Company" refers to the combined company or,
prior to the Arrangement, either of the constituent companies, unless a
distinction between the constituent companies is required. In any instance
in which such distinction is required, the term "Aviation Group" refers to
Aviation Group, Inc. prior to the Arrangement and the term "travelbyus.com"
refers to travelbyus.com, Ltd. prior to the Arrangement.
(b) Going concern
These financial statements have been prepared using generally accepted
accounting principles ("GAAP") applicable to a going concern. The Company
incurred a net loss, before write-off and amortization of goodwill, of
approximately $36 million during the nine months ended June 30, 2001, had
an accumulated deficit of approximately $218 million, and a working capital
deficiency of approximately $40 million, at the end of the period. The
Company has continued to incur losses subsequent to the period end. The
Company used cash of approximately $19 million to fund operations during
the nine-month period. In addition, substantially all of the Company's
assets are provided as security for various financings. Management
estimates that financing facilities currently available are insufficient to
maintain operations and repay obligations due or coming due in the coming
year. The Company will require new sources of financing, a restructuring of
its existing obligations or forbearance of its loan agreements, in order to
continue its operations and satisfy its obligations in the normal course.
Accordingly, the use of generally accepted accounting principles applicable
to a going concern may not be appropriate because substantial doubt exists
with respect to the Company's ability to continue as a going concern.
Management is addressing this situation by attempting to financially
restructure its debt, to raise additional financing, to eliminate redundant
and unnecessary costs and to realize the revenue potential of its recent
acquisitions, products and services. No assurance can, however, be given
that management will be successful in these efforts.
7
These financial statements do not reflect any adjustments to the carrying
value of assets and liabilities, the estimated useful lives of assets, the
reported revenues and expenses and balance sheet classifications used that
would be necessary if the going concern assumption were not appropriate.
Such adjustments could be material.
2. Programming library
The Company acquired a media library. During the three months ended
December 31, 2000, the Company received the balance of the first 40
episodes and has therefore reclassified the remaining balance of advances
for programming services to the programming library. In addition, the
Company capitalized and accrued for the remaining balance of advances due,
$1.5 million with respect to the 40 new episodes. These advances were
written off during the period to reducethe carrying value of the
programming library down to the estimated fair value.
3. Software and other assets
Pursuant to the terms of the share purchase agreement for Muffin
Communications Ltd., the share consideration given for the rights to the
wireless contract was subject to adjustment based on the trading price of
the common shares of travelbyus.com on December 15, 2000. The combination
of shares and/or cash to be paid or given to maintain the total
consideration of $6.7 million or $6.70 per share pursuant to the adjustment
formula, was to be decided by travelbyus.com. During the quarter ended
December 31, 2000, the required value of additional consideration of $6.3
million was expensed due to the continued significant uncertainty about the
level of revenues expected to be derived from the underlying wireless
customer base. During the quarter ended June 30, 2001, the Company issued
10,355,932 shares of travelbyus.com Ltd. (Canadian) shares (equivalent to
2,071,186 shares of travelbyus Inc. (U.S.) shares) into a trust account, in
order to satisfy its additional obligation under the agreement, pending the
outcome of related litigation.
4. Termination of Relationship with American Vacation Resorts, Inc.
On April 13, 2001, the United States District Court for the Northern
District of Illinois, entered an order granting a motion to approve the
sale of certain assets of Med Resorts International, Inc. ("MRI") to
American Vacation Resorts, Inc. ("AVR"), a corporation in which the Company
and Malcolm Wright each held a 50% beneficial interest, subject to the
issuance or reservation of shares representing 17.5% of the AVR's
outstanding common stock under an equity incentive program for current or
future management personnel of AVR. The assets of MRI consist principally
of notes of MRI's vacation club members, three hotels and certain
condominium units and time-share intervals in hotel and resort properties.
MRI was placed in receivership in August, 2000 in an action filed against
it by the Federal Trade Commission and the Commonwealth of Virginia in the
United States District Court for the Northern District of Illinois.
The Company subsequently purported to exercise an option to acquire the 50%
of the common stock of AVR held by Mr. Wright. As previously disclosed in
the Company's quarterly report on Form 10-QSB for the quarter ended March
31, 2001, the Company had neither resolved all issues concerning the terms
of the option exercise nor entered into definitive agreements for the
transfer of Mr. Wright's interest in AVR. The Company subsequently
concluded that, under the terms of the court's order, the transfer could
not become effective for a 10-year period. In order to resolve this and
other issues before the court (under the continuing jurisdiction over the
MRI matter that it had retained), the Company elected to relinquish its
interest in AVR in consideration of the right to receive a return of its
$1.5 million capital contribution to AVR (subject to reduction for legal
expenses of the parties incurred in connection with the court proceedings),
payable in amounts equal to 50% of any new capital raised by AVR, if any,
and otherwise on a subordinated basis from excess cash flow, if any. These
payments are to commence only if the Company obtains releases of the liens
on the AVR assets securing obligations of the Company in the original
principal amount of $5.1 million, which it is presently seeking to do. The
Company also agreed to advance an additional $175,000 to an escrow account
to pay legal fees in connection with this matter (which payments were made
in two installments in July and August 2001). Separately, the Company
negotiated agreements with Mr. Wright, AVR and other corporations
controlled by Mr. Wright under which the parties agreed to mutual releases
and the Company received the right to the return of the $200,000 it had
advanced to Mr. Wright and other consideration unrelated to AVR.
Under the terms of a stipulated order of the court, the Company will
neither have any continuing ownership rights in AVR (and, therefore, AVR
will not be a subsidiary of the Company) nor have any role in the
management or operations of AVR, except that the Company will continue to
provide travel fulfillment services to AVR on a non-exclusive basis and,
until it obtains releases of the liens on AVR assets securing obligations
in the original principal amount of $5.1 million, certain of the Company's
guaranties of AVR's obligations will remain in place. The Company committed
to cause these liens to be released no later than September 30, 2001, and
AVR will not guarantee or pledge its assets to support or secure any
obligations of the Company. At October 31, 2001, the Company had entered
into definitive agreements or reached understandings to release the liens
respecting $3.6 million principal amount of this indebtedness (although
written documentation has not been completed or forwarded to AVR). The
holder of the remaining $1.5 million of debt has not agreed to release its
liens. The Company has failed to satisfy its obligations under the terms of
the order. Among other consequences, unless the Company obtains releases of
all liens (as to which no assurance can be given), and a modification to
the order is negotiated and entered (as to which there have been no
discussions initiated and thus, no indication that a modification will be
considered), the Company's guaranties of AVR's obligations will not be
released and the Company will relinquish its rights to repayment of the
amounts it advanced to or on behalf of AVR.
5. Credit facilities, notes and debt
Credit facilities utilized, due and payable at June 30, 2001, are as follows
(in thousands):
Bank Indebtedness (a) $ 568
Notes Payable & Current Portion of Long-Term-Debt (b) 30,391
Long-term Debt (net of current maturities) (c) 4,799
Non-current Debt to Related Party 222
----------
TOTAL $35,980
(a) Bank indebtedness consists of a single obligation under a
revolving credit agreement.
(b) The following table summarizes the detail and terms of the
various loans comprising the current portion of notes payable
and long-term debt:
Lender/ Principal Interest
Description Amount Rate
Senior Redeemable Debentures (i) $ 6,262 12.5%
Pelham Funds Note (ii) 1,887 12.0%
Debt Related to AVR (Note 4) (iii) 5,050 (See iii)
DCM Asylum LLC (iv) 2,400 12.0%
DCM KG LLC Convertible Loan (v) 1,367 12.5%
Convertible Bridge Notes (vi) 10,625 12.0%
Aberdeen Loan (vii) 1,000 12.0%
Amadeus (viii) 1,000 8.0%
Sadler Loan (ix) 300 12.0%
Starside Loan (x) 500 12.0%
(b)(i) In September, 1999, the Company's Travelbyus.com
Incorporated subsidiary issued CND $12.0 million
(approximately U.S. $8 million) principal amount of its senior
redeemable debentures. In March 2000, the issuer offered early
redemption of the debentures of which approximately CND $2.8
million was retired. The debentures bear interest at a rate of
12.5% per annum, payable semi-annually, and matured on
September 9, 2001. The Company recently concluded discussions
with the Lead Agent, Wellington West Capital, Inc. and has had
the repayment date for both principal and interest extended 15
months, to December 2002. The parties are in the process of
preparing final documentation, and the Company has agreed to
compensate Wellington West with a Rollover Fee equal to 2% of
the aggregate principal amount of the debentures outstanding.
One-half of this fee will be paid in cash and the other half
will be paid for with common stock of the Company, at an issue
price equal to the weighted average trading price of the
shares for the prior 20 trading days. This will equal
approximately 4.0 million shares of the Company's common
stock.
(b)(ii) The Company borrowed $3.0 million from Pelham
Investment Fund on May 9, 2000. In June 2001 $1.2 million was
paid toward the principal balance from proceeds of the Aero
Design sale. The original promissory note required quarterly
interest payments at an annual rate of 12%, and matured
February 2001. The Company previously entered into a
forbearance agreement with the lender that extended the
payment date to September 2001. The balance of this note has
not been paid and the Company is seeking to negotiate an
additional forbearance agreement in conjunction with the debt
restructuring described in Note 15. No assurance can be given
that a further extension will be granted. In conjunction with
the issuance of original promissory note, the Company issued
warrants to purchase 50,000 shares of its common stock at an
exercise price of $1.00 per share. The fair value of these
warrants was previously expensed.
(b)(iii) In late April and May 2001, the Company borrowed $5.1
million in the aggregate evidenced by a series of notes due
120 days after issuance. These notes bear interest at the rate
of 25% for the first 30-day period outstanding, increasing by
25% for each 30-day period thereafter. The Company had entered
into definitive agreements or reached agreement in principle
to restructure $3.6 million principal amount of this
indebtedness. The holder of the remaining $1.5 million of debt
has not agreed to modify the terms of the loan, which
continues to be in default. See Notes 4 and 15.
(b)(iv) In December 2000, the Company executed agreements
relating to a $2.5 million loan from DCM Asylum, LLC, a
company related to Doerge Capital Management, a division of
Balis, Lewites & Coleman, Inc. ("DCM"). This loan matured in
February 2001 and was extended until September 2001.
Subsequently, this loan was exchanged for the Company's Series
D Preferred Stock (See Note 15). In connection with the
original loan, the Company issued warrants to purchase 250,000
shares of its common stock at an exercise price of $2.00 per
share, expiring in December 2005. The fair value of the
warrants was previously expensed. As consideration for the
extension of the maturity date, a further 250,000 warrants
were issued with an exercise price of $0.50 per share,
expiring in April 2004.
(b)(v) In December 2000, the Company borrowed $1.5 million
from DCM KG, LLC, a company related to DCM. Principal payments
in the amount of $133,000 were made during this current
quarter. The loan originally matured in February 2001 and was
extended to June 2001. Subsequently, this loan was exchanged
for the Company's Series D Preferred Stock.
(b)(vi) During the past two quarters the Company has borrowed
$10.6 million in aggregate evidenced by a series of
convertible notes maturing December 31, 2001. The notes bear
interest at the rate of 12% payable quarterly. The notes are
convertible at the holder's option at any time using the
10-day trading average, but at not less than $2.00 per share.
In the event the principal is returned prior to an equity
conversion, the Company will issue 10,000 warrants for every
$100,000 raised, with a strike price of $2.00. Subsequently,
$8.6 million of these notes was converted to Series D
Preferred Stock, and the remaining $2 million was
restructured.
(b)(vii) In January 2001, the Company borrowed $1.0 million
from Aberdeen Strategic Capital LP. This loan matured in
February 2001. This note has not been paid and the Company is
seeking to negotiate an extension or waiver agreement.
(b)(viii) In December 2000, the Company borrowed $2 million
from Amadeus NMC Holding, Inc. This loan bears interest at the
rate of 8% per year, and is repayable quarterly, commencing
June 30, 2001. The Company has not made the most recent
quarterly payment and is now negotiating with the lender to
modify the repayment terms such that repayments will equal a
percentage of travel segment revenue. On that basis, one-half
of the original loan amount ($1.0 million) is reflected as
current and one-half is reflected in the long-term portion of
debt.
(b)(ix) In April 2001, the Company borrowed $300,000 evidenced
by a note due in July 2001. This note bears interest at the
rate of 12% per annum, payable at maturity. The Company is in
discussions with the lender to modify the term of this loan.
(b)(x) In May 2001, the Company borrowed $500,000. This loan
has been converted to Series D Preferred Stock (See Note 15).
(c) Long-term debt detail follows:
Lender or Principal Interest
Description Amount Rate
Travel24.com (i) $ 3,750 LIBOR + 3.0%
Amadeus (ii) 1,000 8.0%
Other 49
-----------
TOTAL $ 4,799
(c)(i) Through November 2000, Travel24 had advanced the
Company $3.75 million. This indebtedness is evidenced by
convertible debentures bearing interest at the rate of LIBOR
plus 3.0% The conversion price on the total indebtedness has
been reduced to $0.50. These debentures mature in June 2002.
Interest has not been paid currently. The Company has entered
into a Remediation Agreement with the lender. The Company has
been unable to comply with all the terms of the Remediation
Agreement.
(c)(ii) In December 2000, the Company borrowed $2 million from
Amadeus NMC Holding, Inc. This loan bears interest at the rate
of 8% per year, and is repayable quarterly, commencing June
30, 2001. The Company has not made the most recent quarterly
payment and is now negotiating with the lender to modify the
repayment terms.
6. Common Stock
Effective April 20, 2001, the Company engaged Steven Antebi as a consultant
to advise it as to financial and strategic planning matters. In accordance
with the terms of the consulting agreement entered into between the Company
and Mr. Antebi, the Company issued 2,200,000 shares of its common stock to
him on May 18, 2001. These shares were issued and registered under a
registration statement on Form S-8 in May 2001. In August 2001, Mr. Antebi
agreed to relinquish his right to receive up to 2,000,000 additional shares
in the event of specified dilutive events and agreed to certain resale
restrictions on the shares he continued to hold.
Following is a table of stock issuances:
Number of Common $ Amount
Shares
Balance September 30, 2000 96,804,569 141,710,000
Shares issued on exercise of warrants 200,000 166,000
Shares issued on exercise of special warrants 7,692,300 7,196,000
--------------------- ----------------------
Balance December 31, 2000 104,696,869 149,072,000
Shares sold 1,417,444 3,982,000
Acquisition of Aviation Group shares 4,956,722 10,000
Conversion of Series A Preferred shares 2,750,000 -0-
Issuance pursuant to acquisition price minimums 4,817,712 -0-
Adjustment for 1:5 reverse share split (94,911,049) -0-
--------------------- ----------------------
Balance March 31, 2001 23,727,698 153,064,000
Shares issued to consultants for services 2,847,274 -0-
Shares issued pursuant to acquisition price minimums
(see Note 3) 2,071,186 -0-
--------------------- ----------------------
Balance June 30, 2001 28,646,158 153,064,000
7. Commitments and contingencies
During June 2000, the Company entered into an agreement with
HealthyConnect.com, Inc. (HC.com), a private health care related internet
technology company. Pursuant to the terms of the agreement, HC.com will
issue 1,200,000 common shares to the Company upon confirmation of necessary
technical specifications to establish links between their respective web
sites. The Company will issue 1,000,000 common shares in exchange for a
further 1,400,000 common shares of HC.com upon certain conditions being
met. Under terms of the agreement, HC.com may request the Company to
acquire up to 1,200,000 common shares of HC.com at $2.50 per share for a
total cash consideration of $3.0 million subject to satisfactory due
diligence and board approval of the Company. The completion of these
transactions is subject to the necessary regulatory approvals. Through June
30, 2001, 17,500,000 shares have been exchanged. On August 8, 2000, the
Company provided a demand loan to HC.com for $175,000 at 6.0% interest. The
loan is secured by 1,200,000 common shares of HC.com and is included in
advances. HC.com has entered into a letter of intent to merge with Next
Generation Technology Holdings, Inc., which will become the surviving
entity if and when the merger is completed.
In July 2001, the Company entered into an amendment of an agreement dated
December 7, 1999, under which it had purchased the right to the
800-I-TRAVEL numbers and a system which utilizes a telephone switching
technology that will route customers' calls to their closest member travel
agency or to the company's call center. Under the amendment, the Company is
required to issue 300,000 of its common shares to the Vendors. In addition,
the Company may be required to issue up to an additional 200,000 of its
common shares to the Vendors, and/or pay the Vendors up to $525,000 in
cash, depending on the average daily closing price and trading volume of
its common shares during the period from October 8, 2001, to January 15,
2002.
In June, 2001, Michael H. Rosenblum ("Rosenblum") has filed suit against
the Company in the Circuit Court of Cook County, Illinois in a case
captioned Michael H. Rosenblum vs. Travelbyus.com, Ltd., et al., No. 01 L
0077689, claiming unspecified damages and costs for the Company's alleged
breach of the terms of the sale agreement pursuant to which the Company
acquired all of the capital stock of Muffin Communications, Inc ("Muffin").
Under the terms of the agreement, the Company had agreed to a share "top
off" provision pursuant to which it would issue additional shares of the
Company's common stock in the event the fair market value of the shares
issue at closing was not equal to a certain amount in December 2000. Prior
to the date for issuance of this additional consideration, the Company
concluded that the assets of Muffin were not as represented and therefore
declined to deliver the additional shares to Rosenblum. The Company has
filed to remove the suit to Federal court and intends to file a
counterclaim seeking recovery of the consideration previously paid to
Rosenblum. The Company intends to defend against the plaintiff's claims and
prosecute its own counterclaims vigorously.
In 2001, Travel Magazine 2000 Inc. filed suit against the Company in the
Superior Court of Justice of Ontario, Canada in a case captioned Travel
Magazine 2000 Inc. vs. Travelbyus.com, Ltd, et al., Court File No.
01-CV-210137CM, claiming unspecified damages and costs for the Company's
alleged breach of the terms of an agreement entered into by the Company
with the plaintiff in 1999. Under the terms of this agreement, the Company
agreed to purchase up to 120 travel shows to be produced by plaintiffs,
subject to the Company's right to cancel production of 80 shows. The
Company cancelled production of 80 shows by so advising plaintiff, both in
writing and orally, in a timely manner. Plaintiff alleges that the Company
failed to follow requisite formalities in canceling production of these
shows, which allegation the Company disputes. The Company intends to
vigorously defend this case.
In June, 2001, Apollo Galileo USA Partnership filed suit against the
Company in the United States District Court for the Northern District of
Illinois Eastern Division in a case captioned Apollo Galileo USA
Partnership vs. Travelbyus, Inc. No. 01 C 2781, claiming unspecified
damages and costs for the alleged breach of the terms of an agreement
between plaintiff and Global Leisure, a wholly owned subsidiary of the
Company, pursuant to which Global Leisure subscribed to plaintiff's
computerized reservation system. In its complaint, as amended, plaintiff
alleges that the Company caused Global Leisure to breach the agreement by
reason of removing assets from Global Leisure which allegedly rendered it
unable to perform its obligations to plaintiffs. In addition, plaintiff
alleges that the Company is responsible for Global Leisure's obligations as
a successor entity to Global Leisure. The Company disputes these
allegations and denies any responsibility for the obligations or
liabilities of Global Leisure. The plaintiff has filed a motion to add
Global Leisure as a party to this litigation. Prior to initiating this
suit, plaintiff made demand on the Company to pay to it $4 million as a
result of the damages it is alleged to have suffered. The Company intends
to vigorously defend this case.
In 2001, World Business Brokers, Inc. filed suit against the Company in the
Eleventh Judicial Circuit in and for Miami-Dade County, Florida in a case
captioned World Business Brokers, Inc vs. Aviation Group, Inc. (now known
as travelbyus, Inc.), Case No. 00-25918 CA 24, claiming unspecified damages
and costs for the Company's alleged failure to pay brokerage commissions to
plaintiff for its services in connection with the Company's merger with
travelbyus.com, Ltd. The Company maintains that the brokerage agreement had
expired prior to the consummation of the transaction and intends to
vigorously defend this case.
In July, 2001, a former employee of Cheap Seats, Inc. ("Cheap Seats"), a
wholly owned subsidiary of the Company, filed suit against Cheap Seats, the
Company and three individuals in California state court claiming
unspecified damages and costs for alleged sexual harassment. Cheap Seats
intends to vigorously defend this case.
In 2001, RSC (Rental Service Corporation) dba Prime Equipment filed suit
against Travelbyus.com, Inc. ("TCI") and Aviation Exteriors Portland, Inc.
("AEP"), subsidiaries of the Company, in Circuit Court of the State of
Oregon for the County of Multnomah in a case captioned RSC (Rental Service
Corporation) dba Prime Equipment vs. Aviation Exteriors Portland, Inc., et
al., No. 0104-04460, claiming damages and costs for AEP's failure to pay an
Amended and Restated Exchangeable Promissory Note in the amount of $263,052
and TCI's failure to honor a guaranty of this note. The note evidenced past
due payables of AEP. The Company has initiated settlement discussions with
the plaintiff.
In 2001, John Fenyes, a former employee of the Company's travelbyusUSA.com,
Inc. subsidiary ("TBU-USA"), initiated an arbitration action against
TBU-USA in Reno, Nevada claiming entitlement to approximately $200,000 in
compensation under the terms of his employment agreement with TBU-USA
following the Company's diminution of his responsibly and his subsequent
resignation. In September 2001, the arbitrator ruled in favor of Mr. Fenyes
and awarded damages in the amount of approximately $69,000. TBU-USA is in
negotiations with Mr. Fenyes with regard to a compromise settlement of such
award. interest in the predecessor of TBU-USA, and to vigorously defend
against his claims in the arbitration.
In August, 2001, JoAnn Smith, a former employee of the Company's TBU-USA
subsidiary, has advised that she intends to initiate an arbitration action
against TBU-USA in Reno, Nevada claiming entitlement to an unspecified
amount of compensation based upon TBU-USA's alleged breach of its
obligations to her under her employment agreement. The Company intends to
vigorously defend this case.
The Company is a party to routine contract and employment-related
litigation matters in the ordinary course of its business. No such pending
matters, individually or in the aggregate, if adversely determined, are
believed by management to be material to the business or financial
condition of the Company. The Company maintains general liability
insurance, property insurance, automobile insurance, employee benefit
liability insurance, fidelity insurance, errors and omissions insurance and
directors' and officers' liability insurance. The Company is generally
self-insured with respect to workers' compensation, but maintains umbrella
workers' compensation coverage to limit its maximum exposure to such
claims.
8. Segment information
The Company operates in three operating segments: Travel, Technology and
Other. The Travel segment provides a broad range of travel products,
targeted primarily at the leisure customer, including airfare, hotel rooms,
cruise packages, and ground packages. Products and services are offered
through and to the traditional travel agency base, 1-800 call centers and
the Internet. Included in the Travel segment are the operations of the
following subsidiaries: Mr. Cheaps Travel, International Tours, GalaxSea
Cruises and Tours, Express Vacations, Cheap Seats, Bell Travel, Global
Leisure and Travelbyus Cruise Operations.
The Technology segment designs and manufactures electronic data storage
systems, develops Internet accessible travel reservations systems, custom
programming services, and a distributed website marketing system. Included
in this segment are the operations of Legacy, Epoch, Prosoft and
SiteRabbit.com.
Included in the Other segment are advertising and associate marketing
operations of International Tours Inc., GalaxSea Cruises and Tours, and
Travelbyus Cruise Operations.
The accounting policies of the segments are the same as those described in
Note 1(b). The Company evaluates the performance of its segments and
allocates resources to them based on operating contribution, which
represents segment revenues less direct costs of operations, excluding the
allocation of corporate general and administrative expenses. Assets of the
operating segments reflect primarily net accounts receivable associated
with segment activities; all other assets are included as corporate assets.
The Company does not track expenditures for long-lived assets on a segment
basis.
The table below presents information on the revenues and operating
contribution for each segment for the three and nine months ended June 30,
2001 and 2000, and items that reconcile segment operating contribution to
the Company's reported pre-tax income (loss) from continuing operations (in
thousands).
Three Months Ended Nine Months Ended
------------------ -----------------
June 30, June 30,
--------- --------
2001 2000 2001 2000
---- ---- ---- ----
Net sales of services:
Travel 1,544 2,247 5,622 5,928
Technology 1,024 199 2,374 526
Other 1,085 535 1,470 1,410
--------------- ------------- ------------- ---------------
3,653 2,981 9,466 7,864
--------------- ------------- ------------- ---------------
Operating contribution:
Travel (7,894) (22,640) (14,463)
(7,592)
Technology (736) (43) (2,499) (87)
Other 360 (1,760) 952
1
--------------- ------------- ------------- ---------------
--------------- ------------- ------------- ---------------
(8,327) (7,577) (26,899) (13,598)
--------------- ------------- ------------- ---------------
--------------- ------------- ------------- ---------------
Consolidated expenses:
Interest expense 3,718 208 5,942 1,664
Investment Reduction 21,123 25,326
--------------- ------------- ------------- ---------------
Pretax loss from
continuing operations (33,168) (7,785) (58,167) (15,262)
=============== ============= ============= ===============
9. Stock options and warrants
The Company has a Stock Option Plan that provides for the granting of
options to purchase common shares to directors, officers, employees and
consultants of the Company. The number of common shares reserved for
issuance under the Stock Option Plan shall not exceed 10,000,000 common
shares or a greater number as approved by the shareholders of the Company.
Terms of the options shall not be for a period less than one year or longer
than ten years. The option price shall be fixed by the directors of the
Company subject to price restrictions imposed by the regulators. All
options were granted at or above market value at the date of grant.
Accordingly, no current or deferred compensation expense has been recorded
in the periods presented.
Stock option transactions
The following table summarizes information about the Company's stock option
activity:
Options exercisable Number of Exercise price
at Options $
end of period
Balance September 30, 2000 7,448,800 0.12 - 4.50
Options granted during the period 547,000 0.90 - 4.28
Options exercised during the period -0- -0-
Options expired during the period (406,500) 1.15 - 4.28
Options exercisable at end of period 3,483,967 0.12 - 4.50
--------------------- -----------------
Balance December 31, 2000 7,589,300 0.12 - 4.50
Options expired during the period (50,000) 3.75
Adjust for reverse split (2,787,174) (6,031,440)
Options issued to Aviation Group 27,000 8.44 - 9.28
Options exercisable at end of period 700,633 0.40 - 16.26
--------------------- -----------------
Balance March 31, 2001 1,534,860 0.40 - 16.26
Options expired during the period (666,300) 1.53 - 16.26
Options exercisable at end of period 334,625 0.40 - 14.93
--------------------- -----------------
Balance June 30, 2001 870,960 0.40 - 14.93
===================== =================
The following table summarizes stock options outstanding at
June 30, 2001:
Range of Number Number
exercise prices Outstanding exercisable
$0.40 - $3.32 312,760 226,049
$5.38 - $5.64 255,400 -0-
$7.80 - $10.62 147,000 60,000
$10.79 - $13.54 47,300 15,510
$14.20 - $14.93 108,500 33,066
870,960 334,625
============== ==========
Warrant transactions
Warrants granted in Travelbyus.com are convertible for
exchangeable shares of the Company at the ratio before the
reverse split effected in January 2001. The following table
summarizes information about the warrant activity in the
travelbyus.com warrant pool:
Number of Exercise price
underlying $
shares
Balance September 30, 2000 11,077,520 0.45 - 2.38
Issued on exercise of special warrants (Note 9) 3,496,500 1.67
Issued on debt financings (Note 5 (b) and (c) 550,000 1.00 - 2.00
Special warrants exercised (6,993,000) 1.67
Debenture warrants exercised (200,000) 0.45
----------------- ---------------
Balance December 31, 2000 7,931,020 0.45 - 2.33
Issued on debt financings (Note 5 (b) and (c) 300,000 1.00
Debenture warrants expired (6,778,250) 2.50 - 3.50
----------------- ----------------
Balance March 31, 2001 1,452,770 0.45 - 3.50
Issued on debt financings (Note 5) 2,771,890 0.62 - 1.00
----------------- ----------------
Balance June 30, 2001 4,224,660 0.45 - 3.50
================= ================
The following table summarizes information about the warrant
activity in the Aviation Group warrant pool:
Number of Exercise price
underlying $
shares
Beginning balance at acquisition date 1,825,882 5.00 - 47.44
Issued on debt financings 10,410,000 0.50 - 7.00
Issued to management 2,100,000 0.50 - 0.75
----------------- ----------------
Balance June 30, 2001 14,335,882 0.50 - 47.44
================= ================
10. Series A preferred stock
In conjunction with the purchase of Global Leisure on May 10, 2000, the
Company issued 1,650 shares of its 9% cumulative convertible Series A
preferred stock for $10,000 per share ($16.5 million in the aggregate). The
Series A shares are convertible into common shares at the Company's option.
As additional consideration, warrants to purchase 750,000 shares of common
stock at an exercise price of $5.00 per share were issued to the former
owners of Global. The Series A shares were converted to common shares in
January, 2001.
11. Change of auditors
As reported in the Company's current report on Form 8-K filed April 23,
2001, PricewaterhouseCoopers LLP ("PWC") resigned as the Company's
independent accountants on April 17, 2001. PWC had served as the
independent accountants for travelbyus.com, which, under the terms of the
Arrangement, was the accounting acquirer of Aviation Group. Aviation
Group's independent accountants, Hein + Associates LLP ("Hein"), had ceased
serving as Aviation Group's independent accountants following the
completion of the Arrangement. Hein subsequently notified the Company that
it had ceased serving in this role. As reported in its current report on
Form 8-K filed August 16, 2001, on August 9, 2001, the Company engaged
Grobstein, Horwath & Company LLP to serve as its independent accountants.
12. Delisting
Effective April 10, 2001, the Company's publicly-traded securities were
delisted from The Nasdaq Stock Market due to the inability of the Company
to satisfy the initial listing criteria, including maintenance of a $4.00
bid price for the specified period. In the United States, the Company's
publicly-traded common stock and warrants continue to trade on the OTC
Bulletin Board under the trading symbols TRIP and TRIPW, respectively.
Sale of assets
On June 26, 2001, the Company completed the sale of the assets of its Aero
Design, Inc. subsidiary, which manufactured aircraft batteries, for $3.0
million. After selling expenses, the Company received net cash amounting to
$2.4 million, which it used to pay down existing debt. The Company recorded
a $23,000 gain on sale.
14. New accounting standards
In June 2001, the FASB issued Statement No. 141, Business Combinations, and
Statement No. 142, Goodwill and Other Intangible Assets. Statement 141
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001 as well as all purchase method
business combinations completed after June 30, 2001. Statement 141 also
specifies criteria intangible assets acquired in a purchase method business
combination must meet to be recognized and reported apart from goodwill,
noting that any purchase price allocable to an assembled workforce may not
be accounted for separately. Statement 142 will require that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead tested for impairment at least annually in accordance with the
provisions of Statement 142. Statement 142 will also require that
intangible assets with definite useful lives be amortized over their
respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of.
The Company is required to adopt the provisions of Statement 141
immediately, and to adopt Statement 142 effective January 1, 2002.
Furthermore, any goodwill and any intangible asset determined to have an
indefinite useful life that are acquired in a purchase business combination
completed after June 30, 2001 will not be amortized, but will continue to
be evaluated for impairment in accordance with the appropriate
pre-Statement 142 accounting literature. Goodwill and intangible assets
acquired in business combinations completed before July 1, 2001 will
continue to be amortized prior to the adoption of Statement 142.
Statement 141 will require upon adoption of Statement 142, that the Company
evaluate its existing intangible assets and goodwill that were acquired in
a prior purchase business combination, and to make any necessary
reclassifications in order to conform with the new criteria in Statement
141 for recognition apart from goodwill. Upon adoption of Statement 142,
the Company will be required to reassess the useful lives and residual
values of all intangible assets acquired in purchase business combinations,
and make any necessary amortization period adjustments by the end of the
first interim period after adoption. In addition, to the extent an
intangible asset is identified as having an indefinite useful life, the
Company will be required to test the intangible asset for impairment in
accordance with the provisions of Statement 142 within the first interim
period. Any impairment loss will be measured as of the date of adoption and
recognized as the cumulative effect of a change in accounting principle in
the first interim period.
In connection with the transitional goodwill impairment evaluation,
Statement 142 will require the Company to perform an assessment of whether
there is an indication that goodwill is impaired as of the date of
adoption. To accomplish this the Company must identify its reporting units
and determine the carrying value of each reporting unit by assigning the
assets and liabilities, including the existing goodwill and intangible
assets, to those reporting units as of the date of adoption. The Company
will then have up to six months from the date of adoption to determine the
fair value of each reporting unit and compare it to the reporting unit's
carrying amount. To the extent a reporting unit's carrying amount exceeds
its fair value, an indication exists that the reporting unit's goodwill may
be impaired and the Company must perform the second step of the
transitional impairment test. In the second step, the Company must compare
the implied fair value of the reporting unit's goodwill, determined by
allocating the reporting unit's fair value to all of its assets (recognized
and unrecognized) and liabilities in a manner similar to a purchase price
allocation in accordance with Statement 141, to its carrying amount, both
of which would be measured as of the date of adoption. This second step is
required to be completed as soon as possible, but no later than the end of
the year of adoption. Any transitional impairment loss will be recognized
as the cumulative effect of a change in accounting principle in the
Company's statement of operations.
During the quarter ended June 30, 2001, the Company made a downward
adjustment in the amount of $21,123,000 to the goodwill relating to its
Global Leisure unit. As of the date of adoption of Statement 142, the
Company expects to have unamortized goodwill and identifiable intangible
assets in the amount of $26,428,000, which will be subject to the
transition provisions of Statements 141 and 142. Amortization expense
related to goodwill, including the Global Leisure adjustment, was
$24,477,000 and $26,657,000 for the three and nine-months ended June 30,
2001, respectively. Because of the extensive effort needed to comply with
adopting Statements 141 and 142, it is not practicable to reasonably
estimate the impact of adopting these Statements on the Company's financial
statements at the date of this report, including whether any transitional
impairment losses will be required to be recognized as the cumulative
effect of a change in accounting principle.
In June 2001, the FASB issued Statement No. 143, Accounting for Asset
Retirement Obligations. The Statement, effective for fiscal years beginning
after June 15, 2002, requires the Company to record a liability for asset
retirement obligations in the period in which they are incurred, which
typically could be upon completion of construction or shortly thereafter.
The FASB decided to limit the scope to legal obligations. Transition is by
cumulative catch-up adjustment. Because the measurement of the liability
would follow FASB Concepts Statement No. 7 on present value, the liability
will recorded at fair value, the amount a third-party contractor would
charge to remove the asset (including an element of profit).
The Statement will apply to asset retirement obligations of all companies,
not only those in specific industries. The Company has not yet determined
if the new Statement will have any impact upon its adoption in the fiscal
year beginning October 1,2001.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. This statement addresses financial
accounting and reporting for the impairment and disposal of long-lived
assets. This statement is effective for fiscal years beginning after
December 15, 2001. The Company is currently evaluating the impact the
adoption of this statement will have on its financial position and results
of operations.
15. Subsequent events
(a) During the period from July 1 through October 31, 2001, the
Company continued to borrow on a short-term basis to fund its working
capital requirements, principally secured by liens on the assets and
stock of the Company's indirect subsidiaries, Travelbyus Cruise
Operations, Inc., Cheap Seats. Inc., Travelbyus-IT Incorporated (which
had acquired the Bell Travel Assets) and Travelbyus-GalaxSea (which
had acquired the International Tours assets). Certain of these loans
have been restructured or converted into shares of the Company's
Series D Preferred Stock. See Note 15 (b).
(b) In September 2001, the Company commenced an offer to certain
debtholders and holders of its Series B Preferred Stock, all of whom
were accredited investors, to exchange such debt or Series B Preferred
Stock for shares of a new Series D Preferred Stock. Certain
debtholders declined to accept the exchange and in lieu thereof agreed
to renegotiate the terms of their loan to the Company.
(c) In order to reduce operating costs in the wake of the September
11, 2001 terrorists attacks, the Company effected a restructuring
which resulted in the termination of a significant number of employees
during the month of October 2001. The termination included senior
level management positions, technology support, reservation agents and
administrative support. A primary result of the restructuring was the
elimination of the wholesale product division which represented the
principal source of the Company's losses in recent periods. This
division produced the company's wholesale travel product to such
locations as Hawaii, Mexico and other destinations. In an effort to
minimize the loss and inconvenience to customers of this business
segment, the Company is negotiating with a third party to assume
responsibility for the fulfillment of customer travel arrangements.
The Company is seeking to enter into an additional arrangement with
this entity to provide wholesale travel product to Company and its
travel agency network in the future.
(d) Effective September 1, 2001, the Company entered into an agreement
with seven senior employees of its Prosoft subsidiary, whereby the
employees separated from the Company and formed a new software company
called Primero. No cash was exchanged in the transaction. All of
Prosoft's customer and vendor contracts were assigned to Primero. The
Company granted Primero a non-exclusive license to the ECHO source
code, and will receive royalties on new ECHO sales. The Company
granted to Primero a line of credit of up to $500,000, which bears
interest at 8%.
(e) In September 2001, the Board approved employment continuation
agreements with certain senior management that provides for payments
to such parties in the event of termination upon a change of ownership
of the Company. In addition, the Board approved a collateral
compensation agreement with Bill Kerby pursuant to which the Company
agreed to compensate Mr. Kerby for pledging shares of common stock of
the Company owned personally by Mr. Kerby as security for certain
obligations of the Company.
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
The discussion set forth below supplements the information found in the
unaudited consolidated financial statements and related notes of travelbyus,
Inc. ("travelbyus") and its subsidiaries, (collectively, the "Company").
The Company and its subsidiaries are in the business of providing
travel-related products and services targeted primarily at the leisure customer,
including airline tickets and tour, cruise and group packages.
The companies held shareholder meetings on December 20, 2000 to vote on
the business combination, which was approved. On January 25, 2001, the Company
completed the statutory Arrangement in accordance with Ontario, Canada law
pursuant to which travelbyus.com was acquired by Travelbyus Canada Holdings
Ltd., formerly known as Aviation Group Canada Limited, a Canadian subsidiary of
Aviation Group. In connection with the consummation of the Arrangement, on
January 24, 2001, Aviation Group also changed its name to travelbyus, Inc.,
effected a one-for-five reverse split of its common stock and increased its
authorized number of shares of common stock from 10,000,000 to 250,000,000.
Aviation Group's pre-existing shareholders retained beneficial ownership of
approximately 5% of the combined entity. The accompanying financial statements
reflect the reverse split from the earliest period presented.
As part of the Arrangement, the outstanding common shares of
travelbyus.com were converted into exchangeable shares of travelbyus.com on a
one-for-one basis. Under the terms of the exchangeable shares and related
agreements, every five exchangeable shares are exchangeable, at the holder's
election, into one share of the Company's common stock. Any remaining
exchangeable shares not previously exchanged will automatically be exchanged
into the Company's common stock on January 1, 2003, or earlier upon the
occurrence of certain events. Each share of common stock of the Company that was
outstanding prior to the Arrangement remains outstanding and unchanged by the
Arrangement, except that every five shares now represents one share in
accordance with the reverse split.
The combined companies have accounted for the transaction under the
purchase method of accounting as if travelbyus.com had acquired Aviation Group
and had recapitalized under the capital structure of Aviation Group.
Accordingly, the combined company has recorded the assets and liabilities of
Aviation Group as being acquired by travelbyus.com in the Arrangement.
Under the terms of the Arrangement, Aviation Group was the legal
acquirer of travelbyus.com and travelbyus.com was the accounting acquirer.
Consequently, the historical financial information set forth in this report is
that of the accounting acquirer, travelbyus.com. Current period financial
results presented for the nine-month period ended June 30, 2001 include only the
results of travelbyus.com through January 25, 2001, the date the Arrangement was
effectuated. For the balance of the nine-month period ended June 30, 2001 and
for the entire three-month period ended June 30, 2001, the results of both
constituent companies to the Arrangement are included. The Company's fiscal year
end has been changed to September 30.
The Company has disposed or is currently seeking to dispose of its
assets that are unrelated to its travel businesses, principally those that were
historically a part of Aviation Group. These non-travel related assets,
liabilities and operations are presented as held for sale or discontinued in the
accompanying financial statements at their estimated liquidation value.
The Company operates within three operating segments: Travel,
Technology and Other. The Travel segment provides a broad range of travel
products, targeted primarily at the leisure customer, including airfare, hotel
rooms, cruise packages, and ground packages. Products and services are offered
through the traditional travel agency base, 1-800 call centers and the Internet.
Included in the Travel segment are the operations of the following subsidiaries:
Mr. Cheaps Travel, International Tours Inc., GalaxSea Cruises and Tours, Inc.,
Express Vacations, Cheap Seats, Bell Travel, Global Leisure and Travelbyus
Cruise Operations.
The Technology segment designs and manufactures electronic data storage
systems, develops internet accessible travel reservations systems, custom
programming services, and a distributed website marketing system. Included in
this segment are the operations of Legacy, Epoch, Prosoft and SiteRabbit.com.
20
Included in the Other segment are advertising and associated marketing
operations of International Tours Inc., GalaxSea Cruises and Tours, Inc. and
Travelbyus Cruise Operations.
Recent Events
Since June 30, 2001, the Company has entered into numerous
financing transactions (see Notes 5 and 15(a) to the consolidated financial
statements), has terminated its relationship with American Vacation Resorts,
Inc. (see Note 4 to the consolidated financial statements), and has sought to
restructure its debt and its operations. See Note 15.
Results of Operations
Three Months Ended June 30, 2001 Compared to Three Months Ended June
30,2000
Net Sales for the quarter ended June 30, 2001 were $3,653,000, which
represents an increase of $672,000 from $2,981,000 in the quarter ended June 30,
2000. This increase is due mainly to the net sales added by the acquisition of
Aviation Group effective January 25, 2001 and the acquisition of the technology
companies in the fourth quarter of fiscal 2000. The addition of Aviation Group
and revenue from the agency distribution network increased net sales in the
other revenue category by $701,000 and the addition of the technology companies
increased net sales by $825,000. Revenue for the [Travel segment] declined by
$854,000 as management eliminated unprofitable and redundant operations and
sought to improve efficiencies.
Cost of net sales for the three months ended June 30, 2001 was $992,000
or 27.2% of net sales as compared to $1,169,000 or 39.2% of net sales in the
three months ended June 30, 2000. The cost of net sales decreased both in dollar
amount and as a percentage of net sales as a result of the strategy undertaken
by management following the completion of the Arrangement to improve margins
throughout the Company.
Selling, general and administrative expenses were $7,359,000 for the
three months ended June 30, 2001 as compared to $6,268,000 for the same period
last year. These expenses have increased primarily as a result of a consulting
fee paid to Steven Antebi in the amount of $500,000 during the period. This fee
was paid for by the issuance of 2,200,000 common shares to Mr. Antebi. After
taking into account this consulting fee, selling, general and administrative
expenses have decreased as a result of the strategy undertaken by management
following the completion of the Arrangement to reduce operating costs.
Management intends to continue to implement this strategy during the remainder
of the 2001 fiscal year in order to seek to further reduce operating expenses.
Depreciation and amortization amounted to $3,629,000 in the quarter
ended June 30, 2001 as compared to an expense of $3,121,000 in the quarter ended
June 30, 2000. The increase in expense in the current quarter is due to the
presence of depreciation and amortization expense relating to Aviation Group in
the current quarter.
The Company's operating loss was $8,327,000 for the three months ended
June 30, 2001 compared to an operating loss of $7,577,000 for the three months
ended June 30, 2000. The Company reduced its operating loss in the Travel
segment by $302,000 in the current quarter as a result of improved gross margins
and significant reductions in operating costs as a result of the initiatives
undertaken by management discussed above. The Company's operating loss in the
Technology segment for the quarter ended June 30, 2001 was $693,000 higher than
for comparable prior year period, principally due to costs incurred by the
Company in developing technology for its travel distribution network. The
Company's operating loss in the [Other segment] for the quarter ended June 30,
2001 was $1,702,000 higher than for comparable prior year period, principally
due to amortization of goodwill in the amount of $1,236,000 and other costs
incurred to develop its distribution network to the travel agents.
Interest expense increased by $3,510,000 to $3,718,000 in the three
months ended June 30, 2001 as compared to $208,000 in the three months ended
June 30, 2000. This higher interest expense for the current period is due to an
increase in debt incurred to fund the operating losses of the Company, debt
incurred to fund acquisitions, and higher interest rates associated with the
debt in the three months ended June 30, 2001. Total interest bearing debt
increased from $9,653,000 at June 30, 2000 to $35,980,000 at June 30, 2001.
During the three months ended June 30,2001, the Company adjusted the
valuation of the goodwill on the acquisition of Global Leisure from $38,123,000
to 17,000,000 resulting in a write off of $21,123,000 in the current period. The
adjustment was made to reflect management's current estimate of the value of the
goodwill associated with the assets of Global Leisure acquired by the Company.
The Company had an income tax benefit of $2,000 in the three months
ended June 30, 2001 as compared to an income tax benefit of $286,000 in the
three months ended June 30, 2000. These income tax benefits resulted from
revisions in the estimate of the deferred tax liability of the Company.
The result was that the loss from continuing operations increased by
$18,081,000 to $25,580,000 in the three months ended June 30, 2001 from
$7,499,000 in the corresponding period in the prior year. The increased loss
from continuing operations in the 2001 period is principally attributable to the
write down of the goodwill associated with the purchase of Global Leisure,
higher interest costs and lower income tax benefits, partially offset by a lower
operating loss. The loss from discontinued operations was $91,000 in the current
period. For the corresponding period in 2000, the Company did not have any
discontinued operations.
Nine Months Ended June 30, 2001 Compared to Nine Months Ended June 30,
2000
Net Sales for the nine months ended June 30, 2001 were $9,466,000,
which represents an increase of $1,602,000 from $7,864,000 in the nine months
ended June 30, 2000. This increase is due mainly to the net sales added by the
acquisition of Aviation Group effective January 25, 2001 and the acquisition of
the technology companies in the fourth quarter of fiscal 2000. The addition of
Aviation Group and revenue from the agency distribution network increased net
sales in the other revenue category by $211,000 and the addition of the
technology companies increased net sales by $1,848,000. Revenue for the Travel
segment declined by $306,000 as management eliminated unprofitable and redundant
operations and sought to improve efficiencies.
Cost of net sales for the nine months ended June 30, 2001 was
$2,730,000 or 28.8% of net sales as compared to $3,568,000 or 45.4% of net sales
in the nine months ended June 30, 2000. The cost of net sales decreased both in
dollar amount and as a percentage of net sales as a result of the strategy
undertaken by management following the completion of the Arrangement to improve
margins throughout the Company.
Selling, general and administrative expenses were $21,973,000 for the
nine months ended June 30, 2001 as compared to $13,572,000 for the same period
last year. Since January 2000, the Company has acquired the operations of 20
businesses (including Aviation Group Inc. as part of the Arrangement in January
2001). Consequently, selling general and administrative expenses increased
significantly in the current nine-month period as the results of the acquired
operations were consolidated with the existing operations. Management has,
however, taken steps since the completion of the Arrangement to reduce operating
costs and intends to continue to implement this strategy during the remainder of
the 2001 fiscal year.
Depreciation and amortization expenses were $13,570,000 in the nine
months ended June 30, 2001 as compared to $4,316,000 in the nine months ended
June 30, 2000. This increase in depreciation and amortization expenses was
principally attributable to the amortization of goodwill associated with
acquisitions of various operations in fiscal 2000.
The Company's operating loss increased by $15,215,000 for the nine
months ended June 30, 2001 to $28,807,000 compared to an operating loss of
$13,592,000 for the nine months ended June 30, 2000 as a result of the factors
discussed above.
Interest expense increased by $4,387,000 to $6,057,000 in the nine
months ended June 30, 2001 as compared to $1,670,000 in the nine months ended
June 30, 2000. This higher interest expense for the current period is due to an
increase in debt incurred to fund the operating losses of the Company, debt
incurred to fund acquisitions, and higher interest rates associated with the
debt in the three months ended June 30, 2001. Total interest bearing debt
increased from $9,653,000 at June 30, 2000 to $35,980,000 at June 30, 2001.
During the nine months ended June 30, 2001, the Company recorded an
adjustment in the amount of goodwill associated with the acquisition of Global
Leisure in the amount of $21,123,000. There was no corresponding expense in the
nine months ended June 30, 2000.
The Company had an income tax benefit of $3,196,000 in the nine months
ended June 30, 2001 as compared to an income tax benefit of $286,000 in the nine
months ended June 30, 2000. These income tax benefits resulted from revisions in
the estimate of the deferred tax liability of the Company.
The result was that the loss from continuing operations increased by
$39,995,000 to $54,971,000 in the nine months ended June 30, 2001 as compared to
$14,976,000 in the corresponding period in the prior year. This higher loss from
continuing operations in the 2001 period is principally attributable to the
write down of goodwill, higher interest costs, and lower income tax benefits.
The loss from discontinued operations was $20,000 in the current
period. For the prior corresponding period in 2000, the Company did not have any
discontinued operations, resulting in a net loss before extraordinary item of
$53,715,000 in the nine months ended June 30, 2001 as compared to $14,976,000 in
the nine months ended June 30, 2000. The extraordinary loss from repayment of
debentures was $699,000 in the nine months ended June 30, 2000. There was no
corresponding extraordinary loss for the current nine-month period.
Financial Condition and Liquidity
The Company incurred a net loss before write-off and amortization of
goodwill and depreciation of approximately $23 million during the nine months
ended June 30, 2001, had an accumulated deficit of approximately $218 million
and a working capital deficiency of approximately $40 million at the end of the
period. During the nine-month period, the Company used cash of approximately $19
million to fund operations.
The Company has incurred significant losses associated with the
acquisition and integration of its various travel and technology acquisitions
into a single fully operational business model. The Company has also incurred
significant operating losses associated with its Travel segment, principally
related to the operations of its Global Leisure subsidiary. The Company has
taken steps to reduce the operating costs associated with these operations and
intends to take all other appropriate actions, including the potential
disposition of assets, to seek to eliminate these losses. During the nine-month
period, the Company also made significant investments in technology development
and infrastructure, principally in bringing online its SiteRabbit.com internet
accessible travel reservations system. This system was launched in February
2001.
In May 2001, the Company received a letter of intent from a Midwest
based lending source for a credit facility providing for borrowing availability
of up to $23.0 million based on eligible collateral. The funding is subject to
negotiation of final documentation, sale of the bonds by the prospective lender
that are needed to fund the facility and other customary conditions. The Company
previously anticipated that these conditions would be satisfied and the loan
agreements finalized prior to September 30, 2001. However, the prospective
lender has experienced repeated delays and encountered numerous obstacles as it
has sought to complete its internal arrangements and sell the bonds needed to
fund the facility. No assurance can be given that the facility will ever be
funded. If the facility is funded, the Company intends to use the proceeds to
retire short-term debt and to fund working capital and other obligations.
As part of the restructuring plan commenced in September 2001, the
Company eliminated some defaults by restructuring the loan terms or exchanging
debt for shares of its new Series D Preferred Stock. In addition, as described
in Note 15(c) to the consolidated financial statements, the Company has taken
steps to dramatically reduce operating costs. However, the Company continues to
have debt outstanding which matures at various times from February 15, 2002
through December 31, 2002. The Company presently does not have sufficient funds
to pay these obligations at maturity and, unless its arrangement with the
Midwest-based lending source references above is completed (as to which there is
no present expectation given current economic conditions), management does not
anticipate that long-term financing will be available to the Company to repay
these obligations. Accordingly, the Company expects to examine all possible
alternative courses of action available to it.
The Company has continued to pursue the sale of its non-travel
operating subsidiaries relating to the former Aviation Group aviation service
activities. On June 26, 2001, the Company completed the sale of the assets of
its Aero Design, Inc. and Battery Shop, LLC subsidiaries for $3.0 million. The
Company is actively seeking a buyer for its Aviation Exteriors subsidiary, which
constitutes its sole remaining aviation service unit. No assurance can be given
that the Company will be successful in completing the sales of the remaining
assets in a timely manner and on favorable terms.
Seasonality and Variability of Results
The Company's travel operations experience seasonal variability in
revenues, primarily relating to the heavy summer and year-end leisure travel
seasons. Management believes, however, that the integration of its various
travel and technology companies can allow it to increase revenues above
historical levels in future periods, and that when combined with other company
products, can generate higher gross margins as well.
New Accounting Standards
In June 2001, the FASB issued Statement No. 141, Business Combinations,
and Statement No. 142, Goodwill and Other Intangible Assets. Statement 141
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001 as well as all purchase method
business combinations completed after June 30, 2001. Statement 141 also
specifies criteria intangible assets acquired in a purchase method business
combination must meet to be recognized and reported apart from goodwill, noting
that any purchase price allocable to an assembled workforce may not be accounted
for separately. Statement 142 will require that goodwill and intangible assets
with indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of Statement 142.
Statement 142 will also require that intangible assets with definite useful
lives be amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in accordance with SFAS
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of.
The Company is required to adopt the provisions of Statement 141
immediately, and to adopt Statement 142 effective January 1, 2002. Furthermore,
any goodwill and any intangible asset determined to have an indefinite useful
life that are acquired in a purchase business combination completed after June
30, 2001 will not be amortized, but will continue to be evaluated for impairment
in accordance with the appropriate pre-Statement 142 accounting literature.
Goodwill and intangible assets acquired in business combinations completed
before July 1, 2001 will continue to be amortized prior to the adoption of
Statement 142.
Statement 141 will require upon adoption of Statement 142, that the
Company evaluate its existing intangible assets and goodwill that were acquired
in a prior purchase business combination, and to make any necessary
reclassifications in order to conform with the new criteria in Statement 141 for
recognition apart from goodwill. Upon adoption of Statement 142, the Company
will be required to reassess the useful lives and residual values of all
intangible assets acquired in purchase business combinations, and make any
necessary amortization period adjustments by the end of the first interim period
after adoption. In addition, to the extent an intangible asset is identified as
having an indefinite useful life, the Company will be required to test the
intangible asset for impairment in accordance with the provisions of Statement
142 within the first interim period. Any impairment loss will be measured as of
the date of adoption and recognized as the cumulative effect of a change in
accounting principle in the first interim period.
In connection with the transitional goodwill impairment evaluation,
Statement 142 will require the Company to perform an assessment of whether there
is an indication that goodwill is impaired as of the date of adoption. To
accomplish this the Company must identify its reporting units and determine the
carrying value of each reporting unit by assigning the assets and liabilities,
including the existing goodwill and intangible assets, to those reporting units
as of the date of adoption. The Company will then have up to six months from the
date of adoption to determine the fair value of each reporting unit and compare
it to the reporting unit's carrying amount. To the extent a reporting unit's
carrying amount exceeds its fair value, an indication exists that the reporting
unit's goodwill may be impaired and the Company must perform the second step of
the transitional impairment test. In the second step, the Company must compare
the implied fair value of the reporting unit's goodwill, determined by
allocating the reporting unit's fair value to all of its assets (recognized and
unrecognized) and liabilities in a manner similar to a purchase price allocation
in accordance with Statement 141, to its carrying amount, both of which would be
measured as of the date of adoption. This second step is required to be
completed as soon as possible, but no later than the end of the year of
adoption. Any transitional impairment loss will be recognized as the cumulative
effect of a change in accounting principle in the Company's statement of
operations.
During the quarter ended June 30, 2001, the Company made a downward
adjustment in the amount of $21,123,000 to the goodwill relating to its Global
Leisure unit. As of the date of adoption of Statement 142, the Company expects
to have unamortized goodwill and identifiable intangible assets in the amount of
$26,428,000, which will be subject to the transition provisions of Statements
141 and 142. Amortization expense related to goodwill, including the Global
Leisure adjustment, was $24,477,000 and $26,657,000 for the three and
nine-months ended June 30, 2001, respectively. Because of the extensive effort
needed to comply with adopting Statements 141 and 142, it is not practicable to
reasonably estimate the impact of adopting these Statements on the Company's
financial statements at the date of this report, including whether any
transitional impairment losses will be required to be recognized as the
cumulative effect of a change in accounting principle.
In June 2001, the FASB issued Statement No. 143, Accounting for Asset
Retirement Obligations. The Statement, effective for fiscal years beginning
after June 15, 2002, requires the Company to record a liability for asset
retirement obligations in the period in which they are incurred, which typically
could be upon completion of construction or shortly thereafter. The FASB decided
to limit the scope to legal obligations. Transition is by cumulative catch-up
adjustment. Because the measurement of the liability would follow FASB Concepts
Statement No. 7 on present value, the liability will recorded at fair value, the
amount a third-party contractor would charge to remove the asset (including an
element of profit).
The Statement will apply to asset retirement obligations of all
companies, not only those in specific industries. The Company has not yet
determined if the new Statement will have any impact upon its adoption in the
fiscal year beginning October 1,2001.
In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. This statement addresses financial
accounting and reporting for the impairment and disposal of long-lived assets.
This statement is effective for fiscal years beginning after December 15, 2001.
The Company is currently evaluating the impact the adoption of this statement
will have on its financial position and results of operations.
Forward Looking Statements
Various statements made in this Report concerning the manner in which
the Company intends to conduct its future operations, management's expectations
or beliefs as to various proposed transactions and potential trends that may
impact future results of operations are forward looking statements. The Company
may be unable to realize its plans and objectives due to various important
factors, including, but not limited to the following factors: The travel
industry in which the Company competes is highly competitive. Two of the
Company's principal competitors in the online travel agency sector,
Travelocity.com and Expedia.com, have substantially greater resources and more
favorable operating results than the Company. Some economists have advised that
the United States has entered or is expected to enter a recessionary period.
Unfavorable general economic conditions significantly affect discretionary
travel and leisure activities on which the Company's business is substantially
dependent and make capital raising activities more difficult and costly. The
terrorist attack on the United States on September 11, 2001 is also expected to
have an unfavorable impact on the level of discretionary travel and leisure
activities in the United States. The extent and duration of such impact cannot
now be determined. The Company has continued to incur substantial losses in its
operations, principally in its Travel segment, and management has taken steps to
dramatically reduce operating costs, which could adversely impact the Company's
ability to conduct operations. As a result of its significant operating losses,
the Company has found it necessary to regularly seek additional debt financing.
The Company has recently incurred significant short-term debt, often at high
interest rates. The Company has defaulted on a significant portion of this debt,
much of which has been restructured or extended. No assurance can be given that
such short-term financing will continue to be available to the Company on any
terms or that the Company will be able to obtain long-term financing to retire
its existing short-term and other debt when due. In addition, the significant
number of shares of common stock issuable upon exercise of the Company's
outstanding options and warrants and upon the conversion of the Company's
outstanding preferred stock and convertible notes, in many instances at low
exercise or conversion prices, the Company's present inability to become listed
on a national securities exchange or Nasdaq, and the low trading volume for the
Company's shares on the over-the-counter markets in which the shares trade, may
impair the Company's ability to raise needed capital by depressing the price at
which the Company can sell its common stock.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
In June, 2001, Michael H. Rosenblum ("Rosenblum") has filed suit
against the Company in the Circuit Court of Cook County, Illinois in a case
captioned Michael H. Rosenblum vs. Travelbyus.com, Ltd., et al., No. 01 L
0077689, claiming unspecified damages and costs for the Company's alleged breach
of the terms of the sale agreement pursuant to which the Company acquired all of
the capital stock of Muffin Communications, Inc ("Muffin"). Under the terms of
the agreement, the Company had agreed to a share "top off" provision pursuant to
which it would issue additional shares of the Company's common stock in the
event the fair market value of the shares issue at closing was not equal to a
certain amount in December 2000. Prior to the date for issuance of this
additional consideration, the Company concluded that the assets of Muffin were
not as represented and therefore declined to deliver the additional shares to
Rosenblum. The Company has filed to remove the suit to Federal court and intends
to file a counterclaim seeking recovery of the consideration previously paid to
Rosenblum. The Company intends to defend against the plaintiff's claims and
prosecute its own counterclaims vigorously.
In 2001, Travel Magazine 2000 Inc. filed suit against the Company in
the Superior Court of Justice of Ontario, Canada in a case captioned Travel
Magazine 2000 Inc. vs. Travelbyus.com, Ltd, et al., Court File No.
01-CV-210137CM, claiming unspecified damages and costs for the Company's alleged
breach of the terms of an agreement entered into by the Company with the
plaintiff in 1999. Under the terms of this agreement, the Company agreed to
purchase up to 120 travel shows to be produced by plaintiffs, subject to the
Company's right to cancel production of 80 shows. The Company cancelled
production of 80 shows by so advising plaintiff, both in writing and orally, in
a timely manner. Plaintiff alleges that the Company failed to follow requisite
formalities in canceling production of these shows, which allegation the Company
disputes. The Company intends to vigorously defend this case.
In June, 2001, Apollo Galileo USA Partnership filed suit against the
Company in the United States District Court for the Northern District of
Illinois Eastern Division in a case captioned Apollo Galileo USA Partnership vs.
Travelbyus, Inc. No. 01 C 2781, claiming unspecified damages and costs for the
alleged breach of the terms of an agreement between plaintiff and Global
Leisure, a wholly owned subsidiary of the Company, pursuant to which Global
Leisure subscribed to plaintiff's computerized reservation system. In its
complaint, as amended, plaintiff alleges that the Company caused Global Leisure
to breach the agreement by reason of removing assets from Global Leisure which
allegedly rendered it unable to perform its obligations to plaintiffs. In
addition, plaintiff alleges that the Company is responsible for Global Leisure's
obligations as a successor entity to Global Leisure. The Company disputes these
allegations and denies any responsibility for the obligations or liabilities of
Global Leisure. The plaintiff has filed a motion to add Global Leisure as a
party to this litigation. Prior to initiating this suit, plaintiff made demand
on the Company to pay to it $4 million as a result of the damages it is alleged
to have suffered. The Company intends to vigorously defend this case.
26
In 2001, World Business Brokers, Inc. filed suit against the Company in
the Eleventh Judicial Circuit in and for Miami-Dade County, Florida in a case
captioned World Business Brokers, Inc vs. Aviation Group, Inc. (now known as
travelbyus, Inc.), Case No. 00-25918 CA 24, claiming unspecified damages and
costs for the Company's alleged failure to pay brokerage commissions to
plaintiff for its services in connection with the Company's merger with
travelbyus.com, Ltd. The Company maintains that the brokerage agreement had
expired prior to the consummation of the transaction and intends to vigorously
defend this case.
In July, 2001, a former employee of Cheap Seats, Inc. ("Cheap Seats"),
a wholly owned subsidiary of the Company, filed suit against Cheap Seats, the
Company and three individuals in California state court claiming unspecified
damages and costs for alleged sexual harassment. Cheap Seats intends to
vigorously defend this case.
In 2001, RSC (Rental Service Corporation) dba Prime Equipment filed
suit against Travelbyus.com, Inc. ("TCI") and Aviation Exteriors Portland, Inc.
("AEP"), subsidiaries of the Company, in Circuit Court of the State of Oregon
for the County of Multnomah in a case captioned RSC (Rental Service Corporation)
dba Prime Equipment vs. Aviation Exteriors Portland, Inc., et al., No.
0104-04460, claiming damages and costs for AEP's failure to pay an Amended and
Restated Exchangeable Promissory Note in the amount of $263,052 and TCI's
failure to honor a guaranty of this note. The note evidenced past due payables
of AEP. The Company has initiated settlement discussions with the plaintiff.
In 2001, John Fenyes, a former employee of the Company's
travelbyusUSA.com, Inc. subsidiary ("TBU-USA"), initiated an arbitration action
against TBU-USA in Reno, Nevada claiming entitlement to approximately $200,000
in compensation under the terms of his employment agreement with TBU-USA
following the Company's diminution of his responsibly and his subsequent
resignation. In September 2001, the arbitrator ruled in favor of Mr. Fenyes and
awarded damages in the amount of approximately $69,000. TBU-USA is in
negotiations with Mr. Fenyes with regard to a compromise settlement of such
award. interest in the predecessor of TBU-USA, and to vigorously defend against
his claims in the arbitration.
In August, 2001, JoAnn Smith, a former employee of the Company's
TBU-USA subsidiary, has advised that she intends to initiate an arbitration
action against TBU-USA in Reno, Nevada claiming entitlement to an unspecified
amount of compensation based upon TBU-USA's alleged breach of its obligations to
her pursuant to the terms of her employment agreement. The Company does not
believe it has breached its agreement and intends to vigorously defend this
case.
The Company is a party to routine contract and employment-related
litigation matters in the ordinary course of its business. No such pending
matters, individually or in the aggregate, if adversely determined, are believed
by management to be material to the business or financial condition of the
Company. The Company maintains general liability insurance, property insurance,
automobile insurance, employee benefit liability insurance, fidelity insurance,
errors and omissions insurance and directors' and officers' liability insurance.
The Company is generally self-insured with respect to workers' compensation, but
maintains umbrella workers' compensation coverage to limit its maximum exposure
to such claims.
Item 2. Changes in Securities and Use of Proceeds.
On January 25, 2001, the Company completed the statutory Arrangement in
accordance with Ontario, Canada law, pursuant to which travelbyus.com was
acquired by Travelbyus Canada Holdings Ltd., formerly known as Aviation Group
Canada Limited, a Canadian subsidiary of Aviation Group. In connection with the
consummation of the Arrangement, on January 24, 2001, Aviation Group also
changed its name to travelbyus, Inc., effected a one-for-five reverse split of
its common stock and increased its authorized number of shares of common stock
from 10,000,000 to 250,000,000. As a result, every five shares of common stock
that were outstanding were combined into one new share of common stock. No
change in the $.01 par value per share resulted from the reverse split. Aviation
Group's pre-existing shareholders retained beneficial ownership of approximately
5% of the combined entity.
As part of the Arrangement, the outstanding common shares of
travelbyus.com were converted into exchangeable shares of travelbyus.com on a
one-for-one basis. Under the terms of the exchangeable shares and related
agreements, every five exchangeable shares are exchangeable, at the holder's
election, into one share of the Company's common stock. Any remaining
exchangeable shares not previously exchanged will automatically be exchanged
into the Company's common stock on January 1, 2003, or earlier upon the
occurrence of certain events. Each share of common stock of the Company that was
outstanding prior to the Arrangement remains outstanding and unchanged by the
Arrangement, except that every five shares now represents one share in
accordance with the reverse split.
27
Pursuant to the Company's agreements with travelbyus.com and Montreal
Trust Company of Canada, as trustee for the exchangeable shareholders, holders
of exchangeable shares are entitled to receive, subject to applicable law,
dividends equivalent to all dividends paid on the Company's common stock and are
also entitled to participate in any liquidation of the Company through an
automatic exchange right. The Company has issued a special voting share to the
trustee for the exchangeable shareholders. The special voting share has a number
of votes equal to the number of outstanding exchangeable shares divided by five.
These votes may be cast at any meeting at which the Company's shareholders are
entitled to vote. An exchangeable shareholder may instruct the trustee how to
vote the special voting share with respect to the exchangeable shares held by
that holder.
Set forth below is a description of various unregistered securities
issued by the Company since January 1, 2001. In each instance, these securities
were issued by the Company in reliance upon the exemption afforded by Section
4(2) of the Securities Act of 1933 and/or the rules and regulations promulgated
thereunder. These securities were issued in privately negotiated transactions to
persons reasonably believed by the Company to be "accredited investors" (as such
term is defined under Rule 501(a) of Regulation D) and/or to be sophisticated
and knowledgeable investors possessing sufficient information about the Company.
In April 2001, the Company sold a total of 425,000 shares of its common
stock to an investor in a private placement at a per share price of $0.38. The
investor paid an aggregate purchase price of $161,500 for these shares.
In April and May 2001, the Company issued convertible notes due
December 31, 2001 in the original principal amount of $8.3 million. These notes
are convertible into common stock of the Company at a conversion price of $2.00
per share.
From January 2001 to May 2001, the Company issued promissory notes to
various lenders. In certain instances, as additional consideration to the
lenders for agreeing to make or extend the maturity dates of loans to the
Company, the Company has issued warrants to purchase shares of its common stock
to such lenders for terms ranging from three to five years from the issuance or
registration of the underlying shares. These warrants are exercisable at per
share prices of $0.50 (2,225,000 shares); $0.625 (600,000 shares); $1.00
(450,000 shares); and $2.00 (340,000 shares). One lender exercised its warrants
to purchase 200,000 shares of the Company's common stock, at a price of $1.00
per share, in March 2001. The Company has also issued warrants to lenders to
purchase 2,170,090 shares of common stock at an exercise price of $1.00 per
share, which are exercisable only upon conversion of the Company's convertible
bridge notes under which these warrants were issued. These warrants are
exercisable for a term ending 60 days after the registration of the underlying
shares.
In exchange for various services, primarily marketing, investor
relations, investment banking, financial and e-commerce consulting services,
from January 2001 to May 2001, the Company issued warrants to vendors to
purchase a total of 3,220,000 shares of common stock at per share exercise
prices of $0.50 (2,450,000 shares); $0.625 (250,000 shares); $2.00 (20,000
shares); $4.00 (150,000 shares); $5.00 (125,000 shares); $6.00 (125,000 shares);
and $7.00 (100,000 shares). The term of these warrants ranges from two to three
years after their issuance.
28
In April 2001, the Company issued warrants to purchase 600,000 shares
of its common stock to former principals of Epoch Technology, Inc., as an
agreed-upon adjustment of the price paid by the Company in May 2000 for the
interests of the principals of Epoch Technology. These warrants are exercisable
at $0.75 per share and expire three years after their issuance.
The Company has agreed to issue approximately 4,000,000 shares of its
common stock to the holders of the debentures as consideration in connection
with the modification of the terms of the debentures.
In connection with the restructuring commenced in September 2001, the
holders of debt and the Company's Series B Preferred Stock have agreed to
exchange such obligations for shares of Series D Preferred Stock with an issue
price fixed at $1,000 per share. The Series D Preferred Stock is convertible
into common stock at an exercise price of $0.50 per share.
On September 10, 2001, the Board of Directors of the Company approved
employee stock options agreements with certain senior management and Board
members that granted such parties the right to acquire up to approximately 10.5%
or the outstanding shares of common stock of the Company. The options vest over
a three year period.
Item 3. Defaults Upon Senior Securities.
Prior to the restructuring referenced in Note 15(a) to the consolidated
financial statements, the Company was in default on substantially all of its
obligations for borrowed money. See Notes 5 and 15 to the consolidated financial
statements.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable
Item 5. Other Information.
In May 2001, the Company received a commitment from a Midwest based
lending source for a credit facility providing for borrowing availability of up
to $23.0 million based on eligible collateral. The commitment is subject to
negotiation of final documentation, sale of the bonds by the prospective lender
that are needed to fund the facility and other customary conditions. The Company
previously anticipated that these conditions would be satisfied and the loan
agreements finalized prior to September 30, 2001. However, the prospective
lender has experienced repeated delays and encountered numerous obstacles as it
has sought to complete its internal arrangements and sell the bonds needed to
fund the facility. No assurance can be given that the facility will ever be
funded. If the facility is funded, the Company intends to use the proceeds to
retire short-term debt and to fund working capital and other obligations.
See also Note 15 of the Company's consolidated financial statements for
a description of certain other recent transactions.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
None.
(b) Reports on Form 8-K.
Since April 1, 2001, the Company has filed the following current
reports on Form 8-K:
29
On April 13, 2001, the Company filed an amended current report on Form
8-K/A (which amended the February 8, 2001 current report) to include the
financial statements of travelbyus.com for years ended September 30, 2000 and
1999 and the three months ended December 31, 2000 and 1999, and the pro forma
financial statements of the combined company for the year ended September 30,
2000 and the three months ended December 31, 2000.
On April 23, 2001, the Company filed a current report on Form 8-K to
report that PricewaterhouseCoopers LLP had resigned as the Company's independent
accountants.
On May 2, 2001, the Company filed a current report on Form 8-K to
report the Company's acquisition of an interest in AVR, which report was amended
by a current report on Form 8-K/A filed on July 10, 2001 that described the
termination of the Company's relationship with AVR. See Note 4 to the
consolidated financial statements.
On August 16, 2001, the Company filed a current report on Form 8-K to
report that it had appointed Grobstein, Horwath & Company, LLP, Sherman Oaks,
California, to serve as its independent auditors.
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.
TRAVELBYUS, INC.
By: /s/ William Kerby
---------------------------
William Kerby
Chief Executive Officer
By: /s/ Thomas Ryman
--------------------------
Thomas Ryman
Sr. Vice President - Finance
(principal financial and accounting
officer)
Date: November 2, 2001