UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2006.
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from _____________________ to _____________________.
Commission file number: 0-32137
Online Vacation Center Holdings Corp.
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(Exact name of registrant as specified in its charter)
FLORIDA 65-0701352
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State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
1801 N.W. 66th Avenue, Suite 102, Plantation, Florida 33313
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(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code: (954) 377-6400
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 Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such report(s), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
APPLICABLE ONLY TO CORPORATE ISSUERS
As of May 1, 2006, there were 16,806,777 shares of Common Stock, par value
$.0001 per share, outstanding.
I N D E X
Page
----
Part I. Financial Information.
------- ----------------------
Item 1. Financial Statements (Unaudited)
Condensed Balance Sheets 3
Condensed Statements of Operations 4
Condensed Statements of Cash Flows 5
Statements of Changes in Shareholders' Equity 6
Notes to the Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations. 20
Item 3. Controls and Procedures. 22
Part II. Other Information. 23
-------- -----------------
Item 1: Legal Proceedings 23
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds 23
Item 3: Defaults upon Senior Securities 23
Item 4: Submission of Matters to a vote of Securities Holders 23
Item 5: Other Information 23
Item 6: Exhibits 23
Signatures 24
2
ONLINE VACATION CENTER HOLDINGS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2006 2005
------------------- ---------------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,474,618 $ 2,213,182
Accounts receivable, net 443,000 581,896
Prepaid expenses and other current assets 440,337 220,720
------------------- ---------------------
Total Current Assets 3,357,955 3,015,798
Restricted cash 315,000 315,000
Property and equipment, net 90,884 111,100
Deferred income taxes 960,727 1,116,148
Intangible assets, net 43,370 44,314
------------------- ---------------------
Total Assets $ 4,767,936 $ 4,602,360
=================== =====================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 1,147,748 $ 894,187
Deferred revenue 440,948 479,434
Customer deposits 1,257,163 1,575,475
------------------- ---------------------
Total Current Liabilities 2,845,859 2,949,096
Subordinate Debentures -- 3,000,000
------------------- ---------------------
Total Liabilities 2,845,859 5,949,096
------------------- ---------------------
Shareholders' Equity (Deficiency)
Common Stock, 20,000,000 shares authorized at
$.001 par value; 171,429 shares issued and outstanding -- 171
Common Stock, 80,000,000 shares authorized at
$.0001 par value; 16,806,777 shares issued and outstanding 1,681 --
Additional paid-in capital 3,295,368 248,473
Accumulated deficit (1,374,972) (1,595,380)
------------------- ---------------------
Total Shareholders' Equity (Deficiency) 1,922,077 (1,346,736)
------------------- ---------------------
Total Liabilities & Shareholders' Equity (Deficiency) $ 4,767,936 $ 4,602,360
=================== =====================
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
3
ONLINE VACATION CENTER HOLDINGS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended March 31,
2006 2005
------------------- -------------------
(Unaudited)
NET REVENUES $ 2,022,901 $ 2,116,715
OPERATING EXPENSES:
Sales and marketing 398,565 831,397
General and administrative 1,185,966 909,292
------------------- -------------------
INCOME FROM OPERATIONS 438,370 376,026
------------------- -------------------
Other expenses:
Interest expense, net (40,036) (58,586)
------------------- -------------------
Total other expenses, net (40,036) (58,586)
------------------- -------------------
Earnings from continuing operations
before provision for income taxes 398,334 317,440
Provision (benefit) for income taxes 177,926 (28,657)
------------------- -------------------
NET INCOME $ 220,408 $ 346,097
=================== ===================
EARNINGS PER SHARE - Basic $ 0.01 $ 2.02
=================== ===================
Weighted average shares outstanding - basic 16,806,777 171,429
=================== ===================
EARNINGS PER SHARE - Diluted $ 0.01 $ 2.02
=================== ===================
Weighted average shares outstanding - Diluted 17,106,777 171,429
=================== ===================
4
ONLINE VACATION CENTER HOLDINGS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended March 31,
2006 2005
---------------------- -------------------------
(Unaudited)
Cash Flows from Operating Activities:
Net income $ 220,408 $ 346,097
Adjustments to reconcile to net cash inflow from
operating activities:
Depreciation and amortization 21,656 16,089
Deferred income taxes 155,421 (46,657)
Changes in operating assets and liabilities:
Accounts receivable 138,896 (136,998)
Prepaid expenses and other current assets (219,617) (34,769)
Accounts payable and accrued expenses 253,561 22,326
Deferred revenue (38,486) 168,015
Customer deposits (318,312) 311,028
Cash payments for settlement obligation -- (26,250)
Net cash provided by operating activities 213,527 618,880
---------------------- -------------------------
Cash Flows from Investing Activities:
Return of investment in restricted cash -- (605)
Purchases of property and equipment (496) (29,320)
---------------------- -------------------------
Net cash (used in) investing activities (496) (29,924)
---------------------- -------------------------
Cash Flows from Financing Activities:
Management & director equity compensation 48,405 --
Net cash provided by financing activities 48,405 --
---------------------- -------------------------
Net increase in cash and cash equivalents 261,437 588,956
Cash and cash equivalents, beginning of year 2,213,182 1,176,923
---------------------- -------------------------
Cash and cash equivalents, end of year $ 2,474,618 $ 1,765,879
====================== =========================
5
ONLINE VACATION CENTER HOLDINGS CORP. AND SUBSIDIARIES
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIENCY)
Common Stock
20,000,000 shares authorized Additional Accumulated
Shares $0.001 par value Paid-in Capital Deficit Total
----------------------------------------------------------------------------------------
Balance - December 31, 2004 171,429 171 248,473 (3,815,915) (3,567,271)
Net income -- -- -- 2,220,535 2,220,535
-------------- ------------- ----------------- ---------------- ---------------
Balance - December 31, 2005 171,429 171 248,473 (1,595,380) (1,346,736)
============== ============= ================= ================ ===============
Common Stock Additional Accumulated
80,000,000 shares authorized Paid-in Capital Deficit Total
--------------------------------------------------------------------------------------
Share Exchange (171,429) (171) (248,473) -- (248,644)
Amended Capitalization 16,799,777 1,680 3,246,964 -- 3,248,644
Management & Director Equity Grants 7,000 1 48,404 -- 48,405
Net income through March 31, 2006 -- -- -- 220,408 220,408
------------- -------------- ----------------- ---------------- ---------------
Balance - March 31, 2006 16,806,777 1,681 3,295,368 (1,374,972) 1,922,077
============= ============== ================= ================ ===============
6
ONLINE VACATION CENTER HOLDINGS CORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BACKGROUND
Overview
--------
Online Vacation Center Holdings Corp. (the "Company") is a Florida holding
company which provides vacation travel services through its wholly owned
subsidiary Online Vacation Center, Inc., an internet-based vacation seller
focused on serving the affluent retiree market.
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 Alan Rubin 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.
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.
Interim Financial Statements
----------------------------
The interim financial statements presented herein have been prepared
pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC"). Certain information and footnote disclosures normally
7
ONLINE VACATION CENTER HOLDINGS CORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to such rules and regulations. The interim
financial statements should be read in conjunction with the Company's
annual financial statements, notes and accounting policies included in the
Company's year-end financial statements as of December 31, 2005. In the
opinion of management, all adjustments (consisting only of normal recurring
adjustments) which are necessary to provide a fair presentation of
financial position as of March 31, 2006 and the related operating results
and cash flows for the interim period presented have been made. The results
of operations, for the period presented are not necessarily indicative of
the results to be expected for the year.
Revenue Recognition
-------------------
Revenues are derived from transactions where the Company is the merchant of
record and determines the price to the customer. The Company has agreements
with suppliers for travel packages that the Company sells. The Company does
not have purchase obligations for unsold travel packages. The Company
presents revenue in accordance with Staff Accounting Bulletin (SAB) No. 104
"Revenue Recognition in Financial Statements" and Emerging Issues Task
Force (EITF) Issue No. 99-19, "Reporting Revenue Gross as a Principal
versus Net as an Agent", including the weighing of the relevant qualitative
factors regarding the Company's status as a primary obligor, and the extent
of their pricing latitude. The method of net revenue presentation does not
impact operating profit, net income, earnings per share or cash flows.
Based upon the Company's evaluation of sales transactions and in accordance
with the various indicators identified in EITF Issue No. 99-19, the
Company's suppliers assume the majority of the business risks such as
providing the service and the risk of unsold travel packages. As such, all
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.
Sales transactions are billed to customers at the time of booking, however
revenue is not recognized on the accompanying consolidated financial
statements until the customers' travel occurs.
The Company generally recognized advertising revenues ratably over the
advertising period, depending on the terms of the advertising contract. For
the three-month periods ended March 31, 2006 and 2005, the Company derived
no revenues from the sales of advertisements on its internet website. The
Company applies EITF Issue No. 99-17, "Accounting for Advertising Barter
Transactions", in the valuation and recognition of barter arrangements,
however, during the current period, there was no revenue derived from
barter agreements.
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 three major cruise lines: Celebrity
Cruises, Norwegian Cruise Line, and Royal Caribbean Cruise Line. The
8
ONLINE VACATION CENTER HOLDINGS CORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 Deposit Insurance Corporation (FDIC) up
to $100,000. At March 31, 2006 and December 31, 2005, the balances at
various financial institutions over the FDIC insured limit relating to cash
and cash equivalents and restricted cash were approximately $2.3 million
and $2.0 million, respectively. The Company believes these balances are not
as risk as they are held by sound financial institutions.
Advertising Costs
-----------------
Substantially all advertising costs are charged to expense as incurred and
principally represent direct mail costs and online advertising, including
fees paid to search engines and distribution partners. Direct mail
advertising costs are recorded as prepaid expenses and charged to expense
as consumed. Advertising expense for the three-month period ended March 31,
2006 and 2005 was $196,574 and $536,285, 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 March 31, 2006
and December 31, 2005, cash and cash equivalents include cash in the bank
and cash on hand.
Accounts Receivable
-------------------
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 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 March 31, 2006 and December 31, 2005, the allowance for
doubtful accounts was $4,317.
Restricted Cash
---------------
In accordance with Accounting Review Board (ARB) No. 43, Chapter 3A,
"Current Assets and Current Liabilities", cash which is restricted as to
9
ONLINE VACATION CENTER HOLDINGS CORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
withdrawal is considered a noncurrent asset. Restricted cash consists of
collateral for two 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 their credit card processor
and will release all funds no later than six months after the final
transaction deposit. Certificates of deposit of $35,000 are collateral for
two outstanding letters of credit due to expire in 2006. 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
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/
Amortization
Asset Category Period
--------------- -------------
Office equipment 2 to 3 Years
Furniture & fixture 5 to 7 Years
Leasehold improvements 6.5 Years
Goodwill and Indefinite-Lived Intangible Assets
-----------------------------------------------
In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets,"
goodwill acquired in business combinations 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 at
the beginning of 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. At March 31, 2006 and December 31, 2005 there
was no goodwill in the accompanying consolidated balance sheets.
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 if the facts and
circumstances suggest that they may be impaired. If this review indicates
that the carrying value will not be recoverable, as determined based on the
10
ONLINE VACATION CENTER HOLDINGS CORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
projected undiscounted future cash flows, the carrying value is reduced to
its estimated fair value.
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 March 31, 2006, there were no 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 that could share in the earnings of the Company.
300,000 stock options that have vested but have not been exercised are
included in the weighted average shares outstanding - diluted.
Stock-Based Compensation
------------------------
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation Transition and Disclosure" ("SFAS No. 148") which amends FASB
Statement No. 123 "Accounting for Stock-Based Compensation" ("SFAS No.
123"). The Company has adopted the expense recognition provision of SFAS
123 and is providing expense for stock based compensation for grants made
on and after January 1, 2003. There was no stock based compensation granted
during the year ended December 31, 2005. On March 16, 2006, 1,860,000 stock
options and 7,000 restricted shares were granted to employees and directors
under the 2005 Management and Director Equity Incentive and Compensation
Plan. Compensation cost recognized in the three-month period ended March
31, 2006 was $42,455 for the stock options and $5,950 for the restricted
shares.
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
11
ONLINE VACATION CENTER HOLDINGS CORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
expenses, results of operations, liquidity, capital expenditures or capital
resources and would be considered material to shareholders. Certain
officers and directors of the Company have provided personal guarantees to
various lenders as required for the extension of credit to the Company.
Recent Accounting Pronouncements
--------------------------------
Share-Based Payment
In December 2004, the 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. Compensation cost for stock options
issued on March 16, 2006 was recognized and is included in the statement of
operations for the three-month period ended March 31, 2006.
In March 2005, the U.S. Securities and Exchange Commission, or SEC,
released Staff Accounting Bulletin 107, "Share-Based Payments," ("SAB
107"). The interpretations in SAB 107 express views of the SEC staff, or
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 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. The Company and management is reviewing SAB 107 in conjunction
with its review of SFAS 123R.
Nonmonetary Exchange
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets--An Amendment of Accounting Principles Board (APB) Opinion No. 29,
Accounting for Nonmonetary Transactions" ("SFAS 153"). SFAS 153 eliminates
the exception from fair measurement for nonmonetary exchanges of similar
productive assets in paragraph 21(b) of APB Opinion No. 29, "Accounting for
Nonmonetary Transactions," and replaces it with an exception for exchanges
that do not have commercial substance. SFAS 153 specifies that a
nonmonetary exchange has commercial substance if the future cash flows of
the entity expected to change significantly as a result of the exchange.
SFAS 153 is effective for fiscal periods beginning after June 15, 2005. The
12
ONLINE VACATION CENTER HOLDINGS CORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
adoption of SFAS 153 is not expected to have a material impact on the
Company's current financial condition or results of operations.
Conditional Asset Retirement
In March 2005, the FASB issued FASB Interpretation (FIN) No. 47 -
"Accounting for Conditional Asset Retirement Obligations - an
Interpretation of SFAS 143 (FIN No. 47). FIN No. 47 clarifies the timing of
liability recognition for legal obligations associated with the retirement
of a tangible long-lived asset when the timing and/or method of settlement
are conditional on a future event. FIN No. 47 is effective no later than
December 31, 2005. FIN No. 47 did not impact the Company for the three
month period ended March 31, 2006.
Accounting Changes and Error Corrections
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections, a Replacement of APB No. 20 and FASB 3 (SFAS No.154). SFAS No.
154 requires retrospective application to prior periods' financial
statements of a voluntary change in accounting principle unless it is
impracticable. APB Opinion No. 20 "Accounting Changes," previously required
that most voluntary changes in accounting principle be recognized by
including in net income of the period of the change the cumulative effect
of changing to the new accounting principle.
NOTE 3 - PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist of the following:
March 31, December 31,
--------------- ---------------
2006 2005
--------------- ---------------
Prepaid expenses $ 347,568 $ 140,176
Refundable deposits with suppliers 92,769 80,543
--------------- ---------------
Prepaid expenses and other current assets $ 440,337 $ 220,719
=============== ===============
13
ONLINE VACATION CENTER HOLDINGS CORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 4 - PROPERTY AND EQUIPMENT, NET
Property and equipment consist of the following:
March 31, December 31,
--------------- ---------------
2006 2005
--------------- ---------------
Office equipment $ 333,158 $ 332,663
Furniture & fixture 54,326 54,326
Leasehold improvements 67,368 67,368
--------------- ---------------
454,852 454,357
Less: Accumulated depreciation (363,968) (343,257)
--------------- ---------------
Property and equipment, net $ 90,884 $ 111,110
=============== ===============
NOTE 5 - INTANGIBLE ASSETS, NET
During 2002, Online Vacation Center Holdings, Inc. purchased the rights to
the Renaissance Cruises name and customer database. Online Vacation Center
Holdings, Inc. also registered two trade names and marks for Online
Vacation Center, Inc. These costs were capitalized and are being amortized
over the expected 15-year useful lives of the trademarks. The estimated
aggregate amortization expense for each of the five succeeding fiscal years
is $3,776 per year.
Intangible assets consist of the following:
March 31, December 31,
2006 2005
--------------- ---------------
Renaissance Cruises $ 50,000 $ 50,000
Other trademarks 6,642 6,642
--------------- ---------------
56,642 56,642
Less: Accumulated amortization (13,272) (12,328)
--------------- ---------------
Intangible assets, net $ 43,370 $ 44,314
=============== ===============
NOTE 6 - DEFERRED REVENUES
Deferred revenue consists of sales commission received from suppliers in
advance of passenger cruise travel dates, net of cancellations. The advance
sales commission is considered unearned revenue and recorded as deferred
revenue in the accompanying consolidated balance sheets. At March 31, 2006
14
ONLINE VACATION CENTER HOLDINGS CORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
and December 31, 2005, deferred revenues were $440,948 and $479,434,
respectively.
NOTE 7 - CUSTOMER DEPOSITS
Deposits received from customers in advance of passenger cruise travel
dates are considered unearned revenues and recorded as customer deposit
liabilities in the accompanying consolidated balance sheets. Customer
deposits are subsequently recognized as revenues upon completion of
passenger travel. At March 31, 2006 and December 31, 2005, customer
deposits were $1,257,163 and $1,575,475, respectively.
NOTE 8 - SUBORDINATE DEBENTURES
On November 16, 2000 Online Vacation Center Holdings, Inc. issued an 8%
Subordinate Debenture (the "first Debenture") in the amount of $2,000,000
to Pacific Tour Services, Inc. that was due on January 1, 2008. The first
Debenture accrued interest on the unpaid principal balance at a rate of 8%
per annum. On June 27, 2001 Online Vacation Center Holdings, Inc. issued an
8% Subordinate Debenture (the "second Debenture") in the amount of
$1,000,000 to Pacific Tour Services, Inc. that was due on January 1, 2008.
The second Debenture accrued interest on the unpaid principal balance at a
rate of 8% per annum. Immediately prior to the share exchange agreement the
debentures were exchanged into shares of common stock of Online Vacation
Center Holdings, Inc. and then Pacific Tour Services, Inc. subsequently
exchanged the shares for shares of common stock of Online Vacation Center
Holdings Corp., in accordance with the share exchange agreement.
NOTE 9 - INCOME TAXES
The provision (benefit) for income taxes from continued operations for the
three month period ended March 31, 2006 and 2005 consist of the following:
March 31,
-------------------------------------
2006 2005
--------------- ---------------
Current:
Federal $ 21,551 $ 0
State 2,075 0
--------------- ---------------
23,626 0
Deferred:
Federal $ 132,300 $ 111,104
State 22,000 17,459
--------------- ---------------
154,300 128,563
Tax (benefit) from the
decrease in valuation allowance (0) (157,220)
--------------- ---------------
Provision (benefit) for income taxes, net $ 177,926 $ (28,657)
=============== ===============
15
ONLINE VACATION CENTER HOLDINGS CORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The difference between income tax expense computed by applying the federal
statutory corporate tax rate and actual income tax expense is as follows:
March 31,
---------------------------------
2006 2005
---------- -----------
Statutory federal income tax rate 35.0% 35.0%
Decrease in valuation allowance 0.0% (49.5)%
State income taxes 3.6% 5.5%
Other 0.4% 0.0%
Gain on sale of cigar assets 5.7% 0.0%
--------- -----------
Effective tax rate 44.7% (9.0)%
========= ===========
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 Alan Rubin in exchange for 2.7 million
shares of stock. The Company recognized gain on each asset distributed
based upon the difference between the fair market value and the Company's
adjusted basis in each asset at the time of closing.
Deferred income taxes result from temporary differences in the recognition
of income and expenses for the 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:
March 31, December 31,
2006 2005
--------------- ------------------
Net operating loss carry-forwards and AMT tax credit $ 656,175 $ 832,088
Depreciation and amortization 83,562 85,568
Accruals and other 220,990 198,492
--------------- ------------------
Deferred income tax asset $ 960,727 $ 1,116,148
=============== ==================
The net deferred tax assets and liabilities are comprised of the following:
March 31, December 31,
2006 2005
--------------- ------------------
Deferred tax assets
Current $ 241,447 $ 234,809
Non-current 719,280 881,339
--------------- ------------------
Net deferred income tax asset $ 960,727 $ 1,116,148
=============== ==================
16
ONLINE VACATION CENTER HOLDINGS CORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 10 - STOCK OPTION COMPENSATION
On March 16, 2006, 1,860,000 stock options were granted to management and
directors under the 2005 Management and Director Equity Incentive and
Compensation Plan. All options have a five-year life and an exercise price
of $1.27.
Plan Type # Options Granted Grant Date Final Vest
--------- ----------------- ---------- ----------
ISO 100,000 3/16/2006 3/16/2006
ISO 100,000 3/16/2006 3/16/2007
ISO 160,000 3/16/2006 3/16/2008
Non-Qualified 200,000 3/16/2006 3/16/2006
Non-Qualified 1,300,000 3/16/2006 3/16/2008
Compensation cost recognized in the three-month period ended March 31, 2006
was $42,455. Compensation cost was calculated using the Black-Scholes model
with the following assumptions: $1.27 exercise price; average remaining
life between 2.5 and 3.5 years, depending on the option vesting; $0.85
stock price; 4.44% interest rate; 40% volatility; 5% forfeiture rate.
Gross compensation cost to be recognized over the next two years is
$313,998.
Compensation Compensation
ISOs NQ cost, gross Forfeitures cost, net
---------- ------------ ------------ ----------- ------------
Q1 $ 14,069 $ 30,620 44,689 5% 42,455
Q2 7,388 28,894 36,283 5% 34,468
Q3 7,469 29,212 36,681 5% 34,847
Q4 7,469 29,212 36,681 5% 34,847
---------- ------------ ---------- -- ---------
2006 $ 36,396 $ 117,938 154,334 5% 146,618
Q1 6,633 28,577 35,210 5% 33,450
Q2 3,556 28,894 32,451 5% 30,828
Q3 3,595 29,212 32,807 5% 31,167
Q4 3,595 29,212 32,807 5% 31,167
---------- ------------ ---------- -- ---------
2007 $ 17,380 $ 115,895 133,275 5% 126,611
Q1 2,892 23,497 26,388 5% 25,069
---------- ------------ ---------- -- ---------
2008 $ 2,892 $ 23,497 26,388 5% 25,069
Total $ 56,668 $ 257,330 313,998 5% 298,298
========== ============ ========== =========
NOTE 11 - RELATED PARTY TRANSACTIONS
Effective October 2005, Online Vacation Center Holdings, Inc. engaged
Richard A. McKinnon to provide consulting services. In consideration for
17
ONLINE VACATION CENTER HOLDINGS CORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
such services Mr. McKinnon received a monthly fee of $10,000. Mr. McKinnon
continues to serve as a consultant to the Company at the same fee rate. Mr.
McKinnon is currently serving as Chairman of the Company.
NOTE 12 - COMMITMENTS AND CONTIGENCIES
Lease Commitments
-----------------
Online Vacation Center Holdings, Inc. 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 $14,962 through June 2006 and increase
approximately three percent each year thereafter. The current lease term is
through June 30, 2008.
Executive Employment Agreement
------------------------------
On March 16, 2006, the Company entered into an executive employment
agreement with its President and Chief Executive Officer, Edward B. Rudner.
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 vest 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.
As of the effective date of the share exchange, Online Vacation Center
Holdings, Inc. had an obligation under the terms of its employment
agreement with Mr. Rudner for compensation and benefits in the amount of
$579,990. The obligation has been assumed by the Company.
Other Contract Obligations
--------------------------
During the course of business, the Company has entered into contracts for
marketing, telephone and other related expenses. At March 31, 2006, the
Company has obligations under the terms of these contracts in the amount of
$207,113, $17,173 and $0 for the nine-month period ended December 31, 2006
and the years ended December 31, 2007, and 2008, respectively.
18
ONLINE VACATION CENTER HOLDINGS CORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
At March 31, 2006, the Company had the following future minimum obligations
for rental lease commitments, employment agreements and other contract
obligations as follows:
Year Amount
---- -----------------
2006 $ 604,532
2007 $ 563,504
2008 $ 473,618
2009 and thereafter $ 96,270
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 March 31, 2006.
Settlement Obligation
---------------------
The Company is involved from time to time in various legal claims and
actions arising in the ordinary course of business. In November 2004, the
Company reached a settlement agreement with a travel company whereby the
Company paid $200,000 and agreed to pay $175,000 over twenty months
commencing January 2005 with interest on the outstanding balance at 8% per
annum.
The balance recorded for the Settlement obligation as of December 31, 2003
was $636,403 and was accrued during 2003. In 2004, an additional $4,412 was
accrued for the Settlement obligation, increasing the balance recorded to
$640,815. As a result of the Settlement Agreement, the difference between
the balance of $640,815 that the Company had accrued and the Settlement Sum
of $375,000 was recorded as a gain in the accompanying statement of
consolidated operations for the year ended December 31, 2004, as this was a
one-time event that did not result from the Company's core operations and
the settlement gain had been realized. The obligation was paid in full in
2005.
Regulatory Matters
------------------
The Company believes it is in compliance with all federal regulatory
requirements, including the CAN-SPAM Act of 2003 which regulates commercial
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.
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
Online Vacation Center Holdings Corp. is an internet-based vacation seller
focused on serving the affluent retiree market. Online Vacation Center Holdings
Corp. provides vacation services from its call center located in Plantation,
Florida. Sales are completed either via web site located at
www.onlinevacationcenter.com or through its toll free telephone number
(1-800-780-9002). Customers may purchase vacation packages 24-hours a day, seven
days a week, via the Internet or may contact live telephone operators from 9
a.m. (e.s.t.) to 8 p.m. (e.s.t.) Monday through Friday and 9 a.m. (e.s.t.) to 5
p.m. (e.s.t.) on weekends.
The following discussion and analysis should be read in conjunction with the
Online Vacation Center Holdings Corp. financial statements and notes thereto
included as exhibits to this report. This discussion contains certain
forward-looking statements that involve risks and uncertainties. Online Vacation
Center Holdings Corp.'s actual results and the timing of certain events could
differ materially from those discussed in these forward-looking statements as a
result of certain factors, including, but not limited to, those set forth herein
and in Online Vacation Center Holdings Corp.'s other public filings with the
Securities and Exchange Commission.
Results of Operations
---------------------
Three Months Ended March 31, 2006 Compared To March 31, 2005
------------------------------------------------------------
Revenues. Revenues decreased $93,814, or 4%, to $2,022,901 for the three month
period ended March 31, 2006 from $2,116,715 for the three month period ended
March 31, 2005. The decrease was due to a decrease in marketing revenue which
was partially offset by an increase in override revenue.
Operating expenses. Operating expenses, which include sales and marketing
expenses and general and administrative expenses, were $1,584,531 for the three
month period ended March 31, 2006 as compared to $1,740,689, for the three month
period ended March 31, 2005 or a decrease of $156,158 or 9%. The decrease was
principally due to a decrease in sales and marketing expenses which was
partially offset by an increase in professional fees described below. For the
three month period ended March 31, 2006, sales and marketing expenses were
$398,565 as compared to $831,397 for the three month period ended March 31,
2005, a decrease of $432,832 or 52%. Sales and marketing expenses primarily
consist of sales salaries, commissions, and marketing expenses. The decrease is
primarily due to a decrease in co-op marketing projects and employee sales
commissions. For the three month period ended March 31, 2006, general and
administrative expenses were $1,185,966 as compared to $909,292 for the three
month period ended March 31, 2005, an increase of $276,674 or 30%. General and
administrative expenses primarily include management compensation, professional
services, and occupancy costs. For the three month period ended March 31, 2006,
professional services expenses were $366,409 as compared to $69,659 for the
three month period ended March 31, 2005, an increase of $296,750 or 426%. The
increase is due to consulting, legal, and accounting expenses that are
associated with the company's transaction to go public.
Income from Operations. For the three month period ended March 31, 2006, income
from operations was $438,370 as compared to $376,026 for the three month period
20
ended March 31, 2005, an increase of $62,344 or 17%. The increase is primarily
due to a decrease in operating expenses.
Other Expenses. Other expenses decreased to $40,036 for the three month period
ended March 31, 2006 as compared to $58,586 for the three month period ended
March 31, 2005. The decrease in other expenses is due to a decrease in interest
expense associated with the subordinated debenture discussed in "Liquidity and
Capital Resources" below and an increase in interest income from
interest-bearing certificates of deposit.
Earnings from Continuing Operations. For the three month period ended March 31,
2006, earnings from continuing operations was $398,334 as compared to $317,440
for the three month period ended March 31, 2005, an increase of $80,894 or 25%.
The increase is primarily due to a decrease in operating expenses and interest
expense.
Provision (Benefit) for Income Taxes. The provision for income taxes increased
to $177,926 for the three month period ended March 31, 2006 as compared to
($28,657) for the three month period ended March 31, 2005. The increase in the
provision for income taxes resulted primarily from a decrease of the valuation
allowance benefit. For the three month period ended March 31, 2006, the non-cash
U.S. income tax provision, which includes a tax expense of $22,505 related to
the gain on the sale of the assets relating to the cigar business to Alan Rubin
in exchange for 2.7 million shares of stock, was $177,926 as compared to
$128,563 for the three month period ended March 31, 2005, an increase of
$49,363. For the three month period ended March 31, 2006, the valuation
allowance benefit was $0 as compared to $157,220 for the three month period
ended March 31, 2005. SFAS No. 109, "Accounting for Income Taxes," requires that
Online Vacation Center record a valuation allowance when it is "more likely than
not that some portion or all of the deferred tax assets will not be realized."
The valuation allowance was decreased to $1,164,968 or 65% of the gross deferred
tax asset of $1,792,258 in 2004 and decreased to $0 or 0% of the gross deferred
tax asset of $1,116,148 in 2005 as described below.
At December 31, 2002, Online Vacation Center recorded a valuation allowance of
$2,217,158 or 80% of the gross deferred tax asset of $2,771,447. Online Vacation
Center decreased the valuation allowance in 2003, 2004, and March 31, 2005. At
June 30, 2005, Online Vacation Center had its most profitable quarter to date.
Net income before taxes and future revenue increased as compared to the same
three month period ending June 30, 2004. Historically, the second quarter of the
year is the time that most bookings travel, therefore it would be expected that
advanced bookings would significantly decrease. Instead, advanced bookings
increased 40% as compared to the same period in 2004. Based on this information,
management concluded at that time that it was no longer more likely than not
that a portion of the deferred tax asset would not be realized and consequently,
the company removed the valuation allowance. Accordingly, Online Vacation Center
recorded a net non-cash tax benefit in the quarter ended June 30, 2005 of
$644,163, resulting primarily from the effect of a $1,007,748 reversal of the
valuation allowance on Online Vacation Center's deferred tax assets, partly
offset by a $363,585 non-cash U.S. income tax provision (prior to the impact of
the valuation allowance).
Net Income. For the three month period ended March 31, 2006, net income was
$220,408 as compared to $346,097 for the three month period ended March 31,
2005, a decrease of $125,689 or 36%. The decrease is primarily due to an
increase in the provision for income taxes, as previously discussed.
Liquidity and Capital Resources
Cash as of March 31, 2006 was $2,474,618 as compared to $2,213,182 as of
December 31, 2005, an increase of $261,436. As of March 31, 2006, Online
21
Vacation Center had a working capital surplus of $512,096 as compared to $66,702
as of December 31, 2005, an increase of $445,394. Total liabilities as of March
31, 2006 were $2,845,859 as compared to $5,949,096 as of December 31, 2005, a
decrease of $3,103,237. Shareholders' equity as of March 31, 2006 was 1,922,077
as compared to a deficit of $1,346,736 as of December 31, 2005, an increase of
$3,268,813. The decrease in liabilities and increase in shareholders' equity
resulted from the conversion of all outstanding subordinated debentures to
shares of Online Vacation Center Holdings, Inc.'s common stock prior to the
share exchange agreement, as discussed below.
On November 16, 2000 Online Vacation Center Holdings, Inc. issued an 8%
Subordinate Debenture (the "First Debenture") in the amount of $2,000,000 to
Pacific Tour Services, Inc. that was due on January 1, 2008. The First Debenture
accrued interest on the unpaid principal balance at a rate of 8% per annum. On
June 27, 2001 Online Vacation Center Holdings, Inc. issued an 8% Subordinate
Debenture (the "Second Debenture") in the amount of $1,000,000 to Pacific Tour
Services, Inc. that was due on January 1, 2008. The Second Debenture accrued
interest on the unpaid principal balance at a rate of 8% per annum. Immediately
prior to the share exchange agreement the debentures were exchanged into shares
of common stock of Online Vacation Center Holdings, Inc. and then Pacific Tour
Services, Inc. subsequently exchanged the shares for shares of common stock of
Online Vacation Center Holdings Corp., in accordance with the share exchange
agreement.
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 its operations. Online Vacation Center may need to seek to
sell equity or debt securities or obtain credit lines from financial
institutions to meet its longer-term liquidity and capital requirements, which
includes strategic growth through mergers and acquisitions. There is no
assurance that Online Vacation Center will be able to obtain additional capital
or financing in amounts or on terms acceptable to Online Vacation Center, if at
all or on a timely basis.
Online Vacation Center has historically been dependent on its relationships with
three major cruise lines: Celebrity Cruises, Norwegian Cruise Line and Royal
Caribbean Cruise Line. Online Vacation Center also depends on third party
service providers for processing certain fulfillment services.
The domestic and international leisure travel industry is seasonal and is
sensitive to global events that are out of its control. The results of Online
Vacation Center have been subject to fluctuations caused by the seasonal
variations in the travel industry and by global events. The company expects
these variations to continue in the future.
ITEM 3. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company's management, with the participation of the Company's principal
executive officer and principal financial officer, evaluated the effectiveness
of the Company's disclosure controls and procedures as of the end of the period
covered by this report. The term "disclosure controls and procedures," as
defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls
and other procedures of a company that are designed to ensure that information
required to be disclosed by a company in the reports that it files or submits
under the Exchange Act is recorded, processed, summarized and reported, within
the time periods specified in the Securities and Exchange Commission's rules and
forms. Disclosure controls and procedures include, without limitation, controls
and procedures designed to ensure that information required to be disclosed by a
company in the reports that it files or submits under the Exchange Act is
22
accumulated and communicated to the Company's management, including its
principal executive and principal financial officers, as appropriate to allow
timely decisions regarding required disclosure. Management recognizes that any
controls and procedures, no matter how well designed and operated, can provide
only reasonable assurance of achieving their objectives and management
necessarily applies its judgment in evaluating the cost-benefit relationship of
possible controls and procedures. Based on the evaluation of the Company's
disclosure controls and procedures as of the end of the period covered by this
report, the Company's principal executive officer and principal financial
officer concluded that, as of such date, the Company's disclosure controls and
procedures were effective.
Changes in Internal Controls
No change in the Company's internal control over financial reporting occurred
during the last fiscal quarter of the period covered by this report that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
PART II: OTHER INFORMATION
------- -----------------
ITEM 1: Legal Proceedings
None.
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 Securities Holders
None.
ITEM 5: Other Information
None.
ITEM 6: Exhibits
31.1 302 Certification (CEO)
31.2 302 Certification (Principal Financial Officer)
32.1 906 Certification (CEO)
32.2 906 Certification (Principal Financial Officer)
23
SIGNATURES
----------
In accordance with the requirements of the Securities Exchange Act of 1934, 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, Principal Executive Officer
and Principal Financial Officer
DATED: May 15, 2006
24