UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2008 or
[ ] 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 incorporation (I.R.S. Employer
or organization Identification No.)
1801 N.W. 66th Avenue, Suite 102, Plantation, Florida 33313
-----------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(954) 377-6400
--------------
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 large accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the
definitions of "large accelerated filer", "accelerated filer", and smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ](Do not check if
a smaller reporting company) Smaller reporting company [X]
Indicate by check mark whether registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). [ ] Yes [X] No
At August 12, 2008, the number of shares outstanding of the registrant's common
stock, $0.0001 par value was 17,252,777.
PAGE
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Part I. Financial Information
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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 19
Item 4T. Controls and Procedures 25
Part II Other Information
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Item 1 Legal Proceedings 26
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 26
Item 3 Default upon Senior Notes 26
Item 4 Submission of Matters to a Vote of Securities Holders 26
Item 5 Other Information 27
Item 6 Exhibits 27
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
June 30, December 31,
2008 2007
------------ -------------
(Unaudited) (Audited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,767,327 $ 1,189,042
Accounts receivable, net 629,343 1,053,556
Deposits and prepaid items 752,945 738,958
Deferred tax asset, net 1,665 1,665
Current assets held for sale -- 504,088
----------- -----------
Total Current Assets 3,151,280 3,487,309
Restricted cash 71,135 351,243
Property and equipment, net 99,382 127,548
Deferred tax asset, net 380,270 431,317
Intangible assets, net 1,105,299 988,466
Goodwill 1,754,279 1,754,279
Other assets 71,166 --
Long lived assets held for sale -- 1,909,274
----------- -----------
Total Assets $ 6,632,811 $ 9,049,436
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 1,004,921 $ 980,078
Deferred revenue 2,275,885 2,384,720
Notes payable, current portion 424,029 427,686
Current liabilities held for sale -- 542,682
----------- -----------
Total Current Liabilities 3,704,835 4,335,166
Notes payable 91,098 182,074
Non current liabilities available for sale -- 302,176
----------- -----------
Total Liabilities 3,795,933 4,819,416
----------- -----------
COMMITMENTS AND CONTINGENCIES
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; 17,252,777 and 18,492,977 shares
issued and outstanding 1,725 1,849
Additional paid-in capital 4,320,100 5,628,318
Accumulated deficit (1,484,947) (1,400,147)
----------- -----------
Total Stockholders' Equity 2,836,878 4,230,020
----------- -----------
Total Liabilities and Stockholders' Equity $ 6,632,811 $ 9,049,436
=========== ===========
The accompanying Notes to the Condensed Consolidated Financial Statements are an
integral part of these statements.
3
ONLINE VACATION CENTER HOLDINGS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three Months Ended June 30, For the Six Months Ended June 30,
----------------------------------- ---------------------------------
2008 2007 2008 2007
----------------------------------- ----------------------------------
NET REVENUES $ 2,691,750 $ 1,966,578 $ 4,947,574 $ 4,227,146
OPERATING EXPENSES:
Selling and marketing 842,407 987,905 1,830,306 1,865,119
General and administrative 1,350,854 1,222,677 2,767,036 2,510,587
Depreciation and amortization 99,569 60,689 186,667 111,750
------------ ------------ ------------ ------------
OPERATING INCOME (LOSS) 398,920 (304,693) 163,565 (260,310)
Interest (expense), net (3,812) (8,998) (22,506) (4,220)
------------ ------------ ------------ ------------
Income (loss) from continuing operations before
provision (benefit) for income taxes 395,108 (313,691) 141,059 (264,530)
Provision (benefit) for income taxes 183,227 (112,983) 106,585 (83,233)
------------ ------------ ------------ ------------
Income (loss) from continuing operations 211,881 (200,708) 34,474 (181,297)
DISCONTINUED OPERATIONS:
Loss from discontinued operations of Phoenix
International Publishing, LLC, net of tax -- (85,923) (119,274) (172,523)
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ 211,881 $ (286,631) $ (84,800) $ (353,820)
============ ============ ============ ============
EARNINGS PER SHARE - Basic
Income (Loss) from continuing operations $ 0.01 $ (0.02) $ 0.01 $ (0.02)
(Loss) from discontinued operations $ -- $ (0.01) $ (0.01) $ (0.02)
------------ ------------ ------------ ------------
Net Income (Loss) $ 0.01 $ (0.03) $ -- $ (0.04)
============ ============ ============ ============
Weighted average shares outstanding - Basic 17,252,777 18,492,977 17,875,256 18,474,773
============ ============ ============ ============
EARNINGS PER SHARE - Diluted
Income (Loss) from continuing operations $ 0.01 $ (0.02) $ 0.01 $ (0.02)
(Loss) from discontinued operations $ -- $ (0.01) $ (0.01) $ (0.02)
------------ ------------ ------------ ------------
Net Income (Loss) $ 0.01 $ (0.03) $ -- $ (0.04)
============ ============ ============ ============
Weighted average shares outstanding - Diluted 17,252,777 18,492,977 17,875,256 18,492,977
============ ============ ============ ============
The accompanying Notes to the 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 Six Months Ended
---------------------------------------
June 30, June 30,
2008 2007
------------ ------------
Cash flows from continuing operating activities:
Net loss $ (84,800) $ (353,820)
Loss from discontinued operations, net of tax (119,274) 172,523
----------- -----------
Income (loss) from continuing operations 34,474 (181,297)
Adjustments to reconcile to net cash inflow from operating activities:
Depreciation and amortization 186,667 111,750
Stock based compensation expense 97,908 106,227
Imputed interest expense- net 3,786 9,027
Deferred income tax expense (benefit) 51,046 (166,132)
Decrease in accounts receivable 424,213 91,797
(Increase) Decrease in deposits and prepaid items 16,429 (373,157)
Increase (Decrease) in accounts payable and accrued liabilities 24,843 (5,970)
Increase (Decrease) in deferred revenue (108,836) 510,879
----------- -----------
Net cash provided by operating activities 730,530 103,123
----------- -----------
Cash flows from continuing investing activites:
Capital expenditures (37,713) (41,787)
Increase in intangible assets (237,620) (1,854)
Decrease (Increase) in restricted cash 280,108 (15,069)
Increase in receivable upon disposition of discontinued operation (100,000) --
Cash paid upon disposition of discontinued operation (4,932) --
Cash paid for acquisition in excess of cash received -- (1,116,713)
----------- -----------
Cash used in investing activities (100,157) (1,175,423)
----------- -----------
Cash flows from continuing financing activites:
Repayment of note payable (100,000) --
----------- -----------
Cash used in financing activities (100,000) --
----------- -----------
Discontinued Operations
Cash provided by (used in) operating activities 47,912 (13,113)
----------- -----------
Cash provided by (used in) discontinued operations 47,912 (13,113)
----------- -----------
Increase (decrease) in cash during the period 578,285 (1,085,412)
Cash at the beginning of the period 1,189,042 2,658,885
----------- -----------
Cash at the end of the period $ 1,767,327 $ 1,573,473
=========== ===========
Supplemental information:
Cash paid for interest $ 15,968 $ 11,250
=========== ===========
Cash paid for taxes $ 1,136 $ 6,250
=========== ===========
Common stock issued in conjunction with acquisitions $ -- $ 337,500
=========== ===========
Net debt issued in conjunction with acquisitions $ -- $ 210,946
=========== ===========
Common stock received in conjunction with disposition of
discontinued operation $ 1,406,250 $ --
=========== ===========
Reduction in fair value of conversion feature of debt $ -- $ 11,187
=========== ===========
The accompanying Notes to the 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 interim condensed consolidated financial statements
of Online Vacation Center Holdings Corp., (the "Company"), and the notes thereto
have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in the financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to such rules and regulations. These condensed
consolidated financial statements should be read in conjunction with the audited
financial statements and notes thereto included in the Company's Annual Report
on Form 10-KSB for the year ended December 31, 2007, and filed with the
Securities and Exchange Commission on March 28, 2008. The interim financial
information contained herein is not certified or audited; it reflects all
adjustments (consisting of only normal recurring accruals) which are, in the
opinion of management, necessary for a fair statement of the operating results
for the periods presented, stated on a basis consistent with that of the audited
financial statements.
The results of operations for the three months ended and six months June 30,
2008 are not necessarily indicative of annual results. The Company manages its
business as one reportable segment.
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. DISPOSITION
In November 2007, the Company's Board of Directors granted the Company the
authority to sell Phoenix International Publishing LLC ("Phoenix"), a publisher
of consumer magazines and guides about travel to the U.S. and Canada. On March
31, 2008, the Company completed the sale of Phoenix to Simon Todd ("Mr. Todd"),
pursuant to the terms of an acquisition agreement ("Acquisition Agreement"),
dated March 31, 2008, by and among the Company, Phoenix, and Mr. Todd. Pursuant
to the Acquisition Agreement, the Company received 1,250,000 shares of the
Company's common stock from Mr. Todd at closing. The Acquisition Agreement
provides for, among other matters, contingent consideration from Mr. Todd in the
event that certain thresholds of profitability, as defined, are attained within
three years from the date of disposition or sale of Phoenix by Mr. Todd to a
third party for an amount in excess of a defined amount for a period of three
years from March 31, 2008. The amount of contingent consideration, if any, can
not be determined as the likelihood of such future events giving rise to such
contingent consideration can not be ascertained nor the effects estimated. Upon
execution of the Acquisition Agreement, Mr. Todd resigned as Vice President of
6
ONLINE VACATION CENTER HOLDINGS CORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
the Company. Prior to the acquisition of Phoenix by the Company, Mr. Todd was
the owner, sole member, and President of Phoenix. The Company acquired Phoenix
from Mr. Todd on August 31, 2006 for 1,450,000 shares of the Company's common
stock.
The Company recorded the sale of Phoenix at its fair value, as defined by
Statement of Financial Accounting Standards No. 157, Fair Value Measurements,
("FAS 157") and Accounting Principles Board Opinion No. 29, Accounting for
Nonmonetary Transactions ("APB 29"). APB 29 states, "If neither the fair value
of a nonmonetary asset transferred nor the fair value of a nonmonetary asset
received in exchange is determined within reasonable limits, the recorded amount
of the nonmonetary asset transferred from the enterprise may be the only
available measure of the transaction". The Company could not determine fair
value of either the asset transferred (Phoenix) or the asset received (shares of
the Company's common stock), and therefore recorded cost, $1,406,250, the value
of the shares received at the time shares were initially issued, was used to
record the sale and a loss of $58,382 was recognized.
In order to value the disposition, the Company reviewed the valuation techniques
listed in FAS 157, paragraph 18: market approach, income approach, and cost
approach. The Company also reviewed the different levels of inputs to valuation
techniques as defined in FAS 157, paragraphs 22 through 30. Level 1 inputs are
quoted prices (unadjusted) in active markets for identical assets. Level 2
inputs are quoted prices for identical or similar assets in markets that are not
active, that is, markets in which there are few transactions for the asset, the
prices are not current, or price quotations vary substantially either over time
or among market makers. Adjustments to Level 2 inputs will vary depending on
factors specific to the asset. Those factors include the volume and level of
activity in the markets within which the inputs are observed. An adjustment that
is significant to the fair value measurement in its entirety might render the
measurement a Level 3 measurement, depending on the level in the fair value
hierarchy within which the inputs used to determine the adjustment fall. Level 3
inputs are unobservable inputs for the asset. Unobservable inputs shall be used
to measure fair value to the extent that observable inputs are not available,
thereby allowing for situations in which there is little, if any, market
activity for the asset at the measurement date.
The Company had difficulty with the valuation of Phoenix as it is a unique
business: Phoenix has no employees, is operated as a sole proprietorship, and
has no tangible assets (the Company's investment in Phoenix was initially
allocated to intangible assets and goodwill). Its competitors are dissimilar and
would not be representative of Phoenix's value. The Company could not find a
Level 1 input as there were no quoted prices in active markets for an identical
asset. The Company then looked for Level 2 inputs, however, there were no quoted
prices for similar assets in active markets nor identical assets in inactive
markets. As stated previously, Phoenix is very different from its competitors
and valuing it based on comparable values of other similar businesses was not
representative of its value. This negated the market approach and the cost
approach as valuation techniques. The Company then attempted to use an income
approach by using present value techniques or an expected cash flow approach to
value Phoenix. The Company's brief ownership of Phoenix coupled with its poor
results during this time (as compared to its history of profitability before the
Company's ownership) made this valuation technique a poor measure of Phoenix.
Therefore, the Company could not determine within reasonable limits the value of
Phoenix.
7
ONLINE VACATION CENTER HOLDINGS CORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Paragraph 18 of APB 29 states, "The Board concludes that in general accounting
for nonmonetary transactions should be based on the fair values of the assets
involved which is the same basis as that used in monetary transactions. Thus,
the cost of a nonmonetary asset acquired in exchange for another nonmonetary
asset is the fair value of the asset surrendered to obtain it, and a gain or
loss should be recognized on the exchange. The fair value of the asset received
should be used to measure the cost if it is more clearly evident than the fair
value of the asset surrendered". The Company concluded that the value of the
Company's stock was "more clearly evident than the fair value of the asset
surrendered", in this case, Phoenix. The Company then tried to value the
Company's stock.
At the time of the disposition, the Company's stock rarely traded. It traded
eight days out of twenty in March 2008 for a total of 9,300 shares. The last
trade before the transaction was on March 28th and the next trade was on April
8th during this time period. On March 31st, the disposition date, the bid was
$0.30 and the ask was $1.05. The Company determined that the stock no longer had
an active market and therefore was not a Level 1 input. In reviewing the
adjustments needed to determine the stock's value, the Company concluded that
the adjustments needed to the price of the stock would be so significant given
its lack of market activity and pricing spread that it would render the
measurement a Level 3 measurement.
Paragraph C21c of FAS 157 allows a practicability exception to the requirement
to measure fair value if fair value is not reasonably determinable. This is
further discussed in paragraph 26 of APB 29, "Fair value should be regarded as
not determinable within reasonable limits if major uncertainties exist about the
realizability of the value that would be assigned to an asset received in a
nonmonetary transaction account for at fair value. An exchange involving parties
with essentially opposing interests is not considered a prerequisite to
determining a fair value of a nonmonetary asset transferred; nor does an
exchange insure that a fair value for accounting purposes can be ascertained
within reasonable limits. If neither the fair value of a nonmonetary asset
transferred nor the fair value of a nonmonetary asset received in exchange is
determined within reasonable limits, the recorded amount of the nonmonetary
asset transferred from the enterprise may be the only available measure of the
transaction". As discussed previously, the Company concluded that the value of
their stock was a Level 3 measurement, an unobservable input. In determining
what value should be given to this input, the Company concluded that it could
not determine the value within reasonable limits. Accordingly, the Company
concluded that the sale of Phoenix would be recorded using the asset's recorded
value, $1,406, 250, the value of the shares received at the time the shares were
initially issued.
For tax purposes, the transaction was treated as split-off with no resulting tax
consequences. The Company retired the 1,250,000 shares of its common stock
received as of March 31, 2008.
The results of operations and cash flows of Phoenix has been removed from the
results of continuing operations and have been accounted for as discontinued
operations.
8
ONLINE VACATION CENTER HOLDINGS CORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the three months ended June 30:
-----------------------------------
2008 2007
--------- ----------
Revenues $ 0 $ 59,533
Loss before income taxes $ 0 $ 140,094
Loss on sale of Phoenix 0 --
Income tax benefit 0 54,171
--- ----------
Loss from discontinued operations $ 0 $ 85,923
==========
For the six months ended June 30:
----------------------------------
2008 2007
--------- -----------
Revenues $ 107,569 $ 476,718
$ (281,793)
Loss before income taxes $ 98,503
Loss on sale of Phoenix 58,382 --
Income tax benefit 37,611 109,270
--------- ----------
Loss from discontinued operations $ 119,274 $ (172,523)
========= ==========
The assets and liabilities of discontinued business have been reclassified
and are segregated in the consolidated balance sheet of December 31, 2007
as summarized as follows:
December 31, 2007
-----------------
Accounts receivable $ 501,992
Deposits and prepaid items 2,096
-----------
Total current assets held for sale $ 504,088
===========
Intangible assets, net $ 783,244
Goodwill 1,126,030
-----------
Total long lived assets held for sale $ 1,909,274
===========
Accounts payable and accrued liabilities $ 359,182
Deferred revenue 183,500
-----------
Total current liabilities available for sale $ 542,682
===========
Non current deferred income taxes payable $ 302,176
-----------
Non current liabilities available for sale $ 302,176
===========
9
ONLINE VACATION CENTER HOLDINGS CORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In conjunction with the Acquisition Agreement, Phoenix is obligated to pay its
pre-disposition intercompany debt balance to the Company of $100,000 in forty
consecutive monthly payments of $2,500 commencing on October 1, 2008. The series
of forty monthly payments of $2,500 has been discounted, using the Company's
estimated incremental borrowing rate of 6.5% and the aggregate related
unamortized net imputed interest of $11,916 as of June 30, 2008 has been offset
against the face value of the receivable and a corresponding interest expense
recorded. The current portion of this receivable from Phoenix, $16,918, has been
classified as deposits and prepaid items and the remaining balance of $71,166 as
other assets as of June 30, 2008.
3. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Fair Value Measurements
In September 2006, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 157, Fair Value Measurements,
("FAS 157"). This Standard defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles and expands
disclosures about fair value measurements. FAS 157 is effective for financial
statements issued for fiscal years beginning after November 15, 2007 and interim
periods within those fiscal years. The adoption of FAS 157 as of January 1, 2008
did not have a material impact on the Company's financial position, results of
operations or cash flows except as discussed in Note 2. Cash equivalents and
restricted cash are carried at cost which approximates fair value.
Accounting for Defined Benefit Pension and Other Postretirement Plans
In September 2006, the FASB issued SFAS No. 158, Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB
Statement No. 87, 88, 106 and 132(R), ("FAS 158"). This Standard requires
recognition of the funded status of a benefit plan in the statement of financial
position. The Standard also requires recognition in other comprehensive income
certain gains and losses that arise during the period but are deferred under
pension accounting rules, as well as modifies the timing of reporting and adds
certain disclosures. FAS 158 provides recognition and disclosure elements to be
effective as of the end of the fiscal year after December 15, 2006 and
measurement elements to be effective for fiscal years ending after December 15,
2008. The Company does not expect the remaining elements of this Statement to
have a material impact on the Company's financial condition, results of
operations or cash flows when adopted.
Fair Value Option of Financial Assets and Financial Liabilities
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities ("FAS 159"). This Standard provides
companies with an option to report selected financial assets and liabilities at
fair value in an attempt to reduce both complexity in accounting for financial
instruments and the volatility in earnings caused by measuring related assets
and liabilities differently. SFAS 159 is effective as of the beginning of an
entity's first fiscal year beginning after November 15, 2007. Upon adoption of
this Statement, the Company did not elect the FAS 159 option for its existing
financial assets and liabilities and therefore adoption of SFAS 159 did not have
any impact on its consolidated financial statements.
10
ONLINE VACATION CENTER HOLDINGS CORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Business Combinations
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations, ("FAS
141(R)"). This Standard establishes principles and requirements for how an
acquirer in a business combination:
o Recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed and any noncontrolling
interest in the acquiree
o Recognizes and measures the goodwill acquired in the business
combination or a gain from a bargain purchase; and
o Determines what information to disclose to enable users of the
financial statements to evaluate the nature and financial effects of
the business combination.
FAS 141(R) is effective for business combinations for which the acquisition date
is on or after the beginning of the first annual reporting period beginning on
or after December 15, 2008. The Company has not yet assessed the impact of
adoption, if any, on its consolidated financial statements.
Noncontrolling Interest in Consolidated Financial Statements
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements--an amendment of ARB No. 51, ("FAS 160"). This
Standard amends ARB 51 to establish accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. It also amends certain of ARB 51's consolidation procedures for
consistency with the requirements of FAS 141(R). FAS 160 is effective for fiscal
years, and interim periods within those fiscal years, beginning on or after
December 15, 2008. The Company has not yet assessed the impact of adoption, if
any, on its consolidated financial statements.
Accounting for Collaborative Arrangements
In December 2007, the Emerging Issues Task Force ("EITF") met and ratified EITF
No.07-01, Accounting for Collaborative Arrangements, in order to define
collaborative arrangements and to establish reporting requirements for
transactions between participants in a collaborative arrangement and between
participants in the arrangement and third parties. This EITF is effective for
financial statements issued for fiscal years beginning after December15, 2008,
and interim periods within those fiscal years. This EITF is to be applied
retrospectively to all prior periods presented for all collaborative
arrangements existing as of the effective date. We are currently assessing the
impact of this EITF to our consolidated financial statements.
Determination of the Useful Life of Intangible Assets
In April 2008, the FASB issued FASB Staff Position ("FSP") FAS 142-3,
"Determination of the Useful Life of Intangible Assets,", which amends the
factors that should be considered in developing renewal or extension assumptions
used to determine the useful life of intangible assets under FAS 142 "Goodwill
and Other Intangible Assets". The intent of this FSP is to improve the
consistency between the useful life of a recognized intangible asset under FAS
142 and the period of the expected cash flows used to measure the fair value of
the asset under FAS 141 (revised 2007) "Business Combinations" and other U.S.
11
ONLINE VACATION CENTER HOLDINGS CORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
generally accepted accounting principles. The Company is currently evaluating
the potential impact of FSP FAS 142-3 upon its consolidated financial
statements.
Disclosure about Derivative Instruments and Hedging Activities
In March 2008, the FASB issued SFAS No. 161, Disclosure about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No. 133,
("FAS 161"). This Statement requires that objectives for using derivative
instruments be disclosed in terms of underlying risk and accounting designation.
The Company is required to adopt FAS 161 on January 1, 2009. The Company is
currently evaluating the potential impact of FAS No. 161 upon its consolidated
financial statements.
A variety of proposed or otherwise potential accounting standards are currently
under study by standard-setting organizations and various regulatory agencies.
Because of the tentative and preliminary nature of these proposed standards,
management has not determined whether implementation of such proposed standards
would be material to the Company's consolidated financial statements.
Accounting for Convertible Debt Instruments That May Be Settled in Cash upon
Conversion (Including Partial Cash Settlement)
In May 2008, the FASB issued Staff Position No. APB 14-1, "Accounting for
Convertible Debt Instruments That May Be Settled in Cash upon Conversion
(Including Partial Cash Settlement)" (the "FSP"), which clarifies the accounting
for convertible debt instruments that may be settled in cash (including partial
cash settlement) upon conversion. The FSP requires issuers to account separately
for the liability and equity components of certain convertible debt instruments
in a manner that reflects the issuer's nonconvertible debt (unsecured debt)
borrowing rate when interest cost is recognized. The FSP requires bifurcation of
a component of the debt, classification of that component in equity and the
accretion of the resulting discount on the debt to be recognized as part of
interest expense in our consolidated statement of operations. The FSP requires
retrospective application to the terms of instruments as they existed for all
periods presented. The FSP is effective for us as of January 1, 2009 and early
adoption is not permitted. The Company is currently evaluating the potential
impact of FSP APB 14-1 upon its consolidated financial statements.
The Hierarchy of Generally Accepted Accounting Principles
In May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted
Accounting Principles" (FAS No. 162). SFAS No. 162 identifies the sources of
accounting principles and the framework for selecting the principles used in the
preparation of financial statements. SFAS No. 162 is effective 60 days following
the SEC's approval of the Public Company Accounting Oversight Board amendments
to AU Section 411, "The Meaning of Present Fairly in Conformity with Generally
Accepted Accounting Principles". The implementation of this standard will not
have a material impact on the Company's consolidated financial position and
results of operations.
Determining Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities
In June 2008, the FASB issued FSP EITF 03-6-1, "Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities" (FSP
EITF 03-6-1). FSP EITF 03-6-1 clarified that all outstanding unvested
12
ONLINE VACATION CENTER HOLDINGS CORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
share-based payment awards that contain rights to nonforfeitable dividends
participate in undistributed earnings with common shareholders. Awards of this
nature are considered participating securities and the two-class method of
computing basic and diluted earnings per share must be applied. FSP EITF 03-6-1
is effective for fiscal years beginning after December 15, 2008. The Company is
currently assessing the impact of FSP EITF 03-6-1 on its consolidated financial
position and results of operations.
Determining Whether an Instrument (or an Embedded Feature) Is Indexed to an
Entity's Own Stock
In June 2008, the FASB ratified EITF Issue No. 07-5, "Determining Whether an
Instrument (or an Embedded Feature) Is Indexed to an Entity's Own Stock" (EITF
07-5). EITF 07-5 provides that an entity should use a two step approach to
evaluate whether an equity-linked financial instrument (or embedded feature) is
indexed to its own stock, including evaluating the instrument's contingent
exercise and settlement provisions. It also clarifies on the impact of foreign
currency denominated strike prices and market-based employee stock option
valuation instruments on the evaluation. EITF 07-5 is effective for fiscal years
beginning after December 15, 2008. The Company is currently assessing the impact
of EITF 07-5 on its consolidated financial position and results of operations.
4. EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income available to common
shareholders by the weighted average number of common shares outstanding during
the period. Diluted earnings per share reflects the potential dilution that
could occur if stock options and other commitments to issue common stock were
exercised or equity awards vest resulting in the issuance of common stock or
conversion of notes into shares of common stock that could share in the earnings
of the Company. This calculation is not done for periods in a loss position as
this would be antidilutive. The information related to basic and diluted
earnings per share is as follows:
13
ONLINE VACATION CENTER HOLDINGS CORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Quarter Ended June 30,
---------------------------------
2008 2007
------------ -------------
Numerator:
Continuing operations:
Income (loss) from continuing operations $ 211,881 $ (200,708)
Effect of dilutive convertible debt -- --
------------ -------------
Total $ 211,881 $ (200,708)
============ =============
Discontinued operations
Loss from discontinued operations $ -- $ (85,923)
============ =============
Net income (loss) $ 211,881 $ (286,631)
============ =============
Denominator:
Weighted average number of shares outstanding - basic 17,252,777 18,492,977
Effect of dilutive stock options and convertible debt -- --
------------ -------------
Diluted 17,252,777 18,492,977
============ =============
EPS:
Basic:
Continuing operations $ 0.01 $ (0.02)
Discontinued operations -- (0.01)
------------ -------------
Net income (loss) $ 0.01 $ (0.03)
============ =============
Diluted
Continuing operations $ 0.01 $ (0.02)
Discontinued operations -- (0.01)
------------ -------------
Net income (loss) $ 0.01 $ (0.03)
============ =============
14
ONLINE VACATION CENTER HOLDINGS CORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Six Months Ended June 30,
2008 2007
----------- -----------
Numerator:
Continuing operations:
Income (loss) from continuing operations $ 34,474 $ (181,297)
Effect of dilutive convertible debt -- --
----------- -----------
Total $ 34,474 $ (181,297)
=========== ===========
Discontinued operations
Loss from discontinued operations $ (119,274) $ (172,523)
=========== ===========
Net income (loss) $ 84,800 $ (353,820)
=========== ===========
Denominator:
Weighted average number of shares outstanding - basic 17,875,256 18,474,773
Effect of dilutive stock options and convertible debt -- --
----------- -----------
Diluted 17,875,256 18,474,773
=========== ===========
EPS:
Basic:
Continuing operations $ 0.01 $ (0.02)
Discontinued operations (0.01) (0.02)
----------- -----------
Net income (loss) $ 0.00 $ (0.04)
=========== ===========
Diluted
Continuing operations $ 0.01 $ (0.02)
Discontinued operations (0.01) (0.02)
----------- -----------
Net income (loss) $ 0.00 $ (0.04)
=========== ===========
5. 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.
On March 26, 2008, 232,400 stock options were granted to seven employees under
the Plan. All options have a five-year life and an exercise price of $1.27. All
options granted during the quarter vest two years after date of grant. No
options were granted during the quarter ended June 30, 2008.
15
ONLINE VACATION CENTER HOLDINGS CORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A summary of the activity in our Plan for the six months ended June 30, 2008 is
presented below:
Weighted Average
Shares Exercise Price
------ --------------
Options outstanding at December 31, 2007 2,215,000 $ 1.41
Granted 232,400 1.27
Canceled - 0.00
Exercised - 0.00
---------- ------
Options outstanding at June 30, 2008 2,447,400 $ 1.39
========== ======
The weighted fair value of options granted during the six months ended June 30,
2008 was $0.04 with the following assumptions: average expected life of 3.5
years; 2.03% average interest rate; 42.1% volatility; 5% forfeiture rate.
Compensation cost recognized for the quarters ended June 30, 2008 and 2007 and
the six month periods then ended was $28,700, $44,147, $81,658 and $87,707,
respectively.
As of June 30, 2008, there was approximately $114,368 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 16 months. The number of non-exercisable shares was
587,400 shares of common stock at June 30, 2008. At June 30, 2008, 1,860,000
shares of common stock at $1.27 per share were exercisable.
For the six months ended June 30, 2008, 9,800 restricted shares were granted to
employees and directors under the Plan. Compensation expense for the six months
ended June 30, 2008 and 2007 related to the restricted share grants was $16,250
and $18,520, respectively. No restricted shares were granted during the three
months ended June 30, 2008.
6. INCOME TAXES
The provision for income taxes from continuing operations for the three months
and six months ended June 30, 2008 and June 30, 2007, respectively, consists of
the following:
16
ONLINE VACATION CENTER HOLDINGS CORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Three Months Ended For the Six Months Ended
June 30, June 30,
----------------------------- -------------------------
2008 2007 2008 2007
---------- ---------- ---------- ----------
Current
Federal $ -- $ -- $ -- $ --
State 17,967 -- 17,967 --
---------- ------------ ---------- -----------
17,967 -- 17,967 --
---------- ------------ ---------- -----------
Deferred
Federal $ 141,697 $ (101,114) $ 75,983 $ (67,123)
State 23,563 (11,869) 12,635 (16,110)
---------- ------------ ---------- -----------
$ 165,260 (112,983) 88,618 (83,233)
---------- ------------ ---------- -----------
Total provision for income taxes - net $ 183,227 $ (112,983) $ 106,585 $ (83,233)
========== ============ ========== ===========
The difference between income tax expense computed by applying the federal
statutory corporate tax rate and actual income tax expense is as follows:
For the Three Months Ended For the Six Months Ended
June 30, June 30,
--------------------------- -------------------------
2008 2007 2008 2007
-------- -------- -------- --------
Statutory federal income tax benefit
rate 35.0% (35.0%) 35.0% (35.0%)
State income taxes net of federal
income tax benefit 3.6 ( 3.6 ) 3.6 ( 3.6 )
True up of prior year's state income
taxes net of federal income tax
benefit 2.6 -- 7.4 --
Tax effect of non deductible items 5.2 2.6 29.6 7.1
----- ----- ----- -----
Effective income tax (benefit) rate 46.4% 36.0% 75.6% 31.5%
===== ===== ----- =====
The tax effect of non-deductible items in 2008 include stock compensation
expense related to incentive stock options of $28,434 and $58,746 for the three
months ended and six months ended June 30, 2008, respectively. and net imputed
interest expense of associated with the debt issued in conjunction with the
acquisition of La Tours and Cruises, Inc. net of the imputed interest income
from the receivable from Phoenix.
Deferred income taxes result from temporary differences in the recognition of
income and expenses for financial reporting purposes and for tax purposes. The
tax effect of these temporary differences representing deferred tax asset and
liabilities result principally from the following:
17
ONLINE VACATION CENTER HOLDINGS CORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, December 31,
2008 2007
------------- -------------
Net operating loss carry-
forwards and AMT tax credit $ 410,575 $ 430,328
Depreciation and amortization (89,715) (49,635)
Accruals and other 61,075 52,289
------------- -------------
Deferred income tax asset $ 381,935 $ 432,982
============= =============
The net deferred tax assets are comprised
of the following:
December 31, December 31,
2007 2007
-------------- --------------
Current $ 1,665 $ 1,665
Non-current 380,270 431,317
-------------- --------------
Net deferred income tax asset $ 381,935 $ 432,982
============== ==============
7. 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, 2008, the Company entered into employment contracts with six
employees. The contracts are each for a term of one year with an aggregate
compensation commitment of $665,000. One contract provides for incentives in the
event that certain annual targets are attained.
8. SUBSEQUENT EVENTS
On August 1, 2008, the Company announced that its Board of Directors has
approved a program to repurchase of up to $200,000 of the Company's common stock
to be funded from available working capital and subject to the applicable rules
and regulations of the Securities and Exchange Commission and other applicable
legal requirements. The program will not extend beyond June 30, 2009, does not
require the Company to acquire a specific number of shares and may be suspended
from time to time or discontinued.
On August 1, 2008 the Company announced that Mr. Edward Rudner had succeeded Mr.
Tony McKinnon as Chairman of its Board of Directors.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward Looking Statements
This Quarterly Report on Form 10-Q 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-Q 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, 2007 filed with the Securities and Exchange
Commission ("SEC") on March 28, 2008 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
We are focused on internally growing and developing our group of diversified
vacation marketers with a range of products that can be cross-sold to an
extensive customer base and provide a high degree of personalized service to
help consumers research, plan and purchase a vacation.
We provide vacation marketing services through eight wholly owned subsidiaries.
Our portfolio of travel companies include:
o Online Vacation Center, Inc. ("Online Vacation Center"), a full
service vacation seller focused on serving the affluent retiree
market. Historically, this subsidiary has been the core business,
accounting for the majority of revenue and net income through the sale
of high margin cruise packages. This business is now integrated with
our other travel companies, Curves Travel, the licensed travel
management company of Curves International, Inc., La Fern, Inc.,
operating as eLeisureLink.com and focusing on land-based vacations,
and Cruises for Less, our home-based selling group,
o Dunhill Vacations, Inc. ("Dunhill"), the publisher of three travel
newsletters, "Top Travel Values", "Spotlight", and "TRAVELFLASH", and
o La Tours and Cruises, Inc. and Thoroughbred Travel, LLC, our Houston
travel agencies operating as "West University Travel / Journeys
Unlimited", focused on providing luxury personal travel products such
as cruises, European tours and all-inclusive vacations.
In the last 23 months, we have completed seven acquisitions. We acquired Phoenix
International Publishing, LLC ("Phoenix"), Thoroughbred Travel, LLC, and La
Fern, Inc. in the latter half of 2006, La Tours and Cruises, Inc., Dunhill
Vacations, Inc. and certain assets of SmartTraveler.com, Inc. in the first
quarter of 2007 and Curves Travel in May 2007 (collectively the "Acquisition
Companies", excluding Phoenix which was sold back to its original owner in March
2008).
19
We generate revenues from:
o commissions on cruises
o commissions on other travel related products
o commissions on travel insurance
o marketing and publishing services 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 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.
In November 2007, our Board of Directors granted us the authority to sell
Phoenix, a publisher of consumer magazines and guides about travel to the U.S.
and Canada. On March 31, 2008, we completed the sale of Phoenix to Simon Todd
("Mr. Todd"), pursuant to the terms of an acquisition agreement ("Acquisition
Agreement"), dated March 31, 2008, by and among the Company, Phoenix, and Mr.
Todd. Pursuant to the Acquisition Agreement, we received 1,250,000 shares of our
common stock from Mr. Todd at closing. Upon execution of the Acquisition
Agreement, Mr. Todd resigned as Vice President of the Company. Prior to our
acquisition of Phoenix, Mr. Todd was the owner, sole member, and President of
Phoenix. We acquired Phoenix from Mr. Todd on August 31, 2006 for 1,450,000
shares of our common stock.
Results of Operations
Three Months Ended June 30, 2008 Compared to the Three Months Ended June 30,
2007
Continuing operations:
Revenues increased by $725,172, 36.9%, to $2,691,750 for the three months ended
June 30, 2008 ("the second quarter of 2008") compared to $1,966,578 for the
three months ended June 30, 2007 ("the second quarter of 2007"). The increase is
attributable to an increase in commission and publishing revenues offset by a
decrease in marketing revenues.
Selling and marketing expenses decreased by $145,498, 14.7%, to $842,407 for the
second quarter of 2008 compared to $987,905 for the second quarter of 2007. The
decrease is primarily attributable to a decrease in sales staff compensation and
marketing costs. Selling and marketing expenses primarily consist of sales staff
compensation and costs to produce marketing materials.
General and administrative expenses increased by $128,177, 10.5%, to $1,350,854
for the second quarter of 2008 compared to $1,222,677 for the second quarter of
2007. The increase is primarily attributable to an increase in the general and
administrative expenses associated with publishing activities commensurate with
its increase in revenues. General and administrative expenses primarily include
management and non sales staff compensation, professional services, and
occupancy costs.
20
Depreciation and amortization expense for the second quarter of 2008 was $99,569
compared to $60,689 for the second quarter of 2007. Amortization expense
increased by $28,284 during the second quarter of 2008, primarily as a result of
an increase in the amortization expense of the Dunhill subscriber list. The
remaining increase of $10,597 is attributable to an increase in depreciation
expense.
Net interest expense decreased from $8,998 for the second quarter of 2007 to
$3,812 for the second quarter of 2008. The reduction in net interest expense for
second quarter of 2008 was primarily attributable to our payments made on the
debt issued by us in conjunction with our acquisition of Thoroughbred Travel,
LLC and La Tours and Cruises, Inc ("La Tours").
Our income before income taxes was $395,108 in the second quarter of 2008
compared to a loss before a benefit for income taxes of $313,691 in the second
quarter of 2007. These results are primarily attributable to the increase in
revenues during the second quarter of 2008.
The provision for income taxes increased to an expense of $183,227 for the
second quarter of 2008 compared to a tax benefit of $112,983 for the second
quarter of 2007. The increase is directly related to our increased income before
income taxes of $395,108 during the second quarter of 2008 compared to a loss
before income taxes of $313,691 in the second quarter of 2007. The tax rate in
the second quarter of 2008, 46.4%, was due to the tax effect of non deductible
items and a true up of prior year state taxes. The tax benefit rate in the
second quarter of 2007 was 36%.
As a result of the foregoing, our income from continuing operations was $211,181
for the second quarter of 2008 compared to a loss from continuing operations of
$200,708 for the second quarter of 2007.
Six Months Ended June 30, 2008 compared to Six Months Ended June 30, 2007
Continuing Operations
Revenues increased by $720,428, 17.0%, to $4,947,574 for the six months ended
June 30, 2008 (the "first half of 2008") compared to $4,227,146 for the six
months ended June 30, 2007 (the "first half of 2007"). The increase is
attributable to an increase in commission and publishing revenues offset by a
decrease in marketing revenues.
Selling and marketing expenses decreased by $34,813, 0.2% to $1,830,306 for the
first half of 2008 compared to $1,865,119 for the first half of 2007. The
decrease is attributable to a decrease in sales staff compensation costs offset
by an increase in marketing costs associated with our specialty cruises: the
first Cruising to Music trip occurred during the first quarter of 2008 and the
first Enrichment Voyage occurred during the second quarter of 2008. Selling and
marketing expenses primarily consist of sales staff compensation and costs to
produce marketing materials.
General and administrative expenses increased by $256,449 or 10.2% to $2,767,036
for the first half of 2008 compared to $2,510,587 for the first half of 2007.
The increase is primarily attributable to an increase in the general and
administrative expenses associated with publishing activities commensurate with
its increase in revenues and general and administrative expenses of Curves
Travel which was acquired in May 2007. General and administrative expenses
primarily include management and non sales staff compensation, professional
services, and occupancy costs.
Depreciation and amortization expense for the first half of 2008 was $186,667 as
compared to $111,750 for the first half of 2007. Amortization expense increased
21
by $53,737 during the first half of 2008 as a result of amortization of
intangible assets acquired in conjunction with the Curves Travel acquisition in
May 2007 and an increase in the amortization expense of the Dunhill subscriber
list. The remaining increase of $21,180 is attributable to an increase in
depreciation expense.
Net interest expense increased from $4,220 for the first half of 2007 to $22,506
for the first half of 2008. The increase is primarily attributable to the first
quarter of 2008 expense imputed on the receivable from Phoenix payable over 40
months and decreased interest income earned on lower cash balances at the bank
at declining interest rates during the first half of 2008.
Our income before provision for income taxes was $141,059 in the first half of
2008 compared to our loss before benefit for income taxes of $264,530 in the
first half of 2007. The income is due to an increase in revenues and a decrease
in selling and marketing expenses, offset by an increase in general and
administrative expenses, depreciation and amortization and net interest expense.
The provision for income taxes increased from a benefit of $83,233 for the first
half of 2007 to a tax provision of $106,585 for the first half of 2008. The
increase is directly related to the increase in results from operations where
income before income taxes was $141,059 for the first half of 2008 whereas the
loss before income taxes was $264,530 for the first half of 2007. The tax rate
in the first half of 2008, 75.6%, was higher than the statutory rate because of
the tax effect of non deductible items and a true up of prior year state taxes.
The benefit rate in the first half of 2007, 31.5%, was lower than the statutory
rate because of the tax effect of items deductible for book but not for tax
purposes.
As a result of the foregoing, our income from continuing operations for the
first half of 2008 was $34,474 compared to a loss from continuing operations of
$181,297 in the first half of 2007.
Discontinued Operations
We acquired Phoenix, a United Kingdom publisher of consumer magazines and guides
about travel to the U.S. and Canada, on August 31, 2006 for 1,450,000 shares of
our common stock. In November 2007, the Company's Board of Directors granted the
Company the authority to sell Phoenix. On March 31, 2008, we sold Phoenix to Mr.
Todd, the former owner of Phoenix, in exchange for 1,250,000 shares of our
common stock which were owned by Mr. Todd. We recorded the sale of Phoenix at
its fair value, as defined by Statement of Financial Accounting Standards No.
157, Fair Value Measurements, resulting in a loss of $58,382. For tax purposes,
the transaction was treated as split-off with no resulting tax consequences. We
retired the 1,250,000 shares of our common stock received from Mr. Todd in the
sale transaction as of March 31, 2008.
The results of operations and cash flows of Phoenix has been removed from the
results of continuing operations and the assets and liabilities of Phoenix have
been classified as available for sale, as of December 31, 2007. The comparisons
of the results of operations of Phoenix between the second quarters of 2008 and
2007 and the first halves of 2008 and 2007, respectively, are as follows:
22
For the Three Months Ended June 30:
Increase/
2008 2007 (Decrease)
------- ------------ -----------
Revenues $ 0 $ 59,533 $ (59,533)
Operating (loss) $ 0 $ (140,094) $ 140,094
(Loss) on sale of Phoenix $ 0 -- $ --
Net (loss) from discontinued operations $ 0 $ (85,923) $ 85,923
For the Six Months Ended June 30:
Increase/
2008 2007 (Decrease)
------------ ------------ ------------
Revenues $ 107,569 $ 476,718 $ (369,149)
Operating (loss) $ (98,805) $ (281,793) $ 182,988
(Loss) on sale of Phoenix $ (58,382) -- $ (58,382)
Net (loss) from discontinued operations $ (119,274) $ (172,523) $ 53,249
As a result of the foregoing, our net income was $211,881 for the second quarter
of 2008 compared to a net loss of $286,631 for the first quarter of 2007. Our
net loss for the first half of 2008 was $84,800 compared to a net loss of
$353,820 for the first half of 2007.
Liquidity and Capital Resources
Cash at June 30, 2008 was $1,767,327 as compared to $1,189,042 at December 31,
2007. The primary source of our liquidity and capital resources has come from
our operations.
Cash flows provided by continuing operating activities for first half of 2008
and 2007 were $730,530 and $103,123, respectively. The increase of $627,407 in
2008 was primarily attributable to an increase of income from continuing
operations of $215,771, an increase in non-cash operating items of $278,535 and
an increase in cash provided by working capital items of $133,101.
Cash flows used in continuing investing activities for the first half of 2008
decreased to $100,157 from $1,175,423 during the first half of 2007. The primary
decrease in cash out flows related to no acquisition activity in the first half
of 2008 compared to $1,116,713 used for four acquisitions completed during the
first half of 2007, an increase in intangible assets and the pre-disposition
intercompany balance receivable from Phoenix totaling $335,766 in 2008, offset
by a decrease in restricted cash of $295,177 during the first half of 2008.
Cash flows used in continuing financing activities for the first half of 2008
totaled $100,000 as result of payment of a note issued in conjunction with the
La Tours acquisition. There were no cash flows from financing activities for the
first half of 2007.
Cash flows provided by discontinued operations, solely from operating
activities, increased by $61,025, to $47,912 provided during the first half of
2008 compared to a use of $13,113 in the first half of 2007.
At June 30, 2008, we had a working capital deficit of $553,555, as compared to a
working capital deficit of $847,857 at December 31, 2007, an increase of working
23
capital of $294,302. We had an accumulated deficit of $1,484,947 at June 30,
2008, a decrease of $84,800.
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. 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. We do not expect inflation to materially affect our revenues and net
income.
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 Annual Report on Form 10-KSB for the year ended
December 31, 2007 filed with the SEC on March 28, 2008, 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 the marketing
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 our status as a primary obligor and the extent of
our pricing latitude. Based upon our evaluation of vacation travel sales
24
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.
ITEM 4(T). - CONTROLS AND PROCEDURES
As of June 30, 2008 under the supervision of and with the participation of our
management, including our chief executive officer and chief financial
officer, we conducted an evaluation 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) under the Securities Exchange Act of 1934 as of the end
of the period covered by this report (the "Evaluation Date"). Based upon the
evaluation, our chief executive officer and chief financial officer
concluded that our disclosure controls and procedures were effective as of the
Evaluation Date. Disclosure controls are controls and procedures designed to
reasonably ensure that information required to be disclosed in our reports filed
under the Exchange Act, such as this report, is recorded, processed, summarized
and reported within the time periods specified in the SEC's rules and forms.
Disclosure controls include controls and procedures designed to reasonably
ensure that such information is accumulated and communicated to our management,
including our chief executive officer and chief financial officer, as
appropriate to allow timely decisions regarding required disclosure.
In connection with this evaluation, our management identified no changes in our
internal control over financial reporting that occurred during the most recent
fiscal quarter that materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
25
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved from time to time in various legal claims and actions.
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
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's annual meeting of stockholders was held on May 7, 2008. Of the
total number of common shares outstanding on March 25, 2008, a total of
16,381,753 were represented in person or by proxy. Results of votes with respect
to proposals submitted at that meeting are as follows:
a. To elect four nominees to serve as directors to hold office until
the next annual meeting of our stockholders or until their successors have been
elected and qualified. Our stockholders voted to elect all four nominees to
serve as directors. Votes recorded by nominee were as follows:
Against/
Nominee For Withheld
------------------- ---------- --------
Richard A. McKinnon 16,331,569 50,184
Edward B. Rudner 16,332,569 49,184
Brian P. Froelich 16,331,269 50,484
Frank Bracken 16,330,369 51,384
There were no broker non-votes in connection with the election of
directors.
b. To ratify our Board's appointment of Jewett, Schwartz, Wolfe &
Associates as our independent public accountants for the 2008 fiscal year. Our
stockholders voted to approve this proposal with 16,155,317 votes for and
226,435 votes against inclusive of 3,783 abstentions. There were no broker
non-votes in connection with the ratification of our independent public
accountants for fiscal 2008.
c. To approve an amendment to the Company's 2005 Management and
Director Equity Incentive and Compensation Plan to increase the number of shares
to which stock options and restricted stock may be granted, by 1,000,000 shares
to 3,500,000 shares. Our stockholders voted to approve this proposal with
15,727,585 votes for and 65,525 votes against inclusive of 9,600 abstentions.
There were no broker non-votes in connection with the approval of the amendment
to the Company's 2005 Management and Director Equity Incentive and Compensation
Plan.
No other matters were submitted to the vote of security holders during
the second quarter of fiscal 2008.
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ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
Exhibit No. Exhibit Description
----------- -------------------
2.1 Acquisition Agreement, dated March 31, 2008, by and among
Online Vacation Center Holdings Corp., Phoenix
International Publishing LLC., and Simon Todd
(incorporated by reference to Exhibit 2.1 in the Company's
Current Report on Form 8-K filed with the SEC on April 2,
2008).
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
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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: August 12, 2008
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