UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2007
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period _____ from ________ to
Commission file number: 0-32137
ONLINE VACATION CENTER HOLDINGS CORP.
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(Name of Small business Issuer in Its Charter)
Florida 65-0701352
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
1801 N.W. 66TH Avenue, Suite 102, Plantation, FL 33313
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(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code:
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(954) 377-6400
Securities registered pursuant to Section 12(b) of the Act:
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None
Securities registered pursuant to Section 12(g) of the Act:
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Common Stock, $.0001 par value per share
Check whether the issuer is not required to file reports pursuant to Section 13
or 15(d) of the Exchange Act. [ ]
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
Indicate by check mark whether the registrant is a shell company (as defined in
rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The issuer's revenues for the most recent fiscal year ended December 31, 2007
were $9,324,386.
The aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $1,911,833 as of March 3, 2008 based on the closing
price of the issuer's common stock on the Over-the-Counter Bulletin Board on
said date ($0.51 per share). For purposes of the foregoing computation, all
executive officers, directors and 10% beneficial owners of the registrant are
deemed to be affiliates.
The number of shares outstanding of the registrant's common stock as of
December 31, 2007: 18,492,977
Documents Incorporated By Reference: None.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
TABLE OF CONTENTS
Page No.
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PART I
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ITEM 1. DESCRIPTION OF BUSINESS 4
ITEM 2. DESCRIPTION OF PROPERTY 11
ITEM 3. LEGAL PROCEEDINGS 11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 11
PART II
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ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL
BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES 12
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION 13
ITEM 7. FINANCIAL STATEMENTS 19
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE 19
ITEM 8A. CONTROLS AND PROCEDURES 19
ITEM 8A.(T). MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL
REPORTING 19
ITEM 8B. OTHER INFORMATION 20
PART III
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ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT 20
ITEM 10. EXECUTIVE COMPENSATION 22
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS 26
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 28
ITEM 13. EXHIBITS 28
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES 30
SIGNATURES 31
2
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
The information in this Annual Report on Form 10-KSB contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Such statements are based upon current expectations, assumptions, estimates and
projections about Online Vacation Center Holdings Corp. (the "Company") and our
industry. These forward-looking statements are subject to the many risks and
uncertainties that exist in our operations and business environment that may
cause actual results, performance or achievements of the Company to be different
from those expected or anticipated in the forward-looking statements. Any
statements contained herein that are not statements of historical fact may be
deemed to be forward-looking statements. For example, words such as "may",
"will", "should", "estimates", "predicts", "potential", "continue", "strategy",
"believes", "anticipates", "plans", "expects", "intends", and similar
expressions are intended to identify forward-looking statements. The Company's
actual results and the timing of certain events could differ significantly from
those anticipated in such forward-looking statements. Factors that might cause
or contribute to such a discrepancy include, but are not limited to, those
discussed in "Risk Factors" contained in Part I, Item 1 of this Annual Report on
Form 10-KSB and the risks discussed in our other filings with the Securities and
Exchange Commission ("SEC"). 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, even if new information becomes available or other events or
circumstances occur.
3
PART I
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Item 1 - Description of Business
Overview
Online Vacation Center Holdings Corp., a Florida holding company ("we," "us,"
"our," or the "Company"), provides vacation travel services through nine
wholly-owned subsidiaries. Our portfolio of travel companies include:
o Online Vacation Center, Inc., an internet-based vacation seller
focused on serving the affluent retiree market;
o Dunhill Vacations, Inc., a travel newsletter and media provider, and
o Curves Travel, the licensed travel management company of Curves
International, Inc.
We are focused on internally growing and developing our group of diversified
vacation marketers with a range of products that can be cross-marketed to our
extensive customer base and provide a high degree of personalized service to
help customers research, plan and purchase a vacation.
We were originally incorporated in the State of Florida under the name of Online
Vacation Center Holdings, Inc. in October 2000 by Edward B. Rudner. On March 16,
2006, we acquired control of Alec Bradley Cigar Corp, a publicly traded company
and the predecessor to our Company in a reverse merger transaction. Under a
share exchange agreement ("Share Exchange Agreement") dated August 25, 2005,
effective as of March 15, 2006, Alec Bradley Cigar Corp issued to Online
Vacation Center Holdings, Inc. interest holders an aggregate of 15,000,000
shares of its common stock in exchange for a 100% interest in Online Vacation
Center Holdings, Inc and sold all of its assets (and transferred all of its
liabilities) to Alan Rubin, its sole executive officer, director and principal
shareholder. For accounting purposes the consummation of these actions resulted
in a reverse merger and Online Vacation Center Holdings, Inc. is the accounting
survivor and surviving business entity; however, Alec Bradley Cigar Corp is the
surviving legal entity. As part of the Share Exchange Agreement, Alec Bradley
Cigar Corp changed its name to Online Vacation Center Holdings Corp.
Since completing the reverse merger transaction on March 15, 2006, we have
acquired six companies, and certain assets of a seventh company.
All references in this Annual Report to the "Company", "we" or "our" refer to
Online Vacation Center Holdings Corp. and our subsidiaries unless otherwise
noted. Our main telephone number is 954-377-6400 and our web site is located at
www.onlinevacationcenter.com. The content on our web site is not incorporated by
reference into this filing.
The Industry
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As reported by Travel Industry Association, the total domestic US travel and
tourism market was estimated at $646 billion dollars in 2005. Our core target
market is the tour and cruise portion of that market, estimated at approximately
$17 billion dollars in 2005. Cruise industry sources estimate that the global
cruise industry carried 16.6 million cruise passengers in 2007 compared to 15.3
million cruise passengers carried in 2006. North America represents the primary
source of cruise passengers and has experienced a compound annual growth rate of
approximately 8.5% since 1970. Almost 70% of the cruise passengers in the world
are sourced from North America, where cruising has developed into a mainstream
alternative to land-based resort and sightseeing vacations. Approximately 10.4
4
million North American-sourced cruise passengers took cruise vacations for two
consecutive nights or more in 2006, and industry sources estimate this amount
increased to about 11.3 million passengers in 2007.
Additionally, increased usage and familiarity with the internet have driven
rapid growth in online penetration of travel expenditures. According to
PhoCusWright, an independent travel, tourism and hospitality research firm, the
U.S. travel market entered a new era of channel balance in 2007, which was the
first year that more travel was purchased online than offline in the U.S.
PhoCusWright believes that the gap between online and offline will continue to
widen as more and more travelers shift behavior to online shopping and buying.
It also predicts that the online leisure/unmanaged business travel market will
surpass US$94 billion in 2007, over one-third of the total travel market (which
includes offline leisure/unmanaged business and on-and offline corporate
travel).
Operations
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We provide vacation marketing services from our call center located in
Plantation, Florida, our retail location in Houston, Texas, and our offices in
Dallas, Texas and London and Horsham, England. Sales are completed via the
Internet, by telephone, or in person.
Marketing
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Marketing of vacation services utilizes publications, direct mail, outbound
telemarketing and email blasts. We are able to stay in touch with consumers by
utilizing these methods.
Principal Suppliers
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We have historically been dependent on our relationships with four major cruise
lines: Celebrity Cruises, Norwegian Cruise Line, Princess Cruises, and Royal
Caribbean Cruise Line. Additionally, we also depend on third party service
providers for processing certain fulfillment services.
Intellectual Property
---------------------
We have registered three service marks: two for "Online Vacation Center" and one
for "Your Personal Vacation Managers".
Personnel
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At December 31, 2007, we had approximately 60 full-time employees; 38 are sales
and marketing personnel, and 22 hold administrative and executive positions. No
personnel are covered by a collective bargaining agreement. We believe our
relationship with our employees is good.
Competition
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The travel service industry is extremely competitive and has low barriers to
entry. We compete with other distributors of travel services, travel providers,
travel agents, tour operators, central reservation service providers and with
conventional and electronic publishers of travel media. Companies including, but
5
not limited to, Travelocity, Expedia and Orbitz, have greater experience, brand
name recognition and financial resources than us.
Regulation
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We believe that we are in material compliance with all federal and state
regulatory requirements applicable to our business, including the CAN-SPAM Act
of 2003 which regulates commercial electronic mail on a nationwide basis. We
adhere to the law by properly representing the nature of our commercial email
messages, not tampering with source and transmission information and obtaining
email addresses through lawful means.
Risk Factors
------------
An investment in our common stock involves a high degree of risk. You should
consider the following factors carefully before deciding to purchase shares of
our common stock. Additional risks not presently known to us or that we
currently deem immaterial may also impair our business operations.
If we do not have adequate financing, we may not be able to implement our
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business growth strategy
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If we have insufficient cash resources, our growth could be limited unless we
are able to obtain additional capital through debt or equity financings. There
can be no assurance that other financing will be available to us on terms we
deem acceptable or if at all. If we are unable to obtain financing sufficient
for all of our organic growth, we may be unable to fully carry out our
development strategy. If funding is insufficient, we may be required to delay,
reduce the scope of or eliminate some or all of our development programs.
Factors beyond our control could result in impairments.
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We operate in a highly competitive and sensitive marketplace whereby
international events, pricing pressures, unanticipated competition, adverse
changes in business climate and loss of key personnel are not uncommon events.
The potential impact of these events could adversely affect future cash flows
and fair values of goodwill and other intangibles in relationship to their
respective carrying values resulting in future impairments.
We operate in an increasingly competitive global environment.
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The market for the services we offer is increasingly and intensely competitive.
We compete with both established and emerging online and traditional sellers of
travel services with respect to each of the services we offer. Some of our
competitors, particularly travel suppliers such as cruise lines, airlines and
hotels, may offer products and services on more favorable terms, including lower
prices, no fees or unique access to proprietary loyalty programs, such as points
and miles. Many of our competitors, such as cruise lines, airlines and hotels,
have been steadily focusing on increasing online demand on their own websites in
lieu of third-party distributors such as us. For instance, some low cost
airlines, which are having increasing success in the marketplace, distribute
their online inventory exclusively through their own websites. Suppliers who
sell on their own websites typically do not charge a processing fee, and, in
some instances, offer advantages such as increased or exclusive product
availability and their own bonus miles or loyalty points, which could make their
offerings more attractive to consumers than offerings like ours. In addition, we
6
face increasing competition from other travel agencies, which in some cases may
have favorable offerings for both travelers and suppliers, including pricing,
connectivity and supply breadth. Increased competition has resulted in and may
continue to result in reduced margins, as well as loss of travelers,
transactions and brand recognition. We cannot assure you that we will be able to
compete successfully against current, emerging and future competitors or provide
differentiated travel products and services to our client base.
We are dependent upon travel providers for access to their inventory. Other
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distributors may have similar arrangements with travel providers, some of which
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may provide better availability or more competitive pricing than that offered by
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us.
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We anticipate that a significant portion of our revenues will continue to be
derived from the sale of inventory from relatively few travel providers. Our
agreements with our travel providers can generally be canceled or modified by
the travel provider upon relatively short notice. The loss of a contract,
changes in our pricing agreements or commission schedules or more restricted
access to travel providers' inventory could have a material adverse effect on
our business, financial condition and results of operations.
Over recent years, we have experienced downward pressure on remuneration from
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our suppliers.
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A substantial portion of our revenue is derived from compensation negotiated
with travel suppliers. Over recent years, cruise, air and hotel travel suppliers
have generally reduced or in some cases eliminated payments to travel agents and
other travel intermediaries. No assurances can be given that travel suppliers
will not further reduce or eliminate compensation, or attempt to charge travel
agencies for content, any of which could reduce our revenue and margins thereby
adversely affecting our business and financial performance.
Our business is currently dependent upon a number of different information and
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telecommunication technologies and any failure of this technology would decrease
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our revenues.
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Our business is currently dependent upon a number of different information and
telecommunication technologies to facilitate our access to information and
manage a high volume off inbound and outbound calls. Any failure of this
technology would have a material adverse effect on our business, financial
condition and results of operations. In addition, we are dependent upon certain
third party vendors, for access to certain information. Any failure of these
systems or restricted access by us would have a material adverse effect on our
business, financial condition and results of operations.
We rely on third-parties for many systems and services.
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We rely on third-party service providers for certain fulfillment, processing,
and other services. If these third-parties experience difficulty meeting our
requirements or standards, it could damage our reputation or make it difficult
7
for us to provide certain services to our clients and operate some aspects of
our business. In addition, if such third-party service providers were to cease
operations, temporarily or permanently, or face financial distress, we could
suffer increased costs and delays in our ability to provide similar services
until an equivalent service provider could be found or we could develop our own
technology or operations. In addition, we rely increasingly on outsourced
providers of traveler care and information technology services. If we are
unsuccessful in choosing high quality partners or we ineffectively manage these
partnerships it could have an adverse impact on our operations and financial
results.
There can be no assurance that our systems, procedures and controls will be
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adequate to support our operations as it expands which could significantly
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increase our expenses and delay or prevent growth.
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We expect to continue to grow internally. We expect to spend significant time
and effort expanding our existing businesses. There can be no assurance that our
systems, procedures and controls will be adequate to support our operations as
they expand. Any future growth also will impose significant added
responsibilities on members of senior management, including the need to
identify, recruit and integrate new senior level managers and executives. There
can be no assurance that such additional management will be identified or
retained by us. To the extent that we are unable to manage our growth
efficiently and effectively, or are unable to attract and retain qualified
management, our business, financial condition and results of operations could be
materially adversely affected.
Our revenues and earnings are especially sensitive to global events that are out
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of our control.
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Our results of operations are dependent upon factors generally affecting the
travel industry. Our revenues and earnings are especially sensitive to events
that affect domestic and international air travel and vacation. A number of
factors could result in an overall decline in demand for travel, including
political instability, armed hostilities, international terrorism, extreme
weather conditions, a rise in fuel prices, a decline in the value of the U.S.
dollar, labor disturbances, excessive inflation, a general weakening in economic
activity and reduced employment in the U.S. These types of events could have a
material adverse effect on our business, financial condition and results of
operations.
The domestic and international leisure travel industry is seasonal. Our results
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have been subject to quarterly fluctuations caused primarily by the seasonal
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variations in the travel industry.
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Net revenues and net income are generally lower in the third quarter. We expect
seasonality to continue in the future. Our quarterly results of operations may
also be subject to fluctuations as a result of changes in the mix of services
offered by us, internal growth rates, fare wars by travel providers, changes in
relationships with certain travel providers, the timing of overrides by travel
providers, extreme weather conditions or other factors affecting travel.
8
Unexpected variations in quarterly results could also adversely affect the price
of our common stock.
The travel service industry is extremely competitive and has low barriers to
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entry.
------
We compete with other distributors of travel services, travel providers, travel
agents, tour operators and central reservation service providers, some of which
have greater experience, brand name recognition and/or financial resources than
us. Our travel providers may decide to compete more directly with us and
restrict the availability and/or preferential pricing of their capacity. In
addition, other distributors may have relationships with certain travel
providers providing better availability or more competitive pricing than that
offered by us. Furthermore, some travel agents have a strong presence in their
geographic area which may make it difficult for us to attract customers in those
areas.
Our operations are dependent on the efforts and relationships of Edward Rudner.
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Our operations and business strategy are dependent on the efforts and
relationships of Edward Rudner. Furthermore, the Company is dependent on the
senior management of previously acquired businesses. If any of these individuals
become unable to continue in their roles with the Company, our business could be
adversely affected. Although we have entered into employment agreements with
Messrs. Rudner and Todd, there can be no assurance that each will be able to
continue in his present capacity for any particular period of time.
Edward Rudner has the ability to control the Company's business and corporate
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affairs.
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Edward Rudner and his affiliates beneficially own shares of common stock
representing approximately 56.3% of the total voting power of the common stock
of the Company. Mr. Rudner will be able to exercise control over the Company's
affairs and be able to elect the entire board of directors and to control the
disposition of any matter submitted to a vote of our shareholders.
Our websites rely on intellectual property, and we cannot be sure that this
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intellectual property is protected from copying or use by others, including
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potential competitors.
----------------------
We regard much of our content and technology as proprietary and try to protect
our proprietary technology by relying on trademarks, copyrights, trade secret
laws and confidentiality agreements. In connection with our license agreements
with third parties, we seek to control access to and distribution of our
technology, documentation and other proprietary information. Even with all of
these precautions, it is possible for someone else to copy or otherwise obtain
and use our proprietary technology without our authorization or to develop
similar technology independently. Effective trademark, copyright and trade
secret protection may not be available in every country in which our services
are made available through the internet, and policing unauthorized use of our
proprietary information is difficult and expensive. We cannot be sure that the
steps we have taken will prevent misappropriation of our proprietary
9
information. This misappropriation could have a material adverse effect on our
business. In the future, we may need to go to court to enforce our intellectual
property rights, to protect our trade secrets or to determine the validity and
scope of the proprietary rights of others. This litigation might result in
substantial costs and diversion of resources and management attention.
We currently license from third parties some of the technologies incorporated
into our websites. As we continue to introduce new services that incorporate new
technologies, we may be required to license additional technology. We cannot be
sure that such technology licenses will be available on commercially reasonable
terms, if at all.
Our processing, storage, use and disclosure of personal data could give rise to
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liabilities as a result of governmental regulation, conflicting legal
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requirements or differing views of personal privacy rights.
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In the processing of our traveler transactions, we receive and store a large
volume of personally identifiable information. This information is increasingly
subject to legislation and regulations in numerous jurisdictions around the
world. This government action is typically intended to protect the privacy of
personal information that is collected, processed and transmitted in or from the
governing jurisdiction. We could be adversely affected if legislation or
regulations are expanded to require changes in our business practices or if
governing jurisdictions interpret or implement their legislation or regulations
in ways that negatively affect our business, financial condition and results of
operations. As privacy and data protection have become more sensitive issues, we
may also become exposed to potential liabilities as a result of differing views
on the privacy of travel data. These and other privacy developments that are
difficult to anticipate could adversely affect our business, financial condition
and results of operations.
We may be found to have infringed on intellectual property rights of others that
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could expose us to substantial damages and restrict our operations.
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We could face claims that we have infringed the patents, copyrights or other
intellectual property rights of others. In addition, we may be required to
indemnify travel suppliers for claims made against them. Any claims against us
could require us to spend significant time and money in litigation, delay the
release of new products or services, pay damages, develop new intellectual
property or acquire licenses to intellectual property that is the subject of the
infringement claims. These licenses, if required, may not be available on
acceptable terms or at all. As a result, intellectual property claims against us
could have a material adverse effect on our business, operating results and
financial condition.
Fluctuations in the British Pound exchange rate can affect our publishing costs,
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as it is dependent on third party production facilities which invoice the
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Company in British Pounds.
--------------------------
Phoenix International Publishing, LLC ("Phoenix") utilizes third party
publishing production facilities in the UK, therefore, a substantial number of
Phoenix's transactions are denominated in British Pounds. As Phoenix's
10
functional currency is the US Dollar, it could be negatively impacted by
fluctuations in the exchange rate.
Our stock is thinly traded.
---------------------------
While our stock trades on the NASDAQ Over-the-Counter Bulletin Board, our stock
is thinly traded and an investor may have difficulty in reselling his or her
shares quickly. The low trading volume of our common stock is outside of our
control, and we can not guarantee that the trading volume will increase in the
near future or that, even if it does increase in the future, it will be
maintained. Without a large float, our common stock is less liquid than the
stock of companies with broader public ownership and, as a result, the trading
prices of our common stock may be more volatile. In addition, in the absence of
an active public trading market, an investor may be unable to liquidate his or
her investment in us. Trading of a relatively small volume of our common stock
may have a greater impact on the trading price for our stock than would be the
case if our public float were larger. We cannot predict the prices at which our
common stock will trade in the future.
Item 2 - Description of Property
Properties
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We lease approximately 10,000 square feet of office space as our principal
location in Plantation, Florida where we have our corporate offices and our call
center. The current lease term is through June 30, 2008. We also lease 2,350
square feet for our retail location for La Tours and Cruises, Inc. in Houston,
Texas which expires on December 31, 2009.
Item 3 - Legal Proceedings
Legal Proceedings
-----------------
On November 15, 2007, we were notified that the Company was being sued in a
putative class action lawsuit in the United States District Court for the
Southern District of Florida (Joseph Kay v Online Vacation Center Holdings
Corp., et al., Case No. 07-61619). The plaintiff claims that the Company
violated the Fair and Accurate Credit Transactions Act. The plaintiff seeks
class action status to represent all consumers of the Company since December 4,
2006. On March 20, 2008, the United States District Court for the Southern
District of Florida dismissed with prejudice the lawsuit.
Additionally, 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, we do not believe
that the resolution of any of these other matters, either individually or in the
aggregate, will materially affect our financial position, cash flows or the
results of our operations.
Item 4 - Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of securities holders during the fourth
quarter of the fiscal year ended December 31, 2007.
11
PART II
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Item 5 - Market for Common Equity, Related Stockholder Matters and Small
Business Issuer Purchases of Equity Securities
The Company's shares of common stock are traded over-the-counter and quoted on
the OTC Electronic Bulletin Board under the symbol "ONVC". Until March 16, 2006,
the Company's shares of common stock traded under the symbol "ABDC".
Historically the stock is thinly traded and transactions in the stock are
sporadic and infrequent. The following table sets forth the high and low bid
quotations for the Company's common stock for the periods indicated. The
quotations reflect inter-dealer prices and do not include retail mark-ups,
mark-downs or commissions. The prices do not necessarily reflect actual
transactions.
Period High Low
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Three Months Ended March 31, 2007 $2.20 $3.28
Three Months Ended June 30, 2007 $2.00 $2.80
Three Months Ended September 30, 2007 $2.15 $1.70
Three Months Ended December 31, 2007 $1.84 $0.56
Three Months Ended March 31, 2006 $4.00 $1.05
Three Months Ended June 30, 2006 $3.44 $1.35
Three Months Ended September 30, 2006 $2.15 $1.25
Three Months Ended December 31, 2006 $3.26 $1.68
On December 31, 2007, there were 539 shareholders of record of the Company's
common stock.
The Company has never paid cash dividends on its common stock. The Company
presently intends to retain future earnings, if any, to finance the expansion of
its business and does not anticipate that any cash dividends will be paid in the
foreseeable future. The future dividend policy will depend upon the Company's
earnings, capital requirements, expansion plans, financial condition and other
relevant factors.
12
Sales of Unregistered Securities
--------------------------------
On November 7, 2007, we issued an aggregate of 240,000 options to five employees
under our 2005 Management and Director Equity Incentive and Compensation Plan.
The exercise price of the options is $1.76 per share and the options vest on
November 7, 2009. The expiration date of the options is November 7, 2012. We
issued these stock options 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
stating that these options are not registered under the Securities Act and set
forth restrictions on their transferability and sale.
Item 6 - Management's Discussion And Analysis Or Plan Of Operation
Management's Discussion and Analysis or Plan of Operation should be read
together with our financial statements and related notes included elsewhere in
this Annual Report on Form 10-KSB. This Annual Report on Form 10-KSB, including
the following discussion, contains trend analysis and other forward-looking
statements within the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Any statements in this Annual Report on Form
10-KSB that are not statements of historical facts are forward-looking
statements. These forward-looking statements are based on a number of
assumptions and involve risks and uncertainties. Actual results may differ
materially from those set forth in such forward-looking statements as a result
of factors set forth elsewhere in this Annual Report on Form 10-KSB, including
under "Risk Factors."
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 nine 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,
o Dunhill Vacations, Inc., a travel newsletter and media provider, and
o Curves Travel, the licensed travel management company of Curves
International, Inc.
In the last sixteen months, we have completed seven acquisitions. We acquired
Phoenix International Publishing, LLC, 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", sans
Phoenix).
13
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 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, the Company's Board of Directors granted the Company the
authority to sell Phoenix, a company acquired in August 2006. Phoenix is a
publisher of consumer magazines and guides about travel to the U.S. and Canada.
We expect the sale will be completed within one year of the Board of Director's
authorization date and Phoenix has been accounted for as discontinued
operations. 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, for all periods presented.
Results of Operations
---------------------
Year Ended December 31, 2007 Compared To Year Ended December 31, 2006
---------------------------------------------------------------------
Continuing Operations
Revenues increased by $2,436,532 or 35.4% to $9,324,386 for the year ended
December 31, 2007 ("2007") compared to $6,887,854 for the year ended December
31, 2006 ("2006'). The increase is attributable to an increase in our core
Online Vacation Center business as well as the revenues from the Acquisition
Companies. We derived revenues from six Acquisition Companies during 2007
compared to revenues from two Acquisition Companies in 2006.
Selling and marketing expenses increased by $1,480,798 or 67.3% to $3,680,837
for 2007 compared to $2,200,039 for 2006. The increase is primarily attributable
to the increased expenses associated with the Acquisition Companies and to an
increase in Online Vacation Center's co-op marketing projects and sales staff
compensation during 2007. Selling and marketing expenses primarily consist of
sales staff compensation and costs to produce marketing materials.
G&A expenses increased by $1,042,066 or 25.5% to $5,126,479 for 2007 compared to
$4,084,413 for 2006. The increase is attributable to the increased G&A expenses
associated with the Acquisition Companies and an increase in Online Vacation
Center's non sales staff compensation costs. G&A expenses primarily include
management and non sales staff compensation, professional services, and
occupancy costs.
14
Depreciation and amortization expense for 2007 was $262,966 compared to $92,197
for 2006. The increase of $170,769 is primarily attributable to the increased
amortization expenses associated with six Acquisition Companies during 2007
compared to expenses associated with two Acquisition Companies during 2006. The
remaining increase of $23,340 is attributable to an increase in depreciation
expense during this time period.
Interest income/(expense) decreased from $16,770 of net interest income for 2006
compared to net interest expense of $15,454 for 2007. Net interest income in
2006 was attributable to interest expense on $3,000,000 of 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), offset by interest
income earned on our invested cash balances which were higher than during the
same period of 2007. Net interest expense in 2007 primarily represents the
excess of the 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., totaling $42,039 offset by the interest income earned on our
invested excess cash balances.
Our income before income taxes was $238,650 in 2007 compared to income before
income taxes of $527,975 in 2006. The decrease in income is due to an increase
in sales and marketing expenses and G&A expenses, partially offset by an
increase in revenues during this time period.
Our provision for income taxes decreased from $300,317 for 2006 to $133,411 for
2007. The decrease is directly related to a decrease in our results from
operations in which income before income taxes was $527,795 for 2006 compared to
income before income taxes of $238,650 for 2007. The tax rate in 2006, 56.9%,
was higher than the statutory rate because of tax rate differentials, the
true-up of permanent tax differences, the tax effect of deductible items for
book but not tax purposes, and the gain on sale of cigar assets, the result of
the transaction wherein we 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. We recognized gain on each asset distributed based upon the
difference between the fair market value and our adjusted basis in each asset at
the time of closing. The tax rate in 2007, 55.9%, is primarily because of the
tax effect of stock based compensation expense associated with incentive stock
options and imputed interest expense associated with Acquisition debt which are
deductible for book but not for tax purposes.
As a result of the foregoing, our net income from continuing operations was
$105,239 for 2007 compared to net income from continuing operations of $227,658
for 2006.
Discontinued Operations
We acquired Phoenix, the United Kingdom's leading publisher of consumer
magazines and guides about travel to the U.S. and Canada, on August 31, 2006. In
November 2007, the Company's Board of Directors granted the Company the
authority to sell Phoenix. The sale is anticipated to be completed within one
year of the Board of Director's authorization date and Phoenix has been
accounted for as discontinued operations. 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, for all periods presented. The comparison of the results of operations of
Phoenix between 2007 (calendar year 2007) and 2006 (August 31, 2006 through
December 31, 2006) is as follows:
15
Increase/
2007 2006 (Decrease)
---------- ---------- ----------
Revenues $ 1,681,083 $ 897,506 $ 783,577
Operating income (loss) (228,673) 16,445 (245,118)
Net income (loss) from discontinued
operations $ (147,859) $ 10,195 $ (158,054)
The Company is actively marketing Phoenix for sale, however, no formal offers
have been received from any prospective purchasers.
Liquidity and Capital Resources
Cash at December 31, 2007 and 2006 was $1,189,842 and $2,658,885 respectively.
The primary source of our liquidity and capital resources has historically come
from our operations.
Cash flows provided by operating activities for 2006 were $962,508 whereas cash
flows used by operating activities in 2007 were $47,094. The decrease of
$1,009,602 was primarily attributable to an increase in cash used for working
capital of $858,776 in 2007, a decline of income from continuing operations of
$122,419 in 2007; from $227,658 in 2006 to $105,239 in 2007, and a decrease in
non-cash operating items of $28,407 in 2007..
Cash flows used in investing activities for 2007 increased to $1,333,720 from
$405,870 during 2006. The primary cash out flows related to an increase in the
excess of cash paid over cash received totaling $794,764 in conjunction with the
four acquisitions completed during 2007 and an increase in capital expenditures
and intangible assets totaling $139,112 during 2007.
Cash flows used in financing activities for the year ended December 31, 2007
totaled $125,000 as result of payment of a note issued in conjunction with the
Thoroughbred Travel LLC acquisition. There were no cash flows from financing
activities for the year ended December 31, 2006.
Cash flows provided by discontinued operations increased by $146,906 as a result
of an increase in 2007 cash provided by operating activities of $63,060 over
2006. There were no investing activities of discontinued operations during 2007,
however, $83,846 was paid in excess of cash received in conjunction with the
acquisition of Phoenix in 2006.
At December 31, 2007, we had a working capital deficit of $847,857, as compared
to a working capital surplus of $581,481 at December 31, 2006, a decrease of
$1,429,338. We had an accumulated deficit of $1,400,147 at December 31, 2007, an
increase of $42,620.
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. There is no assurance that we
will be able to obtain additional capital or financing in amounts or on terms
acceptable to the Company, if at all or on a timely basis.
The Company has historically been dependent on relationships with four major
cruise lines: Celebrity Cruises, Norwegian Cruise Line, Princess Cruises, and
16
Royal Caribbean Cruise Line and also depends 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.
Recent Accounting Pronouncements
--------------------------------
Accounting for Uncertainty in Income Taxes
We adopted the provisions of Financial Accounting Standards Board ("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 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 as of January 1, 2007 did not have a
significant impact on our financial statements. At the date of adoption and as
of December 31, 2007, we do not have a liability for any unrecognized tax
benefits. Our policy is to record interest and penalties on uncertain tax
positions as income tax expense. As of December 31, 2007, we have not accrued
nor recognized interest or penalties related to uncertain tax positions. We have
not recorded any significant increase or decrease to unrecognized tax benefits
during 2007 related to U.S. federal or state tax positions.
We file income tax returns in the U.S. federal jurisdiction and various states.
We have not been subject to U.S. federal income tax examinations by tax
authorities nor state authorities since our inception in 2000. We believe that
we have not taken any uncertain tax positions that would impact our
consolidated financial statements as of December 31, 2007.
Other Recent Accounting Pronouncements
--------------------------------------
See Note 2, "Summary of Significant Accounting Policies" in the Notes to the
Consolidated Financial Statements for a discussion of recent accounting
pronouncements and their effect, if any, on the Company.
17
Critical Accounting Policies
----------------------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues, expenses and the disclosure of contingencies. Due to the
inherent uncertainty involved in making estimates, actual results reported in
future periods may be materially different from those estimates. The following
policies are those that we consider to be the most critical. See Note 2,
"Summary of Significant Accounting Policies," for further description of these
and all other accounting policies.
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 collectability 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 the 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 values of our reporting unit by
discounting its projected future cash flows. Developing these 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
reporting units 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.
18
Item 7 - Financial Statements
The Company's financial statements as of and for the years ended December 31,
2007 and 2006 have been examined to the extent indicated in their report by
Jewett, Schwartz, Wolfe and Associates, independent certified public
accountants, and have been prepared in accordance with generally accepted
accounting principles and pursuant to Regulation S-B as promulgated by the SEC.
The aforementioned financial statements are included herein starting with page
F-1.
Item 8 - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
Item 8A. Controls and Procedures.
------------------------
As of the end of the period covered by this report, the Company carried out
an evaluation, under the supervision and with the participation of management,
including the Chief Executive Officer and Chief Financial Officer, of the
Company's disclosure controls and procedures (as defined in Rules 13a-14 and
15d-14 under the Securities Exchange Act of 1934). Based upon that evaluation,
the Chief Executive Officer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures are effective in timely alerting
them to material information required to be included in periodic filings with
the Securities and Exchange Commission.
There has been no change in the Company's internal controls over financial
reporting during the quarter ended December 31, 2007 that has materially
affected, or is reasonably likely to materially affect, the Company's internal
controls over financial reporting.
Item 8A(T). Management's Annual Report on Internal Control over Financial
-------------------------------------------------------------
Reporting
---------
Our management is responsible for establishing and maintaining adequate
internal control over financial reporting. Internal control over financial
reporting is a process designed by, or under the supervision of, the Chief
Executive Officer and the Chief Financial Officer and effected by our board of
directors, management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles.
Our evaluation of internal control over financial reporting as of
December 31, 2007, was conducted on the basis of framework in "Internal
Control-Integrated Framework," issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this evaluation, management
has concluded that our internal control over financial reporting was effective
as of December 31, 2007.
This Annual Report does not include an attestation report of the
Company's registered public accounting firm regarding internal control over
financial reporting. Management's report was not subject to attestation
requirements by the Company's registered public accounting firm pursuant to
temporary rules of the Securities and Exchange Commission that permit the
Company to provide only management's report in this Annual Report
19
Item 8B - Other Information.
None.
PART III
--------
Item 9 - Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
The following table sets forth certain information with respect to our executive
officers and directors as of December 31, 2007:
Name Age Position
---- --- --------
Edward B. Rudner 57 Chief Executive Officer, President, Chief Financial
Officer and Director
Richard A. McKinnon 68 Chairman of the Board of Directors
Brian P. Froelich 61 Director
Frank Bracken 67 Director
Edward B. Rudner has served as our Chief Executive Officer, President, Chief
Financial Officer and as a director since March 15, 2006, the effective date of
the Share Exchange Agreement. Mr. Rudner has served as an executive officer and
director of Online Vacation Center Holdings, Inc. since its inception in October
2000. Prior to founding Online Vacation Center Holdings, Inc., Mr. Rudner served
as Chief Financial Officer and then Chief Operating Officer of Alamo Rent A Car.
During his tenure, Alamo Rent A Car expanded from a Florida company with 400
cars to a national car rental company with over 50,000 cars. In 1984, Mr. Rudner
became President and Chief Executive Officer of Certified Tours, which grew from
selling 10,000 vacation packages a year to over 250,000. In 1989, Mr. Rudner
became Chairman and Chief Executive Officer of Renaissance Cruises, which
expanded ship assets from $60 million to over $1 billion and increased revenues
from $20 million to over $300 million by 1999. Mr. Rudner holds a BA in history,
cum laude from the University of Massachusetts.
Richard Anthony (Tony) McKinnon has served as the Chairman of the Board of
Directors of the Company since March 15, 2006, the effective date of the Share
Exchange Agreement. With a background at senior levels in marketing and
executive management, Mr. McKinnon has accumulated over thirty years of
experience in the travel industry. His experiences include executive
responsibilities at American Airlines, Pan American World Airways, Delta Air
Lines, Wyndham Resort Hotels, USAir, American Hawaii Cruises and The Delta Queen
Steamboat Company. Most recently, McKinnon developed Vacation.com, which is
currently a network of approximately 6,000 travel agencies across North America.
With the sale of Vacation.com to Amadeus, a leading global distribution system
and technology provider serving the marketing, sales and distribution needs of
the world's travel and tourism industries, Mr. McKinnon served as CEO of
Amadeus' North American Operations from 2000 through 2003. In 2004, he served as
a senior adviser to the Seabury Group, a consulting firm. Mr. McKinnon currently
provides consulting services to travel industry companies. He also currently
serves as a director for the Baptist Foundation of Texas, Tauck, Inc., Passport
Online, Inc., and GSC Acquisition Company. Mr. McKinnon holds a BS from the
United States Military Academy and a JD from Emory University School of Law.
Brian P. Froelich has served as a director since March 15, 2006, the effective
date of the Share Exchange Agreement. After four years in public accounting with
Arthur Anderson and Coopers and Lybrand and five years at US Life, he founded
BPF Travel in 1979. In 1984 he sold BPF Travel to American Express. With BPF
20
Travel's acquisition by American Express, he became part of the senior executive
team of American Express. During his tenure at American Express, he was general
manager of the domestic travel management services business. As a result of his
performance he was named to the American Express Hall of Fame. From 1999 through
2001 he served as the Senior Vice President of Consumer Travel at American
Express. From 2001 through 2002 he served as President and CEO of Allied Tours,
a subsidiary of Global Vacation Group, Inc. (NYSE: GVG) where he affected the
turnaround of Allied Tours and sold it to a large European travel company. From
2003 through 2007, he served as president and CEO of Fenevations, LLC, a
U.S.-based manufacturer of custom windows and doors. Since 2007, he has served
as Chief Operating Officer of Club ABC Tours. Mr. Froelich holds a BS in Finance
from Boston College, an MBA from Rutgers University, and a JD from Seton Hall
Law School.
Frank Bracken has served as a director since March 15, 2006, the effective date
of the Share Exchange Agreement. From 1994 until November 2005, Frank Bracken
served as President and COO of Haggar Clothing Company ("Haggar"). Beginning in
2006, Mr. Bracken retired and continues to serve on numerous public and
not-for-profit boards. Bracken served his entire 42-year professional career at
Haggar, joining the company as a management trainee in 1963, and was named
Regional Sales Manager in 1971. In 1976, Bracken was named Vice
President/National Sales Manager, and then earned the title of Senior Vice
President of Sales and Merchandising in 1984. In 1988, all marketing functions
were added to that responsibility and he was named Senior Vice President of
Marketing. On March 7, 1991, he added the responsibilities of Domestic and
International Manufacturing. At that time he was named Executive Vice President.
On July 20, 1994, he assumed the position of President and COO. Mr. Bracken
serves as a director of two other public companies -Ennis Incorporated
(NYSE:EBF) and Philanthropy World Magazine. Mr. Bracken holds a bachelor's
degree in Marketing from the University of North Texas in Denton, Texas.
Code of Ethics
--------------
We have adopted a Code of Ethical Conduct that includes provisions ranging from
conflicts of interest to compliance with all applicable laws and regulations.
All officers and directors are bound by this Code of Ethical Conduct, violations
of which may be reported to the Chairman of the Board of Directors.
Audit Committee
---------------
Our Company has an Audit Committee comprised of Messrs. Froelich, chairman of
the Committee and Bracken, both independent directors as determined by the rules
of the American Stock Exchange. The responsibilities and duties of the Audit
Committee consist of but are not limited to: (1) overseeing the financial
reporting process; (2) meeting with our external auditors regarding audit
results; (3) engaging and ensuring independence of our outside audit firm and
(4) reviewing the effectiveness of the Company's internal controls. The Audit
Committee met six times during fiscal 2007.
Our Board has determined that Mr. Froelich qualifies as an "audit committee
financial expert" within the meaning of applicable regulations of the SEC,
promulgated pursuant to the Sarbanes-Oxley Act of 2002.
Compensation Committee
----------------------
Our Company has a Compensation Committee comprised of Messrs. Froelich, chairman
of the Committee and Bracken, both independent directors as determined by the
rules of the American Stock Exchange. The responsibilities and duties of the
21
Compensation Committee consist of but are not limited to: (1) approving salaries
and incentive compensation of executive officers, as well as the compensation of
our Board members; (2) reviewing compensation of certain other executive
management employees and (3) administering the employee stock option and benefit
plans. The Compensation Committee met twice during fiscal 2007.
Shareholder Nominations to the Board
------------------------------------
We have not yet adopted a policy regarding the procedure which shareholders
should use when they wish to recommend nominees to our Board of Directors. We
intend on adopting a shareholder nomination policy in the near future.
Section 16(a) of the Exchange Act
---------------------------------
Section 16(a) of the Securities Exchange Act of 1934 requires our directors and
executive officers, and persons who own more than ten percent of our outstanding
common stock to file with the SEC initial reports of ownership and reports of
changes in ownership of common stock. These persons are required by SEC
regulation to furnish the Company with copies of these reports they file.
To our knowledge, based on a review of the copies of reports furnished to us,
Section 16(a) filing requirements applicable to our officers, directors and
greater than ten percent beneficial owners were complied with on a timely basis
for the period which this report relates.
Item 10 - Executive Compensation
The table below summarizes the total compensation paid or earned by each of our
named executive officers ("Named Executive Officers") for the fiscal years ended
December 31, 2007 and 2006, respectively.
SUMMARY COMPENSATION TABLE
All
Name and Stock Option Other
Principal Bonus Awards Awards Compensation Total
Position Year Salary ($) ($) $ (1) $ (1) ($) ($)
--------- ---- ---------- --------- --------- --------- ------------ --------
Edward B. Rudner, 2007 $318,139 $ -- $170 $27,476 $627,990 (2) $973,775
CEO, President 2006 $230,768 (3) $ -- $170 $68,292 $ 43,846 (2) $343,076
And CFO
Simon Todd, 2007 $204,744 $ 45,000 $ -- $ 8,699 $ -- $258,443
Vice President (4) 2006 $ 77,154 $ 110,000 $ -- $ -- $ 140 $187,294
Alan Rubin, Former CEO 2007 $ -- $ -- $ -- $ -- $ -- $ --
and CFO (5) 2006 $ 20,000 $ -- $ -- $ -- $ 52,333 (6) $ 72,333
-------------
(1) Amounts shown do not reflect compensation actually received by the Named
Executive Officers. Instead, the amounts shown are the compensation costs
recognized by the Company in fiscal 2007 and 2006 for option awards and stock
awards as determined pursuant to FAS 123R. The assumptions used to calculate the
value of option awards and stock awards are set forth under Note 13 of the Notes
to Consolidated Financial Statements included in this Annual Report on Form
10-KSB.
(2) Represents $579,990 paid to Mr. Rudner under the Company's Deferred
Compensation Plan, a country club allowance of $30,000 and a car allowance of
22
$18,000, paid in 2007. Represents a car allowance of $ 13,846 and a country club
allowance of $30,000, paid in 2006. Excludes $23,830 in benefits which were paid
to Mr. Rudner by Online Vacation Center Holdings, Inc. prior to March 16, 2006.
(3) Excludes $154,410 which was paid to Mr. Rudner by Online Vacation Center
Holdings, Inc. pursuant to his prior employment agreement prior to March 16,
2006, the effective date of the Share Exchange Agreement.
(4) Mr. Todd became our Vice President on September 1, 2006 in conjunction with
our acquisition of Phoenix International Publishing, LLC.
(5) Mr. Rubin served as our CEO from October 16, 2000 until March 15, 2006, at
which time, he resigned both as director and CEO in conjunction with the Share
Exchange Agreement. Mr. Rubin's 2006 salary represents his salary from January
1, 2006 until March 15, 2006.
(6) Mr. Rubin's other annual compensation during 2006 represents remuneration in
conjunction with a consulting agreement with us, which terminated in September
2006.
Employment Agreements
---------------------
Edward B. Rudner
Effective as of March 16, 2006, we entered into an employment agreement with
Edward B. Rudner to serve as our President and Chief Executive Officer which
replaced the employment agreement which Mr. Rudner had with Online Vacation
Center Holdings, Inc. The employment agreement has no stated termination date
and has a perpetual term of 3 years. We will pay Mr. Rudner an initial annual
base salary of $300,000, payable weekly for a term of 3 years. The base salary
is subject to annual automatic incremental increases of the greater of the
percentage increase in the consumer price index or 6% of the previous year's
base salary. Mr. Rudner is also entitled to a performance-based bonus and to
participate in all Company benefit programs. He is entitled to five weeks paid
vacation per year, reimbursement of all reasonable out-of-pocket business
expenses, a monthly automobile allowance of $1,500, automobile insurance
coverage and reimbursement for memberships in social, charitable or religious
organizations or clubs for up to $30,000 per year.
In addition, we issued Mr. Rudner incentive stock options to purchase 300,000
shares of common stock and nonqualified stock options to purchase 200,000 shares
of common stock, which are exercisable at $1.27 per share. All of the
nonqualified stock options and incentive stock options to purchase 100,000
shares vested immediately. Incentive stock options to purchase 100,000 shares of
common stock vested on March 15, 2007 and the remaining 100,000 incentive stock
options vest on March 15, 2008. All of the options were issued under the 2005
Management and Director Equity Incentive and Compensation Plan. Mr. Rudner also
received options in connection with his service as a director of the Company.
In the event of Mr. Rudner's death or disability during the term of the
agreement, Mr. Rudner or his beneficiaries are entitled to all compensation and
benefits under his employment agreement for a period of one year following the
date of his death or disability. In the event that Mr. Rudner is terminated "for
cause", he will be entitled to receive his salary and earned but unpaid bonuses
due up to the date of termination. "Cause" is defined as committing or
participating in an injurious act of fraud or embezzlement against the Company;
engaging in a criminal enterprise involving moral turpitude; conviction of an
act constituting a felony of a crime of violence, fraud or dishonesty; or any
attempt by Mr. Rudner to assign the employment agreement. In the event there is
a "Change in Control" or "Attempted Change in Control," as such terms are
defined in his employment agreement, Mr. Rudner shall have the right to
23
terminate his employment upon thirty (30) days written notice given at any time
within one year after the occurrence of such event. A Change in Control is
defined as any event set forth in Section 280G of the Internal Revenue Code or
any event that would be required to be reported as a change in control in
response to Item 1 of the SEC form for a current report on Form 8-K, in effect
as of March 16, 2006 and an "Attempted Change of Control" shall be deemed to
have occurred if any substantial attempt accompanied by significant work efforts
and expenditures of money is made to accomplish a Change of Control. In the
event that Mr. Rudner is terminated for any other reason other than for cause,
death or disability or if he terminates his employment because of a Change in
Control or Attempted Change of Control, he will receive all compensation and
benefits under his employment agreement for a period of three years following
the date of termination or if he elects, a lump sum or partial payment of these
amounts. He shall also be entitled to receive a bonus equal to the amount
received for the prior year or if no prior bonus was received, an amount equal
to $150,000, as well as all earned but unpaid bonuses from previous years. The
employment agreement also includes a one-year covenant not to compete and a
non-disclosure provision.
Deferred Compensation Plan
In August 2006, we established the Online Vacation Center Holdings Corp.
Deferred Compensation Plan to satisfy our obligation to Mr. Rudner under the
terms of his previous employment agreement for compensation and benefits in the
amount of $579,990. The plan provided for twenty-six payments in fiscal 2007 and
was paid in full as of January 2008.
Simon Todd
In connection with our acquisition of Phoenix, we entered into an employment
agreement with Simon Todd to serve as Vice President of the Company and as the
President of Phoenix effective as of August 31, 2006. Mr. Todd is entitled to a
base salary of $210,080 per annum which increases by 4% per annum until August
31, 2009, the termination date of his employment agreement. In addition, Mr.
Todd is entitled to a retention bonus in conjunction with the closing of certain
acquisition prospects and a bonus in conjunction with Phoenix achieving certain
profitability thresholds.
On January 11, 2007, we granted Mr. Todd incentive stock options to purchase up
to 20,000 shares of our common stock, which are exercisable at $2.91 per share.
All of the stock options vest on January 11, 2009 and expire on January 11,
2012. All of the options were issued under the 2005 Management and Director
Equity Incentive and Compensation Plan. Mr. Todd received these options in
connection with his service as an officer of the Company.
2005 Management and Director Equity Incentive and Compensation Plan
Effective as of March 15, 2006, our Board of Directors and shareholders approved
our 2005 Management and Director Equity Incentive and Compensation Plan (the
"Plan" or "2005 Plan"). We have reserved an aggregate of 2,500,000 shares of
common stock for issuance under the this Plan which provides for the grants of
stock options, restricted stock, performance-based and other equity-based
incentive awards to directors, officers and key employees. Our Board of
Directors (or at their discretion, a committee of our board members) administers
the Plan including, without limitation, the selection of recipients of awards
under the Plan, the granting of stock options, restricted share or performance
shares, the determination of the terms and conditions of any such awards, the
interpretation of the Plan and any other action they deem appropriate in
connection with the administration of the Plan. As of December 31, 2007, we had
granted 2,220,000 options and 60,000 stock awards under the Plan.
24
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END
The following table provides information concerning unexercised options and
stock that has not vested for each of our Named Executive Officers for the
fiscal year ended December 31, 2007. All options and stock awards were granted
under our 2005 Plan.
Option Awards
Equity
Incentive
Plan
Awards:
Market or
Payout
Value of
Market Unearned
Number of Number of Number of Value of Shares,
Securities Securities Shares or Shares or Units or
Underlying Underlying Units of Units of Other
Unexercised Unexercised Option Stock that Stock that Rights
Options Options Exercise Option Have Not Have Not That Have
(#) (#) Price Expiration Vested Vested Not Vested
Name Exercisable Unexercisable ($) Date (#) ($)(1) ($)
---- ----------- ------------- ------- ---------- ---------- ---------- ----------
Edward B.
Rudner 400,000 (2) 100,000(2) $1.27 3-16-2011 600 (3) $ 630 --
-- 200,000(4) $1.27 3-16-2011
Simon Todd -- 20,000(5) $2.91 1-11-2012 --- $ --- --
----------------
(1) Value is based on the closing price of our common stock on December 29,
2007, which was $1.05 per share.
(2) These options were granted to Mr. Rudner in connection with his execution of
an employment agreement with us on March 16, 2006.
(3) Mr. Rudner received a grant of 1,000 stock awards on March 16, 2006, which
vest at the rate of 20% per year with vesting dates of 3/16/2006, 3/16/2007,
3/16/2008, 3/16/2009 and 3/16/2010. As of December 31, 2007, 600 stock awards
granted to Mr. Rudner had not vested.
(4) These options were granted to Mr. Rudner in his capacity as a director of
the Company. These options vest on March 16, 2008.
(5) These options were granted to Mr. Todd on January 11, 2007 in his capacity
as an officer of the Company. These options vest on March 11, 2009.
Change of Control
Management is not aware of an arrangement which may, at a subsequent date,
result in a change of control of the Company. As noted above, only Mr. Rudner's
employment agreement with the Company has provisions which address a change of
control, as defined in his employment agreement.
25
Compensation of Directors
We use a combination of cash and equity based compensation to attract and retain
qualified candidates to serve on the Board. In setting director compensation, we
consider the significant amount of time that directors expend in fulfilling
their duties, as well as the skill-level required by members of the Board.
We pay each director an annual retainer of $25,000. We pay the Chairman of the
Board of Directors an additional annual fee of $50,000 for his additional duties
as the Chairman. To ensure that directors have an ownership interest aligned
with the Company's other shareholders, we may also grant options or stock awards
to purchase shares of the Company's common stock to our directors from time to
time.
The table below summarizes the total compensation paid by us to our directors
for the fiscal year ended December 31, 2007. All directors began serving their
current terms as directors, upon election by shareholders at the Annual
Shareholders' meeting of May 15, 2007.
Fees Earned Option All Other
Name Paid in Cash Awards(1) Compensation Total
---- ------------ --------- ------------ -------
Richard McKinnon $75,000 $50,816 $90,000 (2) $ 215,816
Edward B. Rudner $25,000 $16,939 $ -- $ 41,939
Brian P. Froelich $25,000 $25,408 $ -- $ 50,408
Frank Bracken $25,000 $16,939 $ -- $ 41,939
------------
(1) Amounts shown do not reflect compensation actually received by the
directors. Instead, the amounts shown are the compensation costs recognized by
us in fiscal 2007 for option grants that were made to directors in 2006 as
determined pursuant to FAS 123R. The assumptions used to calculate the value of
option awards are set forth under Note 13 of the Notes to Consolidated Financial
Statements included in this Annual Report on Form 10-KSB. No options were
awarded to members of the Board of Directors during 2007.
(2) Fees earned pursuant to a consulting agreement between Mr. McKinnon and the
Company which was mutually terminated as of September 30, 2007.
Item 11 - Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The following table set forth certain information regarding the beneficial
ownership of our common stock as of February 29, 2008 by (i) each of our
directors, (ii) each Named Executive Officer, (iii) all our current directors
and executive officers as a group, and (iv) each person known by us to be the
beneficial owner of more than five percent (5%) of the shares outstanding of our
common stock. Unless otherwise indicated, each shareholder has sole voting and
investment power with respect to the indicated shares. Unless otherwise noted,
the address of the owner is 1801 NW 66th Avenue, Plantation, FL 33313.
26
Name and Address Beneficial Ownership Shares % of Shares
---------------- --------------------------- -----------
Simon Todd (1) 1,413,085 7.6%
Edward B. Rudner (2) 10,800,600 56.3%
Richard A. McKinnon (3) 750,000 3.9%
Brian P. Froelich (4) 335,000 1.8%
Reginald Flosse (5) 3,000,000 16.2%
William A. Cataldo (6) 1,009,310 5.5%
Frank Bracken (7) 250,000 1.3%
All directors and executive officers as a
group (five persons) (8) 13,548,685 66.8%
-------------
(1) Mr. Todd's address is 217 Ridge View Lane, Trophy Club, Texas 76262.
(2) Includes an aggregate of 1,680,000 shares held in trust for the benefit of
Mr. Rudner's children and 1,680,000 shares held by Mr. Rudner's wife. Also
includes 400,000 shares of common stock underlying options which are exercisable
and 300,000 shares of common stock underlying options which are exercisable
within 60 days of February 29, 2008.
(3) Includes 600,000 shares of common stock underlying options which are
exercisable within 60 days of February 29, 2008.
(4) Includes 300,000 shares of common stock underlying options which are
exercisable within 60 days of February 29, 2008.
(5) The mailing address for Mr. Flosse is B.P. 21426, Papeete, Tahiti.
Information was obtained from a Form 4 filed by Mr. Flosse with the SEC on June
4, 2007.
(6) Includes 125,000 shares held by Cataldo Family Partners, Ltd., an entity in
which Cataldo serves as general partner and 884,310 shares held by Pacific Tour
Services, Inc., a company beneficially controlled by Mr. Cataldo. Cataldo's
ownership interest excludes 615,980 shares held by the Cataldo Family Trust, a
trust in which Cataldo is a beneficiary, but does not hold voting control.
(7) Includes 200,000 shares of common stock underlying options which are
exercisable within 60 days of February 29, 2008.
(8) Includes 1,400,000 shares of common stock underlying options exercisable
within 60 days of February 29, 2008.
27
Equity Compensation Plan Information
The following table set forth information regarding securities authorized for
issuance under our 2005 Plan as of December 31, 2007.
Number of securities
remaining available for
Number of securities to Weighted-average future issuance under
be issued upon exercise exercise price of equity compensation plans
of outstanding options, outstanding options, (excluding securities
Plan Category warrants and rights warrants and rights reflected in column (a))
------------- ----------------------- -------------------- -------------------------
Equity compensation plans
approved by security
holders 2,215,000 $1.41 233,000
Equity compensation plans
not approved by security
holders -- -- --
--------- ----- -------
Total 2,215,000 $1.41 233,000
========= ===== =======
Item 12 - Certain Relationships and Related Transactions
Effective as of October 2005, we engaged Mr. McKinnon to provide consulting
services to us. In consideration for such services, Mr. McKinnon received a
monthly fee of $10,000. The term of the arrangement is on a month-to-month
basis. We and Mr. McKinnon mutually terminated the consulting services as of
September 30, 2007. During 2007 and 2006 Mr. McKinnon received $90,000 and
$120,000, respectively in consulting fees. Mr. McKinnon became a director of our
Company on March 15, 2006 and continues to serve in such capacity.
Item 13 - 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 and Cecilia 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., 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 5, 2007 and as amended
on March 21, 2007).
2.3 Acquisition Agreement, dated January 19, 2007, by and among Online Vacation
Center Holdings Corp., SmartTraveler.com, Inc. and Peter 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).
3.1 Amended and Restated Articles of Incorporation of the Company (incorporated
by reference to Exhibit 3.1 in the Company's Current Report on Form 8-K/A filed
with the SEC on March 21, 2006).
28
3.2 Bylaws (incorporated by reference to Exhibit 3.2 in the Company's Form 10-SB
filed with the SEC on December 19, 2000).
10.1 Termination of Consulting Agreement effective as of September 30, 2007
between the Company and Richard A. McKinnon (incorporated by reference to
Exhibit 10.1 in the Company's Quarterly Report on Form 10-QSB for the quarter
ended September 30, 2007).
10.2 Employment Agreement dated March 16, 2006 between the Company and Edward B.
Rudner (incorporated by reference to Exhibit 10.1 in the Company's Current
Report on Form 8-K/A filed with the SEC on March 21, 2006).
10.3 2005 Management and Director Equity Incentive and Compensation Plan
(incorporated by reference to Exhibit 4.1 in the Company's Current Report on
Form 8-K/A filed with the SEC on March 21, 2006). *
10.4 Form of Restricted Share Agreement for the Plan (incorporated by reference
to Exhibit 4.2 in the Company's Current Report on Form 8-K/A filed with the SEC
on March 21, 2006). *
10.5 Form of Non-Qualified Stock Option Agreement for the Plan (incorporated by
reference to Exhibit 4.3 in the Company's Current Report on Form 8-K/A filed
with the SEC on March 21, 2006). *
10.6 Online Vacation Center Holdings Corp. Deferred Compensation Plan
(incorporated by reference) to Exhibit 10.2 in the Company's Quarterly on Form
10-QSB for the quarter ended June 30, 2006.) *
14.1 Code of Ethics (incorporated by reference to Exhibit 14 in the Company's
Annual Report on Form 10-KSB for fiscal 2004 filed with the SEC on March 12,
2004)
21.1 Subsidiaries +
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. +
-----------
* Management Compensatory Plan
+ Filed herewith
29
Item 14 - Principal Accountant Fees and Services
The following is a summary of the fees billed to us by Jewett, Schwartz, Wolfe &
Associates ("JSWA") for professional services rendered for the fiscal years
ended December 31, 2007 and 2006:
Fee Category Fiscal 2006 Fiscal 2007
------------ ------------- -------------
Audit Fees $ 59,800 $ 69,000
Audit Related Fees $ 75,000 $ 45,000
Tax Fees $ 0 $ 0
All Other Fees 0 0
------------- -------------
Total Fees $ 134,800 $ 114,000
============= =============
Audit fees consisted of fees billed for professional services rendered or the
audit of the Company's consolidated financial statements included in our annual
report on Form 10-KSB for the years ended December 31, 2007 and 2006 and or
reviews of the consolidated financial statements included in the Company's
quarterly reports on Form 10-QSB during fiscal 2007 and 2006.
Audit related fees consist of general assistance on SEC matters and due
diligence regarding acquisitions completed in 2006 and 2007.
Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit
Services of Independent Auditors
The Audit Committee's policy is to pre-approve all audit and permissible
non-audit services provided by the independent public accountants. These
services may include audit services, audit-related services, tax services and
other services. Pre-approval is generally provided for up to one year and any
pre-approval is detailed as to the particular service or category of services
and is generally subject to a specific budget. JSWA and management are required
to periodically report to the Audit Committee regarding the extent of services
provided by the independent public accountants in accordance with this
pre-approval, and the fees for the services performed to date. The Audit
Committee may also pre-approve particular services on a case by case basis. The
Audit Committee approved one hundred percent (100%) of all such professional
services provided by JSWA during fiscal 2007.
The Audit Committee has considered the nature and amount of the fees billed by
JSWA, and believes that the provision of the services for activities unrelated
to the audit is compatible with maintaining JSWA independence.
30
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.
By: /s/ Edward B. Rudner
------------------------
Edward B. Rudner
Chief Executive Officer, President,
Chief Financial Officer and Director
Date: March 27, 2008
In accordance with the Exchange Act, this report has been signed by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Edward B. Rudner Chief Executive Officer, President, Chief March 27, 2008
---------------- Financial Officer and Director (principal
Edward B. Rudner executive officer and principal financial and
accounting officer)
/s/ Richard A. McKinnon Director March 27, 2008
-------------------
Richard A. McKinnon
/s/ Brian P. Froelich Director March 27, 2008
-----------------
Brian P. Froelich
/s/ Frank Bracken Director March 27, 2008
-------------
Frank Bracken
31
ONLINE VACATION CENTER HOLDINGS CORP.
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2007 and 2006
TABLE OF CONTENTS
Page
----
Report of Independent Registered Public Accounting Firm F - 2
Consolidated Balance Sheets F - 3
Consolidated Statements of Operations F - 4
Consolidated Statements of Changes in Stockholders'
Equity (Deficiency) F - 5
Consolidated Statements of Cash Flows F - 6
Notes to Consolidated Financial Statements F - 7 - 25
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Online Vacation Center Holdings Corp.
We have audited the accompanying consolidated balance sheet of Online Vacation
Center Holdings Corp and Subsidiaries as of December 31, 2007 and 2006 and the
related consolidated statements of operations, changes in stockholders' equity
(deficiency) and cash flows for the years then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Online Vacation
Center Holdings Corp and Subsidiaries as of December 31, 2007 and 2006 and the
results of its operations and its cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States of
America.
/s/ Jewett, Schwartz, Wolfe & Associates
Hollywood, Florida
March 19, 2008
F-2
ONLINE VACATION CENTER HOLDINGS CORP.
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
2007 2006
------------ ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,189,042 $ 2,658,885
Accounts receivable, net 1,053,556 711,201
Deposits and prepaid items 738,958 405,712
Deferred tax asset, net 1,665 248,455
Current assets held for sale 504,088 297,113
----------- -----------
Total Current Assets 3,487,309 4,321,366
Restricted cash 351,243 336,135
Property and equipment, net 127,548 92,215
Deferred tax asset, net 431,317 451,214
Intangible assets, net 988,466 152,788
Goodwill 1,754,279 816,465
Long lived assets held for sale 1,909,274 2,041,091
----------- -----------
Total Assets $ 9,049,436 $ 8,211,274
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 980,078 $ 1,417,779
Deferred revenue 2,384,720 1,964,266
Notes payable, current portion 427,686 125,000
Current liabilities held for sale 542,682 232,840
----------- -----------
Total Current Liabilities 4,335,166 3,739,885
Notes payable 182,074 375,000
Non current liabilities available for sale 302,176 353,031
----------- -----------
Total Liabilities 4,819,416 4,467,916
----------- -----------
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; 18,492,977 and 18,256,777 shares
issued and outstanding 1,849 1,826
Additional paid-in capital 5,628,318 5,099,059
Accumulated deficit (1,400,147) (1,357,527)
----------- -----------
Total Stockholders' Equity 4,230,020 3,743,358
----------- -----------
Total Liabilities and Stockholders' Equity $ 9,049,436 $ 8,211,274
=========== ===========
The accompanying Notes to the Consolidated Financial Statements are an integral
part of these statements.
F-3
ONLINE VACATION CENTER HOLDINGS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Year Ended December 31,
2007 2006
------------ ------------
NET REVENUES $ 9,324,386 $ 6,887,854
OPERATING EXPENSES:
Selling and marketing 3,680,837 2,200,039
General and administrative 5,126,479 4,084,413
Depreciation and amortization 262,966 92,197
------------ ------------
OPERATING INCOME 254,104 511,205
Interest income (expense), net (15,454) 16,770
------------ ------------
Income from continuing operations before provision for
income taxes 238,650 527,975
Provision for income taxes 133,411 300,317
------------ ------------
Income from continuing operations 105,239 227,658
------------ ------------
DISCONTINUED OPERATIONS:
Income (loss) from discontinued operations of Phoenix
International Publishing, LLC, net of tax (147,859) 10,195
------------ ------------
NET (LOSS) INCOME $ (42,620) $ 237,853
============ ============
EARNINGS PER SHARE - Basic
Income from continuing operations $ 0.01 $ 0.01
Income /(Loss) from discontinued operations $ (0.01) 0.00
------------ ------------
Net Income $ -- $ 0.01
============ ============
Weighted average shares outstanding - Basic 18,483,950 17,289,996
============ ============
EARNINGS PER SHARE - Diluted
Income from continuing operations $ 0.01 $ 0.01
Income /(Loss) from discontinued operations $ (0.01) 0.00
------------ ------------
Net Income $ 0.00 $ 0.01
============ ============
Weighted average shares outstanding - Diluted 18,968,552 17,746,920
============ ============
The accompanying Notes to the Consolidated Financial Statements are an integral
part of these statements.
F-4
ONLINE VACATION CENTER HOLDINGS CORP.
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY (DEFICIENCY)
FOR THE YEARS ENDED DECEMBER 31, 2006 and 2007
Common Stock Additional
-------------------------- paid-in Accumulated
Shares Amount capital Deficit Total
----------- ----------- ------------ --------------- -------------
Balance at December 31, 2005 15,299,467 $ 1,530 $ 247,114 $ (1,595,380) $ (1,346,736)
Issuance of common stock in
in exchange for subordinated debt 1,500,310 150 2,999,850 - 3,000,000
Issuance of restricted shares under
compensation plan 7,000 1 5,949 - 5,950
Stock based compensation expense - - 147,430 - 147,430
Issuance of common stock in
conjunction with acquisitions 1,450,000 145 1,631,105 - 1,631,250
Issuance of convertible notes in
conjunction with acquisitions - - 67,611 - 67,611
Net income for the year ended
December 31, 2006 - - - 237,853 237,853
----------- ----------- ------------ --------------- --------------
Balance at December 31, 2006 18,256,777 $ 1,826 $ 5,099,059 $ (1,357,527) $ 3,743,358
Issuance of common stock in
conjunction with acquisitions 225,000 22 337,478 337,500
Issuance of restricted shares under
compensation plan 11,200 1 18,519 18,520
Stock based compensation expense 184,449 184,449
Adjustment to fair value of conversion
feature of debt issued in conjunction
with acqusition (11,187) (11,187)
Net loss for the year ended
December 31, 2007 (42,620) (42,620)
----------- ----------- ------------- --------------- --------------
Balance at December 31, 2007 18,492,977 $ 1,849 $ 5,628,318 $ (1,400,147) $ 4,230,020
=========== =========== ============= =============== ==============
The accompanying Notes to the Consolidated Financial Statements are an integral
part of these statements.
F-5
ONLINE VACATION CENTER HOLDINGS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006
For the Year Ended
----------------------------------
December 31, December 31,
2007 2006
------------- -------------
Cash flows from continuing operating activities:
Net income (loss) $ (42,620) $ 237,853
Loss (income) from discontinued operations, net of tax 147,859 (10,195)
----------- -----------
Income from continuing operations 105,239 227,658
Adjustments to reconcile to net cash inflow from operating activities:
Depreciation and amortization 262,966 92,197
Stock based compensation expense 202,969 153,380
Imputed interest expense 18,150 --
Deferred income tax provision 103,708 370,623
Increase in accounts receivable (342,354) (129,305)
Increase in deposits and prepaid items (386,190) (184,992)
Increase (decrease) in accounts payable and accrued liabilities (432,036) 252,882
Increase in deferred revenue 420,454 180,065
----------- -----------
Net cash provided from (used by) operating activities (47,094) 962,508
----------- -----------
Cash flows from continuing investing activites:
Capital expenditures (140,345) (62,786)
Increase in intangible assets (61,553) --
Increase in restricted cash (15,109) (21,135)
Cash paid for acquisition in excess of cash received (1,116,713) (321,949)
----------- -----------
Cash used in investing activities (1,333,720) (405,870)
----------- -----------
Cash flows from continuing financing activites:
Repayment of note payable (125,000) --
----------- -----------
Cash used in financing activities (125,000) --
----------- -----------
Discontinued Operations
Cash provided by (used by) operating activities 35,971 (27,089)
Cash used in investing activities -- (83,846)
----------- -----------
Cash provided from (used by) discontinued operations 35,971 (110,935)
----------- -----------
Increase (decrease) in cash during the period (1,469,843) 445,703
Cash at the beginning of the period 2,658,885 2,213,182
----------- -----------
Cash at the end of the period $ 1,189,042 $ 2,658,885
=========== ===========
Supplemental information:
Cash paid for interest $ 22,467 $ 48,658
=========== ===========
Cash paid (refunded) for taxes $ 8,386 $ (8,491)
=========== ===========
Common stock issued in conjunction with acquisitions $ 337,500 $ 1,637,200
=========== ===========
Net debt issued in conjunction with acquisitions $ 216,610 $ 500,000
=========== ===========
Conversion of subordinated debt into common stock $ -- $ 3,000,000
=========== ===========
Reduction in fair value of conversion feature of debt $ 11,187 $ --
=========== ===========
Conversion feature of subordinated debt $ -- $ 67,611
=========== ===========
The accompanying Notes to the Consolidated Financial Statements are an integral
part of these statements.
F-6
ONLINE VACATION CENTER HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BACKGROUND
Overview
--------
Online Vacation Center Holdings Corp. (the "Company") is a Florida holding
company, focused on internally growing and developing its 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.
The Company provides vacation travel and marketing services through its wholly
owned subsidiaries: Online Vacation Center, Inc., an internet-based vacation
seller focused on serving the affluent retiree market, Phoenix International
Publishing, LLC ("Phoenix"), the United Kingdom's leading publisher of consumer
magazines and guides about travel to the U.S. and Canada, Thoroughbred Travel,
LLC ("Thoroughbred"), a Houston, Texas based upscale travel agency, operating as
Journeys Unlimited, La Fern, Inc. ("La Fern"), operating as eLeisureLink.com, a
Florida travel agency that sells land-based vacations, La Tours and Cruises,
Inc. ("La Tours"), 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, Dunhill Vacations, Inc.
("Dunhill Vacations"), a travel newsletter and media provider, Cruises for Less,
LLC, a home-based travel selling group, and Tone and Travel, LLC dba Curves
Travel, ("Tone and Travel") the licensed travel management company of Curves
International, Inc.
History
-------
Under a Share Exchange Agreement dated August 25, 2005, effective March 15,
2006, the Company issued to the Online Vacation Center Holdings, Inc. interest
holders an aggregate of 15,000,000 shares of the Company's common stock in
exchange for a 100% interest in Online Vacation Center Holdings, Inc. In
connection with the share exchange, pursuant to an asset purchase agreement, the
Company sold all of its assets (and transferred all of its liabilities) to a
former director and majority shareholder for a total purchase price of 2,700,000
shares of the Company's common stock. The 2,700,000 shares were returned to the
Company and have been cancelled. For accounting purposes the consummation of
these actions resulted in a reverse merger and Online Vacation Center Holdings,
Inc. is the accounting survivor and surviving business entity; however, the
Company is the surviving legal entity.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
---------------------------
The accompanying consolidated financial statements include the accounts of
Online Vacation Center Holdings Corp. and its wholly owned subsidiaries. All
significant intercompany transactions and balances have been eliminated. The
Company makes operating decisions, assesses performance and manages the business
as one reportable segment.
F-7
ONLINE VACATION CENTER HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Use of Estimates
----------------
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements. These
estimates and assumptions also affect the reported amounts of revenues, costs
and expenses during the reporting period. Management evaluates these estimates
and assumptions on a regular basis. Actual results could differ from those
estimates.
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 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 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 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.
Concentration of Credit Risk
----------------------------
The Company's business is subject to certain risks and concentrations including
dependence on relationships with travel suppliers, primarily cruise lines, and
to a lesser extent, exposure to risks associated with online commerce security
and credit card fraud. The Company is highly dependent on its relationships with
four major cruise lines: Celebrity Cruises, Norwegian Cruise Line, Royal
Caribbean Cruise Line and Princess Cruises. The Company also depends on third
party service providers for processing certain fulfillment services.
Concentrations of credit risk with respect to client accounts receivable are
limited because of the Company's policy to require deposits from customers, the
number of customers comprising the client base and their dispersion across
geographical locations.
Financial instruments, which potentially subject the Company to concentration of
credit risk, consist primarily of cash and bank certificates of deposit. These
accounts are maintained with financial institutions insured by the Federal
F-8
ONLINE VACATION CENTER HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deposit Insurance Corporation ("FDIC") up to $100,000. At December 31, 2007 and
December 31, 2006, the balances at various financial institutions over the FDIC
insured limit relating to cash and cash equivalents and restricted cash were
approximately $1.1 million and $2.8 million, respectively. The Company believes
these balances are not at risk as they are held by sound financial institutions.
Marketing Costs
---------------
Substantially all marketing costs are charged to expense as incurred and
principally represent production, printing, direct mail costs, and online
advertising. Marketing expense, inclusive of discontinued operations, for the
years ended December 31, 2007 and 2006 was $2,642,799 and $1,529,168
respectively.
Cash and Cash Equivalents
-------------------------
The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents. At December 31, 2007 and 2006,
respectively, cash and cash equivalents included cash in the bank and cash on
hand.
Accounts Receivable
-------------------
Travel suppliers generally pay commissions between 60 days before to 90 days
after travel has commenced, overrides in the first quarter following the period
earned, and marketing and advertising invoices between 30 days to 90 days after
invoice date. The Company determines its allowance by considering a number of
factors, including the length of time trade accounts receivable are past due,
the Company's previous loss history, the specific supplier's current ability to
pay its obligation to the Company and the condition of the general economy and
the industry as a whole. The Company writes off accounts receivable when they
become uncollectible, and payments subsequently received on such receivables are
recognized as revenue in the period received. At December 31, 2007 and 2006, the
allowance for doubtful accounts was $38,077 and $4,317, respectively.
Restricted Cash
---------------
In accordance with Accounting Review Board ("ARB") No. 43, Chapter 3A, "Current
Assets and Current Liabilities", cash which is restricted as to withdrawal is
considered a noncurrent asset. Restricted cash consists of collateral for three
letters of credit and a reserve for credit card processing. The Company's credit
card processor, Global Payments, holds a $280,000 reserve for credit cards
processed. Global Payments will hold this reserve for as long as the Company
uses them as its credit card processor and will release all funds no later than
six months after the final transaction deposit. Certificates of deposit of
$71,243 are collateral for four outstanding letters of credit due to expire in
2008. The letters of credit are required by industry and state regulations and
will be renewed.
Property and Equipment
----------------------
Property and equipment, including significant improvements, are recorded at
F-9
ONLINE VACATION CENTER HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
cost. Repairs and maintenance and any gains or losses on dispositions are
recognized as incurred. Depreciation and amortization are provided for on a
straight-line basis to allocate the cost of depreciable assets to operations
over their estimated service lives.
Depreciation/
Asset Category Amortization Period
-------------- -------------------
Office equipment 2 to 3 Years
Furniture & fixtures 5 to 7 Years
Leasehold improvements 6.5 Years
Goodwill and Indefinite-Lived Intangible Assets
-----------------------------------------------
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets," goodwill represents the excess of the
purchase price and related costs over the value assigned to net tangible and
identifiable intangible assets of businesses acquired and accounted for under
the purchase method, acquired in business combinations and is assigned to
reporting units that are expected to benefit from the synergies of the
combination as of the acquisition date. Under this standard, goodwill and
intangibles with indefinite useful lives are no longer amortized. The Company
assesses goodwill and indefinite-lived intangible assets for impairment annually
during the fourth quarter, or more frequently if events and circumstances
indicate impairment may have occurred in accordance with SFAS No. 142. If the
carrying value of a reporting unit's goodwill exceeds its implied fair value,
the Company records an impairment loss equal to the difference. SFAS No. 142
also requires that the fair value of indefinite-lived purchased intangible
assets be estimated and compared to the carrying value. The Company recognizes
an impairment loss when the estimated fair value of the indefinite-lived
purchased intangible assets is less than the carrying value.
Long-Lived Assets
-----------------
The Company's accounting policy regarding the assessment of the recoverability
of the carrying value of long-lived assets, including property and equipment and
purchased intangible assets with finite lives, is to review the carrying value
of the assets, annually, during the fourth quarter, or whenever events or
changes in circumstances indicate that they may be impaired. If this review
indicates that the carrying value will not be recoverable, as determined based
on the projected undiscounted future cash flows, the carrying value is reduced
to its estimated fair value.
Foreign Currency Translation
----------------------------
The Company conducts publishing operations in both the United States and the
United Kingdom, and its functional currency is the US dollar. Assets,
liabilities, revenues and expenses denominated in British pounds are recorded in
US dollars by the use of the exchange rate in effect at that date. At the period
end, monetary assets and liabilities denominated in British pounds are
translated into US dollars by using the exchange rate in effect at that date.
The resulting foreign currency transaction gains and losses are included in
operating revenues and expenses for the year. These gains or losses were not
material for the year ended December 31, 2007 and 2006, respectively.
F-10
ONLINE VACATION CENTER HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income Taxes
------------
The Company accounts for income taxes under the liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates in effect for the
year in which those temporary differences are expected to be recovered or
settled.
Comprehensive Income
--------------------
Comprehensive income is comprised of net income and other comprehensive income.
Other comprehensive income includes certain changes in equity that are excluded
from net income. At December 31, 2007 and 2006, respectively, there were no
material items to be included in accumulated other comprehensive income.
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.
Stock-Based Compensation
------------------------
In December 2004, the Financial Accounting Standards Board ("FASB") issued a
revision of SFAS 123 ("SFAS 123(R)") that requires compensation costs related to
share-based payment transactions to be recognized in the statement of
operations. With limited exceptions, the amount of compensation cost will be
measured based on the grant-date fair value of the equity or liability
instruments issued. In addition, liability awards will be remeasured each
reporting period. Compensation cost will be recognized over the period that an
employee provides service in exchange for the award. SFAS 123(R) replaces SFAS
123 and is effective as of January 1, 2006.
In March 2005, the U.S. Securities and Exchange Commission ("SEC") released SAB
107, "Share-Based Payments," ("SAB 107"). The interpretations in SAB 107 express
views of the SEC staff regarding the interaction between SFAS 123R and certain
SEC rules and regulations, and provide the staff's views regarding the valuation
of share-based payment arrangements for public companies. In particular, SAB 107
provides guidance related to share-based payment transactions with
non-employees, the transition from nonpublic to public entity status, valuation
methods (including assumptions such as expected volatility and expected term),
the accounting for certain redeemable financial instruments issued under
share-based payment arrangements, the classification of compensation expense,
non-GAAP financial measures, first-time adoption of SFAS 123R in an interim
period, capitalization of compensation cost related to share-based payment
arrangements, the accounting for income tax effects of share-based payment
F-11
ONLINE VACATION CENTER HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
arrangements upon adoption of SFAS 123R, the modification of employee share
options prior to adoption of SFAS 123R and disclosures in Management's
Discussion and Analysis subsequent to adoption of SFAS 123R. SAB 107 requires
stock-based compensation be classified in the same expense lines as cash
compensation is reported for the same employees.
Off-Balance Sheet Arrangements
------------------------------
The Company has not entered into any off-balance sheet arrangements that have or
are reasonably likely to have a current or future effect on the Company's
financial condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or capital resources and
would be considered material to shareholders. An officer of the Company has
provided personal guarantees to various lenders as required for the extension of
credit to the Company.
Recent Accounting Pronouncements
--------------------------------
Accounting for Uncertainty in Income Taxes
The Company 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
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 as of
January 1, 2007 did not have a significant impact on the Company's financial
statements. At the date of adoption and as of December 31, 2007, the Company
does not have a liability for any unrecognized tax benefits. The Company's
policy is to record interest and penalties on uncertain tax positions as income
tax expense. As of December 31, 2007, the Company had not accrued nor recognized
interest or penalties related to uncertain tax positions. The Company had not
recorded any significant increase or decrease to unrecognized tax benefits
during 2007 related to U.S. federal or state tax positions.
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. The Company believes that it has not taken any uncertain tax positions
that would impact its consolidated financial statements as of December 31, 2007.
F-12
ONLINE VACATION CENTER HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value Measurements
In September 2006, the FASB issued SFAS 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 is not expected to have a
material impact on the Company's financial position, results of operations or
cash flows.
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, 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 of
Financial Assets and Financial Liabilities ("FAS 159"). FAS 159 provides an
option to report selected financial assets and financial liabilities using fair
value. The standard establishes required presentation and disclosures to
facilitate comparisons with companies that use different measurements for
similar assets and liabilities. FAS 159 is effective for fiscal years beginning
after November 15, 2007, with early adoption allowed if FAS 157 is also adopted.
The Company is currently evaluating the impact of adopting FAS 159 on its
financial statements.
Business Combinations
In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations" ("FAS
141(R)"). FAS 141(R) 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.
F-13
ONLINE VACATION CENTER HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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"). FAS
160 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.
Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements
In September 2006, the SEC staff issued SAB 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 completed its evaluation of the impact of SAB 108 and deemed that it
had no material effect on the Company's consolidated results of operations,
financial position, or cash flows.
Sarbanes Oxley Compliance
In July 2002, "The Public Company Accounting Reform and Investor Protection Act
of 2002" (the "Sarbanes-Oxley Act") was enacted. Section 404 of the
Sarbanes-Oxley Act stipulates that public companies must take responsibility for
maintaining an effective system of internal control. The Sarbanes-Oxley Act
requires public companies to report on the effectiveness of their control over
financial reporting and obtain an attestation report from their independent
registered public accounting firm about management's report. The Sarbanes-Oxley
Act requires most public companies (large accelerated and accelerated filers) to
report on their internal controls over financial reporting for years ending on
or after November 15, 2004. Other public companies (non-accelerated filers) must
begin to comply with the new requirements which include a report on the
effectiveness related to internal control over financial reporting for their
first year ending on or after December 15, 2007 and must file an auditor's
attestation report on internal controls over financial reporting in their annual
reports in the first annual report for a fiscal year ending on or after December
15, 2009. The Company is a non-accelerated filer and expects to be able to
comply with these filing requirements.
F-14
ONLINE VACATION CENTER HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist of the following:
December 31, December 31,
-------------- -------------
2007 2006
-------------- -------------
Prepaid expenses $ 236,723 $ 318,445
Refundable deposits with suppliers 502,235 87,267
-------------- -------------
Prepaid expenses and other current assets $ 738,958 $ 405,712
============== =============
NOTE 4 - PROPERTY AND EQUIPMENT, NET
Property and equipment consist of the following:
December 31, December 31,
-------------- -------------
2007 2006
-------------- -------------
Office equipment $ 526,941 $ 393,461
Furniture & fixtures 61,864 61,864
Leasehold improvements 67,368 67,368
------------- ------------
656,173 522,693
Less: Accumulated depreciation (528,625) (430,478)
------------- ------------
Property and equipment, net $ 127,548 $ 92,215
============= ============
Depreciation expense for the years ended December 31, 2007 and 2006 was $105,011
and $81,671, respectively.
NOTE 5 - 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, a Houston, Texas travel agency,
operating as West University Travel, 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 received 50,000 restricted shares of the
Company's common stock which are subject to a lock-up agreement.
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, 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.
F-15
ONLINE VACATION CENTER HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
On May 18, 2007, pursuant to the terms of an Acquisition Agreement, Online
Vacation Center Holdings Corp. acquired all of the issued and outstanding
ownership interests of Tone and Travel, , the licensed, travel management
company of Curves International, Inc. operating as Curves Travel, for $225,000
in cash, subject to future adjustment as defined by the Acquisition Agreement,
payable upon closing.
In conjunction with these acquisitions (collectively the "2007 Acquisitions"),
the cash paid in excess of the net of cash acquired, was $1,116,713.
Additionally the Company issued 225,000 shares of its common stock and issued
notes aggregating $300,000. The consideration had been allocated to assets and
liabilities, including separate identifiable intangible assets based on
independent third party valuations and internal assessments with approximately
$982,563 allocated to goodwill.
During the latter half of 2006, Online Vacation Center Holdings Corp. acquired
Phoenix, Thoroughbred, and La Fern (collectively the "2006 Acquisitions"). In
conjunction with the 2006 Acquisitions, the cash paid in excess of the net of
cash acquired, was $405,795. Additionally the Company issued 1,450,000 shares of
its common stock and issued convertible notes, at the election of the holders,
aggregating $452,720, as adjusted. The consideration had been allocated to
assets and liabilities, including separate identifiable intangible assets based
on independent third party valuations and internal assessments with
approximately $1,942,495 initially allocated to goodwill.
The operations of the 2007 Acquisitions and 2006 Acquisitions have been included
in the Company's consolidated results since their respective dates of
acquisition.
NOTE 6 - INTANGIBLE ASSETS, NET
During 2002, Online Vacation Center, Inc. purchased the rights to the
Renaissance Cruises name and customer database. Online Vacation Center, Inc.
also registered two trade names and marks for Online Vacation Center, Inc. Costs
of $56,643 were capitalized and are being amortized over the expected 15-year
useful lives of the trademarks.
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 the 2006
Acquisitions' and 2007 Acquisitions' respective intangible assets. The fair
value related to the intangible assets acquired pertaining to the 2006
Acquisitions, exclusive of discontinued operations, and 2007 Acquisitions were
$119,000 and $932,080, respectively and were capitalized and amortized over
their expected useful lives, ranging from 1 to 15 years.
The Company conducted its annual test for impairment during the fourth quarter
of 2007. The results of the impairment tests indicated that the intangibles were
not impaired.
F-16
ONLINE VACATION CENTER HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Intangible assets consist of the following:
December 31, December 31,
2007 2006
------------ -----------
Trade names $ 289,753 $ 46,643
Customer contracts and backlog 9,000 9,000
Customer lists and relationships 870,693 120,000
------------ ----------
1,169,276 175,643
Less: Accumulated amortization (180,810) (22,855)
------------ ----------
Intangible assets, net $ 988,466 $ 152,788
============ ==========
Amortization expense, exclusive of discontinued operations, for the years ended
December 31, 2007 and 2006 was $157,955 and $10,526, respectively. The estimated
aggregate amortization expense for the next five years and thereafter is as
follows:
Estimated Annual
Year Amortization Expense
---- --------------------
2008 $ 188,615
2009 178,723
2010 177,362
2011 148,753
2012 and thereafter 295,013
NOTE 7 - DISCONTINUED OPERATIONS
In November 2007, the Company's Board of Directors granted the Company the
authority to sell Phoenix, a publishing company acquired in 2006. The sale is
anticipated to be completed within one year of the Board of Director's
authorization date and Phoenix has been accounted for as discontinued
operations. 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, for all periods presented.
The operating results of Phoenix since its date of acquisition, August 31, 2006,
are classified as discontinued operations and summarized below. The Company is
actively marketing the sale of Phoenix, however, no formal offers have been
received from any prospective purchasers.
2007 2006
------------- -----------
Revenues $ 1,681,083 $ 897,506
Income (loss) before income taxes $ (227,242) $ 16,599
Income tax provision(benefit) (79,383) 6,404
------------- -----------
Income (loss) from discontinued operations $ (147,859) $ 10,195
============= ===========
F-17
ONLINE VACATION CENTER HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The assets and liabilities of discontinued operations have been reclassified and
are segregated in the consolidated balance sheets. Assets and liabilities of the
discontinued business as of December 31 2007 and 2006 are summarized as follows:
December 31,
------------------------
2007 2006
----------- ----------
Accounts receivable $ 501,992 $ 295,154
Deposits and prepaid items 2,096 1,959
---------- ----------
Total current assets held for sale $ 504,088 $ 297,113
========== ==========
Intangible assets, net $ 783,244 $ 915,061
Goodwill 1,126,030 1,126,030
---------- ----------
Total long lived assets held for sale $1,909,274 $2,041,091
========== ==========
Accounts payable and accrued liabilities $ 359,182 $ 112,840
Deferred revenue 183,500 120,000
---------- ----------
Total current liabilities available
for sale $ 542,682 $ 232,840
========== ==========
Non current deferred income taxes payable $ 302,176 $ 353,031
---------- ----------
Non current liabilities available for sale $ 302,176 $ 353,031
========== ==========
NOTE 8 - GOODWILL
The Company initially recorded $816,465 in conjunction with its 2006
Acquisitions, exclusive of its discontinued operations, and $982,563 in
conjunction with its 2007 Acquisitions. The goodwill associated with 2006
Acquisitions was subsequently reduced in 2007 by $44,749 due to the completion
of an audit in 2007 of La Fern resulting in reductions of purchase price and
related beneficial conversion feature of the debt issued and a reduction of
deferred tax liabilities associated with the Thoroughbred Travel LLC
acquisition. During the fourth quarter of 2007, the Company tested the carrying
value of goodwill for impairment. The results of the tests indicated that the
carrying value of the goodwill was not impaired.
Changes to the carrying amounts of consolidated goodwill are as follows:
Balance at December 31, 2006 $ 816,465
Adjustments (44,749)
Acquisitions 982,563
-----------
Balance at December 31, 2007 $ 1,754,279
===========
F-18
ONLINE VACATION CENTER HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following:
December 31, December 31,
2007 2006
------------ -------------
Accounts payable $ 445,985 $ 408,796
Accrued compensation 356,750 878,870
Accrued professional fees 154,932 110,922
Other accrued expenses 22,411 19,191
----------- -------------
Total $ 980,078 $ 1,417,779
=========== =============
NOTE 10 - DEFERRED REVENUES
Deferred revenue consists of sales commission received from vacation travel
suppliers net of cancellations, administrative fees received from passengers in
advance of passenger travel dates and amounts invoiced for publishing
advertising to be contained in future publications. The advance sales
commission, administrative fees and publishing advertising revenue is considered
unearned revenue and recorded as deferred revenue in the accompanying
consolidated balance sheets. Deferred revenue is recognized on the accompanying
consolidated financial statements when the passenger travel occurs or the
publication is distributed. At December 31, 2007 and December 31, 2006, deferred
revenues were $2,384,720 and $1,964,266, respectively. Balances at December 31,
2006 have been reclassified to conform to this presentation.
NOTE 11 - DEBT
The debt components consist of the following:
December 31, December 31,
2007 2006
------------ ------------
Convertible Note - Thoroughbred Travel, LLC $ 0 $ 125,000
Convertible Note - La Fern, Inc. 327,720 375,000
Convertible Note - La Tours and Cruses, Inc. 300,000 -
----------- -----------
627,720 500,000
Less: Unamortized discount 17,960 0
Less: Current portion-net of unamortized discount of
$34 at December 31, 2007 427,686 125,000
----------- -----------
$ 182,074 $ 375,000
=========== ===========
As discussed in Note 5, in conjunction with its acquisition of 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 could be paid in advance by
the Company upon 30 days notice. The Note was 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.
The Note was paid in full on September 25, 2007.
F-19
ONLINE VACATION CENTER HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As discussed in Note 5, in conjunction with its acquisition of La Fern, the
Company issued a Convertible Note to the former owner of La Fern, in the amount
of $375,000, subject to adjustment based upon the results of an audit of the
financial statements of La Fern as of the acquisition, date due October 1, 2008
bearing interest at 6% per annum with interest payable semi-annually commencing
on April 1, 2007 and may not be prepaid by the Company. As a result of the
audit, concluded in 2007, the Note amount was adjusted to $327,720. The Note is
convertible, at the election of La Fern prior to maturity, into 163,860 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 December 31, 2007.
As discussed in Note 5, in conjunction with its acquisition of La Tours,the
Company agreed to pay $300,000 to the former owners of La Tours in three
$100,000 annual installments, subject to adjustment as defined by the
Acquisition Agreement, commencing on January 2, 2008. 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 unamortized imputed
interest of $17,960 as of December 31, 2007 has been offset against the face
value of the debt and a corresponding reduction of purchase price consideration.
Interest expense for the years ended December 31, 2007 and 2006 respectively was
$43,757 and $55,734 respectively.
NOTE 12 - INCOME TAXES
The provision for income taxes from continuing operations for the years ended
December 31, 2007 and 2006 consist of the following:
December 31,
----------------------
2007 2006
--------- ---------
Current:
Federal $ (7,211) $ (46,950)
State 1,864 --
--------- ---------
(5,347) (46,950)
--------- ---------
Deferred:
Federal $ 118,974 $ 297,755
State 19,784 49,512
--------- ---------
138,758 347,267
--------- ---------
Provision for income taxes, net $ 133,411 $ 300,317
========= =========
F-20
ONLINE VACATION CENTER HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The difference between income tax expense computed by applying the federal
statutory corporate tax rate and actual income tax expense is as follows:
December 31,
-------------------------------
2007 2006
---------- --------
Statutory federal income tax rate 35.0 % 35.0%
State income taxes 3.6 6.0
Gain on sale of cigar assets 0.0 4.5
Tax effect of non-deductible items 18.1 3.4
Other 0.8 8.0
---------- --------
Effective tax rate 55.9 % 56.9%
========== ========
The tax effect of non-deductible items in 2007 include $71,811 of stock
compensation expense related to incentive stock options and $18,148 of imputed
interest expense related to the La Tours acquisition debt. Other includes tax
rate differentials and the true-up of permanent tax differences from prior
periods. The gain on sale of cigar assets is 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
stock. The Company recognized a 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.
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:
December 31, December 31,
2007 2006
----------- ------------
Net operating loss carry-
forwards and AMT tax credit $ 430,328 $ 467,969
Depreciation and amortization (49,635) (24,495)
Accruals and other 52,289 256,195
--------- ---------
Deferred income tax asset $ 432,982 $ 699,669
========= =========
The net deferred tax assets are comprised of the following:
December 31, December 31,
2007 2006
----------- -----------
Current $ 1,665 $ 248,455
Non-current 431,317 451,214
--------- ---------
Net deferred income tax asset $ 432,982 $ 699,669
========= =========
F-21
ONLINE VACATION CENTER HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has federal net operating loss carry forwards totaling $1,101,509
which will expire in 2017.
NOTE 13 - 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 16, 2006, 1,860,000 stock options were granted to management and
directors under the Plan. All options have a five-year life and an exercise
price of $1.27. On October 3, 2006, in conjunction with acquisition of La Fern,
10,000 stock options were granted to a principal of La Fern as part of his
employment agreement with the Company under the Plan. The options have a five
year life and an exercise price of $1.95. During 2007, 350,000 stock options
were granted to an officer and key employees under the Plan. All options have a
five year life and exercise prices ranging from $1.76 to $3.02.
A summary of the activity in the Company's Plan for the period of January 1,
2006 through December 31, 2007 is presented below; no options were granted under
the Plan prior to March 16, 2006:
Weighted Average
Shares Exercise Price
----------- --------------
Options outstanding as of January 1, 2006 - $ 0.00
Granted 1,870,000 1.28
Canceled/Forfeited - 0.00
Exercised - 0.00
----------- -------
Options outstanding at December 31, 2006 1,870,000 $ 1.28
Granted 350,000 2.13
Canceled/Forfeited (5,000) 2.91
Exercised - 0.00
------------ -------
Options outstanding at December 31, 2007 2,215,000 $ 1.41
============ =======
The weighted fair value of options granted during 2006 was $0.17 with the
following assumptions: average expected life between 2.5 and 3.5 years,
depending on the option vesting; 4.44% interest rate; 40% volatility; 5%
forfeiture rate. The weighted fair value of options granted during 2007 was
$0.64 with the following assumptions: average expected life of 3.5 years; 4.01%
average interest rate; 42.87% volatility; 5% forfeiture rate. Compensation cost
recognized for the years ended December 31, 2007 and 2006 was $184,450 and
$147,430, respectively.
F-22
ONLINE VACATION CENTER HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2007 there was approximately $186,640 of total stock-based
compensation expense not yet recognized relating to non-vested awards granted
under the Company's 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 six months. The number of
non-exercisable shares was 1,815,000 shares of common stock at December 31,
2007. At December 31, 2007, 400,000 shares of common stock at $1.27 per share
were exercisable.
For the years ended December 31, 2007 and 2006, 11,200 and 7,000 restricted
shares, respectively, were granted to employees and directors under the Plan.
Compensation expense related to the grant of restricted shares for the years
ended December 31, 2007 and 2006 was $18,520 and $5,950, respectively.
NOTE 14 - 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 and
Company, by mutual accord, terminated the consulting services as of September
30, 2007. During 2007 and 2006, this consultant received $90,000 and $120,000,
respectively, in consulting fees.
NOTE 15 - COMMITMENTS AND CONTIGENCIES
Lease Commitments
-----------------
Online Vacation Center Holdings Corp. has entered into a lease for approximately
10,000 square feet of corporate office space in Plantation, Florida. Total
monthly lease payments, which include a proportionate share of building
operating expenses, are $17,767 through June 2008; the termination date of the
lease. The Company and landlord are currently in the process of negotiating a
lease extension. Additionally, the rent expense for the years ended December 31,
2007 and 2006 was $241,651 and $197,322, respectively.
Executive Employment Agreements
-------------------------------
On March 16, 2006, the Company entered into an executive employment agreement
with its President and Chief Executive Officer. The Company will pay an initial
annual base salary of $300,000, payable bi-weekly. The base salary is subject to
annual automatic incremental increases of the greater of the percentage increase
in the consumer price index or 6% of the previous year's base salary. In
addition, the Company issued incentive stock options to purchase 300,000 shares
of common stock and nonqualified stock options to purchase 200,000 shares of
common stock which are exercisable at 150% of the fair market value of the
Company's common stock as of the effective date of the share exchange ($1.27).
All of the nonqualified stock options and incentive stock options to purchase
100,000 shares vested immediately. Incentive stock options to purchase 100,000
shares of common stock vested on March 15, 2007 and the remaining 100,000
incentive stock options vest on March 15, 2008. All of the options were issued
under the 2005 Management and Director Equity Incentive and Compensation Plan.
On August 31, 2006, in conjunction with the acquisition of Phoenix, the Company
entered into an employment agreement with the president of Phoenix to continue
serving in such capacity. The Company will pay a base salary of $202,000 per
annum commencing on September 1, 2006 and increasing by 4% per annum until
F-23
ONLINE VACATION CENTER HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2009, the termination date of the Agreement. In addition, the
president may also be entitled to a retention bonus, as defined, a bonus in
conjunction with the closing of certain acquisition prospects, as defined, and a
bonus in conjunction with Phoenix achieving certain profitability thresholds as
defined.
Other Contract Obligations
--------------------------
During the course of business, the Company has entered into contracts for
internet, telephone and other related expenses.
At December 31, 2007, the Company had the following future minimum obligations,
inclusive of discontinued operations, for rental lease commitments, employment
agreements and other contractual obligations as follows:
Year Amount
---- -----------
2008 $ 1,239,164
2009 696,405
2010 430,784
2011 and thereafter -
-----------
$ 2,366,353
===========
Benefit Plan
------------
The Company participates in a multi-employer 401 (k) Plan managed by a
professional employer organization the Company retains for administering payroll
and employee benefits programs. Contributions to the Plan are at the discretion
of the Company's board of directors. No contributions were approved as of
December 31, 2007.
Asserted Claims
---------------
On November 15, 2007, the Company was notified that it was being sued in a
putative class action lawsuit in the United States District Court for the
Southern District of Florida (Joseph Kay v Online Vacation Center Holdings
Corp., et al., Case No. 07-61619). The plaintiff claims that the Company
violated the Fair and Accurate Credit Transactions Act. The plaintiff seeks
class action status to represent all consumers of the Registrant since December
4, 2006. The Company intends to defend the lawsuit vigorously.
Additionally, 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.
Regulatory Matters
------------------
The Company believes it is in compliance with all federal regulatory
requirements, including the CAN-SPAM Act of 2003 which regulates commercial
F-24
ONLINE VACATION CENTER HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
electronic mail on a nationwide basis. The Company adheres to the law by
properly representing the nature of its commercial email messages, not tampering
with source and transmission information and obtaining email addresses through
lawful means.
NOTE 16 - QUARTERLY FINANCIAL DATA (UNAUDITED)
This table summarizes the unaudited results of operations for each quarter of
2007 and 2006:
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
For the year ended December 31, 2007:
Continuing operations:
Net revenues $ 2,260,568 $ 1,966,578 $ 1,812,478 $ 3,284,762
Operating income/(loss) 44,383 (304,693) (429,355) 943,769
Income/(loss) from continuing
operations 19,411 (200,708) (270,537) 557,072
Discontinued operations:
Net revenues $ 417,185 $ 59,533 $ 198,758 $ 1,005,607
Operating income/(loss) (141,699) (140,094) (112,004) 165,124
Income/(loss) from discontinued
operations (86,600) (85,923) (68,750) 93,415
Net income/(loss) $ (67,189) $ (286,631) $ (339,287) $ 650,487
Net earnings/(loss) per share - basic:
Continuing operations $ 0.00 $ (0.02) $ (0.02) $ 0.05
Discontinued operations $ (0.01) $ (0.01) $ 0.00 $ 0.01
Net income/(loss) $ (0.01) $ (0.03) $ (0.02) $ 0.06
Net earnings/(loss) per share - diluted:
Continuing operations $ 0.00 $ (0.02) $ (0.02) $ 0.05
Discontinued operations $ (0.01) $ (0.01) $ 0.00 $ 0.01
Net income/(loss) $ (0.01) $ (0.03) $ (0.02) $ 0.06
For the year ended December 31, 2006:
Continuing operations:
Net revenues $ 2,022,901 $ 1,805,377 $ 1,079,213 $ 1,980,364
Operating income/(loss) 438,370 306,703 (334,343) 100,475
Income/(loss) from continuing
operations 220,408 143,162 (156,173) 20,260
Discontinued operations:
Net revenues $ 0 $ 0 $ 180,935 $ 716,571
Operating income/(loss) 0 0 (12,359) 28,804
Income/(loss) from discontinued
operations 0 0 (7,554) 17,750
Net income/(loss) $ 220,408 $ 143,162 $ (163,727) $ 38,010
Net earnings/(loss) per share - basic:
Continuing operations $ 0.01 $ 0.01 $ (0.01) $ 0.00
Discontinued operations $ 0.00 $ 0.00 $ 0.00 $ 0.00
Net income/(loss) $ 0.01 $ 0.01 $ (0.01) $ 0.00
Net earnings/(loss) per share - diluted:
Continuing operations $ 0.01 $ 0.01 $ (0.01) $ 0.00
Discontinued operations $ 0.00 $ 0.00 $ 0.00 $ 0.00
Net income/(loss) $ 0.01 $ 0.01 $ (0.01) $ 0.00
NOTE 17- SUBSEQUENT EVENT
On March 20, 2008, the United States District Court for the Southern District of
Florida dismissed with prejudice the lawsuit Joseph Kay v Online Vacation Center
Holdings Corp., et al., Case No. 07-61619.
F-25