UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2007
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from _____________ to_____________
Commission file number: 0-32137
Online Vacation Center Holdings Corp.
-------------------------------------
(Exact name of registrant as specified in its charter)
Florida 65-0701352
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State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization
1801 N.W. 66th Avenue, Suite 102, Plantation, Florida 33313
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(Address of principal executive offices) (Zip Code)
(954) 377-6400
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Registrant's telephone number including area code
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such report(s), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the Registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act): Yes [ ] No [X]
APPLICABLE ONLY TO CORPORATE ISSUERS
As of August 14, 2007, there were 18,492,977 shares of Common Stock, par value,
$0.0001 per share outstanding.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
INDEX
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PAGE
Part I. Financial Information 3
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Item 1 Financial Statements (Unaudited) 3
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operation 11
Item 3 Controls and Procedures 17
Part II Other Information 18
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Item 1 Legal Proceedings 18
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 18
Item 3 Default upon Senior Notes 18
Item 4 Submission of Matters to a Vote of Securities Holders 18
Item 5 Other Information 18
Item 6 Exhibits 19
Exhibit 31.1 - Certification
Exhibit 31.2 - Certification
Exhibit 32.1 - Certification
Exhibit 32.2 - Certification
2
Part I. Financial Information
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Item 1 Financial Statements
ONLINE VACATION CENTER HOLDINGS CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2007 2006
------------- ------------
(Unaudited) (Audited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,573,473 $ 2,658,885
Accounts receivable, net 737,677 1,043,955
Prepaid expenses and other current assets 728,029 370,072
Deferred tax asset, net 155,488 248,455
----------- -----------
Total Current Assets 3,194,667 4,321,367
Restricted cash 351,204 336,135
Property and equipment, net 89,827 92,215
Deferred tax asset, net 186,212 98,183
Intangible assets, net 1,868,300 1,067,849
Goodwill 2,913,870 1,942,495
----------- -----------
Total Assets $ 8,604,080 $ 7,858,244
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 1,300,600 $ 1,339,574
Deferred revenue, net 835,311 805,134
Customer deposits 1,926,119 1,470,178
Notes payable- current portion 221,862 125,000
----------- -----------
Total Current Liabilities 4,283,892 3,739,886
Notes payable 498,110 375,000
----------- -----------
Total Liabilities 4,782,002 4,114,886
----------- -----------
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 5,531,576 5,099,059
Accumulated deficit (1,711,347) (1,357,527)
----------- -----------
Total Stockholders' Equity 3,822,078 3,743,358
----------- -----------
Total Liabilities & Stockholders' Equity $ 8,604,080 $ 7,858,244
=========== ===========
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
3
ONLINE VACATION CENTER HOLDINGS CORP
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the quarter ended June 30, For the six months ended June 30,
2007 2006 2007 2006
------------ ------------ ------------ ------------
NET REVENUES $ 2,026,111 $ 1,805,377 $ 4,703,864 $ 3,828,277
OPERATING EXPENSES:
Selling and marketing 1,078,345 527,976 2,378,740 926,541
General and administrative 1,298,910 950,568 2,689,569 2,114,876
Depreciation and amortization 93,643 20,130 177,658 41,786
------------ ------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS (444,787) 306,703 (542,103) 745,074
Interest income (expense), net (8,799) 18,250 (3,319) (21,787)
------------ ------------ ------------ ------------
Income (loss) before provision (benefit) for income taxes (453,586) 324,953 (545,422) 723,287
Provision / (benefit) for income taxes (166,955) 181,791 (191,602) 359,717
------------ ------------ ------------ ------------
NET (LOSS) INCOME $ (286,631) $ 143,162 $ (353,820) $ 363,570
============ ============ ============ ============
Weighted average shares outstanding - Basic 18,492,977 16,806,777 18,474,773 16,182,201
============ ============ ============ ============
EARNINGS PER SHARE - Basic $ (0.02) $ 0.01 $ (0.02) $ 0.02
============ ============ ============ ============
Weighted average shares outstanding - Diluted 18,492,977 17,187,544 18,474,773 16,415,456
============ ============ ============ ============
EARNINGS PER SHARE - Diluted $ (0.02) $ 0.01 $ (0.02) $ 0.02
============ ============ ============ ============
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
4
ONLINE VACATION CENTER HOLDINGS CORP
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Six Months Ended
---------------------------
June 30, June 30,
2007 2006
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Cash flows from operating activities:
Net income (loss) $ (353,820) $ 363,570
Adjustments to reconcile to net cash inflow from operating activities:
Depreciation and amortization 177,658 41,786
Stock based compensation expense 106,227 82,873
Imputed interest expense 9,027 --
Deferred income tax provision (191,602) 415,175
Decrease in accounts receivable 306,278 22,538
Increase in prepaid and other current assets (410,901) (116,655)
Increase/(Decrease) in accounts payable and accrued liabilities (38,974) 181,404
Increase/(Decrease) in deferred revenue 30,177 (30,875)
Increase/(Decrease) in customer deposits 455,941 (249,409)
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Net cash provided from operating activities 90,011 710,407
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Cash flows from investing activites:
Capital expenditures (41,787) (19,598)
Increase in intangible assets (1,854)
Increase in restricted cash (15,069) --
Cash paid for acquisitions in excess of cash received (1,116,713) --
----------- -----------
Cash used in investing activities (1,175,423) (19,598)
----------- -----------
Increase (decrease) in cash during the period (1,085,412) 690,809
Cash at the beginning of the period 2,658,885 2,213,182
----------- -----------
Cash at the end of the period $ 1,573,473 $ 2,903,991
=========== ===========
Supplemental information:
Cash paid for interest $ 11,250 $ 48,658
=========== ===========
Cash paid for taxes $ 6,250 $ 17,100
=========== ===========
Common stock issued in conjunction with acquisitions $ 337,500 $ --
=========== ===========
Net debt issued in conjunction with acquisitions $ 210,946 $ --
=========== ===========
Conversion of subordinated debt into common stock $ -- $ 3,000,000
=========== ===========
Reduction in fair value of conversion feature of debt $ 11,187 $ --
=========== ===========
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
5
ONLINE VACATION CENTER HOLDINGS CORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of Online
Vacation Center Holdings Corp., (the "Company"), and the notes thereto have been
prepared in accordance with the instructions for Form 10-QSB and Item 310(b) of
Regulation S-B of the Securities and Exchange Commission, or SEC. The year end
condensed consolidated balance sheet data was derived from audited financial
statements, but does not include all disclosures required by accounting
principles generally accepted in the United States of America. These unaudited
condensed consolidated financial statements do not include all of the
information and disclosures required by accounting principles generally accepted
in the United States of America. However, such information reflects all
adjustments (consisting of normal recurring adjustments) that are, in the
opinion of management, necessary for a fair statement of results for the interim
periods presented.
The results of operations for the three months and six months ended June 30,
2007 (also referred to as "the second quarter of 2007" and "the first half of
2007", respectively) are not necessarily indicative of annual results. The
Company manages its business as one reportable segment.
The unaudited condensed consolidated financial statements included herein should
be read in conjunction with the audited consolidated financial statements and
the notes thereto that are included in the Company's Annual Report on Form
10-KSB for the year ended December 31, 2006 that was filed with the SEC on March
21, 2007.
Use of Estimates
----------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. For the Company, key estimates include allowance for
doubtful accounts, the fair value of goodwill and intangible assets, asset lives
used in computing depreciation and amortization, including amortization of
intangible assets, accounting for income taxes, contingencies and litigation.
While the Company believes that such estimates are fair when considered in
conjunction with the condensed consolidated financial position and results of
operations taken as a whole, actual results could differ from those estimates
and such differences may be material to the financial statements.
2. ACQUISITIONS
On 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, LLC, 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.
The cost of this acquisition, net of cash acquired, was $258,580. The
consideration has been allocated to acquired working capital and other accounts.
A third-party company was hired to prepare a valuation to assist management of
the Company in its allocation of the purchase price, primarily through the
determination of the fair value and remaining useful lives of Tone and Travel
6
ONLINE VACATION CENTER HOLDINGS CORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
LLC's intangible assets. The aggregate cost related to these intangible assets
is $258,580 and have been capitalized and are being amortized over their
expected useful lives, ranging from 4.0 to 4.5 years. The Company's assessment
of the value of assets and liabilities acquired is in the process of being
finalized. Accordingly, the amount initially allocated to goodwill and certain
other identifiable intangible assets may change as the integration and valuation
processes are completed. The Acquisition Agreement includes provisions that may
result in common stock issuance to the former owner based on certain measures of
future revenue that may impact goodwill in future periods. The operating results
of this acquisition are included in the accompanying condensed consolidated
financial statements since May 18, 2007, the date of acquisition.
Amortization expense for the second quarter and first of half of 2007 was
$71,577 and $133,483, respectively. Amortization expense for the second quarter
and six months ended June 30, 2006 (also referred to as "the second quarter of
2006" and "the first half of 2006", respectively) was $945 and $1,890
respectively
3. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In September 2006, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 157, "Fair Value
Measurements" which defines fair value, establishes a measurement framework and
expands disclosure requirements ("SFAS 157"). SFAS 157 applies to assets and
liabilities that are required to be recorded at fair value pursuant to other
accounting standards. SFAS 157 is effective for fiscal years beginning after
November 15, 2007 and is not expected to have a material effect on the Company's
consolidated results of operations, financial position, or cash flows.
In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans -- an Amendment of FASB
Statements No. 87, 88, 106 and 132(R)." This standard requires the recognition
of the funded status of defined benefit pension and other postretirement benefit
plans as an asset or liability in the year in which they occur. Furthermore, it
requires changes in the funded status of these plans to be recognized through
"accumulated other comprehensive income," as a separate component of
stockholders' equity, and provides for additional annual disclosure. SFAS No.
158 is effective for fiscal years ending after December 15, 2008 and is not
expected to have a material effect on the Company's consolidated results of
operations, financial position, or cash flows.
In February 2007, the FASB issued Statement No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities" ("SFAS 159"). This statement, which
is expected to expand fair value measurement, permits entities to choose to
measure many financial instruments and certain other items at fair value. SFAS
159 is effective for fiscal years beginning after November 15, 2007 and is not
expected to have a material effect on the Company's consolidated results of
operations, financial position, or cash flows.
In September 2006, the SEC staff issued Staff Accounting Bulletin No. 108,
"Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements" ("SAB 108"). SAB 108
requires the combined use of a balance sheet approach and an income statement
approach in evaluating whether either approach results in an error that is
material in light of relevant quantitative and qualitative factors. The Company
must begin to apply the provisions of SAB 108 no later than its fiscal 2007
7
ONLINE VACATION CENTER HOLDINGS CORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
annual financial statements. The Company is currently evaluating the impact of
SAB 108.
4. EARNINGS PER SHARE
The information related to basic and diluted earnings per share is as follows:
Second Quarter
--------------
2007 2006
------------ ------------
Numerator:
Net earnings (loss) $ (286,631) $ 143,162
Effect of dilutive convertible debt -- --
------------ ------------
Diluted $ (286,631) $ 143,162
============ ============
Denominator:
Weighted average number of shares outstanding - basic 18,492,977 16,806,777
Effect of dilutive stock options and convertible debt -- 380,767
------------ ------------
Diluted 18,492,977 17,187,544
============ ============
EPS:
Basic $ (0.02) $ 0.01
============ ============
Diluted $ (0.02) $ 0.01
============ ============
First Half
----------
2007 2006
------------ ------------
Numerator:
Net earnings (loss) $ (353,820) $ 363,570
Effect of dilutive convertible debt -- --
------------ ------------
Diluted $ (353,820) $ 363,570
============ ============
Denominator:
Weighted average number of shares outstanding - basic 18,492,977 16,182,201
Effect of dilutive stock options and convertible debt -- 233,255
------------ ------------
Diluted 18,492,977 16,415,456
============ ============
EPS:
Basic $ (0.02) $ 0.02
============ ============
Diluted $ (0.02) $ 0.02
============ ============
8
ONLINE VACATION CENTER HOLDINGS CORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Diluted earnings per share are computed similar to basic earnings per share,
except the denominator is increased by including the number of additional common
shares that would have been outstanding if dilutive potential common shares had
been issued. This calculation is not done for periods in a loss position as this
would be antidilutive.
5. STOCK BASED COMPENSATION
In conjunction with the Share Exchange Agreement, the Company's Board of
Directors amended its 2005 Management and Director Equity Incentive and
Compensation Plan (the "Plan"). This Plan provides for the grants of stock
options, restricted stock, performance-based and other equity-based incentive
awards to directors, officers and key employees. Under this Plan, stock options
must be granted at an option price that is greater than or equal to the market
price of the stock on the date of the grant. If an employee owns 10% or more of
the Company's outstanding common stock, the option price must be at least 110%
of the market price on the date of the grant. Options granted under this Plan
become exercisable in accordance with the terms of the grant as determined by a
committee of the Company's Board of Directors. All options granted expire no
more than 10 years following the date of grant. No options or restricted stock
were granted during the second quarters of 2007 or 2006 under the Plan.
A summary of the activity in the Company's Plan for the first half of 2007 is
presented below:
Weighted Average
Shares Exercise Price
------ --------------
Options outstanding at December 31, 2006 1,870,000 $ 1.28
Granted 110,000 2.93
Canceled - 0.00
Exercised - 0.00
--------- ------
Options outstanding at June 30, 2007 1,980,000 $ 1.37
========= ======
The weighted fair value of options granted during the first half of 2007 was
$0.95 with the following assumptions: average expected life of 3.5 years; 4.72%
average interest rate; 46.03% volatility; 5% forfeiture rate. Compensation cost
recognized for the second quarter and first half of 2007 was $44,147 and
$87,707, respectively. Compensation cost recognized for the second quarter and
first half of 2006 was $34,468 and $76,923, respectively.
As of June 30, 2007, there was approximately $169,079 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 9 months. The number of non-exercisable
shares was 1,580,000 shares of common stock at June 30, 2007. At June 30, 2007,
400,000 shares of common stock at $1.27 per share were exercisable.
During the first half of 2007, 11,200 restricted shares were granted to
employees under the Plan. Compensation expense for the first half of 2007 and
2006 related to the restricted share grants was $18,520 and $5,950,
respectively.
9
ONLINE VACATION CENTER HOLDINGS CORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6. RELATED PARTY TRANSACTIONS
Effective October 2005, Online Vacation Center Holdings, Inc. engaged a
consultant who now serves as the Company's Chairman. In consideration for such
services, the consultant received a monthly fee of $10,000. The consultant
continues to serve the Company at the same fee rate on a month to month basis.
During the second quarters of 2007 and 2006, this consultant received $30,000
for each quarter in fees and $60,000 in fees for both the first half of 2007 and
2006.
7. COMMITMENTS AND CONTINGENCIES
The Company is involved from time to time in various legal claims and actions
arising in the ordinary course of business. While from time to time claims are
asserted that may make demands for sums of money, the Company does not believe
that the resolution of any of these matters, either individually or in the
aggregate, will materially affect its financial position, cash flows or the
results of its operations.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward Looking Statements
This Quarterly Report on Form 10-QSB includes forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. All
statements other than statements of historical fact, including statements
regarding guidance, industry prospects or future results of operations or
financial position, made in this Quarterly Report on Form 10-QSB are
forward-looking. We use words such as anticipates, believes, expects, future,
intends, and similar expressions to identify forward-looking statements.
Forward-looking statements reflect management's current expectations and are
inherently uncertain. Actual results could differ materially for a variety of
reasons, including, those risks described in our Annual Report on Form 10-KSB
for the year ended December 31, 2006 filed with the SEC on March 21, 2007 and
the risks discussed in other SEC filings. These risks and uncertainties, as well
as other risks and uncertainties, could cause our actual results to differ
significantly from management's expectations. The forward-looking statements
included in this report reflect the beliefs of our management on the date of
this report. We undertake no obligation to update publicly any forward-looking
statements for any reason.
Overview
Online Vacation Center Holdings Corp. (the "Company", "us", "our" and "we") is a
Florida holding company, focused on building a network of diversified vacation
marketers with a wide range of products that can be cross-sold to an extensive
customer base.
We provide vacation marketing services through our wholly owned subsidiaries:
o Online Vacation Center, Inc., 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 Phoenix International Publishing, LLC, the United Kingdom's leading
publisher of consumer magazines and guides about travel to the U.S. and
Canada,
o Thoroughbred Travel, LLC, a Houston, Texas based upscale travel agency,
operating as Journeys Unlimited,
o La Fern, Inc., operating as eLeisureLink.com, a Florida travel agency
that sells land-based vacations,
o La Tours and Cruises, Inc., a Houston, Texas based travel agency,
operating as West University Travel, focused on providing luxury
personal travel products such as cruises, European tours and
all-inclusive vacations,
o Dunhill Vacations, Inc., a travel newsletter and media provider,
o Cruises for Less, LLC, a home-based travel selling group, and
o Tone and Travel, LLC dba Curves Travel, the licensed travel management
company of Curves International, Inc.
Phoenix International Publishing, LLC, Thoroughbred Travel, LLC, and La Fern,
Inc. were acquired during the latter half of 2006, La Tours and Cruises, Inc.,
11
Dunhill Vacations, Inc. and certain assets of SmartTraveler.com, Inc. (currently
utilized by Cruises for Less, LLC) were acquired during the first quarter of
2007 and Curves Travel in May 2007 (collectively the "Acquisitions").
We generate revenues from:
o marketing performed for travel suppliers
o commissions on cruises, tours and land-based vacations, and
o commissions on travel insurance
We currently market our services by:
o utilizing an advertising sales force,
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, and
o email blasting to our opt-in subscription base
Operating expenses include primarily those items necessary to advertise our
services, produce our marketing materials, maintain and staff our travel
reservation and fulfillment center including technological enhancements,
payroll, commissions and benefits, telephone, ticket delivery and general and
administrative expenses including rent and computer maintenance fees.
Results of Operations
Quarter Ended June 30, 2007 Compared to Quarter Ended June 30, 2006
Revenues increased by 12.2%, $220,734, from $1,805,377 for the quarter ended
June 30, 2006 ("second quarter of 2006") to $2,026,111 for the quarter ended
June 30, 2007 ("second quarter of 2007"). The increase is attributable to the
revenues of the Acquisitions.
Selling and marketing expenses increased by $550,369, 104.2% to $1,078,345 for
the second quarter of 2007 as compared to $527,976 for the second quarter of
2006. The increase is primarily attributable to the Acquisitions and partially
attributable to an increase in co-op marketing projects during the second
quarter of 2007 for Online Vacation Center, Inc. Selling and marketing expenses
primarily consist of sales staff compensation and costs to produce marketing
materials.
General and administrative expenses increased by $348,342 or 36.6% to $1,298,910
for the second quarter of 2007 as compared to $950,568 for the second quarter of
2006. The increase is primarily attributable to the Acquisitions. General and
administrative expenses primarily include management and non sales staff
compensation, professional services, and occupancy costs.
Depreciation and amortization expense for the second quarter of 2007 was $93,643
as compared to $20,130 for the second quarter of 2006. Amortization expense
increased by $70,777 during the second quarter of 2007 as a result of
amortization of intangible assets acquired in conjunction with the Acquisitions.
The remaining increase of $2,736 is attributable to an increase in depreciation
expense.
Interest Income/(Expense) decreased from income of $18,250 for the second
quarter of 2006 to expense of $8,799 for the second quarter of 2007. The second
12
quarter of 2006 income consisted of interest income earned on our invested
excess cash balances which were higher than during the same period of 2007. The
expense of the second quarter of 2007 represents the accrued interest expense on
the debt issued by us in conjunction with our acquisition of Thoroughbred
Travel, LLC, La Fern, Inc., and La Tours and Cruises, Inc. totaling $11,004
offset by interest income earned on our invested excess cash balances.
Our loss before benefit for income taxes was $453,586 in the second quarter of
2007 compared to income before provision for income taxes of $324,953 in the
second quarter of 2006. The loss is due to an increase in sales and marketing
expenses and an increase in general and administrative expenses, offset by an
increase in revenues.
The provision for income taxes decreased from an expense of $181,791 for the
second quarter of 2006 to a tax benefit of $166,955 for the second quarter of
2007. The decrease is directly related to a decrease in results from operations
whereby income before income taxes for the second quarter of 2006 was $324,953
whereas the loss before income taxes for the second quarter of 2007 was
$453,586. The tax rate in the second quarter of 2006, 55.9%, was higher than the
statutory rate because of tax rate differentials, the true-up of permanent tax
differences, and the tax effect of deductible items for book but not tax
purposes. The benefit rate in the second quarter of 2007, 36.8%, was lower than
the statutory rate because of the tax effect of deductible items for book but
not tax purposes.
As a result of the foregoing, our net loss for the second quarter of 2007 was
$286,631 compared to net income of $143,162 in the second quarter of 2006.
Six Months Ended June 30, 2007 compared to Six Months Ended June 30, 2006
Revenues increased by 22.9%, $875,587, from $3,828,277 for the six months ended
June 30, 2006 (the "first half of 2006") to $4,703,864 for the six months ended
June 30, 2007 (the "first half of 2007"). The increase is attributable to the
revenues of the Acquisitions.
Selling and marketing expenses increased by $1,452,199, 156.7% to $2,378,740 for
the first half of 2007 as compared to $926,541 for the first half of 2006. The
increase is primarily attributable to the Acquisitions and partially
attributable to an increase in co-op marketing projects during the first half of
2007 for Online Vacation Center, Inc. Selling and marketing expenses primarily
consist of sales staff compensation and costs to produce marketing materials.
General and administrative expenses increased by $574,693 or 27.2% to $2,689,569
for the first half of 2007 as compared to $2,114,876 for the first half of 2006.
The increase is primarily attributable to the Acquisitions. General and
administrative expenses primarily include management and non sales staff
compensation, professional services, and occupancy costs.
Depreciation and amortization expense for the first half of 2007 was $177,658 as
compared to $41,786 for the first half of 2006. Amortization expense increased
by $131,593 during the first half of 2007 as a result of amortization of
intangible assets acquired in conjunction with the Acquisitions. The remaining
increase of $4,279 is attributable to an increase in depreciation expense.
Interest Expense decreased from $21,787 for the first half of 2006 to $3,319 for
the first half of 2007. The first half of 2006 expense was attributable to
interest of $48,658 on subordinated debt which was ultimately exchanged for
1,500,310 shares of our common stock in conjunction with the Share Exchange
13
Agreement in March 2006, offset by interest income earned on our invested excess
cash balances which were higher than during the same period of 2007. The expense
in the first half of 2007 represents the excess of the accrued interest expense
on the debt issued by us in conjunction with our acquisition of Thoroughbred
Travel, LLC, La Fern, Inc., and La Tours and Cruises, Inc., totaling $21,883
offset by the interest income earned on our invested excess cash balances.
Our loss before benefit for income taxes was $545,422 in the first half of 2007
compared to income before provision for income taxes of $723,287 in the first
half of 2006. The loss is due to an increase in sales and marketing expenses and
an increase in general and administrative expenses, offset by an increase in
revenues.
The provision for income taxes decreased from an expense of $359,717 for the
first half of 2006 to a tax benefit of $191,602 for the first half of 2007. The
decrease is directly related to a decrease in results from operations whereby
income before income taxes for the first half of 2006 was $723,287 whereas the
loss before income taxes for the first half of 2007 was $545,422. The tax rate
in the first half of 2006, 49.7%, 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 benefit rate in the
first half of 2007, 35.1%, was lower than the statutory rate because of the tax
effect of items deductible for book but not for tax purposes.
As a result of the foregoing, our net loss for the first half of 2007 was
$353,820 compared to net income of $363,570 in the first half of 2006.
Liquidity and Capital Resources
Cash at June 30, 2007 was $1,573,473 as compared to $2,658,885 at December 31,
2006. The primary source of our liquidity and capital resources has come from
our operations.
Cash flows provided by operating activities for the first half of 2007 and 2006
were $90,011 and $710,407, respectively. Although the first half of 2007 had a
net loss of $353,820 as compared to a net profit of $363,570 in the first half
of 2006, this decrease of $717,390 was offset by improvements in non cash
operating items, primarily relating to an increase in depreciation and
amortization of $135,872 as a result of increased amortization expense
associated with amortization of intangible assets acquired in conjunction with
the Acquisitions.
Cash flows used in investing activities for the first half of 2007 increased to
$1,175,423 compared to $19,598 during the first half of 2006. The primary cash
out flow related to the excess of cash paid over cash received totaling
$1,116,713 in conjunction with the four acquisitions completed during the first
half of 2007. The balance of the increase, $58,710, is primarily attributable to
capital expenditures, primarily computers and software, made during the first
half of 2007 and an increase in restricted cash representing collateral for
letters of credit and a reserve for credit card processing.
There were no cash flows from financing activities during the first half of 2007
and 2006; however, in conjunction with the Share Exchange Agreement in March
2006, $3,000,000 of 8% subordinated debentures due on January 1, 2008 were
ultimately exchanged for 1,500,310 shares of our common stock effective as of
March 16, 2006.
14
At June 30, 2007, we had a working capital deficit of $1,089,225, a decrease of
$1,670,706 from December 31, 2006 and an accumulated deficit of $1,711,347, an
increase of $353,820 from December 31, 2006.
Management believes that the existing cash and cash expected to be provided by
operating activities will be sufficient to fund the short term capital and
liquidity needs of our operations. We may need to seek to sell equity or debt
securities or obtain credit lines from financial institutions to meet our
longer-term liquidity and capital requirements. We can not provide any
assurances that we will be able to obtain additional capital or financing in
amounts or on terms acceptable to us, if at all or on a timely basis.
We have historically been dependent on our relationships with four major cruise
lines: Celebrity Cruises, Princess Cruises, Norwegian Cruise Line and Royal
Caribbean Cruise Line. We also depend on third party service providers for
processing certain fulfillment services.
Seasonality and Inflation
The domestic and international leisure travel industry is seasonal. Our results
have been subject to quarterly fluctuations caused primarily by the seasonal
variations in the travel industry. Leisure travel net revenues and net income
are generally lower in the third quarter. We expect seasonality to continue in
the future but hope to mitigate the effects of seasonality by acquiring
companies in the travel industry that are not as sensitive to seasonality, such
as travel advertising. We do not expect inflation to materially affect our
revenues and net income.
Critical Accounting Policies
We prepared our consolidated financial statements in accordance with accounting
principles generally accepted in the United States of America. As such,
management is required to make certain estimates, judgments and assumptions that
it believes are reasonable based on the information available. These estimates
and assumptions affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses for the periods presented. A more extensive list of significant
accounting policies and a description of accounting policies that are considered
critical may be found in our 2006 Annual Report on Form 10-KSB filed on March
21, 2007, in the Notes to the Consolidated Financial Statements, Note 2, and the
Critical Accounting Policies section. The significant accounting policies which
management believes are the most critical to aid in fully understanding and
evaluating our reported financial results include revenue recognition,
intangible asset testing and income taxes.
We recognize revenue in accordance with Staff Accounting Bulletin (SAB) No. 104
"Revenue Recognition in Financial Statements", which states that revenue is
realized or realizable and earned when all of the following criteria are met:
persuasive evidence of an arrangement exists, services have been rendered, the
seller's price to the buyer is fixed or determinable, and collectibility is
reasonably assured. Vacation travel sales transactions are billed to customers
at the time of booking, however commission revenue is not recognized in the
accompanying consolidated financial statements until the customers' travel
occurs. Advertising revenue is recognized upon distribution of the 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
15
qualitative factors regarding our status as a primary obligor and the extent of
their pricing latitude. Based upon our evaluation of vacation travel sales
transactions and in accordance with the various indicators identified in EITF
Issue No. 99-19, our vacation travel suppliers assume the majority of the
business risks such as providing the service and the risk of unsold travel
packages. As such, all vacation travel sales transactions are to be recorded at
the net amount, which is the amount charged to the customer less the amount to
be paid to the supplier. The method of net revenue presentation does not impact
operating profit, net income, earnings per share or cash flows.
We adopted the provisions of FASB Interpretation No.48 ("FIN 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 June 30, 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 June 30, 2007, we have not
accrued nor recognized interest or penalties related to uncertain tax positions.
We do not currently anticipate recording 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 condensed
consolidated financial statements as of June 30, 2007.
Absent any circumstances that warrant testing at another time, we test for
goodwill and non-amortizing intangible asset impairment as part of our year-end
closing process. Our goodwill testing consists of comparing the estimated fair
values of each of our operating entities to their carrying amounts, including
recorded goodwill. We estimate the fair value of our reporting unit by
discounting its projected future cash flow. Developing future cash flow
projections requires us to make significant assumptions and estimates regarding
the sales, gross margin and operating expenses of our reporting unit, as well as
economic conditions and the impact of planned business or operational
strategies. Should future results or economic events cause a change in our
projected cash flows, or should our operating plans or business model change,
future determinations of fair value may not support the carrying amount of our
unit, and the related goodwill would need to be written down to an amount
considered recoverable. Any such write down would be included in the operating
expenses. While we make reasoned estimates of future performance, actual results
below these expectations, or changes in business direction can result in
additional impairment charges in future periods.
16
ITEM 3. CONTROLS AND PROCEDURES
As of the end of the period covered by this Quarterly Report, we carried out an
evaluation, under the supervision and with the participation of management,
including Edward B. Rudner, our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the
Securities Exchange Act of 1934. In designing and evaluating the disclosure
controls and procedures, management recognizes that there are inherent
limitations to the effectiveness of any system of disclosure controls and
procedures, including the possibility of human error and the circumvention or
overriding of the controls and procedures. Accordingly, even effective
disclosure controls and procedures can only provide reasonable assurance of
achieving their desired control objectives. Additionally, in evaluating and
implementing possible controls and procedures, management is required to apply
its reasonable judgment.
Based upon the required evaluation, our Chief Executive Officer and Chief
Financial Officer concluded as of June 30, 2007, that our disclosure controls
and procedures are effective in timely alerting him to material information
relating to the Company that is required to be disclosed by us in the reports
that we file or submit under the Exchange Act to be recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
forms. There have been no significant changes in our internal controls over
financial reporting or in other factors that could significantly affect internal
controls over financial reporting subsequent to the date we carried out our
evaluation.
There have been no changes in our internal control over financial reporting
during the quarter ended June 30, 2007, that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
17
PART II. OTHER INFORMATION
------- -----------------
ITEM 1. LEGAL PROCEEDINGS
We are involved from time to time in various legal claims and actions arising in
the ordinary course of business. While from time to time claims are asserted
that may make demands for sums of money, we do not believe that the resolution
of any of these matters, either individually or in the aggregate, will
materially affect our financial position, cash flows or the results of our
operations.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's annual meeting of stockholders was held on May 15, 2007. Of the
total number of common shares outstanding on March 30, 2007, a total of
11,309,958 were represented in person or by proxy. Results of votes with respect
to proposals submitted at that meeting are as follows:
a. To elect four nominees to serve as directors to hold office until the
next annual meeting of our stockholders or until their successors have
been elected and qualified. Our stockholders voted to elect all four
nominees to serve as directors. Votes recorded by nominee were as
follows:
Against/
Nominee For Withheld
------------------- ---------- --------
Richard A. McKinnon 11,306,626 3,332
Edward B. Rudner 11,306,626 3,332
Brian P. Froelich 11,307,476 2,482
Frank Bracken 11,306,726 3,232
There were no abstentions and no broker non-votes in connection with the
election of directors.
b. To ratify our Board's appointment of Jewett, Schwartz, Wolfe &
Associates as our independent public accountants for the 2007 fiscal
year. Our stockholders voted to approve this proposal with 11,307,752
votes for and 948 votes against. There were no abstentions and no
broker non-votes in connection with the ratification of our independent
public accountants for fiscal 2007.
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. EXHIBITS
Exhibit No. Exhibit Description
----------- -------------------
31.1 Certification by Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002. +
31.2 Certification by Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002. +
32.1 Certification by Chief Executive Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002. +
32.2 Certification by Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002. +
---------
+ Filed herewith
19
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ONLINE VACATION CENTER HOLDINGS CORP.
/S/ Edward B. Rudner
---------------------------------------------------
Chief Executive Officer, President, Chief Financial
Officer and Director
Date: August 14, 2007
20