UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2008
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ____________ to ____________
Commission file number: 0-32137
Online Vacation Center Holdings Corp.
-------------------------------------
(Exact name of registrant as specified in its charter)
Florida 65-0701352
------- ----------
State or other jurisdiction (I.R.S. Employer
of incorporation or organization Identification No.)
1801 N.W. 66th Avenue, Suite 102, Plantation, Florida 33313
-----------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(954) 377-6400
--------------
Registrant's telephone number including area code
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such report(s), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the
definitions of "large accelerated filer", "accelerated filer", and smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] (Do not check if a smaller reporting company) Smaller reporting company [X]
Indicate by check mark whether registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). [ ] Yes [X] No
At November 6, 2008, the number of shares outstanding of the registrant's common
stock, $0.0001 par value was 17,252,777.
PAGE
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Part I. Financial Information
-------- ---------------------
Item 1 Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operation 19
Item 4T. Controls and Procedures 25
Part II Other Information
------- -----------------
Item 1 Legal Proceedings 26
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 26
Item 3 Default upon Senior Notes 26
Item 4 Submission of Matters to a Vote of Securities Holders 26
Item 5 Other Information 26
Item 6 Exhibits 27
Exhibit 31.1 - Certification
Exhibit 31.2 - Certification
Exhibit 32.1 - Certification
Exhibit 32.2 - Certification
2
ONLINE VACATION CENTER HOLDINGS CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2008 2007
------------- -------------
(Unaudited) (Audited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,814,084 $ 1,189,042
Accounts receivable, net 968,441 1,053,556
Deposits and prepaid items 928,113 738,958
Deferred tax asset, net 4,387 1,665
Current assets held for sale -- 504,088
----------- -----------
Total Current Assets 3,715,025 3,487,309
Restricted cash 50,000 351,243
Property and equipment, net 96,767 127,548
Deferred tax asset, net 345,642 431,317
Intangible assets, net 1,154,392 988,466
Goodwill 1,754,279 1,754,279
Other assets 64,788 --
Long lived assets held for sale -- 1,909,274
----------- -----------
Total Assets $ 7,180,893 $ 9,049,436
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 1,030,239 $ 980,078
Deferred revenue 2,728,137 2,384,720
Notes payable, current portion 425,549 427,686
Current liabilities held for sale -- 542,682
----------- -----------
Total Current Liabilities 4,183,925 4,335,166
Notes payable 92,571 182,074
Non current liabilities available for sale -- 302,176
----------- -----------
Total Liabilities 4,276,496 4,819,416
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, 1,000,000 shares authorized at
$.0001 par value; 0 shares issued and outstanding -- --
Common stock, 80,000,000 shares authorized at
$.0001 par value; 17,252,777 and 18,492,977 shares
issued and outstanding 1,725 1,849
Additional paid-in capital 4,348,904 5,628,318
Accumulated deficit (1,443,077) (1,400,147)
Treasury stock at cost; 5,000 shares (3,155) --
----------- -----------
Total Stockholders' Equity 2,904,397 4,230,020
----------- -----------
Total Liabilities and Stockholders' Equity $ 7,180,893 $ 9,049,436
=========== ===========
The accompanying Notes to the Condensed Consolidated Financial Statements are an
integral part of these statements.
3
ONLINE VACATION CENTER HOLDINGS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
------------------------------ ------------------------------
2008 2007 2008 2007
-------------- ------------- ------------- -------------
NET REVENUES $ 1,975,977 $ 1,812,478 $ 6,923,551 $ 6,039,624
OPERATING EXPENSES:
Selling and marketing 584,221 928,313 2,414,527 2,793,431
General and administrative 1,204,533 1,242,984 3,971,569 3,753,572
Depreciation and amortization 108,174 70,536 294,841 182,286
------------- ------------ ------------ ------------
OPERATING INCOME (LOSS) 79,049 (429,355) 242,614 (689,665)
Interest (expense), net (2,876) (7,737) (25,382) (11,957)
------------- ------------ ------------ ------------
Income (loss) from continuing operations before provision
(benefit) for income taxes 76,173 (437,092) 217,232 (701,622)
Provision (benefit) for income taxes 34,303 (166,555) 140,888 (249,788)
------------- ------------ ------------ ------------
Income (loss) from continuing operations 41,870 (270,537) 76,344 (451,834)
DISCONTINUED OPERATIONS:
Loss from discontinued operations of Phoenix
International Publishing, LLC, net of tax -- (68,750) (119,274) (241,273)
------------- ------------ ------------ ------------
NET INCOME (LOSS) $ 41,870 $ (339,287) $ (42,930) (693,107)
============= ============ ============ ============
EARNINGS PER SHARE - Basic
Income (Loss) from continuing operations $ -- $ (0.02) $ -- $ (0.02)
(Loss) from discontinued operations $ -- -- $ (0.01) (0.02)
------------- ------------ ------------ ------------
Net (Loss) $ -- $ (0.02) $ -- $ (0.04)
============= ============ ============ ============
Weighted average shares outstanding - Basic 17,252,777 18,492,977 17,666,249 $ 18,480,907
============= ============ ============ ============
EARNINGS PER SHARE - Diluted
Income (Loss) from continuing operations $ -- $ (0.02) $ -- $ (0.04)
(Loss) from discontinued operations $ -- -- $ (0.01) (0.02)
------------- ------------ ------------ ------------
Net (Loss) $ -- $ (0.02) $ -- $ (0.06)
============= ============ ============ ============
Weighted average shares outstanding - Diluted 17,252,777 18,492,977 17,666,249 18,480,907
============= ============ ============ ============
The accompanying Notes to the Condensed Consolidated Financial Statements
are an integral part of these statements.
4
ONLINE VACATION CENTER HOLDINGS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Nine Months Ended
-----------------------------------------
September 30, September 30,
2008 2007
------------------- -------------------
Cash flows from continuing operating activities:
Net loss $ (42,930) $ (693,107)
Loss from discontinued operations, net of tax (119,274) 241,273
------------------- -------------------
Income (loss) from continuing operations 76,344 (451,834)
Adjustments to reconcile to net cash inflow from
operating activities:
Depreciation and amortization 294,841 182,286
Stock based compensation expense 126,712 150,376
Imputed interest expense- net 5,171 13,588
Deferred income tax expense (benefit) 82,952 (246,321)
Decrease in accounts receivable 85,115 47,588
(Increase) in deposits and prepaid items (161,062) (536,688)
Increase (Decrease) in accounts payable and accrued liabilities 50,161 (84,617)
Increase in deferred revenue 343,416 1,011,050
------------------- -------------------
Net cash provided by operating activities 903,650 85,428
------------------- -------------------
Cash flows from continuing investing activites:
Capital expenditures (62,178) (117,906)
Increase in intangible assets (367,807) (3,110)
Decrease (Increase) in restricted cash 301,243 (15,233)
Increase in receivable upon disposition of discontinued operation (89,691) -
Cash paid upon disposition of discontinued operation (4,932) -
Cash paid for acquisition in excess of cash received - (1,116,713)
------------------- -------------------
Cash used in investing activities (223,365) (1,252,962)
------------------- -------------------
Cash flows from continuing financing activites:
Acquisition of treasury stock under approved repurchase plan (3,155) -
Repayment of note payable (100,000) (125,000)
------------------- -------------------
Cash used in financing activities (103,155) (125,000)
------------------- -------------------
Discontinued Operations
Cash provided by (used in) operating activities 47,912 (193,162)
------------------- -------------------
Cash provided by (used in) discontinued operations 47,912 (193,162)
------------------- -------------------
Increase (Decrease) in cash during the period 625,042 (1,485,696)
Cash at the beginning of the period 1,189,042 2,658,885
------------------- -------------------
Cash at the end of the period $ 1,814,084 $ 1,173,189
=================== ===================
Supplemental information:
Cash paid for interest $ 16,273 $ 17,500
=================== ===================
Cash paid for taxes $ 15,684 $ 6,250
=================== ===================
Common stock issued in conjunction with acquisitions $ - $ 337,500
=================== ===================
Net debt issued in conjunction with acquisitions $ - $ 216,610
=================== ===================
Common stock received in conjunction with disposition of
discontinued operation $ 1,406,250 $ -
=================== ===================
Reduction in fair value of conversion feature of debt $ - $ 11,187
=================== ===================
The accompanying Notes to the Condensed Consolidated Financial Statements
are an integral part of these statements.
5
ONLINE VACATION CENTER HOLDINGS CORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited interim condensed consolidated financial statements
of Online Vacation Center Holdings Corp., (the "Company"), and the notes thereto
have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in the financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to such rules and regulations. These condensed
consolidated financial statements should be read in conjunction with the audited
financial statements and notes thereto included in the Company's Annual Report
on Form 10-KSB for the year ended December 31, 2007, and filed with the
Securities and Exchange Commission on March 28, 2008. The interim financial
information contained herein is not certified or audited; it reflects all
adjustments (consisting of only normal recurring accruals) which are, in the
opinion of management, necessary for a fair statement of the operating results
for the periods presented, stated on a basis consistent with that of the audited
financial statements.
The results of operations for the three months ended and nine months September
30, 2008 are not necessarily indicative of annual results. The Company manages
its business as one reportable segment.
Use of Estimates
----------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. For the Company, key estimates include allowance for
doubtful accounts, the fair value of goodwill and intangible assets, asset lives
used in computing depreciation and amortization, including amortization of
intangible assets, and accounting for income taxes, contingencies and
litigation. While the Company believes that such estimates are fair when
considered in conjunction with the condensed consolidated financial position and
results of operations taken as a whole, actual results could differ from those
estimates and such differences may be material to the financial statements.
2. DISPOSITION
In November 2007, the Company's Board of Directors granted the Company the
authority to sell Phoenix International Publishing LLC ("Phoenix"), a publisher
of consumer magazines and guides about travel to the U.S. and Canada. On March
31, 2008, the Company completed the sale of Phoenix to Simon Todd ("Mr. Todd"),
pursuant to the terms of an acquisition agreement ("Acquisition Agreement"),
dated March 31, 2008, by and among the Company, Phoenix, and Mr. Todd. Pursuant
to the Acquisition Agreement, the Company received 1,250,000 shares of the
Company's common stock from Mr. Todd at closing. The Acquisition Agreement
provides for, among other matters, contingent consideration from Mr. Todd in the
event that certain thresholds of profitability, as defined, are attained within
three years from the date of disposition or sale of Phoenix by Mr. Todd to a
third party for an amount in excess of a defined amount for a period of three
years from March 31, 2008. The amount of contingent consideration, if any, can
not be determined as the likelihood of such future events giving rise to such
contingent consideration can not be ascertained nor the effects estimated. Upon
6
ONLINE VACATION CENTER HOLDINGS CORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
execution of the Acquisition Agreement, Mr. Todd resigned as Vice President of
the Company. Prior to the acquisition of Phoenix by the Company, Mr. Todd was
the owner, sole member, and President of Phoenix. The Company acquired Phoenix
from Mr. Todd on August 31, 2006 for 1,450,000 shares of the Company's common
stock.
The Company recorded the sale of Phoenix at its fair value, as defined by
Statement of Financial Accounting Standards No. 157, Fair Value Measurements,
("FAS 157") and Accounting Principles Board Opinion No. 29, Accounting for
Nonmonetary Transactions ("APB 29"). APB 29 states, "If neither the fair value
of a nonmonetary asset transferred nor the fair value of a nonmonetary asset
received in exchange is determined within reasonable limits, the recorded amount
of the nonmonetary asset transferred from the enterprise may be the only
available measure of the transaction". The Company could not determine fair
value of either the asset transferred (Phoenix) or the asset received (shares of
the Company's common stock), and therefore recorded cost, $1,406,250, the value
of the shares received at the time shares were initially issued, was used to
record the sale and a loss of $58,382 was recognized.
In order to value the disposition, the Company reviewed the valuation techniques
listed in FAS 157, paragraph 18: market approach, income approach, and cost
approach. The Company also reviewed the different levels of inputs to valuation
techniques as defined in FAS 157, paragraphs 22 through 30. Level 1 inputs are
quoted prices (unadjusted) in active markets for identical assets. Level 2
inputs are quoted prices for identical or similar assets in markets that are not
active, that is, markets in which there are few transactions for the asset, the
prices are not current, or price quotations vary substantially either over time
or among market makers. Adjustments to Level 2 inputs will vary depending on
factors specific to the asset. Those factors include the volume and level of
activity in the markets within which the inputs are observed. An adjustment that
is significant to the fair value measurement in its entirety might render the
measurement a Level 3 measurement, depending on the level in the fair value
hierarchy within which the inputs used to determine the adjustment fall. Level 3
inputs are unobservable inputs for the asset. Unobservable inputs shall be used
to measure fair value to the extent that observable inputs are not available,
thereby allowing for situations in which there is little, if any, market
activity for the asset at the measurement date.
The Company had difficulty with the valuation of Phoenix as it is a unique
business: Phoenix has no employees, is operated as a sole proprietorship, and
has no tangible assets (the Company's investment in Phoenix was initially
allocated to intangible assets and goodwill). Its competitors are dissimilar and
would not be representative of Phoenix's value. The Company could not find a
Level 1 input as there were no quoted prices in active markets for an identical
asset. The Company then looked for Level 2 inputs, however, there were no quoted
prices for similar assets in active markets nor identical assets in inactive
markets. As stated previously, Phoenix is very different from its competitors
and valuing it based on comparable values of other similar businesses was not
representative of its value. This negated the market approach and the cost
approach as valuation techniques. The Company then attempted to use an income
approach by using present value techniques or an expected cash flow approach to
value Phoenix. The Company's brief ownership of Phoenix coupled with its poor
results during this time (as compared to its history of profitability before the
Company's ownership) made this valuation technique a poor measure of Phoenix.
Therefore, the Company could not determine within reasonable limits the value of
Phoenix.
7
ONLINE VACATION CENTER HOLDINGS CORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Paragraph 18 of APB 29 states, "The Board concludes that in general accounting
for nonmonetary transactions should be based on the fair values of the assets
involved which is the same basis as that used in monetary transactions. Thus,
the cost of a nonmonetary asset acquired in exchange for another nonmonetary
asset is the fair value of the asset surrendered to obtain it, and a gain or
loss should be recognized on the exchange. The fair value of the asset received
should be used to measure the cost if it is more clearly evident than the fair
value of the asset surrendered". The Company concluded that the value of the
Company's stock was "more clearly evident than the fair value of the asset
surrendered", in this case, Phoenix. The Company then tried to value the
Company's stock.
At the time of the disposition, the Company's stock rarely traded. It traded
eight days out of twenty in March 2008 for a total of 9,300 shares. The last
trade before the transaction was on March 28th and the next trade was on April
8th during this time period. On March 31st, the disposition date, the bid was
$0.30 and the ask was $1.05. The Company determined that the stock no longer had
an active market and therefore was not a Level 1 input. In reviewing the
adjustments needed to determine the stock's value, the Company concluded that
the adjustments needed to the price of the stock would be so significant given
its lack of market activity and pricing spread that it would render the
measurement a Level 3 measurement.
Paragraph C21c of FAS 157 allows a practicability exception to the requirement
to measure fair value if fair value is not reasonably determinable. This is
further discussed in paragraph 26 of APB 29, "Fair value should be regarded as
not determinable within reasonable limits if major uncertainties exist about the
realizability of the value that would be assigned to an asset received in a
nonmonetary transaction account for at fair value. An exchange involving parties
with essentially opposing interests is not considered a prerequisite to
determining a fair value of a nonmonetary asset transferred; nor does an
exchange insure that a fair value for accounting purposes can be ascertained
within reasonable limits. If neither the fair value of a nonmonetary asset
transferred nor the fair value of a nonmonetary asset received in exchange is
determined within reasonable limits, the recorded amount of the nonmonetary
asset transferred from the enterprise may be the only available measure of the
transaction". As discussed previously, the Company concluded that the value of
their stock was a Level 3 measurement, an unobservable input. In determining
what value should be given to this input, the Company concluded that it could
not determine the value within reasonable limits. Accordingly, the Company
concluded that the sale of Phoenix would be recorded using the asset's recorded
value, $1,406, 250, the value of the shares received at the time the shares were
initially issued.
For tax purposes, the transaction was treated as split-off with no resulting tax
consequences. The Company retired the 1,250,000 shares of its common stock
received as of March 31, 2008.
The results of operations and cash flows of Phoenix has been removed from the
results of continuing operations and have been accounted for as discontinued
operations.
8
ONLINE VACATION CENTER HOLDINGS CORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the three months ended September 30:
----------------------------------------
2008 2007
------ ----------
Revenues $ 0 $ 198,758
Loss before income taxes $ 0 $ 111,033
Loss on sale of Phoenix 0 --
Income tax benefit 0 42,283
---- ---------
Loss from discontinued operations $ 0 $ 68,750
==== =========
For the nine months ended September 30:
---------------------------------------
2008 2007
--------- ----------
Revenues $ 107,569 $ 675,475
Loss before income taxes $ 98,503 $ 392,826
Loss on sale of Phoenix 58,382 --
Income tax benefit 37,611 151,553
--------- ----------
Loss from discontinued operations $ 119,274 $ 241,273
========= ==========
9
ONLINE VACATION CENTER HOLDINGS CORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The assets and liabilities of discontinued business have been reclassified
and are segregated in the consolidated balance sheet of December 31, 2007
as summarized as follows:
December 31, 2007
-----------------
Accounts receivable $ 501,992
Deposits and prepaid items 2,096
-----------
Total current assets held for sale $ 504,088
===========
Intangible assets, net $ 783,244
Goodwill 1,126,030
-----------
Total long lived assets held for sale $ 1,909,274
===========
Accounts payable and accrued liabilities $ 359,182
Deferred revenue 183,500
-----------
Total current liabilities available for sale $ 542,682
===========
Non current deferred income taxes payable $ 302,176
-----------
Non current liabilities available for sale $ 302,176
===========
In conjunction with the Acquisition Agreement, Phoenix is obligated to pay its
pre-disposition intercompany debt balance to the Company of $100,000 in forty
consecutive monthly payments of $2,500 commencing on October 1, 2008. The series
of forty monthly payments of $2,500 has been discounted, using the Company's
estimated incremental borrowing rate of 6.5% and the aggregate related
unamortized net imputed interest of $10,309 as of September 30, 2008 has been
offset against the face value of the receivable and a corresponding interest
expense recorded. The current portion of this receivable from Phoenix, $24,903,
has been classified as deposits and prepaid items and the remaining balance of
$64,788 as other assets as of September 30, 2008.
3. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Fair Value Measurements
In September 2006, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 157, Fair Value
Measurements, ("FAS 157"). This Standard defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles
and expands disclosures about fair value measurements. FAS 157 is effective for
financial statements issued for fiscal years beginning after November 15, 2007
and interim periods within those fiscal years. The adoption of FAS 157 as of
January 1, 2008 did not have a material impact on the Company's financial
position, results of operations or cash flows except as discussed in Note 2.
Cash equivalents and restricted cash are carried at cost which approximates fair
value.
10
ONLINE VACATION CENTER HOLDINGS CORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In October 2008 the FASB issued FASB Staff Position ("FSP") SFAS No.
157-3, Determining the Fair Value of a Financial Asset When The Market for That
Asset Is Not Active, ("FSP 157-3") to clarify the application of the provisions
of FAS157 in an inactive market and how an entity would determine fair value in
an inactive market. FSP157-3 is effective immediately and applies to our
September 30, 2008 financial statements. The application of the provisions of
FSP 157-3 did not materially affect our results of operations or financial
condition as of and for the periods ended September 30, 2008.
Accounting for Defined Benefit Pension and Other Postretirement Plans
In September 2006, the FASB issued SFAS No. 158, Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB
Statement No. 87, 88, 106 and 132(R), ("FAS 158"). This Standard requires
recognition of the funded status of a benefit plan in the statement of financial
position. The Standard also requires recognition in other comprehensive income
certain gains and losses that arise during the period but are deferred under
pension accounting rules, as well as modifies the timing of reporting and adds
certain disclosures. FAS 158 provides recognition and disclosure elements to be
effective as of the end of the fiscal year after December 15, 2006 and
measurement elements to be effective for fiscal years ending after December 15,
2008. The Company does not expect the remaining elements of this Statement to
have a material impact on the Company's financial condition, results of
operations or cash flows when adopted.
Fair Value Option of Financial Assets and Financial Liabilities
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities ("FAS 159"). This Standard provides
companies with an option to report selected financial assets and liabilities at
fair value in an attempt to reduce both complexity in accounting for financial
instruments and the volatility in earnings caused by measuring related assets
and liabilities differently. FAS 159 is effective as of the beginning of an
entity's first fiscal year beginning after November 15, 2007. Upon adoption of
this Statement, the Company did not elect the FAS 159 option for its existing
financial assets and liabilities and therefore adoption of SFAS 159 did not have
any impact on its consolidated financial statements.
Business Combinations
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations, ( "FAS
141(R) "). This Standard establishes principles and requirements for how an
acquirer in a business combination:
o Recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed and any noncontrolling
interest in the acquiree
o Recognizes and measures the goodwill acquired in the business
combination or a gain from a bargain purchase; and
o Determines what information to disclose to enable users of the
financial statements to evaluate the nature and financial effects of
the business combination.
FAS 141(R) is effective for business combinations for which the acquisition date
is on or after the beginning of the first annual reporting period beginning on
or after December 15, 2008. The Company has not yet assessed the impact of
adoption, if any, on its consolidated financial statements.
11
ONLINE VACATION CENTER HOLDINGS CORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Noncontrolling Interest in Consolidated Financial Statements
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements--an amendment of ARB No. 51, ("FAS 160"). This
Standard amends Accounting Research Bulletin No. 51 ("ARB 51") to establish
accounting and reporting standards for the noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary. It also amends certain
of ARB 51's consolidation procedures for consistency with the requirements of
FAS 141(R). FAS 160 is effective for fiscal years, and interim periods within
those fiscal years, beginning on or after December 15, 2008. The Company has not
yet assessed the impact of adoption, if any, on its consolidated financial
statements.
Accounting for Collaborative Arrangements
In December 2007, the Emerging Issues Task Force ("EITF") met and ratified EITF
No.07-01, Accounting for Collaborative Arrangements, in order to define
collaborative arrangements and to establish reporting requirements for
transactions between participants in a collaborative arrangement and between
participants in the arrangement and third parties. This EITF is effective for
financial statements issued for fiscal years beginning after December15, 2008,
and interim periods within those fiscal years. This EITF is to be applied
retrospectively to all prior periods presented for all collaborative
arrangements existing as of the effective date. We are currently assessing the
impact of this EITF to our consolidated financial statements.
Determination of the Useful Life of Intangible Assets
In April 2008, the FASB issued FSP FAS 142-3, "Determination of the Useful Life
of Intangible Assets,", which amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of
intangible assets under FAS 142 "Goodwill and Other Intangible Assets". The
intent of this FSP is to improve the consistency between the useful life of a
recognized intangible asset under FAS 142 and the period of the expected cash
flows used to measure the fair value of the asset under FAS 141 (revised 2007)
"Business Combinations" and other U.S. generally accepted accounting principles.
The Company is currently evaluating the potential impact of FSP FAS 142-3 upon
its consolidated financial statements.
Disclosure about Derivative Instruments and Hedging Activities
In March 2008, the FASB issued SFAS No. 161, Disclosure about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No. 133,
("FAS 161"). This Statement requires that objectives for using derivative
instruments be disclosed in terms of underlying risk and accounting designation.
The Company is required to adopt FAS 161 on January 1, 2009. The Company is
currently evaluating the potential impact of FAS No. 161 upon its consolidated
financial statements.
12
ONLINE VACATION CENTER HOLDINGS CORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Accounting for Convertible Debt Instruments That May Be Settled in Cash upon
Conversion (Including Partial Cash Settlement)
In May 2008, the FASB issued FSP No. APB 14-1, "Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement)" The FSP, which clarifies the accounting for convertible debt
instruments that may be settled in cash (including partial cash settlement) upon
conversion. The FSP requires issuers to account separately for the liability and
equity components of certain convertible debt instruments in a manner that
reflects the issuer's nonconvertible debt (unsecured debt) borrowing rate when
interest cost is recognized. The FSP requires bifurcation of a component of the
debt, classification of that component in equity and the accretion of the
resulting discount on the debt to be recognized as part of interest expense in
our consolidated statement of operations. The FSP requires retrospective
application to the terms of instruments as they existed for all periods
presented. The FSP is effective for us as of January 1, 2009 and early adoption
is not permitted. The Company is currently evaluating the potential impact of
FSP APB 14-1 upon its consolidated financial statements.
The Hierarchy of Generally Accepted Accounting Principles
In May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted
Accounting Principles" (FAS No. 162). FAS No. 162 identifies the sources of
accounting principles and the framework for selecting the principles used in the
preparation of financial statements. FAS No. 162 is effective 60 days following
the SEC's approval of the Public Company Accounting Oversight Board amendments
to AICPA Audit Section No. 411, "The Meaning of Present Fairly in Conformity
with Generally Accepted Accounting Principles". The implementation of this
standard will not have a material impact on the Company's consolidated financial
position and results of operations.
Determining Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities
In June 2008, the FASB issued FSP EITF 03-6-1, "Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities" (FSP
EITF 03-6-1). FSP EITF 03-6-1 clarified that all outstanding unvested
share-based payment awards that contain rights to nonforfeitable dividends
participate in undistributed earnings with common shareholders. Awards of this
nature are considered participating securities and the two-class method of
computing basic and diluted earnings per share must be applied. FSP EITF 03-6-1
is effective for fiscal years beginning after December 15, 2008. The Company is
currently assessing the impact of FSP EITF 03-6-1 on its consolidated financial
position and results of operations.
Determining Whether an Instrument (or an Embedded Feature) Is Indexed to an
Entity's Own Stock
In June 2008, the FASB ratified EITF Issue No. 07-5, "Determining Whether an
Instrument (or an Embedded Feature) Is Indexed to an Entity's Own Stock" (EITF
07-5). EITF 07-5 provides that an entity should use a two step approach to
evaluate whether an equity-linked financial instrument (or embedded feature) is
indexed to its own stock, including evaluating the instrument's contingent
exercise and settlement provisions. It also clarifies on the impact of foreign
currency denominated strike prices and market-based employee stock option
valuation instruments on the evaluation. EITF 07-5 is effective for fiscal years
13
ONLINE VACATION CENTER HOLDINGS CORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
beginning after December 15, 2008. The Company is currently assessing the impact
of EITF 07-5 on its consolidated financial position and results of operations.
A variety of proposed or otherwise potential accounting standards are currently
under study by standard-setting organizations and various regulatory agencies.
Because of the tentative and preliminary nature of these proposed standards,
management has not determined whether implementation of such proposed standards
would be material to the Company's consolidated financial statements.
4. EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income available to common
shareholders by the weighted average number of common shares outstanding during
the period. Diluted earnings per share reflects the potential dilution that
could occur if stock options and other commitments to issue common stock were
exercised or equity awards vest resulting in the issuance of common stock or
conversion of notes into shares of common stock that could share in the earnings
of the Company. This calculation is not done for periods in a loss position as
this would be antidilutive. The information related to basic and diluted
earnings per share is as follows:
Quarter Ended September 30,
2008 2007
--------------- -------------
Numerator:
Continuing operations:
Income (loss from) continuing operations $ 41,870 $ (270,537)
Effect of dilutive convertible debt -- --
--------------- ------------
Total $ 41,870 $ (270,537)
=============== ============
Discontinued operations
Loss from discontinued operations $ -- $ (68,750)
=============== ============
Net income (loss) $ 41,870 $ (339,287)
=============== ============
Denominator:
Weighted average number of shares outstanding - basic 17,252,777 18,492,977
Effect of dilutive stock options and convertible debt -- --
--------------- ------------
Diluted 17,252,777 18,492,977
=============== ============
EPS:
Basic:
Continuing operations $ -- $ (0.02)
Discontinued operations -- --
--------------- ------------
Net income (loss) $ -- $ (0.02)
=============== ============
Diluted
Continuing operations $ -- $ (0.02)
Discontinued operations -- --
--------------- ------------
Net (income) loss $ -- $ (0.02)
=============== ============
14
ONLINE VACATION CENTER HOLDINGS CORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Nine Months Ended September 30,
2008 2007
------------ ---------------
Numerator:
Continuing operations:
Income (loss) from continuing operations $ 76,344 $ (451,834)
Effect of dilutive convertible debt -- --
------------ --------------
Total $ 76,344 $ (451,834)
============ ==============
Discontinued operations
Loss from discontinued operations $ (119,274) $ (241,273)
============ ==============
Net loss $ (42,930) $ (693,107)
============ ==============
Denominator:
Weighted average number of shares outstanding - basic 17,666,249 18,480,907
Effect of dilutive stock options and convertible debt -- --
------------ --------------
Diluted 17,666,249 18,480,907
============ ==============
EPS:
Basic:
Continuing operations $ -- $ (0.02)
Discontinued operations (0.01) (0.02)
------------ --------------
Net loss $ -- $ (0.04)
============ ==============
Diluted
Continuing operations $ -- $ (0.02)
Discontinued operations (0.01) (0.02)
------------ --------------
Net loss $ -- $ (0.04)
============ ==============
5. STOCK BASED COMPENSATION
In conjunction with the Share Exchange Agreement, the Company's Board of
Directors amended its 2005 Management and Director Equity Incentive and
Compensation Plan (the "Plan"). This Plan provides for the grants of stock
options, restricted stock, performance-based and other equity-based incentive
awards to directors, officers and key employees. Under this Plan, stock options
must be granted at an option price that is greater than or equal to the market
price of the stock on the date of the grant. If an employee owns 10% or more of
the Company's outstanding common stock, the option price must be at least 110%
of the market price on the date of the grant. Options granted under this Plan
become exercisable in accordance with the terms of the grant as determined by a
committee of the Company's Board of Directors. All options granted expire no
more than 10 years following the date of grant.
15
ONLINE VACATION CENTER HOLDINGS CORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On March 26, 2008, 232,400 stock options were granted to seven employees under
the Plan. All options have a five-year life and an exercise price of $1.27. All
options granted during the quarter vest two years after date of grant. No
options were granted during the quarter ended September 30, 2008.
A summary of the activity in our Plan for the quarter ended September 30, 2008
is presented below:
Weighted Average
Shares Exercise Price
------ --------------
Options outstanding at December 31, 2007 2,215,000 $ 1.41
Granted 232,400 1.27
Canceled - 0.00
Exercised - 0.00
---------- ------
Options outstanding at September 30, 2008 2,447,400 $ 1.39
========== ======
The weighted fair value of options granted during the nine months ended
September 30, 2008 was $0.04 with the following assumptions: average expected
life of 3.5 years; 2.03% average interest rate; 42.1% volatility; 5% forfeiture
rate. Compensation cost recognized for the quarters ended September 30, 2008 and
2007 and the nine month periods then ended was $28,805, $44,149, $110,462 and
$131,856, respectively.
As of September 30, 2008, there was approximately $85,563 of total stock-based
compensation expense not yet recognized relating to non-vested awards granted
under our option plan as calculated under SFAS 123R. This expense is net of
estimated forfeitures and is expected to be recognized over a weighted-average
period of approximately 13 months. The number of non-exercisable shares was
587,400 shares of common stock at September 30, 2008. At September 30, 2008,
1,860,000 shares of common stock at $1.27 per share were exercisable.
For the nine months ended September 30, 2008, 9,800 restricted shares were
granted to employees and directors under the Plan. Compensation expense for the
nine months ended September 30, 2008 and 2007 related to the restricted share
grants was $16,250 and $18,520, respectively. No restricted shares were granted
during the three months ended September 30, 2008.
16
ONLINE VACATION CENTER HOLDINGS CORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6. INCOME TAXES
The provision for income taxes from continuing operations for the three months
and six months ended September 30, 2008 and September 30, 2007, respectively,
consists of the following:
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
------------- -------------
2008 2007 2008 2007
--------- ---------- ---------- -------
Current
Federal $ -- $ (7,211) $ -- $ (7,211)
State 2,397 3,745 20,364 3,745
--------- --------- --------- ---------
2,397 (3,466) 20,364 (3,466)
--------- --------- --------- ---------
Deferred
Federal $ 27,357 $(139,452) $ 103,341 $(210,816)
State 4,549 (23,637) 17,183 (35,506)
--------- --------- --------- ---------
$ 31,906 (163,089) 120,524 (246,322)
--------- --------- --------- ---------
Total provision (benefit) for income
taxes - net $ 34,303 $(166,955) $ 140,888 $(249,788)
========= ========= ========= =========
The difference between income tax expense computed by applying the federal
statutory corporate tax rate and actual income tax expense is as follows:
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
------------- -------------
2008 2007 2008 2007
-------- -------- -------- --------
Statutory federal income tax (benefit)
rate 35.0% (35.0)% 35.0% (35.0)%
State income taxes net of federal
income tax benefit 3.6 (3.6) 3.6 (3.6)
True up of prior year's state income
taxes net of federal income tax
benefit (1.7) -.- 7.7 -.-
Tax effect of non deductible items 8.1 0.5 18.6 3.0
------ ------ ----- ------
Effective income tax (benefit) rate 45.0% (38.1)% 64.9% (35.6)%
====== ====== ----- ======
The tax effect of non-deductible items in 2008 include stock compensation
expense related to incentive stock options of $28,601 and $87,348 for the three
months ended and nine months ended September 30, 2008, respectively, and net
imputed interest expense of associated with the debt issued in conjunction with
the acquisition of La Tours and Cruises, Inc. net of the imputed interest income
from the receivable from Phoenix.
17
ONLINE VACATION CENTER HOLDINGS CORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Deferred income taxes result from temporary differences in the recognition of
income and expenses for financial reporting purposes and for tax purposes. The
tax effect of these temporary differences representing deferred tax asset and
liabilities result principally from the following:
September 30, December 31,
2008 2007
------------- ----------------
Net operating loss carry-
forwards and AMT tax credit $ 340,300 $ 430,328
Depreciation and amortization (89,266) (49,635)
Accruals and other 98,995 52,289
------------- ----------------
Deferred income tax asset $ 350,029 $ 432,982
============= ================
The net deferred tax assets are comprised of the following:
September 30, December 31,
2008 2007
---------------- -------------------
Current $ 4,387 $ 1,665
Non-current 345,642 431,317
---------------- -------------------
Net deferred income tax asset $ 350,029 $ 432,982
================ ===================
7. TREASURY STOCK
On August 1, 2008, the Company announced that its Board of Directors had
approved a program to repurchase of up to $200,000 of the Company's common stock
to be funded from available working capital and subject to the applicable rules
and regulations of the Securities and Exchange Commission and other applicable
legal requirements. The program will not extend beyond June 30, 2009, does not
require the Company to acquire a specific number of shares and may be suspended
from time to time or discontinued. On September 30, 2008, the Company purchased
5,000 shares of its common stock in the open market at a cost of $3,155.
8. 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.
9. SUBESEQUENT EVENT
On October 1, 2008, the Company paid $337,085 to the former owner of La Fern,
Inc representing payment in full of the note payable and accrued interest
thereon issued in conjunction with the acquisition of La Fern Inc. in October
2006.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward Looking Statements
This Quarterly Report on Form 10-Q includes forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. All
statements other than statements of historical fact, including statements
regarding guidance, industry prospects or future results of operations or
financial position, made in this Quarterly Report on Form 10-Q are
forward-looking. We use words such as anticipates, believes, expects, future,
intends, and similar expressions to identify forward-looking statements.
Forward-looking statements reflect management's current expectations and are
inherently uncertain. Actual results could differ materially for a variety of
reasons, including, those risks described in our Annual Report on Form 10-KSB
for the year ended December 31, 2007 filed with the Securities and Exchange
Commission ("SEC") on March 28, 2008 and the risks discussed in other SEC
filings. These risks and uncertainties, as well as other risks and
uncertainties, could cause our actual results to differ significantly from
management's expectations. The forward-looking statements included in this
report reflect the beliefs of our management on the date of this report. We
undertake no obligation to update publicly any forward-looking statements for
any reason.
Overview
We are focused on internally growing and developing our group of diversified
vacation marketers with a range of products that can be cross-sold to an
extensive customer base and provide a high degree of personalized service to
help consumers research, plan and purchase a vacation.
We provide vacation marketing services through eight wholly owned subsidiaries.
Our portfolio of travel companies include:
o Online Vacation Center, Inc. ("Online Vacation Center"), a full
service vacation seller focused on serving the affluent retiree
market. Historically, this subsidiary has been the core business,
accounting for the majority of revenue and net income through the
sale of high margin cruise packages. This business is now integrated
with our other travel companies, Curves Travel, the licensed travel
management company of Curves International, Inc., La Fern, Inc.,
operating as eLeisureLink.com and focusing on land-based vacations,
and Cruises for Less, our home-based selling group,
o Dunhill Vacations, Inc. ("Dunhill"), the publisher of three travel
newsletters, "Top Travel Values", "Spotlight", and "TRAVELFLASH",
and
o La Tours and Cruises, Inc. and Thoroughbred Travel, LLC, our Houston
travel agencies operating as "West University Travel / Journeys
Unlimited", focused on providing luxury personal travel products
such as cruises, European tours and all-inclusive vacations.
We generate revenues from:
o commissions on cruises
o commissions on other travel related products
o commissions on travel insurance
o marketing and publishing services performed for travel suppliers
19
We currently market our services by:
o producing travel-related publications for consumers
o telemarketing to our existing customer base
o direct mailing to our existing customer base as well as targeted
prospects
o email blasting to our opt in subscription base
Operating expenses include those items necessary to advertise our services,
produce our marketing materials, maintain and staff our travel reservation and
fulfillment center including technological enhancements, payroll, commissions
and benefits, telephone, ticket delivery and general and administrative expenses
including rent and computer maintenance fees.
In November 2007, our Board of Directors granted us the authority to sell
Phoenix, a publisher of consumer magazines and guides about travel to the U.S.
and Canada. On March 31, 2008, we completed the sale of Phoenix to Simon Todd
("Mr. Todd"), pursuant to the terms of an acquisition agreement ("Acquisition
Agreement"), dated March 31, 2008, by and among the Company, Phoenix, and Mr.
Todd. Pursuant to the Acquisition Agreement, we received 1,250,000 shares of our
common stock from Mr. Todd at closing. Upon execution of the Acquisition
Agreement, Mr. Todd resigned as Vice President of the Company. Prior to our
acquisition of Phoenix, Mr. Todd was the owner, sole member, and President of
Phoenix. We acquired Phoenix from Mr. Todd on August 31, 2006 for 1,450,000
shares of our common stock.
Results of Operations
Three Months Ended September 30, 2008 Compared to the Three Months Ended
September 30, 2007
Continuing operations:
Revenues increased by $163,499, 9.0%, to $1,975,977 for the three months ended
September 30, 2008 ("the third quarter of 2008") compared to $1,812,478 for the
three months ended September 30, 2007 ("the third quarter of 2007"). The
increase is attributable to an increase in publishing revenues offset by a
decrease in commission revenues.
Selling and marketing expenses decreased by $344,092, 37.1%, to $584,221 for the
third quarter of 2008 compared to $928,313 for the third quarter of 2007. The
decrease is primarily attributable to a decrease in sales staff compensation and
marketing costs. Selling and marketing expenses primarily consist of sales staff
compensation and costs to produce marketing materials.
General and administrative expenses decreased by $38,451, 3.1%, to $1,204,533
for the third quarter of 2008 compared to $1,242,984 for the third quarter of
2007. The decrease is primarily attributable to a decrease in professional
services and occupancy expenses offset by an increase in compensation related
expenses. General and administrative expenses primarily include management and
non sales staff compensation, professional services, and occupancy costs.
Depreciation and amortization expense increased by $37,638 to $108,174 for the
third quarter of 2008 compared to $70,536 for the third quarter of 2007. The
increase is attributable to an increase in the amortization expense of the
Dunhill subscriber list.
Net interest expense decreased from $7,737 for the third quarter of 2007 to
$2,876 for the third quarter of 2008. The reduction in net interest expense for
third quarter of 2008 was primarily attributable to lower balances of debt
20
outstanding in conjunction with our acquisition of Thoroughbred Travel, LLC and
La Tours and Cruises, Inc ("La Tours").
Our income before provision for income taxes was $76,173 in the third quarter of
2008 compared to a loss before benefit for income taxes of $437,092 in the third
quarter of 2007. These results are primarily attributable to an increase in
revenues and a decrease in selling and marketing expenses during the third
quarter of 2008.
The provision for income taxes increased to $34,303 for the third quarter of
2008 compared to a benefit for income taxes of $166,555 for the third quarter of
2007. The increase is directly related to our increase in income before income
taxes of $76,173 during the third quarter of 2008 compared to a loss before
income tax benefits of $437,092 in the third quarter of 2007. The tax rate in
the third quarter of 2008, 45%, was due to the tax effect of non deductible
items and a true up of prior year state taxes. The tax benefit rate in the third
quarter of 2007 was 38.1%.
As a result of the foregoing, our income from continuing operations was $41,870
for the third quarter of 2008 compared to a loss from continuing operations of
$270,537 for the third quarter of 2007.
Nine Months Ended September 30, 2008 compared to Nine Months Ended September 30,
2007
Continuing Operations
Revenues increased by $883,927, 14.6%, to $6,923,551 for the nine months ended
September 30, 2008 compared to $6,039,624 for the nine months ended September
30, 2007. The increase is attributable to an increase in commission and
publishing revenues offset by a decrease in marketing revenues.
Selling and marketing expenses decreased by $378,094, 13.6% to $2,414,527 for
the nine months ended September 30, 2008 compared to $2,793,431 for the nine
months ended September 30, 2007. The decrease is attributable to a decrease in
sales staff compensation costs and marketing materials production expenses.
Selling and marketing expenses primarily consist of sales staff compensation and
costs to produce marketing materials.
General and administrative expenses increased by $217,997 or 5.8% to $3,971,569
for the nine months ended September 30, 2008 compared to $3,753,572 for the nine
months ended September 30, 2007. The increase is primarily attributable to an
increase in the general and administrative expenses associated with publishing
activities commensurate with its increase in revenues and general and
administrative expenses of Curves Travel which was acquired in May 2007. General
and administrative expenses primarily include management and non sales staff
compensation, professional services, and occupancy costs.
Depreciation and amortization expense for the nine months ended September 30,
2008 was $294,841 as compared to $182,286 for the nine months ended September
30, 2007. Amortization expense increased by $91,908 as a result of amortization
of intangible assets acquired in conjunction with the Curves Travel acquisition
in May 2007 and an increase in the amortization expense of the Dunhill
subscriber list. The remaining increase of $20,647 is attributable to an
increase in depreciation expense.
Net interest expense increased from $11,957 for the nine months ended September
30, 2007 to $25,382 for the nine months ended September 30, 2008. The increase
is primarily attributable to the first quarter of 2008 expense imputed on the
receivable from Phoenix payable over 40 months and decreased interest income
21
earned on lower cash balances at the bank at declining interest rates during the
nine months ended September 30, 2008.
Our income before provision for income taxes was $217,232 for the nine months
ended September 30, 2008 compared to our loss before benefit for income taxes of
$701,622 for the nine months ended September 30, 2007. These results are
primarily attributable to an increase in revenues and a decrease in selling and
marketing expenses, offset by an increase in general and administrative
expenses, depreciation and amortization and net interest expense.
The provision for income taxes increased from a benefit of $249,788 for the nine
months ended September 30, 2007 to a tax provision of $140,888 for the nine
months ended September 30, 2008. The increase is directly related to the
increase in results from operations where income before income taxes was
$217,232 for the nine months ended September 30, 2008 whereas the loss before
income taxes was $701,622 for the nine months ended September 30, 2007. The tax
rate for the nine months ended September 30 2008, 64.9%, was higher than the
statutory rate because of the tax effect of non deductible items and a true up
of prior year state taxes. The benefit rate for the nine months ended September
30 2007 was 35.6%.
As a result of the foregoing, our income from continuing operations for the nine
months ended September 30, 2008 was $76,344 compared to a loss from continuing
operations of $451,834 for the nine months ended September 30, 2007.
Discontinued Operations
We acquired Phoenix, a United Kingdom publisher of consumer magazines and guides
about travel to the U.S. and Canada, on August 31, 2006 for 1,450,000 shares of
our common stock. In November 2007, the Company's Board of Directors granted the
Company the authority to sell Phoenix. On March 31, 2008, we sold Phoenix to Mr.
Todd, the former owner of Phoenix, in exchange for 1,250,000 shares of our
common stock which were owned by Mr. Todd. We recorded the sale of Phoenix at
its fair value, as defined by Statement of Financial Accounting Standards No.
157, Fair Value Measurements, resulting in a loss of $58,382. For tax purposes,
the transaction was treated as split-off with no resulting tax consequences. We
retired the 1,250,000 shares of our common stock received from Mr. Todd in the
sale transaction as of March 31, 2008.
The results of operations and cash flows of Phoenix has been removed from the
results of continuing operations and the assets and liabilities of Phoenix have
been classified as available for sale, as of December 31, 2007. The comparisons
of the results of operations of Phoenix between the third quarters of 2008 and
2007 and the nine months ended September 30th of 2008 and 2007, respectively,
are as follows:
For the Three Months Ended September 30:
Increase/
2008 2007 (Decrease)
------ ------------ ----------
Revenues $ 0 $ 198,758 $ (198,758)
Operating (loss) $ 0 $ (112,004) $ 112,004
(Loss) on sale of Phoenix $ 0 -- $ --
Net (loss) from discontinued operations $ 0 $ (68,750) $ 68,750
22
For the Nine Months Ended September 30:
Increase/
2008 2007 (Decrease)
---------- ------------ ----------
Revenues $ 107,569 $ 675,475 $ (567,906)
Operating (loss) $ (98,805) $ (393,797) $ 294,992
(Loss) on sale of Phoenix $ (58,382) -- $ (58,382)
Net (loss) from discontinued operations $ (119,274) $ (241,273) $ 121,999
As a result of the foregoing, our net income was $41,870 for the three months
ended September 30, 2008 compared to a net loss of $339,287 for the three months
ended September 30, 2007. Our net loss for the nine months ended September 30,
2008 was $42,930 compared to a net loss of $693,107 for the nine months ended
September 30, 2007.
Liquidity and Capital Resources
Cash at September 30, 2008 was $1,814,084 as compared to $1,189,042 at December
31, 2007. The primary source of our liquidity and capital resources has come
from our operations.
Cash flows provided by continuing operating activities for nine months ended
September 30th of 2008 and 2007 were $903,650 and $85,428, respectively. The
increase of $818,222 in 2008 was primarily attributable to an increase of income
from continuing operations of $528,178 and an increase in non-cash operating
items of $409,747, partially offset by an increase in cash used by working
capital items of $119,703.
Cash flows used in continuing investing activities for the nine months ended
September 30, 2008 decreased to $223,365 from $1,252,962 during the nine months
ended September 30, 2007. The primary decrease in cash out flows related to no
acquisition activity in 2008 compared to $1,116,713 used for four acquisitions
completed during the first half of 2007 and a decrease in restricted cash of
$316,476, partially offset by an increase in intangible assets and the
pre-disposition intercompany balance receivable from Phoenix totaling $459,320
in 2008.
Cash flows used in continuing financing activities for the nine months ended
September 30, 2008 totaled $103,155 as result of payment of a note issued in
conjunction with the La Tours acquisition and the repurchase of 5,000 shares of
common stock in the open market totaling $3,155 in accordance with its
previously announced buy-back program. Cash flows used in continuing financing
activities for the nine months ended September 30, 2007 totaled $125,000 as
result of payment of a note issued in conjunction with the Thoroughbred Travel
acquisition.
Cash flows provided by discontinued operations, solely from its operating
activities, increased by $241,074, to $47,912 provided during the nine months
ended September 30, 2008 compared to a use of $193,162 for the nine months ended
September 30, 2007.
At September 30, 2008, we had a working capital deficit of $468,900, as compared
to a working capital deficit of $847,857 at December 31, 2007, an increase of
working capital of $378,957. At September 30, 2008, we had an accumulated
deficit of $1,443,077, as compared to an accumulated deficit of $1,400,147 at
December 31, 2007, a deficit increase of $42,930.
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
23
liquidity needs of our operations. We may need to seek to sell equity or debt
securities or obtain credit lines from financial institutions to meet our
longer-term liquidity and capital requirements. We can not provide any
assurances that we will be able to obtain additional capital or financing in
amounts or on terms acceptable to us, if at all or on a timely basis.
We have historically been dependent on our relationships with four major cruise
lines: Celebrity Cruises, Princess Cruises, Norwegian Cruise Line and Royal
Caribbean Cruise Line. We also depend on third party service providers for
processing certain fulfillment services.
Seasonality and Inflation
The domestic and international leisure travel industry is seasonal. Our results
have been subject to quarterly fluctuations caused primarily by the seasonal
variations in the travel industry. Leisure travel net revenues and net income
are generally lower in the third quarter. We expect seasonality to continue in
the future. We do not expect inflation to materially affect our revenues and net
income.
Critical Accounting Policies
We prepared our consolidated financial statements in accordance with accounting
principles generally accepted in the United States of America. As such,
management is required to make certain estimates, judgments and assumptions that
it believes are reasonable based on the information available. These estimates
and assumptions affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses for the periods presented. A more extensive list of significant
accounting policies and a description of accounting policies that are considered
critical may be found in our Annual Report on Form 10-KSB for the year ended
December 31, 2007 filed with the SEC on March 28, 2008, in the Notes to the
Consolidated Financial Statements, Note 2, and the Critical Accounting Policies
section. The significant accounting policies which management believes are the
most critical to aid in fully understanding and evaluating our reported
financial results include revenue recognition, intangible asset testing and
income taxes.
Revenue Recognition
We recognize revenue in accordance with Staff Accounting Bulletin (SAB) No. 104
"Revenue Recognition in Financial Statements", which states that revenue is
realized or realizable and earned when all of the following criteria are met:
persuasive evidence of an arrangement exists, services have been rendered, the
seller's price to the buyer is fixed or determinable, and collectibility is
reasonably assured. Vacation travel sales transactions are billed to customers
at the time of booking, however, commission revenue is not recognized in the
accompanying consolidated financial statements until the customers' travel
occurs. Advertising revenue is recognized upon distribution of the marketing
publication.
Emerging Issues Task Force (EITF) Issue No. 99-19, "Reporting Revenue Gross as a
Principal versus Net as an Agent", discusses the weighing of the relevant
qualitative factors regarding our status as a primary obligor and the extent of
our pricing latitude. Based upon our evaluation of vacation travel sales
transactions and in accordance with the various indicators identified in EITF
Issue No. 99-19, our vacation travel suppliers assume the majority of the
business risks such as providing the service and the risk of unsold travel
packages. As such, all vacation travel sales transactions are recorded at the
net amount, which is the amount charged to the customer less the amount to be
24
paid to the supplier. The method of net revenue presentation does not impact
operating profit, net income, earnings per share or cash flows.
Intangible Asset Testing
Absent any circumstances that warrant testing at another time, we test for
goodwill and non-amortizing intangible asset impairment as part of our year-end
closing process. Our goodwill testing consists of comparing the estimated fair
values of each of our operating entities to their carrying amounts, including
recorded goodwill. We estimate the fair value of our reporting unit by
discounting its projected future cash flow. Developing future cash flow
projections requires us to make significant assumptions and estimates regarding
the sales, gross margin and operating expenses of our reporting unit, as well as
economic conditions and the impact of planned business or operational
strategies. Should future results or economic events cause a change in our
projected cash flows, or should our operating plans or business model change,
future determinations of fair value may not support the carrying amount of our
unit, and the related goodwill would need to be written down to an amount
considered recoverable. Any such write down would be included in the operating
expenses. While we make reasoned estimates of future performance, actual results
below these expectations, or changes in business direction can result in
additional impairment charges in future periods.
ITEM 4(T). - CONTROLS AND PROCEDURES
As of September 30, 2008 under the supervision of and with the participation of
our management, including our principal executive officer and principal
financial officer, we conducted an evaluation of the effectiveness of the design
and operation of our disclosure controls and procedures, as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 as of the end
of the period covered by this report (the "Evaluation Date"). Based upon the
evaluation, our principal executive officer and principal financial officer
concluded that our disclosure controls and procedures were effective as of the
Evaluation Date. Disclosure controls are controls and procedures designed to
reasonably ensure that information required to be disclosed in our reports filed
under the Exchange Act, such as this report, is recorded, processed, summarized
and reported within the time periods specified in the SEC's rules and forms.
Disclosure controls include controls and procedures designed to reasonably
ensure that such information is accumulated and communicated to our management,
including our chief executive officer and chief financial officer, as
appropriate to allow timely decisions regarding required disclosure.
In connection with this evaluation, our management identified no changes in our
internal control over financial reporting that occurred during the most recent
fiscal quarter that materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are involved from time to time in various legal claims and actions arising in
the ordinary course of business. While from time to time claims are asserted
that may make demands for sums of money, we do not believe that the resolution
of any of these matters, either individually or in the aggregate, will
materially affect our financial position, cash flows or the results of our
operations.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table provides information with respect to Company purchases made
of Online Vacation Center Holdings Corp. common stock during the third quarter
of the 2008 fiscal year:
(c) Total
Number of
Shares (or (d) Maximum Number
Units) (or Approximate
Purchased as Dollar Value) of
Part of a Shares that May
(a) Total Publicly Yet Be Purchased
Number of (b) Average Announced Under the
Shares Price Paid Plan or Plan or
Period Purchased per Share Program (1) Programs
------ --------- --------- ----------- --------
July 1, 2008 - July 31, 2008 -- $ -- -- $ --
August 1, 2008 - August 31, 2008 -- $ -- -- $ 200,000
September 1, 2008 - September 30, 2008 5,000 $ 0.631 5,000 $ 196,845
----- ------- -----
Total 5,000 $ 0.631 5,000 $ 196,845
===== ======= =====
-----------------
On August 1, 2008, the Company announced that its Board of Directors had
approved a program to repurchase of up to $200,000 of the Company's common
stock to be funded from available working capital and subject to the
applicable rules and regulations of the Securities and Exchange Commission
and other applicable legal requirements. The program will not extend beyond
June 30, 2009, does not require the Company to acquire a specific number of
shares and may be suspended from time to time or discontinued
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
26
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
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SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ONLINE VACATION CENTER HOLDINGS CORP.
/S/ Edward B. Rudner
--------------------------------------
Chief Executive Officer, President,
Chief Financial Officer and Director
Date: November 6, 2008
28