UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2007
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ______________ to______________
Commission file number: 0-32137
Online Vacation Center Holdings Corp.
-------------------------------------
(Exact name of registrant as specified in its charter)
Florida 65-0701352
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State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization
1801 N.W. 66th Avenue, Suite 102, Plantation, Florida 33313
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(Address of principal executive offices) (Zip Code)
(954) 377-6400
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Registrant's telephone number including area code
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such report(s), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the Registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act): Yes [ ] No [X]
APPLICABLE ONLY TO CORPORATE ISSUERS
As of May 1, 2007, there were 18,492,977 shares of Common Stock, par value,
$0.0001 per share outstanding.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
INDEX
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PAGE
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Part I. Financial Information
-------- ---------------------
Item 1 Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operation 14
Item 3 Controls and Procedures 19
Part II Other Information
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Item 1 Legal Proceedings 20
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 20
Item 3 Default upon Senior Notes 21
Item 4 Submission of Matters to a Vote of Securities Holders 21
Item 5 Other Information 21
Item 6 Exhibits 22
Exhibit 31.1 - Certification
Exhibit 31.2 - Certification
Exhibit 32.1 - Certification
Exhibit 32.2 - Certification
2
ONLINE VACATION CENTER HOLDINGS CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2007 2006
----------- ------------
(Unaudited) (Audited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,054,104 $ 2,658,885
Accounts receivable, net 754,930 1,043,955
Prepaid expenses and other current assets 507,062 370,072
Deferred tax asset, net 209,536 248,455
----------- -----------
Total Current Assets 3,525,632 4,321,367
Restricted cash 336,135 336,135
Property and equipment, net 97,336 92,215
Deferred tax asset, net -- 98,183
Intangible assets, net 1,679,589 1,067,849
Goodwill 2,913,870 1,942,495
----------- -----------
Total Assets $ 8,552,562 $ 7,858,244
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 1,471,292 $ 1,339,574
Deferred revenue, net 752,505 805,134
Customer deposits 1,514,003 1,470,178
Notes payable- current portion 220,292 125,000
----------- -----------
Total Current Liabilities 3,958,092 3,739,886
Notes payable 495,118 375,000
Deferred income taxes 34,790 --
----------- -----------
Total Liabilities 4,488,000 4,114,886
----------- -----------
STOCKHOLDERS' EQUITY
Preferred stock, 1,000,000 shares authorized at
$.0001 par value; 0 shares issued and outstanding -- --
Common stock, 80,000,000 shares authorized at
$.0001 par value; 18,492,977 and 18,256,777 shares
issued and outstanding 1,849 1,826
Additional paid-in capital 5,487,429 5,099,059
Accumulated deficit (1,424,716) (1,357,527)
----------- -----------
Total Stockholders' Equity 4,064,562 3,743,358
----------- -----------
Total Liabilities & Stockholders' Equity $ 8,552,562 $ 7,858,244
=========== ===========
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
3
ONLINE VACATION CENTER HOLDINGS CORP
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended March 31,
2007 2006
------------ ------------
(Unaudited) (Unaudited)
NET REVENUES $ 2,677,753 $ 2,022,901
OPERATING EXPENSES:
Selling and marketing 1,300,395 398,565
General and administrative 1,390,659 1,164,310
Depreciation and amortization 84,015 21,656
------------ ------------
INCOME (LOSS) FROM OPERATIONS (97,316) 438,370
Interest income (expense), net 5,480 (40,036)
------------ ------------
Income (loss) before provision (benefit) for income taxes (91,836) 398,334
Provision / (benefit) for income taxes (24,647) 177,926
------------ ------------
NET (LOSS) INCOME $ (67,189) $ 220,408
============ ============
Weighted average shares outstanding - Basic 18,456,366 15,550,685
============ ============
EARNINGS PER SHARE - Basic $ -- $ 0.01
============ ============
Weighted average shares outstanding - Diluted 19,272,670 15,791,056
============ ============
EARNINGS PER SHARE - Diluted $ -- $ 0.01
============ ============
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
4
ONLINE VACATION CENTER HOLDINGS CORP
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Three Months Ended
-----------------------------
March 31, March 31,
2007 2006
------------ ------------
Cash flows from operating activities:
Net income (loss) $ (67,189) $ 220,408
Adjustments to reconcile to net cash inflow from operating activities:
Depreciation and amortization 84,015 21,656
Stock based compensation expense 62,080 48,405
Imputed interest expense 4,464 --
Deferred income tax provision (24,647) 155,421
Decrease in accounts receivable 289,025 138,896
(Increase) in prepaid and other current assets (189,934) (219,617)
Increase in accounts payable and accrued expenses 131,718 253,561
(Decrease) in deferred revenue (52,629) (38,486)
Increase/(Decrease) in customer deposits 43,825 (318,312)
----------- -----------
Net cash provided from operating activities 280,728 261,932
----------- -----------
Cash flows from investing activites:
Capital expenditures (27,375) (496)
Cash paid for acqusitions in excess of cash received (858,133) --
----------- -----------
Cash used in investing activities (885,509) (496)
----------- -----------
Increase in cash during the period (604,781) 261,436
Cash at the beginning of the period 2,658,885 2,213,182
----------- -----------
Cash at the end of the period $ 2,054,104 $ 2,474,618
=========== ===========
Supplemental information:
Cash paid for interest $ 1,534 $ 48,658
=========== ===========
Cash paid for taxes $ -- $ 4,100
=========== ===========
Common stock issued in conjunction with acquisitions $ 337,500 $ --
=========== ===========
Net debt issued in conjunction with acquisitions $ 210,946 $ --
=========== ===========
Conversion of subordinated debt into common stock $ -- $ 3,000,000
=========== ===========
Reduction in fair value of conversion feature of debt $ 11,187 $ --
=========== ===========
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
5
ONLINE VACATION CENTER HOLDINGS CORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of Online
Vacation Center Holdings Corp., (the "Company"), and the notes thereto have been
prepared in accordance with the instructions for Form 10-QSB and Item 310(b) of
Regulation S-B of the Securities and Exchange Commission, or SEC. The year end
condensed consolidated balance sheet data was derived from audited financial
statements, but does not include all disclosures required by accounting
principles generally accepted in the United States of America. These unaudited
condensed consolidated financial statements do not include all of the
information and disclosures required by accounting principles generally accepted
in the United States of America. However, such information reflects all
adjustments (consisting of normal recurring adjustments) that are, in the
opinion of management, necessary for a fair statement of results for the interim
periods presented.
The results of operations for the three months ended March 31, 2007 are not
necessarily indicative of annual results. The Company manages its business as
one reportable segment.
The unaudited condensed consolidated financial statements included herein should
be read in conjunction with the audited consolidated financial statements and
the notes thereto that are included in the Company's Annual Report on Form
10-KSB for the year ended December 31, 2006 that was filed with the SEC on March
21, 2007.
Use of Estimates
----------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. For the Company, key estimates include allowance for
doubtful accounts, the fair value of goodwill and intangible assets, asset lives
used in computing depreciation and amortization, including amortization of
intangible assets, and accounting for income taxes, contingencies and
litigation. While the Company believes that such estimates are fair when
considered in conjunction with the condensed consolidated financial position and
results of operations taken as a whole, actual results could differ from those
estimates and such differences may be material to the financial statements.
2. ACQUISITIONS
On January 3, 2007, pursuant to the terms of an Acquisition Agreement, Online
Vacation Center Holdings Corp. purchased and acquired all of the issued and
outstanding ownership interests of La Tours and Cruises, Inc., a Houston, Texas
travel agency, operating as West University Travel, for $550,000, subject to
6
ONLINE VACATION CENTER HOLDINGS CORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
adjustment as defined by the Acquisition Agreement, $250,000 in cash payable
upon closing and $300,000, payable in $100,000 annual installments, subject to
adjustment as defined by the Acquisition Agreement, commencing on January 2,
2008. Additionally, the owners of La Tours and Cruises, Inc. received 50,000
restricted shares of the Company's common stock which are subject to a lock-up
agreement. The series of three annual installments of $100,000 has been
discounted, using the Company's estimated incremental borrowing rate of 6.5% and
the aggregate related imputed interest of $31,646 as of March 31, 2007 has been
offset against the face value of the debt and a corresponding reduction of
purchase price consideration.
On January 5, 2007, pursuant to the terms of an Acquisition Agreement, Online
Vacation Center Holdings Corp. purchased and acquired all of the issued and
outstanding ownership interests of Dunhill Vacations, Inc., a Fort Lauderdale,
Florida, publisher of a leading vacation values newsletter, Dunhill Vacation
News, for $250,000, in cash payable upon closing and 50,000 restricted shares of
the Company's common stock.
On January 19, 2007, pursuant to the terms of an Acquisition Agreement, Online
Vacation Center Holdings Corp. purchased certain assets of SmartTraveler.com,
Inc., a Royal Palm Beach, Florida, home-based travel seller, for $125,000, in
cash payable upon closing and 125,000 restricted shares of the Company's common
stock which are subject to a lock-up agreement.
The cost of these acquisitions, net of cash acquired, was $858,133. The
consideration has been allocated to acquired working capital and other accounts.
A third-party company was hired to prepare a valuation to assist management of
the Company in its allocation of the purchase price, primarily through the
determination of the fair value and remaining useful lives of La Tours, Dunhill
and SmartTraveler intangible assets. The aggregate cost related to these
intangible assets is $673,500 and have been capitalized and are being amortized
over their expected useful life, ranging from 5 to 10 years. Amortization
expense for the three months ended March 31, 2007 and 2006 was $61,761 and $945,
respectively.
The remaining purchase price of $982,563 has been initially allocated to
goodwill. Our assessment of the value of assets and liabilities acquired are in
the process of being finalized. Accordingly, the amount initially allocated to
goodwill and certain other identifiable intangible assets may change as the
integration and valuation processes are completed. One of the acquisitions
includes provisions that may result in payments to the former owners based on
certain measures of future profitability that may impact goodwill in future
periods.
The operating results of these above acquisitions are included in the
accompanying condensed consolidated financial statements from their respective
acquisition dates.
7
ONLINE VACATION CENTER HOLDINGS CORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In September 2006, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 157, "Fair Value
Measurements" which defines fair value, establishes a measurement framework and
expands disclosure requirements ("SFAS 157"). SFAS 157 applies to assets and
liabilities that are required to be recorded at fair value pursuant to other
accounting standards. SFAS 157 is effective at the beginning of fiscal 2009 and
is not expected to have a material effect on the Company's consolidated results
of operations, financial position, or cash flows.
In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans -- an Amendment of FASB
Statements No. 87, 88, 106 and 132(R)." This standard requires the recognition
of the funded status of defined benefit pension and other postretirement benefit
plans as an asset or liability in the year in which they occur. Furthermore, it
requires changes in the funded status of these plans to be recognized through
"accumulated other comprehensive income," as a separate component of
stockholders' equity, and provides for additional annual disclosure. SFAS No.
158 is effective for fiscal years ending after December 15, 2008 and is not
expected to have a material effect on the Company's consolidated results of
operations, financial position, or cash flows.
In February 2007, the FASB issued Statement No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities" ("SFAS 159"). This statement, which
is expected to expand fair value measurement, permits entities to choose to
measure many financial instruments and certain other items at fair value. SFAS
159 will be effective for us at the beginning of fiscal 2009. The Company is
currently evaluating the impact of SFAS 159.
In September 2006, the SEC staff issued Staff Accounting Bulletin No. 108,
"Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements" ("SAB 108"). SAB 108
requires the combined use of a balance sheet approach and an income statement
approach in evaluating whether either approach results in an error that is
material in light of relevant quantitative and qualitative factors. The Company
must begin to apply the provisions of SAB 108 no later than its fiscal 2007
annual financial statements. The Company is currently evaluating the impact of
SAB 108.
8
ONLINE VACATION CENTER HOLDINGS CORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. CRITICAL ACCOUNTING POLICIES
Revenue Recognition
The Company recognizes revenue in accordance with Staff Accounting Bulletin
(SAB) No. 104 "Revenue Recognition in Financial Statements", which states that
revenue is realized or realizable and earned when all of the following criteria
are met: persuasive evidence of an arrangement exists, services have been
rendered, the seller's price to the buyer is fixed or determinable, and
collectibility is reasonably assured. Vacation travel sales transactions are
billed to customers at the time of booking, however commission revenue is not
recognized in the accompanying consolidated financial statements until the
customers' travel occurs. Advertising revenue is recognized upon distribution of
the publication.
Emerging Issues Task Force (EITF) Issue No. 99-19, "Reporting Revenue Gross as a
Principal versus Net as an Agent", discusses the weighing of the relevant
qualitative factors regarding the Company's status as a primary obligor and the
extent of their pricing latitude. Based upon the Company's evaluation of
vacation travel sales transactions and in accordance with the various indicators
identified in EITF Issue No. 99-19, the Company's vacation travel suppliers
assume the majority of the business risks such as providing the service and the
risk of unsold travel packages. As such, all vacation travel sales transactions
are to be recorded at the net amount, which is the amount charged to the
customer less the amount to be paid to the supplier. The method of net revenue
presentation does not impact operating profit, net income, earnings per share or
cash flows.
The Corporation adopted the provisions of FASB Interpretation ("FIN") No. 48,
"Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement
109," effective January 1, 2007. FIN 48 prescribes a recognition threshold and a
measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. Benefits from tax
positions should be recognized in the financial statements only when it is more
likely than not that the tax position will be sustained upon examination by the
appropriate taxing authority that would have full knowledge of all relevant
information. A tax position that meets the more-likely-than-not recognition
threshold is measured at the largest amount of benefit that is greater than
fifty percent likely of being realized upon ultimate settlement. Tax positions
that previously failed to meet the more-likely-than-not recognition threshold
should be recognized in the first subsequent financial reporting period in which
9
ONLINE VACATION CENTER HOLDINGS CORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
that threshold is met. Previously recognized tax positions that no longer meet
the more-likely-than-not recognition threshold should be derecognized in the
first subsequent financial reporting period in which that threshold is no longer
met. FIN 48 also provides guidance on the accounting for and disclosure of
unrecognized tax benefits, interest and penalties. Adoption of FIN 48 did not
have a significant impact on the Company's financial statements.
The Company files income tax returns in the U.S. federal jurisdiction and
various states. The Company has not been subject to U.S. federal income tax
examinations by tax authorities nor state authorities since its inception in
2000.
5. EARNINGS PER SHARE
The information related to basic and diluted earnings per share is as follows:
Quarter Ended March 31,
----------------------------
2007 2006
------------ ------------
Numerator:
Net earnings (loss) $ (67,189) $ 220,408
Effect of dilutive convertible debt 3,823 --
------------ ------------
$ (63,336) $ 220,408
============ ============
Denominator:
Weighted average number of shares outstanding - basic 18,456,366 15,550,685
Effect of dilutive stock options and convertible debt 816,304 240,371
------------ ------------
Diluted 19,272,670 15,791,056
============ ============
EPS:
Basic $ 0.00 $ 0.01
============ ============
Diluted $ 0.00 $ 0.01
============ ============
6. DEBT
The debt components consist of the following:
March 31, 2007 December 31,2006
-------------- ----------------
Convertible Note - Thoroughbred Travel, LLC $125,000 $125,000
Convertible Note - La Fern, Inc. 322,056 375,000
Cash payable-La Tours and Cruises, Inc.-net of
imputed interest of $31,646 268,354 --
-------- --------
715,410 500,000
Less: Current portion 220,292 125,000
-------- --------
$495,118 $375,000
======== ========
10
ONLINE VACATION CENTER HOLDINGS CORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In conjunction with its acquisition of Thoroughbred Travel, LLC ("Thoroughbred")
the Company issued a Convertible Note to the former owner of Thoroughbred in the
amount of $125,000 bearing interest at 5% per annum with accrued interest and
principal payable on September 25, 2007; the Note may be paid in advance by the
Company upon 30 days notice. The Note is convertible, at the election of
Thoroughbred prior to the earlier of prepayment or maturity, into 62,500 shares
of the Company's common stock at a conversion price equal to $2.00 per share.
Thoroughbred had not converted the Note as of March 31, 2007.
In conjunction with its acquisition of La Fern, Inc. ("La Fern"), the Company
issued a Convertible Note to the former owner of La Fern, in the amount of
$375,000, due October 1, 2009 bearing interest at 6% per annum with interest
payable semi-annually commencing on April 1, 2007 and may not be prepaid by the
Company. In accordance with the terms of the Acquisition Agreement, the
principal amount of the Note was subject to adjustment based upon audit as
defined by the Agreement. The audit was concluded during the quarter ended March
31, 2007 and resulted in a reduction of principal of $52,944 to $322,056 and a
reduction of a corresponding receivable from the former owner; all other terms
remained unchanged. The Note is convertible, at the election of La Fern prior to
maturity, into 161,028 shares of the Company's common stock at a conversion
price equal to $2.00 per share. La Fern had not converted the Note as of March
31, 2007. As a result of the conversion feature and adjustment to the principal
amount of the Note, additional paid in capital and goodwill were reduced by
$11,187 representing the fair value of the effect of the reduction of the
principal value of the Note upon its conversion feature.
In conjunction with its acquisition of La Tours and Cruises, Inc. on January 3,
2007, the Company is obligated to pay $100,000 on January 2, 2008, January 2,
2009 and January 2, 2010. Each payment is subject to an adjustment of $25,000 in
accordance with the terms of the Acquisition Agreement. The Company has
discounted each of the payments by its estimated annual incremental rate of
borrowing of 6.5% and the aggregate unamortized imputed interest of $31,646 as
of March 31, 2007 has been offset against the face value of the debt.
Interest expense for the quarter ended March 31, 2007 and 2006 was $11,830 and
$48,658, respectively.
7. STOCK BASED COMPENSATION
In conjunction with the Share Exchange Agreement, the Company's Board of
Directors amended its 2005 Management and Director Equity Incentive and
Compensation Plan (the "Plan"). This Plan provides for the grants of stock
options, restricted stock, performance-based and other equity-based incentive
awards to directors, officers and key employees. Under this Plan, stock options
must be granted at an option price that is greater than or equal to the market
price of the stock on the date of the grant. If an employee owns 10% or more of
the Company's outstanding common stock, the option price must be at least 110%
of the market price on the date of the grant. Options granted under this Plan
become exercisable in accordance with the terms of the grant as determined by a
committee of the Company's Board of Directors. All options granted expire no
more than 10 years following the date of grant.
11
ONLINE VACATION CENTER HOLDINGS CORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On January 11, 2007, 95,000 stock options were granted to eight employees under
the Plan. All options have a five-year life and an exercise price of $2.91. On
March 28, 2007, 15,000 stock options were granted to three employees under the
Plan. The options have a five year life and an exercise price of $3.02. All
options granted during the quarter vest two years after date of grant.
A summary of the activity in our Plan for the quarter ended March 31, 2007 is
presented below:
Weighted Average
Shares Exercise Price
--------- --------------
Options outstanding at December 31, 2006 1,870,000 $ 1.28
Granted 110,000 2.93
Canceled - 0.00
Exercised - 0.00
--------- ------
Options outstanding at March 31, 2007 1,980,000 $ 1.37
========= ======
The weighted fair value of options granted during the quarter ended March 31,
2007 was $0.17 with the following assumptions: average expected life of 3.5
years; 4.72% average interest rate; 46.03% volatility; 5% forfeiture rate.
Compensation cost recognized for the quarters ended March 31, 2007 and 2006 was
$43,560 and $42,455, respectively.
As of March 31, 2007, there was approximately $213,198 of total stock-based
compensation expense not yet recognized relating to non-vested awards granted
under our option plan as calculated under SFAS 123R. This expense is net of
estimated forfeitures and is expected to be recognized over a weighted-average
period of approximately 1.25 years. The number of non-exercisable shares was
1,580,000 shares of common stock at March 31, 2007. At March 31, 2007, 400,000
shares of common stock at $1.27 per share were exercisable.
For the quarter ended March 31, 2007, 11,200 restricted shares were granted to
employees and directors under the Plan. Compensation expense for the quarters
ended March 31, 2007 and 2006 related to the restricted share grants was
$18,520 and $5,950, respectively.
8. STOCKHOLDERS' EQUITY
In conjunction with the acquisition of La Tours and Cruises, Inc. on January 3,
2007, the Company issued 50,000 restricted shares of the Company's common stock
which are subject to a lock-up agreement.
In conjunction with the acquisition of Dunhill Vacations, Inc. on January 5,
2007, the Company issued 50,000 restricted shares of the Company's common stock.
In conjunction with the acquisition of SmartTraveler.com, Inc. on January 19,
2007, the Company issued 125,000 restricted shares of the Company's common stock
which are subject to a lock-up agreement.
12
ONLINE VACATION CENTER HOLDINGS CORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
9. RELATED PARTY TRANSACTIONS
Effective October 2005, Online Vacation Center Holdings, Inc. engaged a
consultant who now serves as the Company's Chairman. In consideration for such
services, the consultant received a monthly fee of $10,000. The consultant
continues to serve the Company at the same fee rate on a month to month basis.
During the quarters ended March 31, 2007 and 2006, this consultant received
$30,000 for each quarter in consulting fees.
10. COMMITMENTS AND CONTINGENCIES
The Company is involved from time to time in various legal claims and actions
arising in the ordinary course of business. While from time to time claims are
asserted that may make demands for sums of money, The Company does not believe
that the resolution of any of these matters, either individually or in the
aggregate, will materially affect its financial position, cash flows or the
results of its operations.
On January 1, 2007, the Company entered into employment contracts with seven
employees. The contracts are each for a term of one year with an aggregate
compensation commitment of $740,000. One contract provides for incentives in the
event that certain annual targets are attained.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward Looking Statements
This Quarterly Report on Form 10-QSB includes forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. All
statements other than statements of historical fact, including statements
regarding guidance, industry prospects or future results of operations or
financial position, made in this Quarterly Report on Form 10-QSB are
forward-looking. We use words such as anticipates, believes, expects, future,
intends, and similar expressions to identify forward-looking statements.
Forward-looking statements reflect management's current expectations and are
inherently uncertain. Actual results could differ materially for a variety of
reasons, including, those risks described in our Annual Report on Form 10-KSB
for the year ended December 31, 2006 filed with the SEC on March 21, 2007 and
the risks discussed in other SEC filings. These risks and uncertainties, as well
as other risks and uncertainties, could cause our actual results to differ
significantly from management's expectations. The forward-looking statements
included in this report reflect the beliefs of our management on the date of
this report. We undertake no obligation to update publicly any forward-looking
statements for any reason.
Overview
Online Vacation Center Holdings Corp. (the "Company") is a Florida holding
company, focused on building a network of diversified vacation marketers with a
range of products that can be cross-sold to an extensive customer base. Target
businesses will be financially and technologically sound and provide a high
degree of personalized service to help consumers research, plan and purchase a
vacation.
We provide vacation marketing services through our wholly owned subsidiaries:
o Online Vacation Center, Inc., an internet-based vacation seller focused
on serving the affluent retiree market,
o Phoenix International Publishing, LLC ("Phoenix"), the United Kingdom's
leading publisher of consumer magazines and guides about travel to the
U.S. and Canada,
o Thoroughbred Travel, LLC, a Houston, Texas based upscale travel agency,
operating as Journeys Unlimited,
o La Fern, Inc., operating as eLeisureLink.com, a Florida travel agency
that sells land-based vacations,
o La Tours and Cruises, Inc., a Houston, Texas based travel agency,
operating as West University Travel, focused on providing luxury
personal travel products such as cruises, European tours and
all-inclusive vacations, and
o Dunhill Vacations, Inc., a Fort Lauderdale, Florida travel newsletter
and media provider.
14
Additionally, we acquired certain assets of SmartTraveler.com, Inc. in January
2007, including two online consumer travel newsletters as well as a home-based
travel selling group.
We generate revenues from:
o commissions on cruises
o commissions on other travel related products
o commissions on travel insurance
o marketing performed for travel suppliers
We currently market our services by:
o producing travel-related publications for consumers
o telemarketing to our existing customer base
o direct mailing to our existing customer base as well as targeted
prospects
o email blasting to our opt in subscription base.
Operating expenses include primarily those items necessary to advertise our
services, produce our marketing materials, maintain and staff our travel
reservation and fulfillment center including technological enhancements,
payroll, commissions and benefits, telephone, ticket delivery and general and
administrative expenses including rent and computer maintenance fees.
Results of Operations
Quarter Ended March 31, 2007 Compared to Quarter Ended March 31, 2006
Revenues increased by 32.4%, $654,852, from $2,022,901 for the quarter ended
March 31, 2006 ("first quarter of 2006") to $2,677,753 for the quarter ended
March 31, 2007 ("first quarter of 2007"). The increase is attributable to the
revenues of the six acquisitions that we completed during the fourth quarter of
2006 and the first quarter of 2007 ("the acquisitions").
Selling and marketing expenses increased by $901,830, 326% to $1,300,395 for the
first quarter of 2007 as compared to $398,565 for the first quarter of 2006. The
increase is primarily attributable to the acquisitions and partially
attributable to an increase in co-op marketing projects during the first quarter
of 2007 for Online Vacation Center, Inc. Selling and marketing expenses
primarily consist of sales staff compensation and costs to produce marketing
materials.
General and administrative expenses increased by $226,349 or 19.4% to $1,390,659
for the first quarter of 2007 as compared to $1,164,310 for the first quarter of
2006. The increase is entirely attributable to the acquisitions. General and
administrative expenses primarily include management and non sales staff
compensation, professional services, and occupancy costs.
Depreciation and amortization expense for the first quarter of 2007 was $84,015
as compared to $21,656 for the first quarter of 2006. Amortization expense
increased by $60,816 during the first quarter of 2007 as a result of
amortization of intangible assets acquired in conjunction with the acquisitions.
The remaining increase of $1,543 is attributable to an increase in depreciation
expense.
15
Interest Income/ (Expense) increased from an expense of $40,036 for the first
quarter of 2006 to income of $5,480 for the first quarter of 2007. The first
quarter of 2006 expense was attributable to accrued interest on subordinated
debt which was ultimately exchanged for 1,500,310 shares of our common stock in
conjunction with the Share Exchange Agreement in March 2006. The income in the
first quarter of 2007 represents the excess of interest income earned on our
cash balances at the bank over the accrued interest expense on the debt issued
by us in conjunction with our acquisition of Thoroughbred Travel, LLC, La Fern,
Inc., and La Tours and Cruises, Inc.
Our loss before benefit for income taxes was $91,836 in the first quarter of
2007 compared to income before provision for income taxes of $398,334 in the
first quarter of 2006. These results are primarily attributable to the six
acquisitions that we completed in the first quarter of 2007 and the fourth
quarter of 2006.
The provision for income taxes decreased from an expense of $177,926 for the
first quarter of 2006 compared to a tax benefit of $24,647 for the first quarter
of 2007. The decrease is directly related to a decrease in results from
operations whereby income before income taxes for the first quarter of 2006 was
$398,334 whereas the loss before income taxes for the first quarter of 2007 was
$91,836. The tax rate in the first quarter of 2006, 44.6%, was due to the gain
on sale of cigar assets, the result of the transaction wherein the Company
distributed the assets relating to the cigar business to a former director and
majority shareholder in exchange for 2.7 million shares of its common stock. The
Company recognized gain on each asset distributed based upon the difference
between the fair market value and the Company's adjusted basis in each asset at
the time of closing. The benefit rate in the first quarter of 2007, 26.8% was
due to the tax effect of non-deductible items.
As a result of the foregoing, our net loss for the first quarter of 2007 was
$67,189 compared to net income of $220,408 in the first quarter of 2006.
Liquidity and Capital Resources
Cash at March 31, 2007 was $2,054,104 as compared to $2,658,885 at December 31,
2006. The primary source of our liquidity and capital resources has come from
our operations.
Cash flows provided by operating activities for first quarter of 2007 and 2006
were $280,728 and $261,932, respectively. Although the first quarter of 2007 had
a net loss of $67,189 as compared to a net profit of $220,408 in the first
quarter of 2006, this decrease of $287,597 was offset by improvements in non
16
cash operating items. This was comprised of an increase in depreciation and
amortization of $84,015 as a result of increased amortization expense associated
with amortization of intangible assets acquired in conjunction with the
acquisitions and an increase in stock based compensation of $62,080 as result of
the issuance of restricted stock grants and options under our 2005 Management
and Director Equity Incentive and Compensation Plan. Additionally, accounts
receivable decreased by $289,025 as a result of increased collection efforts
during the first quarter of 2007.
Cash flows used in investing activities for the first quarter of 2007 increased
to $885,509 compared to $496 during the first quarter of 2006. The primary cash
out flow related to the excess of cash paid over cash received totaling $858,133
in conjunction with the three acquisitions completed during the first quarter of
2007. The balance of the increase, $27,376, is attributable to capital
expenditures, primarily computers and software, made during the first quarter of
2007.
There were no cash flows from financing activities during the first quarter of
2007 and 2006; however, in conjunction with the Share Exchange Agreement in
March 2006, $3,000,000 of 8% subordinated debentures due on January 1, 2008 were
ultimately exchanged for 1,500,310 shares of our common stock effective as of
March 16, 2006.
At March 31, 2007, we had a working capital deficit of $432,460, a decrease of
$1,013,941 from December 31, 2006 and an accumulated deficit of $1,424,716, an
increase of $67,189 from December 31, 2006.
Management believes that the existing cash and cash expected to be provided by
operating activities will be sufficient to fund the short term capital and
liquidity needs of our operations. We may need to seek to sell equity or debt
securities or obtain credit lines from financial institutions to meet our
longer-term liquidity and capital requirements, which includes strategic growth
through mergers and acquisitions. We can not provide any assurances that we will
be able to obtain additional capital or financing in amounts or on terms
acceptable to us, if at all or on a timely basis.
We have historically been dependent on our relationships with four major cruise
lines: Celebrity Cruises, Princess Cruises, Norwegian Cruise Line and Royal
Caribbean Cruise Line. We also depend on third party service providers for
processing certain fulfillment services.
Seasonality and Inflation
The domestic and international leisure travel industry is seasonal. Our results
have been subject to quarterly fluctuations caused primarily by the seasonal
variations in the travel industry. Leisure travel net revenues and net income
are generally lower in the third quarter. We expect seasonality to continue in
the future but hope to mitigate the effects of seasonality by acquiring
companies in the travel industry that are not as sensitive to seasonality, such
as travel advertising. We do not expect inflation to materially affect our
revenues and net income.
17
Critical Accounting Policies
We prepared our consolidated financial statements in accordance with accounting
principles generally accepted in the United States of America. As such,
management is required to make certain estimates, judgments and assumptions that
it believes are reasonable based on the information available. These estimates
and assumptions affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses for the periods presented. A more extensive list of significant
accounting policies and a description of accounting policies that are considered
critical may be found in our 2006 Annual Report on Form 10-KSB filed on March
21, 2007, in the Notes to the Consolidated Financial Statements, Note 2, and the
Critical Accounting Policies section. The significant accounting policies which
management believes are the most critical to aid in fully understanding and
evaluating our reported financial results include revenue recognition,
intangible asset testing and income taxes.
Revenue Recognition
We recognize revenue in accordance with Staff Accounting Bulletin (SAB) No. 104
"Revenue Recognition in Financial Statements", which states that revenue is
realized or realizable and earned when all of the following criteria are met:
persuasive evidence of an arrangement exists, services have been rendered, the
seller's price to the buyer is fixed or determinable, and collectibility is
reasonably assured. Vacation travel sales transactions are billed to customers
at the time of booking, however, commission revenue is not recognized in the
accompanying consolidated financial statements until the customers' travel
occurs. Advertising revenue is recognized upon distribution of media.
Emerging Issues Task Force (EITF) Issue No. 99-19, "Reporting Revenue Gross as a
Principal versus Net as an Agent", discusses the weighing of the relevant
qualitative factors regarding our status as a primary obligor and the extent of
our pricing latitude. Based upon our evaluation of vacation travel sales
transactions and in accordance with the various indicators identified in EITF
Issue No. 99-19, our vacation travel suppliers assume the majority of the
business risks such as providing the service and the risk of unsold travel
packages. As such, all vacation travel sales transactions are recorded at the
net amount, which is the amount charged to the customer less the amount to be
paid to the supplier. The method of net revenue presentation does not impact
operating profit, net income, earnings per share or cash flows. Intangible Asset
Testing
Absent any circumstances that warrant testing at another time, we test for
goodwill and non-amortizing intangible asset impairment as part of our year-end
closing process. Our goodwill testing consists of comparing the estimated fair
values of each of our operating entities to their carrying amounts, including
recorded goodwill. We estimate the fair value of our reporting unit by
discounting its projected future cash flow. Developing future cash flow
projections requires us to make significant assumptions and estimates regarding
the sales, gross margin and operating expenses of our reporting unit, as well as
economic conditions and the impact of planned business or operational
strategies. Should future results or economic events cause a change in our
projected cash flows, or should our operating plans or business model change,
future determinations of fair value may not support the carrying amount of our
unit, and the related goodwill would need to be written down to an amount
considered recoverable. Any such write down would be included in the operating
expenses. While we make reasoned estimates of future performance, actual results
below these expectations, or changes in business direction can result in
additional impairment charges in future periods.
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ITEM 3. CONTROLS AND PROCEDURES
As of the end of the period covered by this Quarterly Report, we carried out an
evaluation, under the supervision and with the participation of management,
including Edward B. Rudner, our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the
Securities Exchange Act of 1934. In designing and evaluating the disclosure
controls and procedures, management recognizes that there are inherent
limitations to the effectiveness of any system of disclosure controls and
procedures, including the possibility of human error and the circumvention or
overriding of the controls and procedures. Accordingly, even effective
disclosure controls and procedures can only provide reasonable assurance of
achieving their desired control objectives. Additionally, in evaluating and
implementing possible controls and procedures, management is required to apply
its reasonable judgment.
Based upon the required evaluation, our Chief Executive Officer and Chief
Financial Officer concluded as of March 31, 2007, that our disclosure controls
and procedures are effective in timely alerting him to material information
relating to the Company that is required to be disclosed by us in the reports
that we file or submit under the Exchange Act to be recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
forms. There have been no significant changes in our internal controls over
financial reporting or in other factors that could significantly affect internal
controls over financial reporting subsequent to the date we carried out our
evaluation.
There have been no changes in our internal control over financial reporting
during the quarter ended March 31, 2007, that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are involved from time to time in various legal claims and actions arising in
the ordinary course of business. While from time to time claims are asserted
that may make demands for sums of money, we do not believe that the resolution
of any of these matters, either individually or in the aggregate, will
materially affect our financial position, cash flows or the results of our
operations.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On January 3, 2007, we consummated the acquisition of La Tours and Cruises Inc.
d/b/a West University Travel ("La Tours"), a Houston, Texas based travel agency
focused on providing luxury personal travel products such as cruises, European
tours and all-inclusive vacations, pursuant to the terms of an Acquisition
Agreement, dated January 3, 2007, by and among the Company, La Tours a Texas
corporation, and Ray and Ceciliae Schutter, the sole shareholders of La Tours.
Pursuant to the Acquisition Agreement, we purchased and acquired all of the
issued and outstanding ownership interests of La Tours for $550,000, subject to
adjustment as defined by the Acquisition Agreement, $250,000 in cash payable
upon closing and $300,000, payable in $100,000 annual installments, subject to
adjustment as defined by the Acquisition Agreement, commencing on January 2,
2008. Additionally, the owners of La Tours and Cruises, Inc. received 50,000
restricted shares of the Company's common stock which are subject to a lock-up
agreement. The shares were issued in a transaction that was exempt from
registration under Section 4(2) of the Securities Act of 1933, as amended, as a
transaction by an issuer not involving a public offering. Mr. and Mrs. Schutter
are knowledgeable, sophisticated, have access to comprehensive information about
us and represented their intention to acquire the shares for investment only and
not with a view to distribute or sell the shares. We placed legends on the
certificates stating that the shares were not registered under the Securities
Act and set forth the restrictions on their transferability and sale.
On January 5, 2007, we consummated the acquisition of Dunhill Vacations, Inc.
("Dunhill"), a Fort Lauderdale, Florida, publisher of a leading vacation values
newsletter, Dunhill Vacation News, pursuant to the terms of an Acquisition
Agreement, dated January 5, 2007, by and among the Company, Dunhill, a Florida
corporation, and Messrs. Pat Daly, James DiStefano and Robert Dunhill, the sole
shareholders of Dunhill. Pursuant to the terms of an Acquisition Agreement, we
purchased and acquired all of the issued and outstanding ownership interests of
Dunhill, for $250,000, in cash payable upon closing and 50,000 restricted shares
of the Company's common stock. The shares were issued in a transaction that was
exempt from registration under Section 4(2) of the Securities Act of 1933, as
amended, as a transaction by an issuer not involving a public offering. Messrs.
Daly, DiStefano and Dunhill are knowledgeable, sophisticated, have access to
comprehensive information about us and represented their intention to acquire
the shares for investment only and not with a view to distribute or sell the
shares. We placed legends on the certificates stating that the shares were not
registered under the Securities Act and set forth the restrictions on their
transferability and sale.
20
On January 11, 2007, we issued an aggregate of 95,000 options to eight employees
under our 2005 Management and Director Equity Compensation Plan. The exercise
price of the options is $2.91 per share and the options vest on January 11,
2009. The expiration date of the options is January 11, 2012. On January 11,
2007, we granted an aggregate of 25,000 stock awards to seven employees. The
stock awards vest at the rate of 20% per year with vesting dates of January 11,
2007, January 11, 2008, January 11, 2009, January 1, 2010 and January 11, 2011.
On March 28, 2007, we issued an aggregate of 15,000 options to five employees
under our 2005 Management and Director Equity Compensation Plan. The exercise
price of the options is $3.02 per share and the options vest on March 28, 2009.
The expiration date of the options is March 28, 2012. We issued these stock
options and stock awards to our employees in reliance upon Section 4(2) of the
Securities Act, as a transaction that does not constitute a public offering. All
of our employees have access to comprehensive information about us and
represented his or her intention to acquire the options and underlying shares
for investment only and not with a view to distribute or sell the options or
underlying shares. We placed restrictive legends in the option agreements and on
the stock awards stating that these awards are not registered under the
Securities Act and set forth restrictions on their transferability and sale
On January 19, 2007, we consummated the acquisition of certain assets of
SmartTraveler.com, Inc. ("SmartTraveler.com"), a Royal Palm Beach, Florida
home-based travel seller , pursuant to the terms of an Acquisition Agreement,
dated January 19, 2007, by and among the Company, SmartTraveler, a Florida
corporation, and Mr. Peter Coloyan, the sole shareholder of SmartTraveler.
Pursuant to the terms of an Acquisition Agreement, we purchased certain assets,
as defined, of SmartTraveler, for $125,000, in cash payable upon closing and
125,000 restricted shares of the Company's common stock which are subject to a
lock-up agreement. The shares were issued in a transaction that was exempt from
registration under Section 4(2) of the Securities Act of 1933, as amended, as a
transaction by an issuer not involving a public offering. Mr. Coloyan is
knowledgeable, sophisticated, has access to comprehensive information about us
and represented their intention to acquire the shares for investment only and
not with a view to distribute or sell the shares. We placed legends on the
certificates stating that the shares were not registered under the Securities
Act and set forth the restrictions on their transferability and sale.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to the vote of security holders during the
first quarter of fiscal 2007.
ITEM 5. OTHER INFORMATION
None.
21
ITEM 6. EXHIBITS
Exhibit No. Exhibit Description
----------- ----------------------------------------------------------
2.1 Acquisition Agreement, dated January 3, 2007, by and among
Online Vacation Center Holdings Corp., La Tours and
Cruises, Inc., and Ray Schutter and Ceciliae Schutter
(incorporated by reference to Exhibit 2.1 in the Company's
Current Report on Form 8-K filed with the SEC on January
4, 2007 and as amended on March 21, 2007).
2.2 Acquisition Agreement, dated January 5, 2007, by and among
Online Vacation Center Holdings Corp., Dunhill Vacations,
Inc. and Messrs. Pat Daly, James DiStefano and Robert
Dunhill (incorporated by reference to Exhibit 2.1 in the
Company's Current Report on Form 8-K filed with the SEC on
January 11, 2007 and as amended on March 22, 2007).
2.3 Acquisition Agreement, dated January 19, 2007, by and
among Online Vacation Center Holdings Corp.,
SmartTraveler.com, Inc. and Pat Coloyan (incorporated by
reference to Exhibit 2.1 in the Company's Current Report
on Form 8-K filed with the SEC on January 22, 2007).
31.1 Certification by Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. +
31.2 Certification by Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. +
32.1 Certification by Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. +
32.2 Certification by Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. +
----------
+ Filed herewith
22
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ONLINE VACATION CENTER HOLDINGS CORP.
/S/ Edward B. Rudner
------------------------------------------
Chief Executive Officer, President,
Chief Financial Officer and Director
Date: May 14, 2007
23