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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT
OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
000-30835
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(Commission File No.)
AFFINITY INTERNATIONAL TRAVEL SYSTEMS, INC.
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(Name of Small Business Issuer in Its Charter)
NEVADA 86-0885559
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(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
100 SECOND AVENUE SOUTH, SUITE 1100S 33701-4301
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ST. PETERSBURG, FLORIDA (Zip Code)
(Address of principal executive offices)
(727) 896-1513
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(ISSUER'S TELEPHONE NUMBER)
CHECK WHETHER THE ISSUER (1) FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION
13 OR 15 (D) OF THE EXCHANGE ACT DURING THE PAST 12 MONTHS (OR FOR SUCH SHORTER
PERIOD THAT THE ISSUER WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN
SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.
[X] YES [ ] NO
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AS OF NOVEMBER 10, 2000:
26,239,196
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT:
[X] YES [ ] NO
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AFFINITY INTERNATIONAL TRAVEL SYSTEMS INC.
FORM 10-QSB
<TABLE>
<S> <C> <C>
PART I FINANCIAL INFORMATION............................................................. 2
ITEM 1. Financial Statements ............................................................. 2
Balance Sheets at September 30, 2000 (unaudited) and June 30, 2000................ 2
Statement of operations for the three months ended September 30, 2000 and
September 30, 1999 (unaudited).. ................................................. 3
Statements of Cash Flows for the three months ended September 30, 2000 and
September 30, 1999 (unaudited) ................................................... 4
ITEM 2. Management's Discussion and Analysis of Financial Condition of
Results of Operations............................................................. 7
PART II OTHER INFORMATION................................................................. 12
ITEM 1. Legal Proceedings................................................................. 12
ITEM 2. Changes in Securities............................................................. 12
ITEM 3. Defaults Upon Senior Securities................................................... 13
ITEM 4. Submission of Matters to a Vote of Security Holders............................... 13
ITEM 5. Other Information................................................................. 13
ITEM 6. Exhibits and Reports on Form 8-K.................................................. 13
SIGNATURES................................................................................... 14
</TABLE>
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Affinity International Travel Systems, Inc. and Subsidiaries
Consolidated Balance Sheet
September 30, 2000
<TABLE>
<CAPTION>
(UNAUDITED)
September 30, June 30,
2000 2000
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<S> <C> <C>
ASSETS
CURRENT:
Cash and cash equivalents $ 2,418 $ 39,526
Restricted certificates of deposit 40,823 40,269
Accounts receivable 63,770 62,354
Prepaid accommodations 124,969 127,466
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TOTAL CURRENT ASSETS 231,980 269,615
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RESTRICTED CERTIFICATES OF DEPOSIT 120,000 120,000
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $469,655 and $375,454 1,843,635 1,437,457
GOODWILL, net of accumulated amortization
of $101,276 and $99,516 50,502 52,262
DEPOSITS 205,332 205,231
PREPAID FEES 1,355,000 1,040,000
OTHER ASSETS 13,433 13,433
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TOTAL ASSETS $ 3,819,882 $ 3,137,998
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LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 3,176,897 $ 1,997,937
Accrued expenses 1,664,732 1,460,090
Deferred revenue 340,685 416,566
Due to customers 9,821 9,821
Current portion of capital lease obligations 11,666 11,780
Convertible debentures -- 309,867
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TOTAL CURRENT LIABILITIES 5,203,801 4,206,061
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CAPITAL LEASE OBLIGATIONS, LESS CURRENT PORTION 8,847 12,515
TOTAL LIABILITIES 5,212,648 4,218,576
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COMMON STOCK SUBJECT TO RESCISSION 5,613,000 5,613,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT
Common stock, $.001 par value, shares authorized
100,000,000 issued and outstanding 26,236,696 and
20,796,408 19,467 14,027
Convertible preferred stock, $.001 par value,
shares authorized 100,000,000, issued and
outstanding -0-
Additional paid-in capital 25,243,346 22,060,911
Accumulated deficit (32,268,579) (28,768,516)
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TOTAL STOCKHOLDERS' DEFICIT (7,005,766) (6,693,578)
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TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 3,819,882 $ 3,137,998
============ ============
</TABLE>
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Affinity International Travel Systems, Inc. and Subsidiaries
Consolidated Statements of Operations
(UNAUDITED)
Three Months Ended
September 30
2000 1999
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NET SALES $ 1,242,645 $ 1,095,165
COST OF SALES 1,057,110 664,854
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Gross profit 185,535 430,311
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OPERATING EXPENSES:
Selling, general and administrative 530,026 528,313
Salaries and wages 517,122 1,327,602
Consulting fees 64,400 --
Consulting fees to related party 15,660 40,000
Rent 85,180 86,477
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TOTAL OPERATING EXPENSES 1,212,388 1,982,392
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Operating loss (1,026,853) (1,552,081)
OTHER INCOME (EXPENSE):
Interest income 2,358 9,285
Interest expense (217,078) (169,098)
Interest expense to related party (600) --
Finance charges to related party (2,257,890) 1,020
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TOTAL OTHER INCOME (EXPENSE) (2,473,210) (158,793)
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NET LOSS $(3,500,063) $(1,710,874)
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NET LOSS PER COMMON SHARE, BASIC AND DILUTED $ (.15) $ (.13)
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WEIGHTED AVERAGE SHARES OUTSTANDING 23,335,766 13,184,179
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Affinity International Travel Systems, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
For the three months ended September 30
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
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<S> <C> <C>
Cash flows used in operating activities $ (32,292) $ (289,591)
Cash flows used in investing activities (501,034) (701,839)
Cash flows provided by financing activities 496,218 (30,467)
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NET DECREASE (USED IN) IN CASH AND CASH EQUIVALENTS (37,108) (1,021,897)
CASH and CASH EQUIVALENTS, beginning of period 39,526 1,119,796
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CASH AND CASH EQUIVALENTS, beginning of period 2,418 97,899
========= ===========
</TABLE>
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. FINANCIAL STATEMENT PRESENTATION
The unaudited condensed consolidated financial statements of Affinity
International Travel Systems, Inc. ("Affinity International", "we", or "us")
have been prepared by the Company in accordance with generally accepted
accounting principles for interim financial information and within the
guidelines to Form 10-QSB. The financial statements do not include all
information and notes required by generally accepted accounting principles for
complete financial statements. These condensed consolidated interim financial
statements should be read in conjunction with the Company's audited financial
statements as of and for the year ended June 30, 2000 and the related notes
included in the Company's Annual Report on Form 10-KSB. In the opinion of
management, all adjustments, consisting only of normal recurring adjustments and
financing charges (see Note 3) on warrants in the first quarter of fiscal 2001,
considered necessary for a fair presentation, have been included.
The results of operations and cash flows for the three months ended
September 30, 2000 are not necessarily indicative of the results of operations
and cash flows expected for the year ending June 30, 2001.
2. CONVERTIBLE DEBENTURE
On September 15, 2000, the Company entered into an agreement to convert
its outstanding $350,000 convertible debentures into 542,359 shares of its
common stock at an agreed-upon price of $.65 per share and issue 54,235 common
stock warrants with an exercise price of $1.29 per share, which expire five
years from the date of issuance. Interest expense of $49,000 was recorded during
the three months ended September 30, 2000 related to the effects of the
conversion and the fair value ascribed to the warrants.
3. FINANCE CHARGES
On August 2, 2000, the Company entered into agreements to reprice a
total of 4,250,000 common stock warrants held by a significant stockholder who
has provided financing to the Company, related entities, and an investor, to
approximately $.05 per share. The market value of the Company's common stock was
$.53 per share on that date. The Company recorded a financing charge of
$2,253,000 related to the repricing of these common stock warrants. All of the
common stock warrants were then exercised and the Company received net proceeds
of $200,000.
4. COMMON STOCK SUBJECT TO RESCISSION
From July 1998 to January 1999, we sold an aggregate of 6,768,572
shares of common stock in reliance upon the exemption from registration
contained in Rule 504 of Regulation D, including shares issued in the
acquisition of SunStyle (an acquisition that was treated as a reverse
acquisition for accounting purposes). Those sales may have been in violation of
Rule 504 of Regulation D. Accordingly, stockholders who purchased shares in
those transactions may have rescission rights against us; that is, such persons
may have the right to compel us to repurchase the shares for an amount equal in
general to the purchase price paid plus interest.
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Although there is no definitive answer as to whether we violated Rule
504, we have reclassified amounts previously recorded as stockholders' equity to
mezzanine capital on our balance sheet. The recorded amount of shares subject to
rescission is $5,613,000 as of September 30, 2000 and 1999, excluding related
accrued interest expense. These amounts are shown on our balance sheet under the
line item "Common Stock Subject to Rescission" and "Accrued Expenses."
Until the rescission issue is completely resolved, we have recorded the
maximum potential known effect as of September 30, 2000. During the three months
ended September 30, 2000 there was $168,000 charged to interest expense related
to the common stock subject to rescission. The cumulative amount of accrued
interest expense related to this issue is $1,474,000 and is included in accrued
expenses at September 30, 2000. Although there can be no assurance that the
rescission issue will be resolved in our favor, a favorable decision could
result in the reversal of all, or part of, the accrued interest in future
periods.
5. PREPAID EXPENSES
Prepaid expenses consist of amounts relating to an agreement with
June Online Services, Inc. for us to provide travel packages and services via
their Website.
6. SUBSEQUENT EVENTS
CONTROLLED DISTRIBUTION AGREEMENT
On September 29, 2000, the Company entered into a Controlled
Distribution Agreement (the "Agreement") with a significant stockholder and
related entities. Under the terms of the Agreement, the stockholder may not,
without the written consent of the Company, offer, sell or otherwise transfer
any common stock owned or deemed to be beneficially owned for a period of three
years. The Agreement provides for certain exceptions and termination provisions
based on future stock offerings, financings and for private sales.
On October 31, 2000, the Agreement had expired based on our failure to
complete certain levels of additional financing. We anticipate that the parties
involved in the Agreement will enter into a similar agreement following the
completion of long term financing that we are currently seeking. However, there
are no assurances that we will be able to secure additional financing or execute
a new Controlled Distribution Agreement.
FINANCING AGREEMENT
In October 2000, we entered into an agreement with an investment firm
for the purpose of securing $5-$15 million in outside financing. Based on the
terms of the agreement, the Company will record financing charges of $386,000 in
the second quarter of fiscal 2001 related to the issuance of 500,000 warrants to
purchase the Company's common stock at a price below market value. An additional
1,000,000 warrants to purchase our common stock will also be issued as part of
the agreement.
EQUITY LINE OF CREDIT
Subsequent to the end of the three months ended September 30, 2000,
the Company has entered into a tentative agreement for an equity line of
credit. The equity line of credit would be for a minimum of $3 million, and for
up to $10 million, over a period of 3 years, subject to certain valuations of
the our common stock. Should we be able to complete this agreement it could
provide us with the basis of long term financing, but could create significant
dilution to our
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existing shareholders, depending on the price or our common stock and the
amount of financing provided. There are no assurances that this particular
agreement will be finalized.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD LOOKING INFORMATION
This quarterly report on Form 10-QSB may contain forward-looking
statements within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act and is subject to the relevant safe harbors created.
The words "plan," "intend," "anticipate" "project," estimate," "expect," "may,"
"may," "might," "believe," "potential," "could," "should," "would", and similar
statements are intended to be among the statements that are forward-looking
statements. Investors are cautioned that forward-looking statements are
inherently uncertain. Actual performance and results of operations may differ
materially from those projected or suggested in the forward-looking statements
due to the to certain risks and uncertainties, including, without limitation,
the ability of the Company to obtain adequate financing to continue its current
operations; the ability of the Company to successfully enter into strategic
relationships and agreements with additional suppliers and marketers; the
ability of the Company to retain and possibly increase its employees; the
ability of the Company to continue as a going concern; risks associated with
the Company's ability to continue as a going concern; risks associated with the
Company's Web site, www.FarAway.com; the Company's history of operating losses;
dependence on senior management; risks inherent in the travel and internet
industries and the Company's ability to manage anticipated growth. The
forward-looking statements contained in this report should not be regarded as a
representation by the Company, or any other person, that the objectives or
plans of the Company will be achieved. The Company cautions readers not to
place undue reliance on the forward-looking statements.
GENERAL
During the three months ended September 30, 2000 we continued to
follow our strategy of focusing on providing wholesale cruises, travel
packages, and services to travel agents and consumers. Following through with
this plan, in October 2000, subsequent to the end of the first quarter, we
closed our Intrepid retail travel operation.
Our total revenue of $1,243,000 for the three months ended September
30, 2000 was an increase of $148,000 (13.5%) from the prior year period of
$1,095,000. We anticipate being able to grow our overall volume through the
completion of technology enhancement projects now in progress, and by adding to
the number of our strategic business partners and suppliers.
We recorded an operating loss of $1,027,000 in the three months ended September
30, 2000, a decrease of $525,000 (33.8%) from the operating loss of $1,552,000
in the prior year period. The primary reason for the decrease in operating
losses, relates primarily to our recording $750,000 in salary expense for stock
options granted below market price in the first quarter of fiscal 2000. There
was not a similar transaction in the first quarter of fiscal 2001. During
fiscal 2001, $2,253,000 was recorded as finance charges related to the
repricing of certain warrants to a significant shareholder, which were then
exercised for proceeds of $200,000.
A net loss of $3,500,000 was reported for the three months ended
September 30, 2000 compared to a net loss of $1,711,000 in the three months
ended September 30, 1999, an increased loss of $1,789,000 or 104.6%.
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REVENUE
Total revenue of $1,243,000 for the three months ended September 30,
2000 consists primarily of revenue from wholesale operations. The three month
period ended September 30, 2000 included $61,000 of revenue or commissions from
our remaining retail operation (Intrepid), compared to the prior year period
that included $463,000 in retail revenue. After considering the $402,000
decrease in retail revenue in the first quarter of fiscal 2001, our comparable
revenue from wholesale operations increased $549,000 (87.0%) from the three
months ended September 30, 1999.
GROSS PROFIT
Gross profit of $186,000 for the three months ended September 30, 2000
is a decrease of $244,000 (57.0%) from the prior year, due to the reduction in
the amount of retail travel operations. Gross profit of $430,000 in the prior
year, included retail revenue or commissions earned of $463,000 less related
expenses of $139,000 which then contributed $324,000 in gross profit.
The gross profit percentage of 14.9% for the three months ended
September 30, 2000 decreased from 39.3% in the prior year three month period.
This decrease was directly related to the reduction of retail operations which
record net commissions as revenue, with relatively minimal cost of sales. The
Company expects to continue to produce gross profit margins comparable to the
first quarter of 2001 in the future. However, future gross margins for our
wholesale business could be affected by revenue sharing arrangements or
promotions used to increase revenue.
The decrease in retail revenue and related gross profit was primarily
the result of the sale of our Prestige retail operation in December 1999. While
a primary component of gross profit, Prestige did not have a material effect on
operating results in the first quarter of fiscal 2000.
OPERATING EXPENSES
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $530,000 in the
three months ended September 30, 2000, a decrease of $2,000 from $528,000 in
the prior year. Decreases of $52,000 in computer expense, and $20,000 in
advertising, were partially offset by a $41,000 increase in legal and
accounting and $33,000 in depreciation. Total depreciation and amortization
costs included in SG&A expenses for the first quarter of fiscal 2001 was
$96,000.
SALARIES AND WAGES
Salaries and wages of $517,000 decreased $811,000 from $1,328,000 in
the first quarter of fiscal 2000, primarily as a result of a $750,000 charge
for stock options granted at below market prices in the prior year. Other
decreases in salaries and wages from the reduction of retail operations were
offset by recording
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$67,000 for restricted stock issued to employees in the first quarter of 2001
and some personnel increases to support the growth of the wholesale business.
CONSULTING FEES, RENT
Consulting fees consist primarily of costs related to general fund
raising efforts.
Rent of $85,000 for the three months ended September 30, 2000 is
comparable to rent of $86,000 from the three months ended September 30, 1999.
Decreases in rent for retail operations was primarily offset by additional
primary office space obtained later in fiscal year 2000.
INCOME TAXES
The Company accounts for income taxes using the liability method.
Under this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and
liabilities. We recorded a valuation allowance to state deferred tax assets at
estimated realizable value due to the uncertainty related to realization of
those assets through future taxable income.
OTHER INCOME AND EXPENSE
Interest expense includes $168,000 in interest related to the
rescission offer and $49,000 related to a convertible debenture which was
converted into our common stock on September 15, 2000. During the three months
ended September 30, 1999, interest expense of $168,000 related to the
rescission offer was recorded.
Finance charges of $2,258,000 relate primarily to the repricing of
warrants in August, 2000 to a significant shareholder. No similar transaction
occurred during the first quarter of fiscal 2000.
LIQUIDITY AND CAPITAL RESOURCES
From July 1998 to January 1999, we sold an aggregate of 6,768,572
shares of common stock in reliance upon the exemption from registration
contained in Rule 504 of Regulation D, including shares issued in the
acquisition of SunStyle (an acquisition that was treated as a reverse
acquisition for accounting purposes). Those sales may have been in violation of
Rule 504 of Regulation D. Accordingly, stockholders who purchased shares in
those transactions may have rescission rights against us; that is, such persons
may have the right to compel us to repurchase the shares for an amount equal in
general to the purchase price paid plus interest. If all or a portion of the
purchasers of the common stock in those transactions exercise any rescission
right they may have, we may be subject to substantial liability, in which case,
there would be a severe impact on our financial condition and ability to
continue as a going concern. We do not have sufficient cash reserves to
repurchase the shares of our common stock that are subject to possible
rescission. While we believe that the issue will eventually be resolved in our
favor with minimal financial effect, there is no assurance that this will
occur. In addition, our ability to raise additional capital may be severely
restricted, as investor may be hesitant to invest in us because of this
potential liability. Our inability to raise capital when needed would have an
adverse effect on our ability to continue as a going concern.
Although there is no definitive answer as to whether we violated Rule
504, we have reclassified amounts previously recorded as stockholders' equity to
mezzanine capital on our balance sheet. The recorded amount of shares subject to
rescission is $5,613,000 as of September 30, 2000 and 1999, excluding related
accrued interest. We believe that our total exposure to the rescission will be
much less than the maximum indicated since approximately 5,394,000 shares, or
80% of the amounts isolated as potentially subject to rescission are owned by 3
significant shareholders, or shareholder groups (owners of more than 5% of our
common stock). One portion of this amount or 2,850,000 shares (42% of the
amounts potentially subject to rescission) are owned by Daniel G. Brandano, Jr.
our
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Chairman, CEO and one of our directors, and/or Joan Brandano our Secretary and
one of our directors.
Until the rescission issue is completely resolved, we have recorded the
maximum potential known effect as of September 30, 2000. Accrued interest of
$1,474,000 is included in accrued expenses. Although there can be no assurance
that the rescission issue will be resolved in our favor, a favorable decision
could result in the reversal of all or part of the accrued interest in future
periods.
We have no line of credit or loans for working capital and we have
relied upon proceeds from the sale of our equity securities or debentures to
fund negative cash flow from operations and to fund our capital expenditures
related to the implementation of our Internet business strategy.
For the three months ended September 30, 2000 we recorded a net loss of
$3,500,000. For the year ended June 30, 2000, we had a net loss of $21,636,000,
which included $17,353,000 in non-cash expenses.
We have been experiencing and expect to continue to experience
significant negative cash flow. For the three months ended September 30, 2000
our operations used $32,000 in cash, and our investing activities used $501,000
in cash, primarily for $496,000 in a new fixed asset purchases. During the three
month period ended September 30, 2000, our principal source of cash was $496,000
provided from net financing activities, including - $300,000 in proceeds from
the sale of common stock and $200,000 in proceeds from the exercise of common
stock warrants.
As of September 30, 2000 we had a working capital deficit of
$4,972,000, total stockholders' deficit of $7,005,766 and a total of 26,236,696
shares outstanding.
Our auditor's report on our financial statements for the year ended
June 30, 2000 and included in our Form 10-KSB, indicates that certain factors
raise substantial doubt about our ability to continue as a going concern. Our
ability to continue as a going concern is contingent upon the following:
- We may be subject to substantial liability in connection with sales of
our common stock which may have been made in violation of Rule 504 of
Regulation D, and our ability to raise additional capital may be
severely restricted, as investors may be hesitant to invest in us
because of this potential liability.
- Anticipated additional periods of negative cash flow, regardless of
any potential liability in violation of Rule 504 of Regulation D, will
require us to continue to attract outside investments. Any reduction
or delay in our historical ability to raise capital could severely
hinder our planned technology investments, and would adversely affect
our operations, since we do not anticipate generating sufficient cash
from existing operations to internally finance our business for the
next 12 months.
- We cannot assure you that we will be able to generate internally or
raise sufficient funds to continue our operations, or that our
auditor's will not issue another going concern opinion. Our failure to
raise sufficient additional funds, either through additional financing
or continuing operations, will have a material adverse effect on our
business and financial condition and on our ability to continue as a
going concern.
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Our consolidated financial statements do not include any adjustments
to reflect the possible future effects on the recoverability and classification
of assets or the amounts and classification of liabilities that may result from
our possible inability to continue our operations.
We expect net losses and negative cash flow to continue for the
foreseeable future and anticipate our losses and the use of cash will increase
from current levels because we expect to incur significant expenses and capital
expenditures related to:
- brand development, advertising, marketing and promotional activities,
including product discounts and revenue sharing agreements;
- continued development of our Web site, transaction-processing systems,
fulfillment capabilities and network infrastructure, most of which are
capital expenditures;
- expansion of our supplier/distributor relationships;
- expansion of our order fulfillment infrastructure;
- expansion of our product offerings and Web site content; and
- employment of additional personnel as our business expands
With our intended increase in expenditures on marketing and
promotional activities, there are no assurances these efforts will be effective
in attracting customers to our on-line method of shopping for travel products
and services via our Web site. In addition, we may be obligated to pay
commissions, based on a percentage of revenue, to companies with whom we have
online marketing relationships. These costs will increase as our revenues
increase. If we do achieve profitability, we cannot be certain that we will be
able to sustain or increase profitability on a quarterly or annual basis in the
future.
Our ability to achieve profitability depends on our ability to secure
additional financing, to generate and sustain substantially higher revenues and
control the growth in operating costs.
In order to fund our operations and continue the implementation of our
Internet business strategy, we anticipate the need to raise at least $5.0
million in additional capital during the fiscal year ending June 30, 2001. We
will need to raise a portion of that capital immediately to fund negative cash
flow from operations and fund capital expenditures related to the
implementation of our Internet business strategy. If we raise additional funds
through the issuance of equity or debt securities, those securities may have
rights senior to those of our current stockholders, and our stockholders will
experience substantial additional dilution. We are working to finalize a new
three year equity line of credit. This line of credit, if available, would
create a significant capital resource, and would also cause dilution to our
existing shareholders.
We cannot be certain that additional financing will be available to us
on favorable terms when required, or at all. In an effort to secure such
financing, subsequent to the three months
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ended September 30, 2000, we have entered into an agreement to obtain $5-15
million in new investment. There can be no assurance that we will be able to
successfully secure the anticipated financing which is necessary for the
implementation of our Internet business strategy, complete our plans for
growing revenue through existing projects, support our working capital needs
and to provide available capital for potential acquisitions . Our failure to
obtain sufficient additional funds, either through additional financing or
continuing operations, would have a material adverse effect on our business and
financial condition, our ability to implement our Internet business strategies
and our ability to continue our operations.
We anticipate incurring capital expenditures of approximately $1.5
million during fiscal 2001. This estimate is dependent on our ability to obtain
access to additional funding or generating positive cash flow from operations,
that is necessary to complete the development of travel booking engines and the
primary Web site, and other improvements in software and technology.
PART II OTHER INFORMATION
ITEM 1. Legal proceedings
Affinity International Travel Systems, Inc. v. Information Architects
Corporation ("IAC"), Circuit Court of the Sixth Judicial Circuit in and for
Pinellas County Civil division, Case No. 00-6491-CI-19. On September 20, 2000,
we filed a civil action suit against IAC, a contractor hired to perform work on
the FarAway.com Web site. We have alleged that IAC failed to deliver the work
in a timely and suitable manner, and we are seeking rescission of the contract
and/or to obtain a declaratory judgment for breach of contract.
IAC v. Affinity International Travel Systems, Inc., United States
District Court Western District of North Carolina, Charlotte Division, Case No.
3:00CV474-H. On September 22, 2000, IAC filed suit against us separately in
North Carolina alleging breach of the contract discussed above and seeking
damages in excess of $1,000,000. We are seeking to dismiss IAC's action in the
State of North Carolina and to litigate both our action and IAC's counterclaim
in the State of Florida.
We are not aware of any pending legal proceedings against us other than
the matters discussed above that, individually or in the aggregate, would have a
material adverse effect on our business, results or operations, financial
condition or cash flow. Also we may in the future be party to litigation arising
in the course of our business. These claims, even if not meritorious, could
result in the expenditure of significant financial and managerial resources.
ITEM 2. Changes in Securities and Use of Proceeds
RECENT SALE OF UNREGISTERED SECURITIES
Set forth below, in chronological order, is information regarding the
numbers of shares of common stock sold, the number of options and warrants
granted and the principal amount of debt instruments issued by us from July 1,
2000 to September 30, 2000 and the consideration received by us for such
shares, options, warrants and debt instruments. None of these securities was
registered under the Securities Act. In our opinion, all offers and sales of
our securities were exempt from registration by virtue of Section 4(2) of the
Securities Act and the rules promulgated therewith. All purchasers of our
securities represented their intention to acquire our securities for investment
purposes only and not with a view to or for sale in connection with any
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distribution thereof. Appropriate legends were affixed to the certificates
representing the securities issued in such transactions. All purchasers of our
securities had adequate access to information about us and were "accredited
investors" as defined in Section 501 of Regulation D promulgated under the
Securities Act. Except as otherwise indicated, no sales of securities involved
the use of an underwriter and no commissions were paid in connection with the
sale of any securities.
On July 14, 2000, we granted warrants representing the right to
purchase 40,000 shares of our common stock to R.J. Martin & Associates. These
warrants have an exercise price of $0.75 per share and an expiration date of
July 14, 2003.
On August 2, 2000, the Company entered into agreements to reprice a
total of 4,250,000 common stock warrants held by a significant stockholder and
related entities, and an investor to approximately $.05 per share. The market
value of the Company's common stock was $.53 per share on that date. The Company
recorded a financing charge of $2,252,5000 related to the repricing of these
common stock warrants. All of the common stock warrants were then exercised and
the Company received net proceeds of $200,000.
On August 25, 2000, the Company sold 571,429 shares of its common
stock for proceeds of $300,000 or an average price of $.52 per share. In
connection with this offering, 57,143 common stock warrants were issued at an
exercise price of $1.05 per share, which expire five years from the date of
issuance.
On August 25, 2000 the Company granted incentive stock options to
certain employees to purchase 868,500 shares of the company's Common stock with
an exercise price of $1.00 per share, which was above the market value of $.75
on the date of the grant. These options are exercisable eighteen months after
the employee's hire date and expire three years from the grant date. In
addition, the Company issued one-time stock grants of a total of 76,500 shares
of its common stock to these employees.
On September 15, 2000, the Company entered into agreement to convert
its outstanding $350,000 convertible debentures into 542,359 shares of its
common stock at an agreed-upon price of $.65 per share and issue 54,235 common
stock warrants with an exercise price of $1.29 per share, which expire five
years from the date of issuance.
ITEM 3. Defaults Upon Senior Securities
none
ITEM 4. Submission of Matters to a Vote of Security Holders
none
ITEM 5. Other Information
none
ITEM 6. Exhibits and Reports on Form 8-K
Exhibit 27 Financial Data Schedule
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SIGNATURES
Pursuant to the requirements of Section 13 and 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: November 20, 2000
AFFINITY INTERNATIONAL TRAVEL SYSTEMS, INC.
-------------------------------------------
(Registrant)
By: /s/ Daniel G. Brandano, Jr.
----------------------------------------
Daniel G. Brandano, Jr.
Chief Executive Officer
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