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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the fiscal year ended June 30, 2000
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
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000-30835
(Commission File No.)
AFFINITY INTERNATIONAL TRAVEL SYSTEMS, INC.
(Name of Small Business Issuer in Its Charter)
NEVADA 86-0885559
(State or other jurisdiction of incorporation or (I.R.S. Employer
organization) Identification No.)
100 SECOND AVENUE SOUTH, SUITE 1100S 33701-4301
ST. PETERSBURG, FLORIDA (Zip Code)
(Address of principal executive offices)
Issuer's Telephone Number, including area code: (727) 896-1513
Securities registered under Section 12(b) of the Securities
Exchange Act of 1934:
NONE
Securities registered under Section 12(g) of the Securities
Exchange Act of 1934:
COMMON STOCK, PAR VALUE $.001 PER SHARE
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained herein, and no disclosure will be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
As of September 30, 2000, the aggregate market value of the common stock held by
non-affiliates computed by reference to the closing price of the registrant's
common stock as reported on the OTC Bulletin Board was $18,857,499.
Issuer's revenues for its most recent fiscal year were $3,645,409.
As of September 30, 2000, there were 26,237,696 shares of issuer's common stock
outstanding.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
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TABLE OF CONTENTS
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PAGE
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PART I
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ITEM 1. DESCRIPTION OF BUSINESS...................................................................................1
ITEM 2. DESCRIPTION OF PROPERTY...................................................................................7
ITEM 3. LEGAL PROCEEDINGS.........................................................................................7
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......................................................7
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS..................................................8
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS...................................................................................11
ITEM 7. FINANCIAL STATEMENTS.....................................................................................18
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE...................................................................................18
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH
SECTION 16(a) OF THE EXCHANGE ACT............................................................19
ITEM 10. EXECUTIVE COMPENSATION..................................................................................20
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..........................................22
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..........................................................24
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K........................................................................27
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FORWARD LOOKING STATEMENTS
Except for the historical information contained herein, this Annual
Report may contain forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended (the "Securities Act"), and Section
21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act").
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
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
produce sufficient revenues through travel sales using 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 growth. The forward-looking statements contained
herein represent the Company's judgment as of the date of filing this Annual
Report, and the Company cautions readers not to place undue reliance on such
statements.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
OVERVIEW
Affinity International Travel Systems, Inc. ("Affinity", the "Company",
"we" or "us"), operating primarily through its wholly-owned subsidiary, SunStyle
International Holidays, Inc. ("SunStyle"), markets, sells and distributes a
variety of wholesale and retail travel related products and services. These
products and services include vacation packages, tours, cruises, domestic and
international airline tickets, car rentals and accommodation products and
services to travel agencies and consumers. Our business strategy entails using
the Internet, through our Web site, FarAway.com, as a delivery platform for our
inventory of travel related products and services.
We fulfill demand for our travel products in both the
business-to-business and business-to-consumer online travel arenas by
aggregating our inventory of packaged leisure travel products and using the
Internet as the delivery platform. We have been able to implement our business
strategy by:
- developing and acquiring technologies;
- developing specialized knowledge and experience concerning
certain geographic destinations; and
- establishing relationships with travel suppliers that enable
us to offer a large inventory base at competitive prices.
A key component of our business strategy is our Web site through which
we sell to other travel providers leisure travel products that traditionally
have had higher profit margins than airline ticket sales, including, among
others, vacation packages, tours and cruises. We also use our Web site to sell
our leisure travel products directly to consumers.
COMPANY HISTORY AND BACKGROUND
We were incorporated in Nevada in 1977 under the name Medanco, Inc. We
had no revenues and limited operations until July 1998, when we acquired
SunStyle and changed our name to Affinity. Since July 1998, we have been
primarily engaged in marketing, selling and distributing travel products to
travel agents and consumers.
Our wholesale revenue consists principally of the sales activities of
SunStyle, which functions primarily as a tour operator. SunStyle contracts with
airline, hotel and auto suppliers for net contracts and then sells vacation
packages to both travel agents and directly to consumers. In 1998 and 1999, we
acquired several retail travel agencies to provide a channel of distribution for
wholesale products. Prestige Travel Services II, Inc. ("Prestige") was the
largest of these agencies. In December 1999, we abandoned our agency
distribution strategy and sold Prestige back to its original owners. Prestige
accounted for approximately 27.0% and 16.1% of our revenues during fiscal 1999
and 2000, respectively.
We also generate revenue from our retail travel services, which
consists primarily of commissions earned from travel service suppliers, such as
airlines, car rental companies, resorts and hotels, for facilitating travel
arrangements for these suppliers' retail customers.
RECENT ACQUISITIONS
On January 1, 1999, we acquired all of the outstanding common stock of
Prestige for $1,600,000, which we paid for through the issuance of 800,000
shares of Series A Convertible Preferred Stock. The shares of preferred stock
were subsequently converted into 1,497,076 shares of common stock in accordance
with the terms of the
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preferred stock. Prestige is a retail travel agency headquartered in Tampa,
Florida. Prestige caters mainly to the leisure segment of the travel industry.
Prestige also operated branch locations in Ft. Lauderdale and Holiday, Florida.
In December 1999, we sold Prestige to its original owners for a sale price of
$75,000 in cash and the surrender of 1,497,076 shares of our common stock.
On February 8, 1999, we acquired the assets and operations of
Design-A-Tour, Inc. in exchange for 36,320 shares of our common stock valued at
approximately $2.07 per share, or an aggregate purchase price of approximately
$75,000. Design-A-Tour, established in 1988, specializes in tour programs to
Costa Rica, Belize, Guatemala, Brazil, Argentina, Chile, and Peru. Design-A-Tour
currently operates as a division of SunStyle and operates tour programs to
Aruba, Bonaire, Curacao and Margarita Island and has wholesale air contracts
with Aerolinas Argentinas, TransBrazil, Varig, Aero Peru, Groupo Taca (Taca
Airlines, Aviateca, COPA, Lacasa, NICA), Serviventsa, and ALM.
In July 1999, we acquired the assets and operations of Integrity Credit
Services (d/b/a Intrepid Travel and Goldmark Travel). Intrepid is a retail
travel agency that services clients in the Tampa Bay metropolitan area. On
January 7, 2000, we sold certain assets and the operations of Goldmark Travel to
Skelton's Dolphin Travel, located in St. Petersburg, Florida, for $30,000 in
cash.
INDUSTRY BACKGROUND
Because of the inherent limitations of traditional retail channels of
distribution, the Internet is changing the way consumers and businesses are
buying and selling products and services. According to Jupiter Communications,
individual Internet users in the U.S. in 1999 will top the 100 million mark and
continue to grow steadily to 157 million users in over 67 million households by
2003. A recent Forrester Research study stated that online travel sales are
anticipated to exceed those of every other e-commerce category.
In addition, online use in Europe and Latin America is poised for
significant growth. According to International Data Corporation, in Europe, the
number of Internet users is predicted to grow from 38 million to 150 million by
2003, with online sales to consumers anticipated to grow from $5.4 billion in
1999 to more than $115 billion in 2003. In Latin America, the number of Internet
users in the region is anticipated to grow from 4.8 million in 1998 to 7.5
million this year and 19 million by 2003, and e-commerce sales are anticipated
to increase from $167 million in 1998 to $8 billion within five years, according
to International Data Corporation.
To date, the travel industry has been actively involved in e-commerce
trends, particularly in the United States. According to Forrester Research,
during 1999, online travel sales were the single highest grossing product sold
on the Web. Internet analysts at Forrester Research predict that the U.S. online
travel marketplace will increase from the current $2.8 billion to $29.5 billion
within the next four years. Similarly, online travel research firm PhoCusWright
predicts the online travel market in the U.S. to reach $20 billion by as early
as 2001. Industry analysts see similar online travel growth trends in both the
European and Latin American markets. Specific projections for the Latin American
market are yet to be released. However, by 2002, Data Monitor predicts the sale
of online travel products in Europe will reach $1.7 billion, an increase from
$7.7 million in 1997.
PRODUCTS AND SERVICES
Through our Web site, we sell travel products such as vacation
packages, tours and cruises, which traditionally have had a higher profit margin
than airline ticket sales, to other travel providers and consumers. Our strategy
is to:
- Attract and acquire a substantial base of travel customers in
the U.S., Europe and Latin America, by developing a compelling
and functional Web presence, launching the appropriate
marketing and strategic partnership initiatives and offering
the necessary customer service mechanisms; and
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- Convert customers into leisure travel buyers by offering
attractive prices on personalized vacation packages, tours and
cruises utilizing our TOURSCAPE operating system.
We continue to develop our Web site into a full-service site that will
use our existing hardware and software infrastructure, as well as our strategic
partnerships and existing vendor contracts.
Our infrastructure is comprised of our network architecture,
Internet-enabled software engines, back-end operations and strategic and
contract-based relationships.
NETWORK ARCHITECTURE. Our network architecture is designed to support
our Internet and enterprise-based activities. This architecture takes advantage
of, and builds upon, our existing technologies. We believe that our systems will
be capable of supporting all of our internal operations and Internet-related
initiatives, including:
- A hosting environment for our Web site, FarAway.com, and any
other of our web properties;
- A processing capability for online users' query and booking
transactions;
- A platform for multimedia intensive technologies, such as live
agent video-conferencing, voice-over-IP (Internet telephony)
and video streaming;
- An ability to provide on and off-site agents with the tools
and resources necessary to deliver customer service; and
- A means to support expansion that meets growing corporate
needs and consumer demands.
INTERNET-ENABLED SOFTWARE SYSTEMS. We have made significant investments
in the software infrastructure that is integrated into our Web site. Our
software systems include the following:
- TOURSCAPE: TOURSCAPE is a tour/wholesale reservation software
system. TOURSCAPE, developed by THE SABRE GROUP, improves
productivity, efficiency, record keeping and business
tracking, as well as reducing operator training and booking
time. It also supports multiple product lines, unlimited
packaging capabilities, numerous pricing and costing methods
and various commission levels.
- TOURPATH: TOURPATH is a system interface that delivers
single-source connectivity to land and air reservation
information. Additionally, it delivers the ability to
interface with multiple airline reservation systems. These
software applications are currently in full use by our
reservations agents in their day-to-day operations.
- BOOKIT!: BOOKIT! is a Java-based online booking engine
developed by Datalex of Dublin, Ireland that allows users to
book air, car and hotel reservations using inventory managed
by a computer reservation system.
- BOOKIT! PRO: BOOKIT! PRO provides outside agents affiliated
with us access to our in-house reservation system so that they
may process their own bookings from any remote location
through the Internet.
We license each of these software systems on a non-exclusive basis.
These software systems are not proprietary to us and some of our competitors
also use these systems.
INTERNAL OPERATIONS. Despite the automation of the real-time booking
processes, travel reservations still require some human interaction for
completion. This includes physically handling and mailing paper airline tickets
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to customers, where applicable, and manually reviewing tour package transactions
for accuracy and completeness. We currently provide live agent customer support
to those customers requiring it.
CONTRACTUAL RELATIONSHIPS. The leisure tours and packages we currently
market, which are a critical component to the overall success of our Internet
initiatives, are the result of contracts we have secured with travel industry
vendors. These contractual relationships, along with the other relationships we
have created with others in the Internet and travel industries help lay the
foundation for our Internet initiatives. These contracts can be canceled or
modified by the supplier upon no or relatively short notice.
MARKETING STRATEGY
We are employing the following marketing strategies:
- Focusing On The Sale Of Specialized Leisure Travel Packages.
- Encouraging customers to interact with our reservation agents
through online chats, Internet call buttons and toll free
telephone numbers.
- Expansion of our intellectual presence through the operations
of our office in the United Kingdom.
- Pursuing strategic online partnerships with web portals,
e-commerce companies and content providers.
- Promoting a FarAway.com affiliate program with complementary
Web sites which would provide link-through access to our Web
site.
COMPETITION
Our competitors in the online travel industry include travel suppliers
and travel agencies. Many of our competitors have greater experience, brand name
recognition and/or financial resources than we do.
SUPPLIERS. Suppliers primarily encompass airlines, hotels, car rental
agencies and some cruise lines. Among the suppliers, airlines are expanding
their Internet presence the most. This includes not only enhancing their Web
sites and adding the Internet as a significant distribution channel to
consumers, but also expanding their marketing efforts and forming new strategic
alliances with other key online players.
TRAVEL AGENCIES. Travel agencies with an online presence are comprised
of both the online companies and established brick-and-mortar operations.
According to studies of online travel, such as the Jupiter Analyst Report, some
of the leaders in online travel include, among others:
- Travelocity
- Expedia
- Preview Travel
- GetThere.com
- Trip.com
- Travel Network
- Uniglobe Travel
- Lowestfare.com
All of the leaders mentioned above offer price and availability search
capabilities for air, hotel and car rental and allow the user to book directly
online without human intervention. Most of the agencies also offer special
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deals and discounted offerings. Some provide destination content. One of the
areas some agencies are endeavoring to enhance is their offering of tour
packages and cruises.
CUSTOMERS
Our targeted customers are divided between travel service providers and
individual consumers. It is anticipated that the growth of the business will be
provided primarily by individual consumers through a combination of (i) direct
search to our Faraway.com Web site, (ii) linked travel opportunities via our
business partner agreements, (iii) development and expansion of the SunStyle
brand tour and vacation programs and (iv) through branded private label programs
to be developed for outside partners.
During fiscal year 2000, we began our business partnerships with
Internet portals by entering into an agreement with Juno Online Services, Inc.
(an internet search engine and portal) to be their exclusive travel provider and
with Travel Navigator to provide travel packages on a non-exclusive basis
through both Yahoo travel and Travel Navigator's own Web site.
In addition to business provided by individuals, we intend to grow our
servicing arrangements similar to our existing program with Asiana airlines,
where we provide and supply administrative services for US ticketing passengers,
using our established technology and fulfillment experience on a commission fee
basis. Asiana airlines is a major carrier in the Korean and Pacific Rim market.
For the years ended June 30, 2000 and June 30, 1999, no customer
comprised more than 10% of our sales volume.
INTELLECTUAL PROPERTY
We regard the protection of our intellectual property as important to
our future success and rely on a combination of copyright, trademark, service
mark and trade secret laws, license agreements and contractual restrictions to
establish and protect intellectual property rights in our Web site architecture
and technology, products, content and services. We have entered into
confidentiality and invention assignment agreements with our employees and
contractors in order to limit disclosure of our confidential information and to
protect our ownership interest in our Web site architecture and technology. We
cannot assure you that these contractual arrangements or the other steps taken
by us to protect our intellectual property will prove sufficient to prevent
misappropriation of our technology or deter independent third-party development
of similar technologies.
We have filed an application to register our trademark for FarAway.com.
There are a number of other trademarks and domain names that may be similar to
ours. An infringement action could be brought against us at any time by the
holders of these marks. If the owner of such marks were to prevail in such an
action, we could lose the ability to use the FarAway.com name and domain name
and could be subject to substantial damages. Such adverse outcomes could
adversely affect our business. If we are required to change our domain name, we
could lose customers and brand equity which would have a material adverse effect
on our business and financial condition. Although we may attempt to acquire or
license the right to use potentially relevant third-party trademarks and domain
names, we may not be successful.
REGULATORY ENVIRONMENT
REGULATION OF THE TRAVEL INDUSTRY
Many travel suppliers, particularly airlines, are subject to extensive
regulation by federal, state and foreign governments. In addition, the travel
services industry is subject to certain special taxes by federal, state, local
and foreign governments, including hotel bed taxes, car rental taxes, airline
excise taxes and airport taxes and fees. New or different regulatory schemes and
changes in tax policy could have an adverse impact on the travel service
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industry in general and could have a material adverse affect on our business,
financial condition, and results of operations. Changes in tax policy for online
purchases, including travel purchases, could also have a material adverse affect
on our business, financial condition and results of operations.
REGULATION OF THE INTERNET
At the present time the amount of state and federal governmental
regulation applicable to the Internet is relatively small when compared to other
areas of communication and commerce. As the size, use and popularity of the
Internet increases, it is possible that laws and regulations may be enacted with
respect to the Internet, covering issues such as user privacy, pricing,
taxation, content, copyrights, distribution, antitrust and quality of products
and services. Additionally, the rapid growth of electronic commerce may trigger
the development of tougher consumer protection laws. The adoption of such laws
or regulations could reduce the rate of growth of the Internet and could make it
more difficult and expensive for us to carry on our planned business activities.
Due to the increasing use of the Internet and the burden it has placed
on the current telecommunications infrastructure, telephone carriers have
requested the Federal Communications Commission, the FCC, to regulate Internet
service providers and online service providers and impose access fees on those
providers. If the FCC imposes access fees, the costs of using the Internet could
increase dramatically. These regulations, if promulgated, could result in the
reduced use of the Internet as a medium for commerce, which could have a
material adverse effect on our business, financial condition and results of
operations.
REGULATION CONCERNING PRIVACY
Specific laws and regulations concerning the use of the Internet have
been enacted. In particular, as directed by Congress in the Children's Online
Privacy Protection Act, also known as COPPA, the Federal Trade Commission
adopted regulations, effective April 21, 2000, prohibiting unfair and deceptive
acts and practices in connection with the collection and use of personal
information obtained from children under 13 years old on the Internet. Because
our Web site is not directed at children and we do not anticipate its widespread
use by children, COPPA and the FTC's regulations should not have a significant
effect upon our business.
The European Union has adopted a directive that imposes restrictions on
the collection and use of personal data. Under the directive, EU citizens are
guaranteed rights to access their data, rights to know where the data
originated, rights to have inaccurate data rectified, rights to recourse in the
event of unlawful processing and rights to withhold permission to use their data
for direct marketing. The directive could, among other things, adversely affect
U.S. companies that collect information over the Internet from individuals in EU
member countries, and may impose restrictions that are more stringent than
current Internet privacy standards in the United States. We may ultimately
engage in data collection from users in EU member countries. If we do, we would
be subject to the EU directive.
While we anticipate having a privacy policy designed to ensure the
protection of the privacy of our users, there can be no assurance that these
programs will conform with any regulations which have been adopted by the FTC or
the European Union directive.
It is also possible that cookies, or information keyed to a specific
server, file pathway or directory location that is stored on a user's hard
drive, which are used to track demographic information and to target
advertising, may become subject to laws limiting or prohibiting their use.
Limitations on or elimination of our use of cookies could limit the
effectiveness of our ability to market to certain users, which could have a
material adverse effect on our business, results of operations and financial
condition.
We intend to take the necessary measures to ensure that our Web site
complies with industry standards relating to user privacy.
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PRODUCT DEVELOPMENT
Product development is a constant, on-going process for us, as it is in
the industry generally. Development of next-generation use interfaces, site
navigation and transaction processing are currently in process. Current site
performance is continually evaluated by us for future development activities.
Product development is conducted both through our in-house resources and by
third party contractors.
EMPLOYEES
As of September 30, 2000, we had 48 full-time employees, including 17
in the reservation and customer service departments, and 31 serving in
operations, sales and marketing, information systems, management, accounting and
administration. All of our employees are leased through T.T.C. Illinois, Inc. of
Kankakee, Illinois, and we occasionally engage through consulting agreements
administrative, operational, and technical specialists on an as needed basis.
Our employees are not represented by a union, and we believe our employee
relations are good.
ITEM 2. DESCRIPTION OF PROPERTY
Our headquarters are located in City Center, St. Petersburg, Florida,
where we lease an office with approximately 10,815 square feet of space. This
lease expires in June 2004 and the monthly base lease payments range from
$14,871 to $16,673. We have also entered into a sublease agreement for an
additional 5,683 square feet of office space to accommodate our Internet
expansion strategy. The sublease has a monthly base lease payment ranging from
$6,577 to $8,051 per month and expires on March 18, 2002. We believe that our
current office space will accommodate our needs for the next twelve months.
ITEM 3. 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.
Information Architects Corporation 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 one discussed above that, individually or in the aggregate, would have
a material adverse effect on our business, results of 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
Our shares of common stock are traded over-the-counter on the OTC
Bulletin Board under the symbol "AFFT." The following table sets forth, for the
periods indicated, the high and low bid prices of our common stock, as reported
in published financial sources. Quotations reflect inter-dealer prices, without
retail mark-up, mark-down, commission, and may not represent actual
transactions.
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FISCAL YEAR ENDING JUNE 30, 2001 HIGH LOW
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Second Quarter(1)................................. 0.781 0.594
First Quarter..................................... 1.438 0.313
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FISCAL YEAR ENDING JUNE 30, 2000 HIGH LOW
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Fourth Quarter(2)................................. 2.937 1.031
Third Quarter..................................... 7.093 1.250
Second Quarter.................................... 2.490 0.156
First Quarter..................................... 1.562 0.300
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FISCAL YEAR ENDING JUNE 30, 1999 HIGH LOW
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Fourth Quarter.................................... 2.000 0.687
Third Quarter..................................... 4.000 0.875
Second Quarter.................................... 2.250 0.500
First Quarter..................................... 3.500 1.250
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(1) as of October 10, 2000
(2) Through May 4, 2000. The last reported sale price of
our common stock on the OTC Bulletin Board on May 4,
2000 was $1.65 per share. From May 5, 2000 through
June 27, 2000, our common stock was quoted in the
"pinksheets" on the over-the-counter market.
HOLDERS
As of September 30, 2000, there were 156 holders of record of our
common stock.
DIVIDENDS
We have never declared or paid any cash dividends on our common stock,
and we do not anticipate paying cash dividends in the foreseeable future. Our
current policy is to retain any earnings to finance our future development and
growth. We may reconsider this policy from time to time in light of conditions
then existing, including our earnings performance, financial condition and
capital requirements. Any future determination to pay cash dividends will be at
the discretion of our board of directors and will depend upon our financial
condition, operating results, capital requirements, general business conditions
and other factors that our board of directors deems relevant.
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RECENT SALES 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,
1999 to June 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 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 1, 1999, we granted incentive stock options to purchase
2,000,000 shares of our common stock at an exercise price of $.50 per share to
Daniel Brandano, our chief executive officer, in consideration for services
provided and to be provided. The closing sale price of our common stock was $.88
on the date of grant, for which we recorded $750,000 as compensation expense.
These options expire ten years from the date of grant.
On July 5, 1999, we entered into an asset purchase agreement pursuant
to which we acquired certain assets of Integrity Credit Services, an entity
doing business under the names Intrepid Travel and Goldmark Travel. We issued
140,000 shares of our common stock, at a fair market value of $118,132, as
payment for the assets we acquired.
From July 1999 to May 2000, we issued 85,000 shares of our common
stock, at a fair market value of $123,901, to Gerard J. LaMontagne, our Chief
Financial Officer, Vice President of Finance and Controller, as consideration
for compensation earned during fiscal years 1999 and 2000.
On August 1, 1999, we converted 800,000 shares of our convertible
preferred stock to 1,497,076 shares of our common stock, based on the average
closing sale price of our common stock for the preceding 20 days. The preferred
stock had been issued as part of the January 1, 1999 acquisition of Prestige, a
retail travel agency, with the conversion amount determined as part of the
purchase agreement. On December 29, 1999, we sold all the outstanding common
stock of Prestige to its original owners for $75,000 in cash plus the return of
1,497,076 shares of our common stock held by the original owners of Prestige.
These shares of common stock were then cancelled.
On October 31, 1999, we issued 168,954 shares of our common stock, at a
fair market value of $112,929, to Brian Kessler as consideration for
reimbursement of expenses and consulting services.
On November 24, 1999, we sold 25,000 shares of our common stock, at a
purchase price of $0.40 per share, to Mark Young for $10,000.
On December 20, 1999, we entered into agreements (that were later
terminated on January 26, 2000) to sell 1,458,571 shares of our common stock to
GCD Investments, LLC for $500,000, and 714,286 shares of our common stock to
Schoemann Venture Capital, LLC for $250,000. These transactions were
subsequently terminated on January 26, 2000. As part of this transaction,
outstanding warrants to purchase 4,250,000 shares of our common stock were
repriced to an exercise price per share of $.50.
On December 20, 1999, we granted incentive stock options to purchase
50,000 shares of our common stock at an exercise price of $1.00 per share to
each of Daniel Brandano and Joan Brandano in consideration for services provided
as a director. These options expire three years from the date of grant. We also
granted nonqualified stock options to purchase 50,000 shares of our common stock
to John Vahl at an exercise price of
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$1.00 per share in consideration for services provided as a director. These
options also expire three years from the date of grant.
On December 31, 1999, following the terms of a Note Subscription
Agreement dated January 15, 1999, a Warrant Subscription Agreement dated January
15, 1999, a Note Subscription Agreement dated April 23, 1999, and a Note
Subscription Agreement dated June 10, 1999, we issued a total of 840,000 shares
of our common stock, with a fair market value of $759,000. These shares were
issued as payment for penalties incurred for not having a registration statement
declared effective by the SEC prior to a specified date in prior financing
agreements with Schoemann Venture Capital, LLC. The shares were issued to
various entities at the request of Schoemann Venture Capital, LLC.
On January 15, 2000, we issued 240,000 shares of our common stock, with
a fair market value of $450,000, as payment for penalties incurred for not
having a registration statement declared effective by the SEC prior to a
specified date in prior financing agreements with Schoemann Venture Capital,
LLC. The shares were issued to various entities at the request of Schoemann
Venture Capital, LLC.
On January 26, 2000 we granted warrants representing the right to
purchase 2,300,000 shares of our common stock to GCD Investments in exchange for
payment of $500,000. These warrants have an exercise price of $0.25 per share
and an expiration date of December 20, 2004. The warrants were issued pursuant
to an agreement which replaced an existing agreement between us and GCD
Investments dated December 20, 1999.
On January 26, 2000 we granted warrants representing the right to
purchase 1,150,000 shares of our common stock to Schoemann Venture Capital, LLC,
in exchange for payment of $250,000. These warrants have an exercise price of
$0.25 per share and an expiration date of December 20, 2004. The warrants were
issued pursuant to our agreement which replaced an existing agreement between us
and Schoemann Venture Capital, LLC dated December 20, 1999.
On January 26, 2000 we granted Schoemann Venture Capital, LLC, warrants
representing the right to purchase 800,000 shares of our common stock, with an
exercise price of $0.25, as payment for penalties incurred for not having a
registration statement declared effective by the SEC prior to a specified date
in prior financing agreements. Also, as payment for Schoemann Venture Capital,
LLC terminating certain penalty provisions in previous financing agreements, we
agreed to reprice warrants representing the right to purchase 4,500,000 shares
of our common stock to an exercise price of $.25 per share. The closing sale
price of our common stock on January 26, 2000 was $1.75 per share. We recorded
an expense of $7,139,500 relating to the issuance and repricing of these
warrants in January 2000.
During January 2000, we sold 345,401 shares of our common stock for net
proceeds of $454,345 after offering costs of $53,155, an average price of $1.47
per share. In connection with this offering, we granted warrants representing
the right to purchase 34,535 shares of our common stock at exercise prices of
$2.50 to $3.00 (the closing sale prices of our common stock on the day of
grant). The warrants expire three years from the date of grant.
During February 2000, we sold 990,000 shares of our common stock for
proceeds of $990,000, or $1.00 per share. In connection with this offering, we
granted warrants representing the right to purchase 1,190,000 shares of our
common stock at an exercise price of $.75 (the closing sale price of the common
stock on the day of grant). The warrants expire three years from the date of
grant.
During March 2000, we sold 362,836 shares of our common stock for net
proceeds of $733,552, after offering costs of $93,773, or an average price of
$2.28 per share. In connection with this offering, we granted warrants
representing the right to purchase 36,282 shares of our common stock at exercise
prices of $4.00 to $5.50 (the closing sale prices of the common stock on the day
of grant). The warrants expire five years from the date of grant.
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On May 8, 2000, we entered into an agreement with Juno Online Services,
Inc. to provide Juno's users with certain vacation package, airline ticket, car
rental and hotel reservation services. The agreement required us to make advance
payments to Juno that will be applied against the future amounts due to Juno
from sales generated through their Web site. Included in the advance payments to
Juno were 500,000 shares of our common stock valued at $625,000, based on the
closing sale price of the stock on the day of issuance.
On May 22, 2000, we issued 9.5% convertible debentures in the principal
amount of $350,000 to David A. Simonini. On September 15, 2000, the $350,000
principal was converted at $0.64533 per share into 542,359 shares of our common
stock, and Simonini was granted warrants representing the right to purchase
54,235 shares of our common stock at an exercise price of $1.29 per share.
During May and June 2000, we issued 92,541 shares of our common stock
to various employees and outside parties for compensation and services. The fair
market value of all these shares was $70,804.
On June 22, 2000, we entered into agreements with Rodney R. Schoemann,
Sr., individually, and Gina M. Music and Marcus A. Pelleterri, as trustees for
various trusts, to reprice warrants representing the right to purchase 4,500,000
shares of common stock to an exercise price of approximately $.12 per share. The
market value of our common stock on June 22, 2000 was $1.00. Therefore, we
recorded $4,455,000 in non-cash financing charges relating to the repricing of
these warrants. The warrants were immediately exercised for proceeds of
$509,912, net of offering costs of $19,500. Upon the immediate exercise of the
warrants, we issued 4,500,000 shares of common stock.
In June 2000, we issued 138,657 shares of our common stock and granted
warrants representing the right to purchase 55,462 shares of our common stock to
an individual for services rendered during the January and March 2000 sales of
our common stock.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ALL STATEMENTS, TREND ANALYSIS AND OTHER INFORMATION CONTAINED IN THE FOLLOWING
DISCUSSION RELATIVE TO MARKETS FOR OUR SERVICES AND TRENDS IN REVENUE, GROSS
MARGINS AND ANTICIPATED EXPENSE LEVELS, AS WELL AS OTHER STATEMENTS, INCLUDING
THE WORDS SUCH AS "MAY," "WILL," "ANTICIPATE," "BELIEVE," "PLAN," "ESTIMATE,"
EXPECT," AND "INTEND" AND OTHER SIMILAR EXPRESSIONS CONSTITUTE FORWARD-LOOKING
STATEMENTS. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO BUSINESS AND
ECONOMIC RISKS AND UNCERTAINTIES, AND OUR ACTUAL RESULTS OF OPERATIONS MAY
DIFFER MATERIALLY FROM THOSE CONTAINED IN THE FORWARD-LOOKING STATEMENTS.
FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT
LIMITED TO, THOSE DISCUSSED IN "OTHER SIGNIFICANT MATTERS."
FISCAL YEAR 2000 VERSUS FISCAL YEAR 1999
The discussion that follows is based on the Consolidated Statement of
Operations and compares the results of our operations for the twelve months
ended June 30, 2000 to our operations for the twelve months ended June 30, 1999.
NET LOSS
During the twelve month period ended June 30, 2000 we had a net loss of
$21,636,000, compared to a $5,590,000 net loss during the same period in the
prior year. The loss in fiscal year 2000 includes $14,886,000 in finance charges
to a related party, $960,000 of interest expense, a $587,000 loss related to Web
site development,
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and total operating expenses of $6,298,000 or an increase of $2,828,000 from the
prior fiscal year. These expenses were only partially offset by the increase of
$301,000 in gross profit.
REVENUES
Revenues increased $1,320,000 or 56.8% during the twelve month period
ended June 30, 2000 compared to the same period in the prior year. Of this
increase $1,232,000 was attributable to an increase in revenue related to the
wholesale travel package business following the implementation of our Internet
business strategy.
Additionally, retail revenues decreased $14,000 or 1.5% from our retail
travel services during the twelve month period ended June 30, 2000 compared to
same period in the prior year. The decrease in retail travel was the result of
the divestiture of retail operations during fiscal year 2000.
The domestic and international leisure travel industry is typically
seasonal. We expect our future results may be subject to fluctuations caused by
seasonal variations in the travel industry, especially the leisure travel
segment.
Revenue and results of operations may also be subject to fluctuations
as a result of a number of other factors including: the timing and cost of
acquisitions; changes in the mix of services offered by us as a result of
acquisitions; internal growth rates among various travel segments; fare wars by
travel providers; changes in relationships with certain travel providers; the
timing of the payment of additional revenue when certain volumes are reached by
travel providers; extreme weather conditions; and other factors affecting
travel.
GROSS PROFIT
Gross profit for the twelve month period ended June 30, 2000 increased
$301,000 or 40.7%, compared to the same period in the prior year. Of the
increase in gross profit, $267,000 was related to wholesale travel business
principally from the results of our Internet based strategy implementation.
Additionally, gross profit increased $34,000 or 5.4% from our retail
travel services during the twelve month period ended June 30, 2000 compared to
the same period in the prior year. The increase in retail travel was the result
of the operations of Prestige during the first six months of fiscal year 2000.
As previously mentioned, by selling Prestige in December 1999, we will no longer
realize revenues or gross profits from Prestige's operations. Accordingly, we
expect our future revenues to be principally from the results of our Internet
based strategy implementation. Management expects that gross profit on the
wholesale travel package business will continue to increase as we establish
ourselves in the wholesale travel package business.
OPERATING EXPENSES
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - Selling, general and
administrative expenses increased $1,495,000 or 128.8% during the twelve month
period ended June 30, 2000, compared to the same period in the prior year. The
increase in selling, general, and administrative expenses resulted primarily
from expenses related to additional personnel hired in anticipation of expected
volume increases and professional fees incurred during the filing of our
registration statement on Form S-1 under the Securities Act. The Form S-1 was
filed with the SEC in the second half of fiscal year 2000. An increase in
professional fees of $730,000 was the largest part of the overall increase in
expenses and was comprised primarily of $590,000 in costs related to the filing
of the Form S-1 and another $88,000 in fees related to the development of our
Internet strategy. Another $704,000 in increased selling, general, and
administrative expenses compared with fiscal year 1999 resulted from a (i)
$223,000 increase in computer related expenses, (ii) $232,000 increase in
amortization and depreciation, (iii) $191,000 increase in employee related
expenses for recruiting, payroll taxes, and administrative services, and (iv)
$95,000 increase in travel related expenses.
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SALARIES AND WAGES - Salaries and wages increased $1,890,000 or 163.0%
during the twelve month period ended June 30, 2000, compared to the same period
in the prior year. The increase was primarily attributable to the wholesale
travel package business, and the implementation of our Internet business
strategy. There was also a $750,000 charge to salaries and wages during fiscal
year 2000 resulting from stock options granted to an officer with an exercise
price below the trading value on the date of grant.
CONSULTING FEES - Consulting fees decreased $686,000 or 69.8% during
the twelve month period ended June 30, 2000, compared to the same period in the
prior year. This decrease was principally related to a $ 546,000 reduction in
consulting fees paid to a significant shareholder for financial advisory
services.
RENT - Rent expense increased $129,000 or 77.5% during the twelve month
period ended June 30, 2000, compared to the same period in the prior year. This
increase was a result of the expansion of our office space in anticipation of
future growth.
INTEREST INCOME - Interest income increased $18,000 during the twelve
month period ended June 30, 2000, compared to the same period in the prior year,
due to the increased investment of available funds in interest bearing accounts.
INTEREST EXPENSE - Interest expense of $960,000 increased $308,000
during the twelve month period ended June 30, 2000 compared to the same period
in the prior year principally as a result of the issuance of convertible debt at
a discount in fiscal year 2000.
The largest component of interest expense is interest being accrued as
part of common stock potentially subject to rescission, or repurchase, by us
(see also note 5 "Common Stock Subject to Rescission" in the Notes to the
Consolidated Financial Statements). Accrued interest of $674,000 for fiscal
year 2000 and $633,000 for fiscal year 1999 has been recorded. Total accrued
interest of $1,307,000 is included in accrued expenses at June 30, 2000. Should
we resolve the potential for the rescission of common stock to our benefit,
this accrued interest would be reversed in future periods.
In fiscal year 1999, discounts on convertible debt resulted in interest
expense to a related party of $2,222,000. Similar transactions did not occur in
fiscal year 2000, and therefore there was no interest expense to related
parties.
FINANCE CHARGES TO RELATED PARTY - The finance charges of $14,886,000
to a related party in the twelve month period ended June 30, 2000 resulted from
a $13,677,000 charge for the repricing of stock warrants at a lower price than
originally issued and from a $1,209,000 charge for additional shares issued due
to our failure to have a registration statement declared effective by the SEC
prior to a specified date. Since these finance charges were created by the
repricing of warrants, they were considered to be non-cash transactions.
OTHER INCOME - Other income increased $41,000 to $55,000 during the
twelve month period ended June 30, 2000 compared to the same period in the prior
year. Other income consists primarily of a $75,000 gain on the sale of the
Prestige business, reduced by other minor expenses fiscal year 1999 did not
include a similar gain on the sale of a business.
LOSS ON DISPOSALS AND ABANDONMENT OF ASSETS - We recognized a loss of
$606,000 on the disposal and abandonment of assets during the twelve month
period ended June 30, 2000. During the fiscal year 2000, we charged $587,000 to
expense related to the development of our FarAway.com Web site. The majority of
these charges related to performance issues with consultants engaged to perform
Web site and technology development. These performance issues have also resulted
in certain disputes on amounts owed to the consultants, of which approximately
$493,000 is recorded in accounts payable at June 30, 2000.
INCOME TAXES - There is no benefit for income taxes in the twelve month
periods ended June 30, 2000 and 1999 due to the operating losses for those
periods and uncertainties about the realization of such benefits in future
periods.
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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 investors 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. More specifically, the recorded amount
of shares subject to rescission is $5,613,000 as of June 30, 2000 and 1999,
excluding related accrued interest of $674,000 and $633,000, respectively, which
has been charged to interest expense. These amounts are shown on our balance
sheet under the line item "Common Stock Subject to Rescission" and "Accrued
Expenses." 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 then 5% of our
common stock), including 2,850,000 shares or 42% of the amounts potentially
subject to recession are owned by Daniel G. Brandano, Jr. our 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 June 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.
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.
We have had net losses in each of the last two twelve month periods
ended June 30, 1999 and 2000 that total $27,226,000. For the twelve month
period ended June 30, 2000, we had a net loss of $21,636,000, of which
$17,353,000 was attributable to non-cash expenses including: the issuance of
common stock and new common stock warrants, and the repricing of existing
warrants ($14,886,000); the issuance of options to an employee with a below
market exercise prices ($750,000); accrued interest related to the rescission
issue ($673,000); the issuance of common stock for compensation and services
($388,000); amortization and depreciation ($383,000); and a discount on the
issuance of convertible debt ($273,000). Based on our current plans to expand
operations in order to meet anticipated increased volume and to invest in
technology to support our Internet strategy, we expect to continue to
experience, for the foreseeable future, negative cash flow from operations. We
will also incur a non-cash charge of $2,252,000 related to a repricing of
warrants in August 2000, the first quarter of our 2001 fiscal year.
We have been experiencing and expect to continue to experience
significant negative cash flow. For the twelve month periods ended June 30, 2000
and 1999 our operations used $2,678,000 and $1,515,000 in cash, respectively,
and our investing activities used $2,078,000 and $286,000 in cash, respectively.
The use of cash for investing activities in fiscal year 2000 includes the
purchase of equipment and for fiscal year 1999 the purchase of restricted use
certificates of deposit.
As of June 30, 2000, we had a working capital deficit of $3,936,000,
total stockholders' deficit of $6,694,000, a total of 20,796,408 shares
outstanding and outstanding warrants and options to purchase 5,601,279
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and 2,165,000 shares of our common stock, respectively, with average exercise
prices of $0.43 and $0.54 per share, respectively.
Our auditor's report on our financial statements 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.
Our consolidated financial statements do not include any adjustments to
reflect the possible future affects 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.
During the twelve month period ended June 30, 2000, our principal
source of cash was $3,677,000 provided from net financing activities, including
proceeds from the sale of common stock totaling $2,188,000, proceeds from the
issuance of common stock warrants totaling $650,000, net proceeds from the
exercise of common stock warrants totaling $515,000, and proceeds from the
issuance of convertible debentures totaling $350,000. During the twelve month
period ended June 30, 1999, our principal source of cash was $2,857,000 provided
from net financing activities, including proceeds from the issuance of
convertible debentures totaling $2,247,000 and proceeds from the sale of common
stock totaling $672,000.
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;
- expansion of our supplier/distributor relationships;
- expansion of our order fulfillment infrastructure;
- continued development of our Web site, transaction-processing
systems, fulfillment capabilities and network infrastructure,
most of which are capital expenditures;
- expansion of our product offerings and Web site content; and
- employment of additional personnel as our business expands.
With our intended significant 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
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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 with
high gross margins and control the growth in operating costs. From January to
March 2000, we raised net proceeds totaling $2,433,000 that was used to reduce
our working capital deficit and is being used to fund negative cash flow from
operations and capital expenditures related to the implementation of our
Internet business strategies. In addition, $400,000 of current liabilities were
converted into warrants to purchase shares of our common stock. In May 2000, we
raised $350,000 through the issuance of convertible debentures with warrants. As
of June 30, 2000, we had warrants and options outstanding to purchase 5,601,279
and 2,165,000 shares of our common stock, respectively, with average per share
exercise prices of $.43 and $.54, respectively. If all currently outstanding
warrants and options were exercised, we would receive gross proceeds of
$3,568,000. However, there can be no assurance the holders of these warrants and
options will exercise their right under these financial instruments at such time
we are in need of additional capital or before the warrants and options expire.
The following table sets forth the annual amount of proceeds we could
expect to receive in the future if all outstanding warrants and options are
exercised just prior to their expiration. In addition, the table sets forth the
annual proceeds we could expect to receive in the future if we do not receive
$1,063,000 of proceeds from the exercise of outstanding warrants because of the
cashless exercise provisions contained in outstanding warrants to purchase
4,250,000 shares.
<TABLE>
<CAPTION>
TOTAL EXERCISE PRICE
FISCAL YEAR LESS WARRANTS WITH
ENDED JUNE 30, TOTAL EXERCISE PRICE CASHLESS FEATURE
<S> <C> <C>
2003 $1,058,000 $1,058,000
2004 575,000
2005 936,000 448,000
2010 1,000,000 1,000,000
---------- ----------
Total $3,569,000 $2,506,000
========== ==========
</TABLE>
In order to fund our operations and continue the implementation of our
Internet business strategy, we anticipate the need to raise at least $6.0
million in additional capital during the calendar year 2000. 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 stockholders, and our stockholders will experience substantial additional
dilution. We cannot be certain that additional financing will be available to us
on favorable terms when required, or at all. Additionally, we cannot be certain
that this additional financing will be sufficient to fund the implementation of
our Internet business strategy. Our failure to obtain sufficient additional
funds, either through additional financing or continuing operations, will 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 over the next twelve months to complete the development of booking
engines and the primary Web site, and other improvements in software and
technology.
We have never paid any cash dividends on our common stock, and we do
not anticipate paying cash dividends in the foreseeable future. Our current
policy is to retain all of our earnings to finance our future development and
growth. We may reconsider this policy from time to time in light of conditions
then existing, including our earnings performance, financial condition and
capital requirements. Any future determination to pay cash dividends will be at
the discretion of our Board of Directors and will depend upon our financial
condition,
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operating results, capital requirements, general business conditions and other
factors that our Board of Directors deems relevant.
OTHER SIGNIFICANT MATTERS
The travel industry is subject to numerous risks that may also affect
our business, financial condition and result of operations. Our revenues and
earnings are especially sensitive to events that affect domestic and
international air travel and the level of car rentals and hotel reservations. A
number of factors could result in a temporary or long-term overall decline and
demand for packaged vacations, including:
- political instability;
- labor disturbances;
- a rise in fuel prices or other travel costs, or a surcharge
imposed by a travel provider to offset rising fuel prices;
- excessive inflation;
- extreme weather conditions; and
- concerns about passenger safety.
Pricing pressures. We believe that price-based competition will
continue for the foreseeable future. The continuation of such competition and
the occurrence of any of the events mentioned above could have a material
adverse effect on our business, financial condition and results of operations.
In addition, demand for our products and services may be significantly affected
by the general level of economic activity and employment in the United States
and key international markets. Therefore, any significant economic down turn or
any recession in the United States or these other markets could have a material
adverse effect on our business, financial condition in the result operations.
Fuel prices. The impact of the recent increase in fuel prices on the
travel business, both directly, in the cost of gasoline, airline tickets, and
cruise prices, and indirectly, as it may impact the general public's disposable
income and ability to take leisure trip packages, is not determinable at this
time. The impact will depend upon the duration and degree of the fuel price
increases which are uncertain at this time.
Acquisition strategy. We have recently used acquisitions as part of our
strategy to produce revenue growth. Should we continue with this strategy there
is a risk that new businesses may not be efficiently integrated into our
existing operations, creating a negative affect on future earnings.
Financing future acquisitions. We intend to finance future acquisitions
by using shares or our common stock or preferred stock for a substantial portion
of the consideration to be paid. This reliance upon the use of common stock or
preferred stock as consideration will dilute shareholders' interest in Affinity.
Preferred Stock. Our articles of incorporation allow for the board of
directors alone, without further stockholder approval, to authorize the issuance
of a series of preferred stock that may have more voting power than the common
stock. The issuance of this type of preferred stock could make it more difficult
for a third party to acquire, or discourage a third party from attempting to
acquire, a majority of our outstanding voting stock. The difficulty could
potentially discourage or delay a merger or acquisition which other stockholders
view favorably.
Uncertainty of future revenues. Our limited operating history makes it
difficult to forecast our future revenues. Should we achieve a level of revenues
that is lower than we expect, it could result in greater then expected losses.
Reliance on technology. We are currently dependent on a number of
different information and telecommunication technologies which provide us access
to information and manage a high volume of inbound and
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<PAGE> 20
outbound calls. Our future plans expect a significant part of our growth to
develop from our presence on the Internet and ability to process transactions
using new technology through the development of our new Web site, FarAway.com.
If we should fail to properly develop new systems, or if our technology should
become obsolete or inefficient, it would have a material and adverse affect on
our business.
Relationships with travel suppliers. We are dependent upon travel
suppliers for access to their products and services. While we believe that our
relationships with our existing suppliers is good, any decline in the quality of
travel products and services provided by these suppliers or a perception by
travelers of such a decline could adversely our ability to sustain or grow our
business.
Key personnel. The success or our business depends on the continuing
contribution of our key personnel, including Mr. Daniel Brandano, our president
and chief executive officer, along with our other executive officers, whose
knowledge of our business would be difficult to replace in the event we lose
their services.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities".
SFAS No. 133 requires companies to recognize all derivatives contracts as either
assets or liabilities in the balance sheet and to measure them at fair value. If
certain conditions are met, a derivative may be specifically designated as a
hedge, the objective of which is to match the timing of gain or loss recognition
on the hedging derivative with the recognition of (i) the changes in the fair
value of the hedged asset or liability that are attributable to the hedged risk
or (ii) the earnings effect of the hedged forecasted transaction. For a
derivative not designated as a hedging instrument, the gain or loss is
recognized in income in the period of change. SFAS No. 133, as amended by SFAS
No. 137, is effective for all fiscal quarters of fiscal years beginning after
June 15, 2000.
Historically, the Company has not entered into derivatives contracts
either to hedge existing risks or for speculative purposes. Accordingly, the
Company does not expect adoption of the new standard on July 1, 2000 to affect
its financial statements.
In March 2000, the FASB issued Interpretation No. 44 ("FIN 44"),
"Accounting for Certain Transactions Involving Stock Compensation, an
Interpretation of APB Opinion No. 25." FIN 44 clarifies the application of APB
Opinion No. 25 for (a) the definition of employee for purposes of applying APB
Opinion No. 25, (b) the criteria for determining whether a plan qualifies as a
noncompensatory plan, (c) the accounting consequences of various modifications
to the terms of a previously fixed stock option or award, and (d) the accounting
for an exchange of stock compensation awards in a business combination. FIN 44
is effective July 2, 2000, but certain conclusions cover specific events that
occur after either December 15, 1998 or January 12, 2000. The Company believes
that adoption of FIN 44 will not have a material effect on the Company's
historical financial position or results of operations but may impact the
accounting for grants or awards in future periods.
On December 3, 1999, the SEC issued Staff Accounting Bulletin 101 ("SAB
101"), Revenue Recognition in Financial Statements. SAB 101 summarizes some of
the SEC's interpretations of the application of generally accepted accounting
principles to revenue recognition. Revenue recognition under SAB 101 was
initially effective for the Company's first fiscal of fiscal year beginning
after December 15, 1999. However, SAB 101B, which was released June 26, 2000,
delayed adoption of SAB 101 until no later than the fourth fiscal quarter of
fiscal year beginning after December 15, 1999. The Company believes that its
revenue recognition practices are in substantial compliance with SAB 101 and
that adoption of its provisions would not be material to its annual or quarterly
results of operations.
ITEM 7. FINANCIAL STATEMENTS
We have filed the following financial statements as part of this
Report:
<TABLE>
<CAPTION>
Page
----
<S> <C>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-2
FINANCIAL STATEMENTS
Consolidated Balance Sheet as of June 30, 2000 F-3
Consolidated Statements of Operations for the years ended
June 30, 2000 and June 30, 1999 F-4
Consolidated Statements of Stockholders' Deficit for years ended
June 30, 2000 and June 30, 1999 F-5
Consolidated Statements of Cash Flows for the years ended
June 30, 2000 and June 30, 1999 F-6
Notes to consolidated financial statements F-7 -- F-31
</TABLE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
18
<PAGE> 21
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
DIRECTORS, EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES
Our directors, executive officers and significant employees, and their
ages as of September 30, 2000, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
------------------------------------ --- -----------------------------------------------
<S> <C> <C>
Daniel G. Brandano, Jr................ 51 Chief Executive Officer, President and Director
Joan Brandano......................... 49 Secretary and Director
John Vahl............................. 65 Director
</TABLE>
Set forth below is certain information regarding the professional
experience during the past five years of each of the above-named persons.
DANIEL G. BRANDANO has served as our President, Chief Executive Officer
and Chairman of the Board since July 1998. Prior to joining us, Mr. Brandano
served as a consultant to HARS Systems, Inc. d/b/a VIP Reservations, a Canadian
hotel reservation-processing firm, from May 1994 to May 1995. Mr. Brandano
founded SunStyle International Holidays, Inc., a wholly-owned subsidiary of
Affinity, and served as chief executive officer and director of SunStyle
International Holidays from May 1995 through July 1998. Mr. Brandano is married
to Joan Brandano, our secretary and a director. Mr. Brandano received a
bachelors degree in business administration from the University of Lowell.
JOAN C. BRANDANO has served as our Secretary and a Director since
August 1998. Prior to joining us, Ms. Brandano served as vice president of
SunStyle International Holidays from May 1995 to May 1998. Prior thereto, she
served as a senior manager at USA Rent-A-Car and as a customer service manager
for Crew Gear, a large wholesale supplier of airline crew equipment and
supplies. Ms. Brandano is married to Daniel G. Brandano, our president and chief
executive officer and a director.
JOHN E. VAHL has been a Director of Affinity since August 1998. Prior
to joining us, Mr. Vahl served as a director of SunStyle International Holidays,
Inc. from August 1996 through July 1998. Mr. Vahl served as president of Payless
Rent-A-Car System, an international rental car-franchising firm, from June 1990
to April 1991. Mr. Vahl has extensive international business experience with
particular emphasis in the emerging Asian markets. From April 1993 to the
present, he has been serving as a liaison between Rover Motor Cars, a major
European automobile manufacturer and representatives of Beijing Lu Hua Auto
Sales Company, a Rover Distributor.
BOARD OF DIRECTORS AND COMMITTEES
Our bylaws provide for a board of directors consisting of at least 1
but no more than 5 individuals who are elected at the annual meeting and serve
for 1 year and until their successor is elected and qualified. Our board of
directors currently consists of three members.
We currently do not have any committees of the board of directors.
19
<PAGE> 22
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires our directors and executive
officers, and persons who own more than 10% of our outstanding common stock, to
file with the SEC initial reports of ownership and reports of changes in
ownership of common stock. Such persons are required by SEC regulations to
furnish us with copies of all such reports they file. Gina M. Music, Marcus A.
Pelletteri and Florence M. Schoemann each failed to file on a timely basis an
initial report of ownership on Form 3 in connection with their becoming owner of
more than 10% of our outstanding common stock.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth certain summary information for the last
three fiscal years concerning the compensation paid by us to our Chief Executive
Officer and each of our other executive officers that received total
compensation in excess of $100,000 during such periods, collectively referred to
below as the "named executive officers."
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL LONG-TERM
COMPENSATION COMPENSATION AWARDS
--------------------------------- ---------------------
OTHER ANNUAL SECURITIES UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY ($) COMPENSATION ($) OPTIONS (#)
--------------------------------- ---- ---------- ---------------- ---------------------
<S> <C> <C> <C> <C>
Daniel G. Brandano, Jr., 2000 120,000 18,927(3) 2,050,000(7)
Chief Executive Officer 1999 62,000 14,600(4) --
and President(1) 1998 52,500 -- --
Gerard J. LaMontagne, 2000 75,000 78,119(5) 15,000(8)
Vice President - Finance 1999 48,500 66,563(6) --
and Controller(2)
</TABLE>
------------------
(1) The compensation shown for the fiscal year ended June 30, 1998 includes
amounts paid to Mr. Brandano for services rendered in his capacity as
Chief Executive Officer of SunStyle International Holidays, Inc., prior
to the SunStyle acquisition in July 1998.
(2) Mr. LaMontagne served as our Chief Financial Officer from October, 1998
to April, 2000. He served as our Vice President - Finance and
Controller from April 2000 to his termination of employment on August
1, 2000.
(3) Includes an automobile allowance of $6,987 and $11,940 in lease
payments for rental of a condominium by Affinity for relocated
employees. The condominium is owned by Dan and Joan Brandano.
(4) Includes an automobile allowance of $6,640 and $7,960 in lease payments
for rental of a condominium by Affinity for relocated employees. The
condominium is owned by Dan and Joan Brandano.
(5) Represents the fair market value of 45,000 shares of common stock of
Affinity that were issued as part of Mr. LaMontagne's compensation
during fiscal year 2000. These shares were valued at the closing sale
price of our common stock as quoted on the OTC Bulletin Board on the
last day of each month, the date on which such shares were earned by
Mr. LaMontagne.
(6) Represents the fair market value of 55,000 shares of common stock of
Affinity that were issued as part of Mr. LaMontagne's compensation
during fiscal year 1999. These shares were valued at the closing sale
price of our common stock as quoted on the OTC Bulletin Board on the
last day of each month, the date on which such shares were earned by
Mr. LaMontagne.
20
<PAGE> 23
(7) Includes an option granted on December 20, 1999 to purchase 50,000
shares of common stock at an exercise price of $1.00 as compensation
for his service as a director from May 1999 through June 2000.
(8) Received an option on August 17, 1999 to purchase 15,000 shares of
common stock at an exercise price of $1.00 per share as compensation
for services.
OPTION GRANTS TABLE
The following table sets forth each grant of stock options during the
fiscal year ended June 30, 2000 to each of the named executive officers listed
in the Summary Compensation Table. No stock appreciation rights were granted to
these individuals during that year.
OPTION GRANTS IN FISCAL YEAR ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
--------------------------------------------------------------------
INDIVIDUAL GRANTS
--------------------------------------------------------------------
% OF TOTAL
NUMBER OF OPTIONS
SECURITIES GRANTED TO
UNDERLYING EMPLOYEES EXERCISE
OPTIONS IN FISCAL PRICE EXPIRATION
NAME GRANTED YEAR PER SHARE DATE
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Daniel G. Brandano, Jr. 2,000,000(1) 96.9% $0.50 07/01/09
50,000(2) 2.4% $1.00 12/20/02
Gerard J. LaMontagne 15,000(3) 0.7% $1.00 08/17/02
</TABLE>
---------------------------
(1) The options were granted on July 1, 1999 and are immediately
exercisable. The exercise price for these options was less than the
fair market value of our common stock on the date of grant.
(2) The options were granted on December 1, 1999 and are immediately
exercisable.
(3) The options were granted on August 17, 1999 and are immediately
exercisable.
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUE TABLE
The following table sets forth information concerning the year-end
number and value of unexercised options for each of the named executive officers
in the summary compensation table. None of the individuals listed below
exercised any options during the last fiscal year.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED IN-THE-MONEY
UNEXERCISED OPTIONS AT OPTIONS AT
JUNE 30, 2000 (#) JUNE 30, 1999 ($)(1)
-------------------------------- --------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Daniel G. Brandano, Jr. 2,050,000 -0- $900,000 -0-
Gerard J. LaMontagne 15,000 -0- -0- -0-
</TABLE>
----------------------------
(1) The value of our common stock on June 30, 2000 (based on the closing
sale price of our common stock on the OTC Bulletin Board on such date)
was $0.95. The value of each of these options has been calculated based
on a price of $0.95 per share, minus the applicable per share exercise
price.
21
<PAGE> 24
EMPLOYMENT AND CONSULTING AGREEMENTS
Mr. Daniel G. Brandano, our president and chief executive officer, has
an employment agreement with us dated July 1, 1999. The term of Mr. Brandano's
agreement ends on June 30, 2006 and may be extended for additional one year
periods thereafter. Mr. Brandano's base salary is $120,000 for fiscal 2000 and
increases each year of his term. Mr. Brandano is also eligible to receive a
bonus and fringe benefits, such as a monthly payment for an automobile. In the
event we terminate Mr. Brandano without cause or if Mr. Brandano terminates his
employment for good reason, we must pay him an amount equal to his base salary
payable during the term of his agreement and we must continue to pay the cost of
his participation in our health and dental plans. In the event of Mr. Brandano's
death, resignation, disability, termination for cause, we must pay him an amount
equal to base salary and bonus or incentive pay earned and unpaid as of the date
of termination.
Mr. Gerard J. LaMontagne, our former chief financial officer and Vice
President - Finance and Controller, had an arrangement with us to receive $6,500
in cash and 5,000 shares of our common stock as compensation each month for
services rendered. The shares we issued to Mr. LaMontagne were valued at the
closing sale price of our common stock as compensation as quoted on the OTC
Bulletin Board on the last day of each month for which he provided services.
Additionally Mr. LaMontagne received 15,000 shares of common stock as
compensation for services on August 17, 1999. Mr. LaMontagne resigned as an
officer and employee as of August 1, 2000.
STOCK OPTION PLAN
We have adopted the 1999 Combination Stock Option Plan. Under the 1999
Combination Stock Option Plan, both non-qualified and incentive stock options to
purchase shares of our common stock may be granted to key employees and other
persons who are in a position to contribute to our long-term success and growth.
The board of directors currently administers the stock option plan and has the
authority to, among other things, determine those persons who are eligible to
participate; determine the size of the grant; establish the terms and conditions
of the options granted; make or alter restrictions and conditions on the
options; and adopt rules and regulations and interpret the stock option plan. A
total of 4,000,000 shares have been reserved for issuance under the stock option
plan. As of June 30, 2000, options to purchase 2,165,000 shares of common stock
were outstanding or committed for issuance under the stock option plan.
DIRECTOR COMPENSATION
In December 1999, we granted each of our three directors options to
purchase 50,000 shares of our common stock at an exercise price of $1.00 per
share as compensation for services provided and to be provided from April 1999
through August 2000. The exercise price of these options on the date of grant
was greater than the last closing sale price of our common stock as quoted on
the OTC Bulletin Board. All of the options granted are immediately exercisable
and expire three years from the date of grant. Our directors do not receive any
monetary compensation for acting as one of our directors. We do reimburse our
directors for reasonable out-of-pocket expense incurred in attending meetings of
the board of directors.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The table below sets forth information regarding the beneficial
ownership of Affinity's common stock as of September 30, 2000, by the following
individuals or groups:
- each person or entity who we know beneficially owns more than
5.0% in the aggregate of our outstanding common stock;
- each of the executive officers named in the Summary
Compensation Table;
- each of our directors; and
- all directors and executive officers as a group.
22
<PAGE> 25
Unless otherwise indicated, the address of each of the individuals
listed in the table is c/o Affinity International Travel Systems, Inc., 100
Second Avenue South, Suite 1100S, St. Petersburg, Florida 33701. To our
knowledge, except as otherwise indicated, and subject to community property laws
where applicable, the persons named in the table have sole voting and investment
power with respect to all shares of common stock held by them.
The percentage of beneficial ownership in the following table is based
upon 26,237,696 shares of common stock outstanding as of September 30, 2000.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Shares of our common stock issuable under
options, warrants or other conversion rights that are presently exercisable or
exercisable within 60 days of September 30, 2000 are deemed to be outstanding
and beneficially owned by the person holding the options, warrants or conversion
rights for the purpose of computing the percentage of ownership of that person,
but are not treated as outstanding for the purpose of computing the percentage
of any other person.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
NAME AND ADDRESS OF NUMBER OF SHARES OWNED AS A PERCENTAGE
BENEFICIAL OWNER BENEFICIALLY OWNED OF CLASS OUTSTANDING
--------------------------------- -------------------- ---------------------
<S> <C> <C>
DANIEL G. BRANDANO, JR. 4,900,000(1) 17.3%
JOAN C. BRANDANO 2,976,500(2) 11.3%
JOHN E. VAHL 50,000(3) *
GERARD J. LAMONTAGNE 115,000(4) *
GDC, LLC 2,300,000 8.8%
C/O GORDON DUMONT
4821 Sheridan
Metairie, LA 70002
BRADLEY S. JOHNSON 2,550,000(5)(9) 9.7%
c/o David Lukinovich
3333 W. Napoleon Ave., Suite 101
Metairie, LA 70001
GINA M. MUSIC 2,694,206(6)(9) 10.3%
c/o David Lukinovich
3333 W. Napoleon Ave., Suite 101
Metairie, LA 70001
MARCUS A. PELLETTERI 2,750,000(7)(9) 10.5%
c/o David Lukinovich
3333 W. Napoleon Ave., Suite 101
Metairie, Louisiana 70001
FLORENCE M. SCHOEMANN 3,103,294(8)(9) 11.8%
3904 Wheat Dr.
Metairie, Louisiana 70002
</TABLE>
23
<PAGE> 26
<TABLE>
<S> <C> <C>
All directors and executive officers 8,041,500 28.2%
as a group (4 persons)
</TABLE>
--------------
* Less than one percent.
(1) Includes 2,050,000 shares of common stock subject to options either
currently exercisable or exercisable within 60 days of September 30,
2000. Includes 2,825,000 shares of common stock held jointly between
Mr. Brandano and his spouse, Joan Brandano, our secretary and a
director, and each person, acting individually, may vote and/or dispose
of all such shares.
(2) Includes 150,000 shares of common stock subject to options either
currently exercisable or exercisable within 60 days of September 30,
2000. Also includes 2,825,000 shares held jointly between Ms. Brandano
and her spouse, Daniel Brandano, our chief executive officer and
president, and each person, acting individually, may vote and/or
dispose of all such shares.
(3) All 50,000 shares of common stock are subject to options either
currently exercisable or exercisable within 60 days of September 30,
2000.
(4) Includes 15,000 shares of common stock subject to options either
currently exercisable or exercisable within 60 days of September 30,
2000.
(5) Includes 600,000 shares of common stock held in the Affinity 5R Trust;
650,000 shares of common stock held in the Affinity 5K Trust; 650,000
shares of common stock held in the Affinity 6R Trust and 650,000 shares
of common stock held in the Affinity 6K Trust. Mr. Johnson serves as
the trustee for each of these trusts.
(6) Includes 750,000 shares of common stock held in the Affinity 1R Trust;
515,853 shares of common stock held in the Affinity 1K Trust; 678,353
shares of common stock held in the Affinity 2R Trust; and 750,000
shares of common stock held in the Affinity 2K Trust. Ms. Music serves
as the trustee for each of these trusts.
(7) Includes 690,000 shares of common stock held in the Affinity 3R Trust;
690,000 shares of common stock held in the Affinity 3K Trust; 690,000
shares of common stock held in the Affinity 4R Trust; and 680,000
shares of common stock held in the Affinity 4K Trust. Mr. Pelletteri
serves as the trustee for each of these trusts.
(8) Includes 465,824 shares of common stock held in the Rodney Ryan
Schoemann Sr. Family Trust No. 1; 465,823 shares of common stock held
in the Rodney Ryan Schoemann Sr. Family Trust No. 2; 705,823 shares of
common stock held in the Carol Lynn Henry Schoemann Family Trust No. 1;
705,824 shares of common stock held in the Carol Lynn Henry Schoemann
Family Trust No. 2; 380,000 shares of common stock held in the Rodney
Ryan Schoemann, Jr. Intervivos Trust of 1998 UAD 12/10/97; and 380,000
shares of common stock held in the Kristina Marie Schoemann Intervivos
Trust of 1998 UAD 12/10/97. Ms. Schoemann serves as trustee for each of
these trusts.
(9) The majority of shares held by the trusts were obtained from Schoemann
Venture Capital, LLC. Rodney R. Schoemann, Sr., the managing member of
the LLC, transferred the shares for estate planning purposes. Each
trust is independent of each other. Schoemann Venture Capital, LLC and
Mr. Schoemann, individually, disclaim beneficial ownership of the
shares.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Between December 1998 and June 2000, we entered into a series of
transactions with Schoemann Venture Capital, LLC. Pursuant to these
transactions, Schoemann Venture Capital, LLC was to acquire shares of our
common stock and warrants representing the right to purchase shares of our
common stock. For estate planning purposes, however, subsequent to these
transactions, Schoemann Venture Capital, LLC transferred its interests in such
shares and warrants into various trusts formed by Rodney R. Schoemann, Sr., the
managing member of the LLC, and controlled by parties other than Mr. Schoemann.
Schoemann Venture Capital, LLC and Mr. Schoemann, individually, disclaim
beneficial ownership of such shares and warrants. The transactions are as
follows:
24
<PAGE> 27
In December 1998, Schoemann Venture Capital, LLC, purchased for an
aggregate consideration of $400,000, 1,142,857 shares of our common stock and
warrants to purchase an additional 200,000 shares of our common stock at an
exercise price of $0.35 per share. In January 1999, Schoemann Venture Capital,
LLC acquired the 200,000 shares under its warrant agreement for $70,000.
In January 1999, Schoemann Venture Capital, LLC, purchased for an
aggregate consideration of $222,000, a convertible note in the principal amount
of $222,000 and warrants to purchase 250,000 shares of our common stock at an
exercise price of $.35 per share. Schoemann Venture Capital, LLC subsequently
converted its note into 634,286 shares of our common stock;
In April 1999, Schoemann Venture Capital, LLC, purchased for an
aggregate consideration of $1,000,000, a convertible note in the principal
amount of $1,000,000 and warrants to purchase 750,000 shares of our common stock
at an exercise price of $1.75 per share. Schoemann Venture Capital, LLC
subsequently converted its note into 2,300,000 shares of our common stock;
In April 1999, we entered into a consulting agreement with Schoemann
Venture Capital, LLC, pursuant to which Schoemann Venture Capital, LLC was
entitled to receive a monthly consulting fee of $6,666 for business and
financial advisory services and a 5% commission on gross proceeds we received
from the sale of our securities resulting from introductions Schoemann Venture
Capital, LLC made to us. This agreement was amended in June 1999 to provide that
Schoemann Venture Capital, LLC is entitled to receive a monthly consulting fee
of $13,333 and warrants to purchase 750,000 shares of our common stock at an
exercise price of $2.00;
In June 1999, Schoemann Venture Capital, LLC, purchased for an
aggregate consideration of $1,000,000, a convertible note in the principal
amount of $1,000,000 and warrants to purchase 2,750,000 shares of our common
stock at an exercise price of $2.00 per share. Schoemann Venture Capital, LLC
subsequently converted its note into 2,000,000 shares of our common stock;
In December 1999, we issued 840,000 shares to Schoemann Venture
Capital, LLC, in payment of penalties to Schoemann Venture Capital, LLC
resulting from our failure to have a registration statement declared effective
by the SEC prior to a specified date in our then existing agreements with
Schoemann Venture Capital, LLC;
In December 1999, Schoemann Venture Capital, LLC and GCD Investments,
LLC, an unrelated third party, purchased, for an aggregate consideration of
$250,000 and $500,000, respectively, 714,286 and 1,458,571 shares of common
stock, respectively, at a price of $0.35 per share. In connection with this
transaction, we repriced outstanding warrants to purchase 4,250,000 shares of
our common stock. The last sale price of our common stock on December 20, 1999
as quoted on the OTC Bulletin Board was $0.50 per share. These agreements were
terminated in January 2000, as described below;
In January 2000, we issued an additional 240,000 shares to Schoemann
Venture Capital, LLC in payment of penalties to Schoemann Venture Capital, LLC
resulting from our failure to have a registration statement declared effective
by the SEC prior to a specified date in our then existing agreements with
Schoemann Venture Capital, LLC;
In January 2000, we terminated the December agreements and entered into
an agreement with Schoemann Venture Capital, LLC, pursuant to which we agreed to
sell for $250,000 (less
25
<PAGE> 28
certain costs) warrants to purchase 1,150,000 shares of our common stock at an
exercise price of $0.25 per share; and
In January 2000, we agreed to issue warrants to purchase an aggregate
of 800,000 shares of our common stock at an exercise price of $0.25 per share in
payment of penalties to Schoemann Venture Capital, LLC resulting from our
failure to have a registration statement declared effective by the SEC prior to
a specified date in the prior agreements with Schoemann Venture Capital, LLC. We
also agreed that the exercise price for all outstanding warrants to purchase
4,500,000 shares of our common stock that were previously sold to Schoemann
Venture Capital, LLC would be further reduced to $0.25 per share. Finally, we
agreed that all rights and obligations of the parties under the earlier
agreements with Schoemann Venture Capital, LLC, aside from certain registration
rights and rights to receive a 5% commission on certain sales of our securities,
were terminated in all respects.
In January 2000, as part of the same financing with Schoemann Venture
Capital, LLC in January 2000, we entered into an agreement with GCD Investments,
LLC, a five percent beneficial owner, which replaced an existing agreement dated
December 20, 1999, pursuant to which we agreed to sell warrants to 2,300,000
shares of our common stock at an exercise price of $0.25 per share. GCD
Investments paid us $500,000, less certain costs, in consideration of the
issuance of the warrants. GCD Investments became a five percent beneficial owner
as a result of this transaction.
In June 2000, we agreed to reprice 4,500,000 warrants issued to
Schoemann Venture Capital, LLC in January, April, and June of 1999 to an
exercise price of approximately $.12 per share. These warrants were then
immediately exercised for 4,500,000 shares of our common stock.
26
<PAGE> 29
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<S> <C>
2.1 Agreement and Plan of Acquisition Agreement dated July 14, 1999 between Affinity International Systems, Inc. ("Affinity")
and SunStyle International Holidays, Inc. (1)
2.2 Affinity/Prestige Acquisition Agreement dated January 1, 1999 (1)
2.3 Asset Purchase Agreement between Affinity Design-A-Tour, Inc. dated February 3, 1999 (1)
2.4 Asset Purchase Agreement between Affinity and Integrity Credit Services, Inc. (d/b/a Intrepid Travel and/or Goldmark
Travel) dated July 15, 1999 (1)
2.5 Agreement dated December 29, 1999 between Affinity, Prestige Travel Services II, Anita LaScala, Ron LaScala, Kimberly
LaScala and Prestige Travel Systems (1)
3.1 Articles of Incorporation, as amended (1)
3.2 Bylaws of Affinity International Travel Systems, Inc. (2)
4.1 Specimen Certificate of Common Stock (1)
4.2 Subscription Agreement between Affinity and Schoemann Venture Capital, LLC dated December 2, 1998 (1)
4.3 Warrant Subscription Agreement between Affinity and Schoemann Venture Capital, LLC dated December 2, 1998 (1)
4.4 Amendment to Subscription Agreement between Affinity and Schoemann Venture Capital, LLC dated January 21, 1999 (1)
4.5 Warrant Subscription Agreement between Affinity and Schoemann Venture Capital, LLC dated January 15, 1999 (1)
4.6 Restatement of Subscription Agreement between Affinity and Schoemann Venture Capital, LLC date January 31, 1999 (1)
4.7 Subscription Agreement between Affinity and Schoemann Venture Capital, LLC dated April 23, 1999 (1)
4.8 Warrant Subscription Agreement between Affinity and Schoemann Venture Capital, LLC dated April 23, 1999 (1)
4.9 Consulting Agreement between Affinity and Schoemann Venture Capital, LLC dated April 23, 1999 (1)
4.10 Subscription Agreement between Affinity and Schoemann Venture Capital, LLC dated June 10, 1999 (1)
</TABLE>
27
<PAGE> 30
<TABLE>
<S> <C>
4.11 Warrant Subscription Agreement between Affinity and Schoemann Venture Capital, LLC dated June 10, 1999 (1)
4.12 Subscription Agreement between Affinity and Schoemann Venture Capital, LLC dated December 20, 1999 (1)
4.13 Letter Agreement between Affinity and Schoemann Venture Capital, LLC effective date as of September 1, 1999 (1)
4.14 First Amended and Restated Consulting Agreement between Schoemann Venture Capital, LLC dated June 1, 1999 (1)
4.15 Termination of Agreements by and between Affinity and Schoemann Venture Capital, LLC dated January 26, 2000 (1)
4.16 Warrant Subscription Agreement dated January 26, 2000 which amends and restates the Warrant Subscription Agreement dated
January 15, 1999, as amended on January 31, 1999 (1)
4.17 Warrant Subscription Agreement dated January 26, 2000 which amends and restates the Warrant Subscription Agreement dated
April 23, 1999 (1)
4.18 Warrant Subscription Agreement dated January 26, 2000 which amends and restates the Warrant Subscription Agreement dated
June 1, 1999 (1)
4.19 Warrant Subscription Agreement dated January 26, 2000 which amends and restates the Warrant Subscription Agreement dated
June 10, 1999 (1)
4.20 Warrant Subscription Agreement between Affinity and Schoemann Venture Capital, LLC dated January 26, 2000 regarding an
Amendment and Restatement of the Subscription Agreement dated December 20, 1999 (1)
4.21 Subscription Agreement between Affinity and GCD Investments, LLC dated December 20, 1999 (1)
4.22 Termination of Agreements between Affinity and GCD Investments, LLC dated January 26, 1999 (1)
4.23 Warrant Subscription Agreement between Affinity and GCD Investments, LLC dated January 26, 2000 regarding an Amendment
and Restatement of the Subscription Agreement dated December 20, 1999 (1)
4.24 Amended and Restated Stock Purchase Warrant dated January 26, 2000 and regarding the shares issued to Schoemann Venture
Capital, LLC on January 15, 1999 (1)
4.25 Amended and Restated Stock Purchase Warrant dated January 26, 2000 and regarding the shares issued to Schoemann Venture
Capital, LLC on April 23, 1999 (1)
4.26 Amended and Restated Stock Purchase dated January 26, 2000 and regarding the shares issued to Schoemann Venture Capital,
LLC on June 1, 1999 (1)
4.27 Amended and Restated Stock Purchase Warrant dated January 26, 2000 and regarding the shares issued to Schoemann Venture
Capital, LLC on June 10, 1999 (1)
4.28 Stock Purchase Warrant issued to Schoemann Venture Capital, LLC dated December 20, 1999 (1)
</TABLE>
28
<PAGE> 31
<TABLE>
<S> <C>
4.29 Stock Purchase Warrant issued to GCD Investments, LLC dated December 20, 1999 (1)
4.30 Form of Subscription Agreement used in connection with Affinity's Private Placement in January 2000 (1)
4.31 Form of Warrant used in connection with Affinity's Private Placement in January 2000 (1)
4.32 Incentive Stock Option Agreement between Affinity and Daniel G. Brandano dated July 1, 1999 (1)
4.33 Promissory Note payable to the order of Schoemann Venture Capital, L.L.C. in the amount of $30,000 dated August 25, 2000.
*
4.34 Promissory Note payable to the order of Schoemann Venture Capital, L.L.C. in the amount of $100,000 dated August 28,
2000. *
10.1 Lease Agreement Between Affinity and City Center Associates, Ltd. dated May 27, 1999 (1)
10.2 Employment Agreement dated July 1, 1999 between Affinity and Daniel Brandano (1)
10.3 Employment Agreement dated July 1, 1999 between SunStyle International Holidays, Inc. and Mark S. Mandula, as amended (1)
10.4 1999 Combination Stock Option Plan (1)
10.5 Management Agreement and Option to Purchase effective as of April 5, 1999 (1)
10.6 Termination and Settlement Agreement between Affinity, Prestige Travel Services II and Kenneth Wiggins effective as of
April 5, 1999 (1)
10.7 Software License Agreement between SunStyle International Holidays City and The SABRE Group, Inc. dated April 26, 1997
(2)
10.8 Amendment No. 1 effective June 1, 1999 of Software License Agreement dated April 26, 1997 (2)
10.9 Consulting Agreement between Affinity and James E. Hicks dated December 20, 1999 (1)
10.10 Sabre Tourguide Agreement between the Sabre Group, Inc. and SunStyle International Holidays, Inc. (2)
10.11 Consulting Agreement between Affinity and Schoemann Venture Capital, L.L.C dated August 25, 2000. *
21.1 Subsidiaries of Affinity International Travel Systems, Inc. (1)
27.1 Financial Data Schedule *
</TABLE>
-------------------------
(1) Incorporated by reference and filed as an exhibit to the Company's
Registration Statement on Form S-1, filed with the Securities and
Exchange Commission on March 13, 2000.
(2) Incorporated by reference and filed as an exhibit to the Company's
Registration Statement on Form S-1/A, filed with the Securities and
Exchange Commission on April 27, 2000.
* Filed herewith.
(B) REPORTS ON FORM 8-K:
None
29
<PAGE> 32
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
<TABLE>
<S> <C>
AFFINITY INTERNATIONAL TRAVEL SYSTEMS, INC.
Date: October 13, 2000 BY: /s/ Daniel G. Brandano, Jr.
---------------------------------------------------
Daniel G. Brandano, Jr., Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
Date: October 13, 2000 BY: /s/ Daniel G. Brandano, Jr.
---------------------------------------------------
Daniel G. Brandano, Jr., President, Chief Executive
Officer and Director
Date: October 13, 2000 BY: /s/ Joan Brandano
---------------------------------------------------
Joan Brandano, Secretary and Director
Date: October 13, 2000 BY: /s/ John Vahl
---------------------------------------------------
John Vahl, Director
</TABLE>
31
<PAGE> 33
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<S> <C>
2.1 Agreement and Plan of Acquisition Agreement dated July 14, 1999 between Affinity International Systems, Inc. ("Affinity")
and SunStyle International Holidays, Inc. (1)
2.2 Affinity/Prestige Acquisition Agreement dated January 1, 1999 (1)
2.3 Asset Purchase Agreement between Affinity Design-A-Tour, Inc. dated February 3, 1999 (1)
2.4 Asset Purchase Agreement between Affinity and Integrity Credit Services, Inc. (d/b/a Intrepid Travel and/or Goldmark
Travel) dated July 15, 1999 (1)
2.5 Agreement dated December 29, 1999 between Affinity, Prestige Travel Services II, Anita LaScala, Ron LaScala, Kimberly
LaScala and Prestige Travel Systems (1)
3.1 Articles of Incorporation, as amended (1)
3.2 Bylaws of Affinity International Travel Systems, Inc. (2)
4.1 Specimen Certificate of Common Stock (1)
4.2 Subscription Agreement between Affinity and Schoemann Venture Capital, LLC dated December 2, 1998 (1)
4.3 Warrant Subscription Agreement between Affinity and Schoemann Venture Capital, LLC dated December 2, 1998 (1)
4.4 Amendment to Subscription Agreement between Affinity and Schoemann Venture Capital, LLC dated January 21, 1999 (1)
4.5 Warrant Subscription Agreement between Affinity and Schoemann Venture Capital, LLC dated January 15, 1999 (1)
4.6 Restatement of Subscription Agreement between Affinity and Schoemann Venture Capital, LLC dated January 31, 1999 (1)
4.7 Subscription Agreement between Affinity and Schoemann Venture Capital, LLC dated April 23, 1999 (1)
4.8 Warrant Subscription Agreement between Affinity and Schoemann Venture Capital, LLC dated April 23, 1999 (1)
4.9 Consulting Agreement between Affinity and Schoemann Venture Capital, LLC dated April 23, 1999 (1)
4.10 Subscription Agreement between Affinity and Schoemann Venture Capital, LLC dated June 10, 1999 (1)
4.11 Warrant Subscription Agreement between Affinity and Schoemann Venture Capital, LLC dated June 10, 1999 (1)
4.12 Subscription Agreement between Affinity and Schoemann Venture Capital, LLC dated December 20, 1999 (1)
</TABLE>
<PAGE> 34
<TABLE>
<S> <C>
4.13 Letter Agreement between Affinity and Schoemann Venture Capital, LLC effective date as of September 1, 1999 (1)
4.14 First Amended and Restated Consulting Agreement between Schoemann Venture Capital, LLC dated June 1, 1999 (1)
4.15 Termination of Agreements by and between Affinity and Schoemann Venture Capital, LLC dated January 26, 2000 (1)
4.16 Warrant Subscription Agreement dated January 26, 2000 which amends and restates the Warrant Subscription Agreement dated
January 15, 1999, as amended on January 31, 1999 (1)
4.17 Warrant Subscription Agreement dated January 26, 2000 which amends and restates the Warrant Subscription Agreement dated
April 23, 1999 (1)
4.18 Warrant Subscription Agreement dated January 26, 2000 which amends and restates the Warrant Subscription Agreement dated
June 1, 1999 (1)
4.19 Warrant Subscription Agreement dated January 26, 2000 which amends and restates the Warrant Subscription Agreement dated
June 10, 1999 (1)
4.20 Warrant Subscription Agreement between Affinity and Schoemann Venture Capital, LLC dated January 26, 2000 regarding an
Amendment and Restatement of the Subscription Agreement dated December 20, 1999 (1)
4.21 Subscription Agreement between Affinity and GCD Investments, LLC dated December 20, 1999 (1)
4.22 Termination of Agreements between Affinity and GCD Investments, LLC dated January 26, 1999 (1)
4.23 Warrant Subscription Agreement between Affinity and GCD Investments, LLC dated January 26, 2000 regarding an Amendment
and Restatement of the Subscription Agreement dated December 20, 1999 (1)
4.24 Amended and Restated Stock Purchase Warrant dated January 26, 2000 and regarding the shares issued to Schoemann Venture
Capital, LLC on January 15, 1999 (1)
4.25 Amended and Restated Stock Purchase Warrant dated January 26, 2000 and regarding the shares issued to Schoemann Venture
Capital, LLC on April 23, 1999 (1)
4.26 Amended and Restated Stock Purchase dated January 26, 2000 and regarding the shares issued to Schoemann Venture Capital,
LLC on June 1, 1999 (1)
4.27 Amended and Restated Stock Purchase Warrant dated January 26, 2000 and regarding the shares issued to Schoemann Venture
Capital, LLC on June 10, 1999 (1)
4.28 Stock Purchase Warrant issued to Schoemann Venture Capital, LLC dated December 20, 1999 (1)
4.29 Stock Purchase Warrant issued to GCD Investments, LLC dated December 20, 1999 (1)
4.30 Form of Subscription Agreement used in connection with Affinity's Private Placement in January 2000 (1)
4.31 Form of Warrant used in connection with Affinity's Private Placement in January 2000 (1)
4.32 Incentive Stock Option Agreement between Affinity and Daniel G. Brandano dated July 1, 1999 (1)
</TABLE>
<PAGE> 35
<TABLE>
<S> <C>
4.33 Promissory Note payable to the order of Schoemann Venture Capital, L.L.C. in the amount of $30,000 dated August 25, 2000.
*
4.34 Promissory Note payable to the order of Schoemann Venture Capital, L.L.C. in the amount of $100,000 dated August 28,
2000. *
10.1 Lease Agreement Between Affinity and City Center Associates, Ltd. dated May 27, 1999 (1)
10.2 Employment Agreement dated July 1, 1999 between Affinity and Daniel Brandano (1)
10.3 Employment Agreement dated July 1, 1999 between SunStyle International Holidays, Inc. and Mark S. Mandula, as amended (1)
10.4 1999 Combination Stock Option Plan (1)
10.5 Management Agreement and Option to Purchase effective as of April 5, 1999 (1)
10.6 Termination and Settlement Agreement between Affinity, Prestige Travel Services II and Kenneth Wiggins effective as of
April 5, 1999 (1)
10.7 Software License Agreement between SunStyle International Holidays City and The SABRE Group, Inc. dated April 26, 1997
(2)
10.8 Amendment No. 1 effective June 1, 1999 of Software License Agreement dated April 26, 1997 (2)
10.9 Consulting Agreement between Affinity and James E. Hicks dated December 20, 1999 (1)
10.10 Sabre Tourguide Agreement between the Sabre Group, Inc. and SunStyle International Holidays, Inc. (2)
10.11 Consulting Agreement between Affinity and Schoemann Venture Capital, L.L.C dated August 25, 2000. *
21.1 Subsidiaries of Affinity International Travel Systems, Inc. (1)
27.1 Financial Data Schedule (for SEC use only)*
</TABLE>
-------------------------
(1) Incorporated by reference and filed as an exhibit to the Company's
Registration Statement on Form S-1, filed with the Securities and
Exchange Commission on March 13, 2000.
(2) Incorporated by reference and filed as an exhibit to the Company's
Registration Statement on Form S-1/A, filed with the Securities and
Exchange Commission on April 27, 2000.
* Filed herewith.
<PAGE> 36
INDEX TO FINANCIAL STATEMENTS
AFFINITY INTERNATIONAL TRAVEL SYSTEMS, INC. AND SUBSIDIARIES
<TABLE>
<S> <C>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-2
FINANCIAL STATEMENTS
Consolidated Balance Sheet as of June 30, 2000 F-3
Consolidated Statements of Operations for the years ended June 30, 2000 and
June 30, 1999 F-4
Consolidated Statements of Stockholders' Deficit for the years ended June 30,
2000 and June 30, 1999 F-5
Consolidated Statements of Cash Flows for the years ended June 30, 2000 and
June 30, 1999 F-6
Notes to consolidated financial statements F-7 - F-31
</TABLE>
F-1
<PAGE> 37
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
Affinity International Travel Systems, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Affinity
International Travel Systems, Inc. and Subsidiaries as of June 30, 2000 and the
related consolidated statements of operations, stockholders' deficit and cash
flows for the years ended June 30, 2000 and 1999. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Affinity
International Travel Systems, Inc. and Subsidiaries as of June 30, 2000 and the
results of their operations and their cash flows for the years ended June 30,
2000 and 1999 in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1(A) to
the consolidated financial statements, from July 1998 to January 1999 the
Company made sales of common stock in reliance upon the exemption from
registration contained in Rule 504 of Regulation D. 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 the
Company; that is, such persons may have the right to compel the Company to
repurchase the shares for an amount equal in general to the purchase price paid
plus interest. This potential violation may also negatively affect the
Company's ability to raise capital when needed and on terms that are acceptable
to the Company and that may be required to fund the Company's operations. Also,
as described in Note 1(A) to the consolidated financial statements, the Company
has experienced recurring losses from operations, has negative working capital
and a stockholders' deficit. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. The accompanying consolidated
financial statements do not include any adjustments that might result from the
outcome of these uncertainties.
BDO Seidman, LLP
New York, New York
September 29, 2000
F-2
<PAGE> 38
Affinity International Travel Systems, Inc. and Subsidiaries
Consolidated Balance Sheet
June 30, 2000
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
<S> <C>
ASSETS
CURRENT:
Cash and cash equivalents $ 39,526
Restricted certificates of deposit (Note 7) 40,269
Accounts receivable 62,354
Prepaid accommodations 127,466
-------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 269,615
RESTRICTED CERTIFICATES OF DEPOSIT (Note 7) 120,000
PROPERTY AND EQUIPMENT, net of accumulated depreciation
of $375,454 (Note 3) 1,437,457
GOODWILL, net of accumulated amortization of $99,516 52,262
DEPOSITS 205,231
PREPAID FEES (Note 7) 1,040,000
OTHER ASSETS 13,433
-------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 3,137,998
===================================================================================================================
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 1,997,937
Accrued expenses (Note 5) 1,460,090
Deferred revenue 416,566
Due to customers 9,821
Current portion of capital lease obligations (Note 7) 11,780
Convertible debentures (Note 4) 309,867
-------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 4,206,061
CAPITAL LEASE OBLIGATIONS, LESS CURRENT PORTION (NOTE 7) 12,515
-------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 4,218,576
-------------------------------------------------------------------------------------------------------------------
COMMON STOCK SUBJECT TO RESCISSION (Note 5) 5,613,000
COMMITMENTS AND CONTINGENCIES (Notes 1, 5, 6 and 7)
STOCKHOLDERS' DEFICIT (Notes 1, 4, 5, 6, 7 and 8):
Common stock, $.001 par value, shares authorized 100,000,000, issued and
outstanding 20,796,408 14,027
Convertible preferred stock, $.001 par value, shares authorized 100,000,000,
issued and outstanding -0- -
Additional paid-in capital 22,060,911
Accumulated deficit (28,768,516)
-------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' DEFICIT (6,693,578)
-------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 3,137,998
===================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 39
Affinity International Travel Systems, Inc. and Subsidiaries
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year ended June 30, 2000 1999
------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET SALES $ 3,645,409 $ 2,324,943
COST OF SALES 2,605,556 1,585,807
-----------------------------------------------------------------------------------------------------------------
Gross profit 1,039,853 739,136
-----------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Selling, general and administrative 2,655,855 1,160,678
Salaries and wages (Note 8) 3,050,051 1,159,709
Consulting fees 135,995 276,670
Consulting fees to related party (Note 6) 160,018 705,682
Rent 296,476 167,058
-----------------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 6,298,395 3,469,797
-----------------------------------------------------------------------------------------------------------------
Operating loss (5,258,542) (2,730,661)
-----------------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest income 19,651 1,775
Interest expense (Notes 5 and 10) (960,076) (652,570)
Interest expense to related party (Notes 4 and 10) - (2,222,000)
Finance charges to related party (Note 4) (14,886,000) -
Other income, net 54,674 13,374
Loss on disposals and abandonment of assets (Note 3) (605,639) -
-----------------------------------------------------------------------------------------------------------------
TOTAL OTHER EXPENSE (16,377,390) (2,859,421)
-----------------------------------------------------------------------------------------------------------------
NET LOSS $(21,635,932) $ (5,590,082)
-----------------------------------------------------------------------------------------------------------------
NET LOSS PER COMMON SHARE, BASIC AND DILUTED $ (1.54) $ (.89)
-----------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE SHARES OUTSTANDING 14,093,477 6,290,174
-----------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 40
Affinity International Travel Systems, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Deficit
<TABLE>
<CAPTION>
Convertible
Common Stock Preferred Stock
------------------------- ----------------------
Par Par
Shares Value Shares Value
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE, June 30, 1998 4,902,894 $ 4,903 - $ -
Issuance of common stock related to reverse acquisition 330,840 331 - -
Beneficial conversion feature in convertible debentures and common
stock warrants issued to related party - - - -
Issuance of common stock for conversion of debentures to related party 4,934,286 4,934 - -
Issuance of convertible preferred stock for acquisition - - 800,000 800
Issuance of common stock for acquisition 36,320 36 - -
Issuance of common stock for warrants exercised 200,000 200 - -
Issuance of common stock for compensation and services 182,433 182 - -
Issuance of common stock warrants for services by related party - - - -
Sale of common stock 1,676,392 1,677 - -
Reclassification of common shares subject to rescission - (6,769) - -
Net loss - - - -
----------------------------------------------------------------------------------------------------------------------------------
BALANCE, June 30, 1999 12,263,165 5,494 800,000 800
Issuance of common stock for acquisition 140,000 140 - -
Beneficial conversion feature in convertible debentures and common
stock warrants - - - -
Issuance of common stock options for compensation - - - -
Issuance of common stock for conversion of preferred stock 1,497,076 1,497 (800,000) (800)
Sale of common stock 1,861,894 1,862 - -
Issuance of common stock for compensation and services 921,349 921 - -
Issuance and repricing of common stock warrants - - - -
Issuance of common stock for conversion of debentures 25,000 25 - -
Return of common stock through disposal of Prestige Travel Services II,
Inc. (1,497,076) (1,497) - -
Issuance of common stock for financing charges to related party 1,080,000 1,080 - -
Issuance of common stock for warrants exercised by related party 4,505,000 4,505 - -
Issuance of common stock warrants - - - -
Net loss - - - -
----------------------------------------------------------------------------------------------------------------------------------
BALANCE, June 30, 2000 20,796,408 $ 14,027 - $ -
==================================================================================================================================
<CAPTION>
Additional Total
Paid-in Accumulated Stockholders'
Capital Deficit Deficit
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BALANCE, June 30, 1998 $ 1,098,514 $ (1,542,502) $ (439,085)
Issuance of common stock related to reverse acquisition (331) - -
Beneficial conversion feature in convertible debentures and common
stock warrants issued to related party 2,222,000 - 2,222,000
Issuance of common stock for conversion of debentures to related party 2,217,066 - 2,222,000
Issuance of convertible preferred stock for acquisition 1,599,200 - 1,600,000
Issuance of common stock for acquisition 74,964 - 75,000
Issuance of common stock for warrants exercised 69,800 - 70,000
Issuance of common stock for compensation and services 228,348 - 228,530
Issuance of common stock warrants for services by related party 682,500 - 682,500
Sale of common stock 599,852 - 601,529
Reclassification of common shares subject to rescission (5,606,231) - (5,613,000)
Net loss - (5,590,082) (5,590,082)
------------------------------------------------------------------------------------------------------------------------------
BALANCE, June 30, 1999 3,185,682 (7,132,584) (3,940,608)
Issuance of common stock for acquisition 117,992 - 118,132
Beneficial conversion feature in convertible debentures and common
stock warrants 313,200 - 313,200
Issuance of common stock options for compensation 750,000 - 750,000
Issuance of common stock for conversion of preferred stock (697) - -
Sale of common stock 2,186,035 - 2,187,897
Issuance of common stock for compensation and services 1,011,713 - 1,012,634
Issuance and repricing of common stock warrants 13,656,915 - 13,656,915
Issuance of common stock for conversion of debentures 24,975 - 25,000
Return of common stock through disposal of Prestige Travel Services II,
Inc. (1,553,280) - (1,554,777)
Issuance of common stock for financing charges to related party 1,207,920 - 1,209,000
Issuance of common stock for warrants exercised by related party 510,407 - 514,912
Issuance of common stock warrants 650,049 - 650,049
Net loss - (21,635,932) (21,635,932)
------------------------------------------------------------------------------------------------------------------------------
BALANCE, June 30, 2000 $ 22,060,911 $(28,768,516) $ (6,693,578)
==============================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 41
Affinity International Travel Systems, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended June 30, 2000 1999
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
RECONCILIATION OF NET LOSS TO NET CASH USED FOR OPERATING ACTIVITIES:
Net loss $(21,635,932) $(5,590,082)
Adjustments to reconcile net loss to net cash used for operating activities:
Depreciation and amortization 383,452 151,613
Amortization of discount on convertible debt 273,067 --
Amortization of discount on convertible debt to related party -- 2,222,000
Loss on disposals and abandonment of assets 605,639 3,623
Gain on sale of Prestige Travel Services II, Inc. (75,000) --
Loss on sale of Goldmark Travel 5,265 --
Write off of prepaid expenses 48,273 --
Write off of notes receivable -- 10,000
Issuance of common stock for compensation and services 387,634 206,655
Issuance of common stock warrants for services to related party -- 682,500
Issuance of common stock options for compensation 750,000 --
Repricing of common stock warrants per warrant agreements and issuance of common
stock to related party for financing charges 14,886,000 --
Legal fees in connection with repricing of common stock warrants (20,085) --
Changes in assets and liabilities, net of effects of acquisitions:
Accounts receivable 49,550 (59,838)
Prepaid accommodations 1,005 (96,951)
Prepaid expenses (415,000) 10,852
Accounts payable 1,390,346 35,767
Accrued expenses 522,609 765,478
Deferred revenue 168,379 197,570
Due to customers (4,044) (54,201)
--------------------------------------------------------------------------------------------------------------------
Net cash used for operating activities (2,678,842) (1,515,014)
--------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Redemption (purchase) of restricted certificate of deposit 35,011 (163,148)
Purchase of property and equipment (2,036,427) (87,696)
Proceeds from sale of property and equipment 1,020 --
Cash paid for acquisition of SunStyle International Holidays, Inc. -- (28,558)
Cash paid for acquisition of Prestige Travel Services II, Inc. -- (6,185)
Cash obtained from acquisition of Prestige Travel Services II, Inc. -- 33,428
Cash paid for acquisition of Intrepid Travel (1,018) --
Net proceeds from sale of Goldmark Travel 30,000 --
Net proceeds from sale of Prestige Travel Services II, Inc. 56,390 --
Increase in deposits (165,001) (11,050)
Net (increase) decrease in other assets 1,778 (23,250)
--------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (2,078,247) (286,459)
--------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of notes payable (12,000) (34,889)
Principal payments of long-term debt -- (13,984)
Principal payments of capital lease obligations (14,039) (12,448)
Proceeds from issuance of convertible debentures 350,000 25,000
Proceeds from issuance of convertible debentures to related party -- 2,222,000
Net proceeds from sale of common stock 2,187,897 671,529
Net proceeds from exercise of common stock warrants 514,912 --
Proceeds from issuance of common stock warrants 650,049 --
--------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 3,676,819 2,857,208
--------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,080,270) 1,055,735
CASH AND CASH EQUIVALENTS, beginning of year 1,119,796 64,061
--------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, end of year $ 39,526 $1,119,796
===================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 42
Affinity International Travel Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. NATURE OF Nature of Organization
ORGANIZATION Affinity International Travel Services, Inc. and
Subsidiaries, formerly Medanco, Inc. ("Medanco"),
through its wholly-owned subsidiaries, currently
provides packaged vacation programs, as well as
airline, car rental, hotel and cruise ship
reservations for both retail travel agents and
direct consumers.
The consolidated financial statements include the
accounts of Affinity International Travel Systems,
Inc. ("Affinity" or collectively the "Company") and
its wholly-owned subsidiaries, Affinity
International Travel Services, Ltd.; Prestige Travel
Services II, Inc.; Design-A-Tour, Inc.; Travel
Systems, Inc.; Intrepid Travel; Goldmark Travel; and
SunStyle International Holidays, Inc. ("SunStyle"),
SunStyle International Holidays, Ltd.; and SunStyle
International Holidays of California, Inc. All
intercompany balances and transactions have been
eliminated.
(A) Going Concern and Liquidity
The Company's consolidated financial
statements are presented on the going
concern basis, which contemplates the
realization of assets and satisfaction of
liabilities in the normal course of
business. The Company has been advised that
certain transactions described in Note 5
may have been in violation of Rule 504 of
Regulation D of the Securities Act of 1933,
as amended. There is no assurance that a
violation has not occurred, that a
rescission offer to holders of the common
stock will not have to be made and that
these stockholders will not exercise rights
they may have to rescind the transactions
that resulted in their receipt of
Affinity's common stock.
The Company does not have sufficient cash
reserves to repurchase its common stock
subject to possible rescission. Further,
the Company has no line of credit or loans
for working capital and it relies upon
proceeds from the sale of equity securities
or debentures to fund negative cash flow
from operations and its capital
expenditures related to the implementation
of its internet strategies.
The Company had a net loss for the year
ended June 30, 2000 of approximately
$21,636,000, of which $17,353,000 was
attributable to noncash expenses as
follows: $750,000 related to the issuance
of options to an employee with below-market
exercise prices, $14,880,000 related to the
issuance of common stock, repricing of
existing warrants, and the issuance of new
warrants and $673,000 relating to accrued
interest on the rescission liability,
$388,000 relating to common stock issued
for compensation and services, $383,000
relating to amortization and depreciation
and $273,000 relating to a discount on
convertible debt.
For the year ended June 30, 2000, the
Company's operations used approximately
$2,679,000 and the Company's investing
activities used approximately $2,078,000 in
cash. Cash used for investing activities
during the year ended June 30, 2000
included the expenditure of
F-7
<PAGE> 43
Affinity International Travel Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
approximately $2,036,000 for computer
equipment. Net cash provided by financing
activities for the year ended June 30, 2000
of approximately $3,677,000 related
primarily to proceeds from the issuance of
common stock and warrants totaling
approximately $3,353,000 and the proceeds
from the issuance of convertible debentures
of $350,000.
As of June 30, 2000, the Company had a
working capital deficit of approximately
$3,936,000, total stockholders' deficit of
approximately $6,694,000, a total of
20,796,408 shares outstanding and
outstanding warrants and options to
purchase 5,601,279 and 2,165,000 shares of
common stock with average exercise prices
of $.43 and $.54 per share, respectively.
The Company expects net losses and negative
cash flow to continue for the foreseeable
future and anticipates that losses and the
use of cash will increase significantly
from current levels because the Company
expects to incur significant expenses and
capital expenditures related to the
implementation of the Company's internet
strategies.
As of September 29, 2000, the Company had
warrants and options outstanding to
purchase 1,427,657 and 3,033,500 shares of
common stock with average exercise prices
of $.93 and $.67 per share, respectively.
If all currently outstanding warrants and
options were exercised, the Company would
receive gross proceeds of approximately
$3,364,000. However, there can be no
assurance the holders of these warrants and
options will exercise their right under
these financial instruments at such time as
the Company is in need of additional
capital or before the warrants and options
expire.
In order to fund the Company's operations
and continue the implementation of their
internet business strategies, the Company
anticipates the need to raise at least $4.0
million in additional capital during fiscal
2001. The Company anticipates that its
online booking engines and primary website,
www.faraway.com, will be developed and
operational within the first half of the
year. The Company believes that it will
need to use $1.5 million of additional
capital raised to complete the development
of the booking engines and primary website.
In addition, the Company will need to raise
a portion of the additional capital
immediately to fund negative cash flow from
operations and fund capital expenditures
related to the implementation of its
internet business strategies.
The potential violation of Rule 504
described above may negatively affect the
Company's ability to continue to raise
capital when needed and on terms that are
acceptable to the Company as investors may
be hesitate to invest in the Company
because of this potential rescission
liability. The existence of the possible
rescission liability without sufficient
working capital to satisfy this potential
obligation and possible restrictions on the
F-8
<PAGE> 44
Affinity International Travel Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Company's access to capital raise
substantial doubt about the Company's
ability to continue as a going concern. The
consolidated financial statements do not
include any adjustments to reflect the
possible future affects on the
recoverability and classification of assets
or the amounts and classification of
liabilities that may result from the
possible inability of the Company to
continue as a going concern.
(B) Acquisition of Sunstyle International
Holidays, Inc.
On July 31, 1998, Affinity acquired
SunStyle, and SunStyle became a
wholly-owned subsidiary of Affinity.
Pursuant to the acquisition agreement, all
the outstanding common stock of SunStyle
was acquired by Affinity and the following
occurred:
1. Affinity effected a 1.75-to-1
reverse stock split, after which
it had 330,840 of its 100,000,000
authorized shares of $.001 par
value common stock outstanding.
2. The holders of SunStyle common
stock received one common share of
Affinity for each common share
held of SunStyle, which
represented 4,902,894 shares or
approximately 94% of the 5,233,734
shares of common stock of Affinity
outstanding after the acquisition.
3. The officers and director of
Affinity resigned, and the former
officers and directors of SunStyle
were appointed officers and
directors of Affinity.
Although SunStyle was acquired by Affinity,
the transaction was accounted for as a
purchase of Affinity by SunStyle (a reverse
acquisition in which SunStyle is considered
the acquirer for accounting purposes) since
the previous stockholders of SunStyle
obtained a majority of the voting rights of
Affinity as a result of this transaction.
Therefore, the historical financial
statements herein are those of SunStyle up
to July 31, 1998, the acquisition date.
Immediately after the acquisition, the
Company's balance sheet included the
accounts of Affinity and SunStyle. The
historical operations and related financial
statements of Affinity prior to the
acquisition were insignificant, and
therefore, pro forma information (assuming
the acquisition had taken place at the
beginning of the respective period) is not
presented.
The purchase price for Affinity consisted
solely of the acquisition costs incurred of
$28,558. As the common stock of Affinity
had no recent activity and Affinity had no
operations or net book value, no value was
allocated to the common stock issued for
the acquisition.
(C) Acquisition and Sale of Prestige Travel
Services II, Inc.
On January 1, 1999, the Company acquired
all of the outstanding stock of Prestige
Travel Services II, Inc. ("Prestige"), a
retail travel agency
F-9
<PAGE> 45
Affinity International Travel Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
with an independent agent sales program and
an internet cruise brokerage operation
known as Cruise Brokers.com., for
$1,600,000, paid through the issuance of
800,000 shares of convertible preferred
stock. Prestige operated offices in Tampa
and Ft. Lauderdale, Florida. The
transaction was accounted for as a
purchase. The agreement provided for the
measurement of the conversion price to be
made on August 1, 1999 based on the average
trading price of the Company's common stock
for the preceding 20 days' average trading
price. The conversion price on August 1,
1999 was determined to be $1.06875 per
share of common stock, resulting in
1,497,076 shares of common stock subsequent
to the conversion of the preferred stock.
The purchase price, including acquisition
costs of $107,715, plus the excess of the
liabilities assumed over the fair market
value of the assets acquired of $1,750,361,
was recorded as goodwill and was being
amortized on a straight-line basis over ten
years.
Acquisition costs included $85,000 payable
to an unrelated third party as a finder's
fee, of which $5,000 had been paid as of
June 30, 1999. The remaining $80,000 was
accrued as of June 30, 1999 and was
converted into 74,854 shares of the
Company's common stock. The conversion
price was determined at August 1, 1999
based on the defined average trading price
of the Company's common stock.
On December 29, 1999, the Company sold all
the outstanding common stock of Prestige to
its original owners for $75,000 in cash
plus the return of 1,497,076 shares of the
Company's common stock valued at
$1,554,777, or approximately $1.04 per
share. The Company recorded a gain of
$75,000 on the transaction and subsequently
cancelled this common stock.
The operating results of Prestige have been
included in the consolidated statements of
operations from the date of acquisition
through the date of its disposal. The
following pro forma information has been
prepared assuming the sale of Prestige,
which was deemed to be a significant
disposal of assets, had taken place
immediately prior to July 1, 1999. The pro
forma information includes adjustments to
remove the operating results of Prestige,
related amortization of goodwill arising
from the initial acquisition and the gain
on disposal. The pro forma financial
information is not necessarily indicative
of the results of operations as they would
have been had the transaction been effected
on the assumed date.
<TABLE>
<CAPTION>
Year ended June 30, 2000 (Unaudited)
-------------------------------------------------
<S> <C>
Total revenues $ 3,055,633
Net loss (21,576,344)
Net loss per common share (1.61)
-------------------------------------------------
</TABLE>
F-10
<PAGE> 46
Affinity International Travel Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(D) Acquisition of Design-A-Tour, Inc.
On February 8, 1999, the Company entered
into an asset purchase agreement in which it
acquired the assets of Design-A-Tour, Inc.
in exchange for $75,000 of the Company's
convertible preferred stock in a transaction
accounted for under the purchase method of
accounting. The purchase agreement was
subsequently amended to provide for the
issuance of 36,320 shares of the Company's
common stock valued at approximately $2.07
per share (the quoted market value on the
acquisition date) in lieu of the convertible
preferred stock.
The entire purchase price was allocated to
the assets acquired based on their estimated
fair market value. The assets included
furniture and equipment, an internet web
site, rights to use a search engine on that
web site and the rights to make airline
reservations under a related servicing
agreement. The acquired tangible and
intangible assets were being depreciated and
amortized over their estimated useful lives
of three to five years. On June 16, 2000,
the Company temporarily suspended operations
and intends to start up operations in the
near future.
(E) Acquisition of Integrity Credit Services,
Inc.
On July 5, 1999, the Company acquired
certain assets of Integrity Credit Services,
Inc. ("Integrity") in exchange for 140,000
shares of the Company's common stock. The
value ascribed to the shares of $118,132 was
based on the fair quoted market value of the
Company's common stock on the acquisition
date. The excess of the purchase price over
the fair market value of the assets acquired
of $51,232 was recorded as goodwill.
Integrity operated a series of travel
agencies located in Seminole and St.
Petersburg, Florida under the trade names
Intrepid Travel and Goldmark Travel. The
Company also entered into an employment
agreement with the seller of Integrity which
provides for payment of salary through July
2002.
(F) Sale of Business Unit
On January 7, 2000, the Company sold certain
assets and related operations of a business
unit that was acquired on July 5, 1999 as
part of the Integrity acquisition for
$30,000 in cash and recognized a loss of
$5,265 on the transaction. Revenues and
related expenses from this business unit
were not material to the Company's
consolidated operations during the year
ended June 30, 2000.
The operating results of the significant
acquired businesses have been included in
the consolidated statements of operations
from the dates of acquisition. The following
pro forma information has been prepared
assuming certain of the acquisitions above,
which were deemed to be significant
acquisitions, had taken place on July 1,
1998. The pro forma information includes
adjustments for interest expense that would
have
F-11
<PAGE> 47
Affinity International Travel Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
been incurred to finance the purchases,
additional depreciation based on the fair
value of property acquired and the
amortization of intangibles arising from the
transactions. The pro forma financial
information is not necessarily indicative of
the results of operations as they would have
been had the transactions been effected on
July 1, 1998.
<TABLE>
<CAPTION>
Year ended June 30, 1999 (Unaudited)
-------------------------------------------------------------------------------
<S> <C>
Total revenues $ 3,588,584
Net loss (5,722,932)
Net loss per common share (.91)
===============================================================================
</TABLE>
The results of operations of the
insignificant acquisitions were not material
to the Company's consolidated results of
operations.
2. SUMMARY OF (A) Cash and Cash Equivalents
SIGNIFICANT
ACCOUNTING For purposes of the statement of cash flows,
POLICIES the Company considers all highly liquid
debt instruments purchased with a maturity
of three months or less to be cash
equivalents.
(B) Revenue Recognition
The Company sells travel packages through
both wholesale and retail operations. The
revenues and cost of sales from wholesale
operations are recorded at the gross amounts
received from customers and the amounts paid
to vendors. The Company negotiates the
prices it pays to its vendors and sets the
prices that it sells to customers and
therefore bears the financial risks of the
transactions. The revenues and cost of sales
from the retail operations are recorded on a
net basis. The revenues consist primarily of
commissions earned by travel agents on the
sales of products and the cost of sales
consist primarily of commissions paid to
independent travel agents. For these
transactions, the travel agents merely act
as intermediaries for the customers and
vendors thereby earning a commission.
Advance payments made by customers are
recorded as deferred revenue and advance
payments made to vendors are recorded as
prepaid accommodations. Revenues and related
expenses are recognized when the revenue is
earned, which varies by the type of product.
Revenues from airline ticket sales are
recorded when the tickets are issued.
Revenues from cruise and tour sales are
recognized at the customer's departure date.
Revenues from hotel sales and auto rentals
are not recognized until the customer
utilizes them. The related commissions due
to travel agents are recorded as a cost of
sales and are payable at the same time the
underlying revenue is recognized.
F-12
<PAGE> 48
Affinity International Travel Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(C) Property and Equipment and Depreciation
Property and equipment are stated at cost.
Depreciation is computed over the estimated
useful lives of the assets by the
straight-line method for financial statement
purposes and by accelerated methods for
income tax purposes.
(D) Advertising Costs
The Company expenses advertising costs as
incurred. The total advertising costs
charged to expense were approximately
$42,000 and $44,000 for the years ended June
30, 2000 and 1999, respectively.
(E) Income Taxes
The Company accounts for income taxes on 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. Measurement of deferred
income taxes is based on enacted tax rates
and laws that will be in effect when the
differences are expected to reverse, with
the measurement of deferred tax assets being
reduced by a valuation allowance in the
event that realization of the deferred tax
asset can not be considered more likely than
not.
(F) Net Loss per Common Share
Net loss per common share is based upon the
weighted average number of common shares
outstanding during each period. Potential
common shares have not been considered in
the calculation of diluted net loss per
common share because their inclusion would
be antidilutive. Potential common shares
consist of 7,768,279 common stock options
and warrants and 500,000 common shares for
convertible debt as of June 30, 2000 and
4,505,000 common stock warrants and 800,000
shares of convertible preferred stock as of
June 30, 1999.
(G) Use of Estimates
The preparation of financial statements in
conformity with generally accepted
accounting principles requires management to
make estimates and assumptions that affect
the reported amounts of assets and
liabilities at the date of the financial
statements and the reported amounts of
revenues and expenses during the reporting
period. Actual results could differ from
those estimates.
(H) Financial Instruments
Statement of Financial Accounting Standards
("SFAS") No. 107, "Disclosures about Fair
Value of Financial Instruments," requires
disclosure of fair value information about
financial instruments. Fair
F-13
<PAGE> 49
Affinity International Travel Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
value estimates discussed herein are based
upon certain market assumptions and
pertinent information available to
management as of June 30, 2000.
The respective carrying value of certain
balance-sheet financial instruments
approximated their fair values. These
financial instruments include cash and cash
equivalents, accounts receivable, accounts
payable, accrued expenses, convertible
debentures and capital lease obligations.
Fair values were assumed to approximate
carrying values for these financial
instruments since they are short term in
nature and their carrying amounts
approximate fair values or they are
receivable or payable on demand.
(I) Impairment of Long-Lived Assets
Assets are evaluated for impairment when
events or changes in circumstances indicate
that the carrying amounts of the assets may
not be recoverable. When any such impairment
exists, the related assets will be written
down to fair value.
(J) Stock-Based Compensation
The Company accounts for stock-based
compensation under the provisions of SFAS
No. 123, "Accounting for Stock-Based
Compensation." As permitted by SFAS No. 123,
the Company has elected to continue to
follow Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued
to Employees" and related interpretations in
accounting for stock-based compensation to
employees. Stock options and warrants
granted to nonemployees and creditors are
valued using a Black-Scholes option pricing
model with appropriate assumptions for
risk-free investment rates, expected lives,
dividend yields and volatility factors. The
value of options and warrants granted or
issued to nonemployees is charged to
appropriate asset or expense accounts when
the options and warrants are granted or
issued.
(K) Recent Accounting Pronouncements
In June 1998, the Financial Accounting
Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments
and Hedging Activities". SFAS No. 133
requires companies to recognize all
derivatives contracts as either assets or
liabilities in the balance sheet and to
measure them at fair value. If certain
conditions are met, a derivative may be
specifically designated as a hedge, the
objective of which is to match the timing of
gain or loss recognition on the hedging
derivative with the recognition of (i) the
changes in the fair value of the hedged
asset or liability that are attributable to
the hedged risk or (ii) the earnings effect
of the hedged forecasted transaction. For a
derivative not designated as a hedging
instrument, the gain or loss is recognized
in
F-14
<PAGE> 50
Affinity International Travel Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
income in the period of change. SFAS No.
133, as amended by SFAS No. 137, is
effective for all fiscal quarters of fiscal
years beginning after June 15, 2000.
Historically, the Company has not entered
into derivatives contracts either to hedge
existing risks or for speculative purposes.
Accordingly, the Company does not expect
adoption of the new standard on July 1, 2000
to affect its financial statements.
In March 2000, the FASB issued
Interpretation No. 44 ("FIN 44"),
"Accounting for Certain Transactions
Involving Stock Compensation, an
Interpretation of APB Opinion No. 25." FIN
44 clarifies the application of APB Opinion
No. 25 for (a) the definition of employee
for purposes of applying APB Opinion No. 25,
(b) the criteria for determining whether a
plan qualifies as a noncompensatory plan,
(c) the accounting consequences of various
modifications to the terms of a previously
fixed stock option or award, and (d) the
accounting for an exchange of stock
compensation awards in a business
combination. FIN 44 is effective July 2,
2000, but certain conclusions cover specific
events that occur after either December 15,
1998 or January 12, 2000. The Company
believes that adoption of FIN 44 will not
have a material effect on the Company's
historical financial position or results of
operations but may impact the accounting for
grants or awards in future periods.
On December 3, 1999, the SEC issued Staff
Accounting Bulletin 101 ("SAB 101"), Revenue
Recognition in Financial Statements. SAB 101
summarizes some of the SEC's interpretations
of the application of generally accepted
accounting principles to revenue
recognition. Revenue recognition under SAB
101 was initially effective for the
Company's first fiscal of fiscal year
beginning after December 15, 1999. However,
SAB 101B, which was released June 26, 2000,
delayed adoption of SAB 101 until no later
than the fourth fiscal quarter of fiscal
year beginning after December 15, 1999. The
Company believes that its revenue
recognition practices are in substantial
compliance with SAB 101 and that adoption of
its provisions would not be material to its
annual or quarterly results of operations.
(L) Reclassifications
Certain items have been reclassified in the
1999 financial statements to conform to the
2000 presentation.
F-15
<PAGE> 51
Affinity International Travel Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
3. PROPERTY AND Property and equipment at June 30, 2000 are
EQUIPMENT summarized as follows:
<TABLE>
<CAPTION>
Useful
Lives
---------------------------------------------------------------------------
<S> <C> <C>
Leasehold improvements 3-5 yrs. $ 23,814
Furniture and equipment 5-7 yrs. 1,063,496
Computer software 3 yrs. 725,601
---------------------------------------------------------------------------
1,812,911
Less accumulated depreciation (375,454)
---------------------------------------------------------------------------
$ 1,437,457
===========================================================================
</TABLE>
FarAway.com Website Development
As part of the FarAway.com website
development process, the Company has used a
combination of in-house technology personnel
and multiple outside programming and site
development consultants. During the year
ended June 30, 2000, the Company entered
into contracts which include billing for
work-in-process totaling $712,172. Due to a
lack of desired functionality, the Company
terminated several of these contracts and
charged to expense $587,000 of the total
billings under these contracts that were
initially capitalized in property and
equipment. At June 30, 2000, approximately
$512,000 of this amount is recorded in
accounts payable and is being disputed by
the Company, due to nonperformance under
these contracts (see Note 7).
4. CONVERTIBLE On January 15, 1999, the Company issued a
DEBT AND convertible note to a significant
WARRANTS stockholder in the amount of $222,000.
The note was immediately convertible into
634,286 shares of the Company's common stock
at a conversion price of $.35 per share,
which was below the quoted market price of
the Company's common stock on the date of
issuance. The value of the beneficial
conversion feature was approximately
$1,522,000, of which $222,000 was
immediately charged to interest expense as
the debt discount related to the beneficial
conversion feature is limited to the
original balance of the note. The note was
converted into common stock on February 1,
1999.
The Company granted warrants to purchase
250,000 shares of its common stock at $.35
per share in connection with the convertible
note issued on January 15, 1999. The
warrants were immediately exercisable and
expire two years from the date of grant. The
value of these warrants was not recorded as
the maximum debt discount related to the
convertible note had previously been
recorded. These warrants were subsequently
repriced and were exercised on June 22, 2000
(see Note 8).
On April 14, 1999, the Company issued a
convertible debenture to an individual in
the amount of $25,000. The debenture was
immediately convertible into 25,000 shares
of the Company's common stock at a
conversion
F-16
<PAGE> 52
Affinity International Travel Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
price of $1.00 per share, which approximated
the quoted market price for the Company's
common stock on the date of issuance. In
connection with this debenture, the Company
also issued warrants to purchase 5,000
shares of the Company's common stock with an
exercise price of $1.00 per share. The value
of these warrants was approximately $4,000
determined using the Black-Scholes
option-pricing model at the date of grant
with the following assumptions: 0% dividend
yield, an expected life of two years;
expected volatility of 140% and a risk-free
interest rate of 5.8% and has been charged
to interest expense for the year ended June
30, 1999. The debenture was converted into
common stock on December 22, 1999, and the
warrants were exercised on March 9, 2000.
On April 23, 1999, the Company issued a
convertible note to a significant
stockholder in amount of $1,000,000. The
note was immediately convertible into
2,300,000 shares of the Company's common
stock at a conversion price of $.43 per
share, which was below the quoted market
price of the Company's common stock on the
date of issuance. The value of the
beneficial conversion feature was
approximately $1,084,000, of which
$1,000,000 was immediately charged to
interest expense as the debt discount
related to the beneficial conversion feature
is limited to the original balance of the
note. The note was converted into common
stock on May 6, 1999.
The Company granted warrants to purchase
750,000 shares of its common stock at $1.75
per share in connection with the convertible
note issued on April 23, 1999. The warrants
were immediately exercisable and expire five
years from the date of grant. The value of
these warrants was not recorded as the
maximum debt discount related to the
convertible note had previously been
recorded. These warrants were subsequently
repriced and were exercised on June 22, 2000
(see Note 8).
On June 10, 1999, the Company issued a
convertible note to a significant
stockholder in the amount of $1,000,000. The
note was immediately convertible into
2,000,000 shares of the Company's common
stock at $.50 per share, which was below the
quoted market price of the Company's common
stock. The value of the beneficial
conversion feature was approximately
$1,250,000, of which $1,000,000 was
immediately charged to interest expense as
the debt discount related to the beneficial
conversion feature is limited to the
original balance of the note on the date the
note was issued. The note was converted into
common stock on June 15, 1999.
The Company granted warrants to purchase
2,750,000 shares of its common stock at
$2.00 per share in connection with the
convertible note issued June 10, 1999. The
warrants were immediately exercisable and
expire five years from the date of grant.
The value of these warrants was not recorded
as the maximum debt discount related to the
convertible note had previously been
recorded. These warrants were subsequently
repriced and were exercised on June 22, 2000
(see Note 8).
F-17
<PAGE> 53
Affinity International Travel Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
In May 2000, the Company issued $350,000 of
9.5% convertible debentures. The debentures
were convertible into common stock at $1 per
share for a period of 3 months after the
Company's S-1 registration statement was
declared effective, which occurred on June
16, 2000. In connection with these
debentures, the Company also issued warrants
to purchase 35,000 shares of its common
stock at a price of $2 per share. The
warrants were also exercisable as of June
16, 2000, for a period of five years. The
conversion price and the exercise price of
the warrants were reduced by 30% under an
agreement, since the average closing bid
price of the Company's common stock, for the
five-day trading period ending on the day
prior to the 30th day after the closing
date, was less than $2 per share. The value
of the beneficial conversion feature was
approximately $253,000 and was charged to
interest expense upon the Company's
registration statement being declared
effective. The debentures were converted
into common stock on September 15, 2000 (see
Note 8).
The value of the warrants was calculated
using the Black-Scholes option-pricing model
and approximated $60,000; such amount was
recorded as a debt discount with a
corresponding credit to additional paid in
capital and is being charged to interest
over the term of the convertible debt.
Approximately $20,000 of the discount had
been charged to interest expense as of June
30, 2000. The net balance of the convertible
debentures was $309,867 as of June 30, 2000.
5. COMMON STOCK From July 1998 to January 1999, the Company
SUBJECT TO RESCISSION 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 the Company; that
is, such persons may have the right to
compel the Company 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, the Company
may be subject to substantial liability, in
which case, there would be a severe impact
on the Company's financial condition and
ability to continue as a going concern.
Although there is no definitive conclusion
as to whether the Company violated Rule 504,
the Company has reclassified amounts
previously recorded in stockholders' deficit
to mezzanine capital on its consolidated
balance sheet. More specifically, the
recorded amount of shares subject to
rescission was $5,613,000 as of June 30,
2000, excluding related accrued interest of
$1,307,000 included in accrued expenses in
the consolidated balance sheet. During the
years ended June 30, 2000 and 1999, $674,000
and $633,000, respectively, has been charged
to interest expense. The $5,613,000 is shown
on the Company's consolidated balance sheet
under the line item "Common stock subject to
rescission."
F-18
<PAGE> 54
Affinity International Travel Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
6. RELATED PARTY Consulting Agreement
TRANSACTIONS
On April 23, 1999, the Company executed a
consulting agreement with a company (the
"Consultant") owned by a significant
stockholder of the Company. Under the terms
of the agreement, the Consultant was to
provide business and financial advisory
services in exchange for monthly consulting
fees of approximately $6,700. The Consultant
was also to receive a 5% commission on gross
proceeds received by the Company from the
sale of the Company's securities resulting
from introductions made by the Consultant
and from related transactions in which the
Consultant's efforts were instrumental in
negotiating and closing a transaction on
behalf of the Company.
On June 1, 1999, the consulting agreement
was amended providing for a monthly
consulting fee of approximately $13,000 and
the granting of warrants to purchase 750,000
shares of the Company's common stock with an
agreed-upon exercise price of $2.00 per
share. The warrants were immediately
exercisable and expire June 1, 2004. The
warrants were valued at $682,500 using the
Black-Scholes option-pricing model at the
date of grant with the following
assumptions: 0% dividend yield, an expected
life of five years; expected volatility of
140% and a risk-free interest rate of 5.7%.
The Company charged the value of the
warrants to operations in June 1999. The
consulting agreement was terminated on
January 26, 2000. The warrants were
subsequently repriced and exercised on June
22, 2000 (see Note 8).
7. COMMITMENTS AND Juno Online Services, Inc. Agreement
CONTINGENCIES
On May 8, 2000, the Company entered into an
advertising and marketing agreement with
Juno Online Services, Inc. ("Juno") (an
internet search engine and portal) to
provide Juno users the ability to purchase
on-line vacation packages, airline tickets,
car rentals and hotel reservations. The
agreement term is for one year from the
launch date of the web site content,
expected to be October 2000. The Company is
to pay Juno a percentage of all sales
generated through the web site. The
agreement requires the Company to make
advance payments to Juno that will be
applied against future amounts due Juno
under the agreement. As of June 30, 2000,
$1,040,000 in advance payments had been made
to Juno, of which $415,000 was in cash and
500,000 shares of the Company's common stock
valued at $625,000, or $1.25 per share, the
market price at May 8, 2000, the date of the
agreement. An additional $945,000 in advance
payments are due between 90 and 270 days
after the launch date.
Letters of Credit
The Company has two letters of credit which
total $37,300 in connection with the
certifications enabling the Company to issue
airline tickets. Both letters of credit are
secured by restricted certificates of
deposit which total approximately $40,000 as
of June 30, 2000 and mature in June 2001. As
of June 30, 2000, there were no outstanding
balances under these letters of credit.
F-19
<PAGE> 55
Affinity International Travel Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
The Company also has a $120,000 letter of
credit in connection with the lease for its
corporate office space. The letter of credit
is secured by a $120,000 restricted
certificate of deposit as of June 30, 2000
which matures in July 2001. As of June 30,
2000, there was no outstanding balance under
this letter of credit.
Leases
The Company leases various equipment under
lease agreements which are classified as
capital leases. Total monthly payments under
these capital leases are approximately
$1,500, which includes interest at rates
ranging from 11% to 19%. The equipment was
recorded at a cost of approximately $57,000
and had accumulated depreciation of
approximately $33,000 as of June 30, 2000.
The Company leases various equipment and
office space under leases classified as
operating leases. Rental expense under all
operating leases amounted to approximately
$234,000 and $158,000 for the years ended
June 30, 2000 and 1999, respectively.
Capital and Operating Lease Obligations
As of June 30, 2000, future minimum rental
payments required under capital and
operating lease obligations that have
initial or remaining noncancelable lease
terms in excess of one year are as follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
--------------------------------------------------------------------------------
<S> <C> <C>
2001 $ 13,933 $ 298,320
2002 8,856 265,158
2003 4,428 196,642
2004 -- 183,404
--------------------------------------------------------------------------------
Total net minimum lease payments 27,217 $ 943,524
==========
Less amount representing interest (2,922)
---------
Present value of net minimum lease payments $ 24,295
=========
</TABLE>
Service Agreement with Weblink
Communications, Inc.
On October 26, 1998, the Company entered
into an agreement to pay $250,000 to receive
electronic media consulting services from
Weblink Communications, Inc. ("Weblink"), an
unrelated third party. The Company had paid
$26,398 in cash and issued 25,000 shares of
common stock valued at $21,875 (the quoted
market price on the date of the agreement)
upon the execution of the agreement. Weblink
was to assist the Company in the design,
implementation and marketing of an internet
web site that would be affiliated with other
web sites maintained by Weblink. As of June
30, 1999, services under this agreement had
F-20
<PAGE> 56
Affinity International Travel Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
not been provided pending resolution of the
payment terms for the balance due Weblink
under the service agreement, and the Company
therefore recorded the advance payments to
Weblink as a prepaid expense.
As of September 3, 1999, a tentative
agreement had been reached which provided
for the issuance of an additional 257,143
shares of the Company's common stock to
Weblink in full satisfaction of amounts due
under the terms of the agreement. However,
in January 2000, the consulting agreement
was terminated, and therefore, the Company
did not issue any additional shares and
wrote off its advance payments and existing
shares issued (valued, in the aggregate, at
$48,273) under the contract.
Reservation Systems Agreements
The Company has agreements with reservation
systems providers that require the Company
to pay monthly fees equal to the larger of
certain flat monthly fees or fees based on
the number of bookings recorded each month.
All such contracts are cancelable upon short
notice and minimum payments are considered
not to be material.
Employment Agreement
On July 1, 1999, the Company entered into an
employment agreement with its President. The
agreement provided for an initial annual
salary of $120,000 with annual increases
through June 2006 and the establishment of a
bonus program.
Litigation
The Company filed suit in September 2000
against a contractor hired to perform work
on the FarAway.com website (see Note 3). The
Company maintains that the contractor failed
to deliver the work in a timely and suitable
manner. The Company filed suit seeking
rescission of the contract and/or to obtain
declaratory judgment for breach of contract.
The contractor subsequently filed suit
against the Company in North Carolina
alleging breach of contract and seeking
damages in excess of $1,000,000. The Company
will seek to dismiss the contractor's action
in the State of North Carolina and to
litigate both its action and the
contractor's counterclaim in the State of
Florida. The Company feels the counterclaim
is without merit and intends to vigorously
defend its position. The outcome of this
suit cannot be determined at this time.
The Company filed suit against another
contractor hired to provide services
relating to the FarAway.com website (see
Note 3). The Company claims that this
contractor failed to provide the necessary
services in breach of an agreement. The
Company filed suit to recover deposits and
advanced payments totaling $75,000. The
contractor has counter claimed in that suit
and claims that it provided services to the
Company and should receive over $260,000 for
the value of those services. The Company
feels the counterclaim is without merit and
intends to vigorously defend its position.
The outcome of this suit cannot be
determined at this time.
F-21
<PAGE> 57
Affinity International Travel Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
The Company is a defendant in a suit brought by a
former officer of the Company. The Company terminated
the employment of the officer for failure to perform.
The former officer brought suit against the Company
for breach of his employment contract and also claims
that his employment termination was retaliatory and
thereby in violation of Florida law. The former
officer is seeking economic damages over $200,000.
The Company feels the claim is without merit and
intends to vigorously defend its position. The
outcome of this suit cannot be determined at this
time.
8. STOCKHOLDERS' Common Stock
EQUITY
In December 1998, the Company sold 1,142,857 shares
of its common stock at a price of $.35 per share for
net proceeds of $354,869 to a significant
stockholder. The Company recorded offering costs of
$45,131 related to this stock issuance. In connection
with this sale of common stock, the Company granted
warrants to purchase 200,000 shares of its common
stock at $.35 per share. The warrants were
immediately exercisable and expire two years from the
date of the agreement. These warrants were exercised
on January 25, 1999.
The Company sold an additional 533,535 shares of
common stock for net proceeds of $246,660 or an
average price of $.46 per share during the year ended
June 30, 1999.
In December 1999, the Company sold 25,000 shares of
common stock for $10,000, or $.40 per share, to an
unrelated investor.
In December 1999, the Company issued 840,000 shares
of common stock valued at $759,000, or approximately
$.90 per share for the Company's failure to have a
registration statement declared effective by the SEC
prior to a specified date. This amount was charged to
financing charges during the year ended June 30,
2000. On January 15, 2000, the stockholder was
entitled to receive an additional 240,000 shares of
common stock valued at $450,000, or $1.88 per share,
pursuant to these agreements, which was charged to
financing charges during the year ended June 30,
2000.
On December 20, 1999, the Company entered into
agreements (that were later terminated on January 26,
2000) to receive gross proceeds of $250,000 and
$500,000 from the significant stockholder and another
investor in exchange for 714,286 and 1,428,571 shares
of common stock, respectively, at a price of $.35 per
share. The significant stockholder also agreed to the
repricing of 4,250,000 common stock warrants to $.50
per share. The quoted market value of the Company's
common stock on December 20, 1999 was $.50 per share.
The Company recorded a charge of $2,082,500 to
financing charges related to the repricing of these
warrants.
F-22
<PAGE> 58
Affinity International Travel Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
On January 26, 2000, the Company terminated the
December 20, 1999 agreements and entered into new
agreements to sell 1,150,000 and 2,300,000 common
stock warrants for $250,000 and $500,000,
respectively. All warrants have an exercise price of
$.25 per share and an expiration date of December 20,
2004. The Company received proceeds of $650,049, net
of offering costs of $99,951.
On January 26, 2000, the significant stockholder also
agreed to terminate certain penalty provisions in all
previously issued financing agreements and a
consulting agreement in exchange for 800,000 common
stock warrants with an exercise price of $.25 per
share that expire in five years and the repricing of
4,500,000 common stock warrants to an exercise price
of $.25 per share. The market value of the Company's
common stock on January 26, 2000 was $1.75 per share.
Therefore, the Company recorded an additional charge
of $7,139,500 to financing charges relating to the
issuance and repricing of these warrants in January
2000.
During January 2000, the Company sold 345,401 shares
of common stock for proceeds of $454,345, net of
offering costs of $53,155, or an average price of
$1.47 per share. In connection with this offering,
34,535 common stock warrants were issued at exercise
prices from $2.50 to $3.00 (the quoted market prices
of the common stock on the day of the grant), which
expire five years from the date of issuance.
During February 2000, the Company sold 990,000 shares
of common stock for proceeds of $990,000, or $1.00
per share. In connection with this offering,
1,190,000 common stock warrants were issued at an
exercise price of $.75 (the quoted market price of
the common stock on the day of the grant), which
expire three years from the date of issuance.
During March 2000, the Company sold 362,836 shares of
stock for proceeds of $733,552, net of offering costs
of $93,773, or an average price of $2.28 per share.
In connection with this offering, 36,282 common stock
warrants were issued at exercise prices from $4.00 to
$5.50 (the quoted market prices of the common stock
on the day of the grant), which expire five years
from the date of issuance.
On March 13, 2000, the Company filed a Form S-1
Registration Statement under the Securities Act of
1933 with the Securities and Exchange Commission
("SEC") The registration statement was filed to allow
selling stockholders to offer, sell or other wise
transfer up to 23,353,094 shares of common stock,
which included 9,940,000 shares that were registered
for sale upon the private exercise of outstanding
common stock warrants. The SEC declared the
registration statement effective on June 16, 2000.
The Company did not receive any proceeds from the
sale of shares of common stock by the selling
stockholders.
On June 22, 2000, the Company entered into agreements
with the significant stockholder and related entities
to reprice 4,500,000 common stock warrants to an
exercise price of approximately $.12 per share. The
market value of the
F-23
<PAGE> 59
Affinity International Travel Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Company's common stock on June 22, 2000 was $1.00.
Therefore, the Company recorded an additional charge
of $4,455,000 to financing charges relating to the
repricing of these warrants. The warrants were
immediately exercised for proceeds of $509,912, net
of offering costs $19,500.
In June 2000, the Company issued 138,657 shares of
common stock and 55,462 common stock warrants to an
individual for services rendered relating to the
January and March 2000 sale of common stock. The
market value of the common stock and common stock
warrants was treated as offering costs and was offset
against additional paid-in capital.
The Company issued 921,349 and 182,433 shares of
common stock for compensation and services valued at
$1,012,634 and $228,530 during the years ended June
30, 2000 and 1999, respectively.
Convertible Preferred Stock
In September 1998, the Company authorized 100,000,000
shares of $.001 par value convertible preferred
stock. In January 1999, the Company issued 800,000
shares of convertible preferred stock in connection
with the acquisition of Prestige Travel Services II,
Inc., which was subsequently converted into common
stock on August 1, 1999 (see Note 1[C]).
Stock Option Plan
On July 1, 1999, the Company adopted the Affinity
International Travel Systems, Inc. 1999 Combination
Stock Option Plan (the "Plan") which authorizes the
issuance of up to 4,000,000 shares of its common
stock in the form of incentive stock options to
employees and nonqualified stock options to
nonemployees. Upon the Plan's adoption, the Company
granted its President incentive stock options to
purchase 2,000,000 shares of its common stock with an
exercise price of $.50 per share which expire ten
years from the date of grant. The Company recorded
compensation expense of $750,000 related to the
difference between the exercise price of $.50 per
share and the market price of $.88 per share on the
date of grant.
On August 17, 1999, the Company granted incentive
stock options to an employee to purchase 15,000
shares of the Company's common stock with an exercise
price of $1.00 per share, which was the market value
on the date of grant. These options expire three
years from the grant date.
On December 20, 1999, the Company granted incentive
stock options and nonqualified stock options to two
employee/directors and an outside director to
purchase a total of 100,000 and 50,000 shares of the
Company's common stock, respectively. These options
were granted with an exercise price of $1.00 per
share when the market value of the Company's common
stock was $.50 per share. The fair market value of
the nonqualified stock options was insignificant on
the date of grant, and all options granted expire
three years from the grant date.
F-24
<PAGE> 60
Affinity International Travel Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
All of the foregoing options were fully vested and
exercisable on the date of grant.
No options were granted during the year ended June
30, 1999. For grants during the year ended June 30,
2000, the Company estimated the fair value of each
stock option at the grant date by using the
Black-Scholes option-pricing model with the following
weighted-average assumptions: no dividend yield,
volatility of 140% - 212%, risk-free interest rates
of 5.65% - 6.57% and expected lives of three to ten
years.
SFAS No. 123 requires the Company to provide pro
forma information regarding net income and earnings
per share as if compensation cost for the Company's
stock options had been determined in accordance with
the fair value based method prescribed in SFAS No.
123. Under the accounting provisions of SFAS No. 123,
the Company's net loss applicable to common stock and
basic loss per common share for the year ended June
30, 2000 would be as follows:
<TABLE>
----------------------------------------------------------------------------------
<S> <C>
Pro forma net loss applicable to common stock $ (22,686,782)
Pro forma net loss per common share, basic and diluted $ (1.61)
==================================================================================
</TABLE>
Changes in options outstanding under the Plan are
summarized as follows:
<TABLE>
<CAPTION>
Weighted-
Weighted- Average
Average Fair Value
Exercise of Options
Shares Price Granted
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, June 30, 1999 -- $ -- $ --
Granted above market 150,000 1.00 .46
Granted at market 15,000 1.00 .79
Granted below market 2,000,000 .50 .86
-------------------------------------------------------------------------------------
Balance, June 30, 2000 2,165,000 $ .54 $ --
=====================================================================================
</TABLE>
As of June 30, 2000, a total of 2,165,000 of the
outstanding Plan options were exercisable with a
weighted-average exercise price of $.54 per share and
a weighted-average remaining contractual life of 8.1
years.
Reserved Common Stock
The Company has reserved 10,101,279 shares of common
stock as of June 30, 2000 for issuance in connection
with the convertible debt and common stock options
and warrants (see Note 4).
F-25
<PAGE> 61
Affinity International Travel Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
9. INCOME TAXES The components of the net deferred tax assets consist
of the following:
<TABLE>
<CAPTION>
Year ended June 30, 2000
-------------------------------------------------------------------------------------
<S> <C>
Deferred tax assets:
Net operating loss carryforwards $ 2,623,000
Options issued 282,000
Interest on rescission liability 492,000
Other 7,000
-------------------------------------------------------------------------------------
Gross deferred tax assets 3,404,000
Valuation allowance 3,383,000
-------------------------------------------------------------------------------------
Total deferred tax assets 21,000
-------------------------------------------------------------------------------------
Deferred tax liabilities:
Depreciation (21,000)
-------------------------------------------------------------------------------------
Net deferred tax assets $ --
=====================================================================================
</TABLE>
The Company has recorded a valuation allowance to
state its deferred tax assets at estimated realizable
value due to the uncertainty related to realization
of those assets through future taxable income. The
change in the valuation allowance for deferred tax
assets was an increase of $1,951,000 during the year
ended June 30, 2000.
The amounts shown for income taxes in the statements
of operations differ from amounts that would be
derived from computing income taxes at federal
statutory rates. The following is a reconciliation of
those differences:
<TABLE>
<CAPTION>
Year ended June 30, 2000 1999
-----------------------------------------------------------------------------------
<S> <C> <C>
Income taxes at federal statutory rates (34%) (34%)
Beneficial conversion feature and discount on convertible
debt 23 14
Amortization of goodwill -- 1
Gain on sale of Prestige and other 2 --
Valuation allowance 9 19
-----------------------------------------------------------------------------------
Income taxes at effective rates --% --%
===================================================================================
</TABLE>
The Company had unused net operating losses for
income tax purposes, expiring in various amounts from
2012 through 2020, of approximately $6,870,000 at
June 30, 2000 for carryforward against future years'
federal and state taxable income.
F-26
<PAGE> 62
Affinity International Travel Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
10. INTEREST EXPENSE Interest expense consists of the following:
<TABLE>
<CAPTION>
Year ended June 30, 2000 1999
------------------------------------------------------------------------------------
<S> <C> <C>
Discount on convertible debt to related party $ -- $ 2,222,000
Discount on convertible debt 273,067 --
Interest on common stock subject to rescission 674,000 633,000
Interest on convertible debt 3,700 --
Other 9,309 19,570
------------------------------------------------------------------------------------
$ 960,076 $ 2,874,570
====================================================================================
</TABLE>
11. SUBSEQUENT Repricing and Exercise of Common Stock Warrants
EVENTS
On August 2, 2000, the Company entered into
agreements to reprice a total of 4,250,000 common
stock warrants held by its significant stockholder
and related entities and an outside investor (see
Note 8) to approximately $.05 per share. The market
value of the Company's common stock was $.53 per
share on that date. The Company will record a
financing charge of $2,252,500 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.
Sale of Common Stock
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.
Incentive Stock Options
On August 25, 2000, the Company granted incentive
stock options to certain employees to purchase a
total of 868,500 shares of the Company's common stock
with an exercise price of $1.00 per share. The quoted
market price for the Company's common stock was $.75
on the date of issuance. The incentive stock options
are exercisable eighteen months after the employee's
hire date and expire three years from the date of
grant. In addition, the Company issued one-time stock
grants of a total of 76,500 shares of its common
stock to these employees.
Notes Payable
On August 25, 2000, and August 28, 2000, the Company
signed notes payable for $30,000 and $100,000,
respectively, from a significant stockholder. The
principal and interest at 5% per annum was due in
full on September 11, 2000. As of September 29,
2000, the notes payable are still outstanding. A
daily late fee is being assessed until such time the
notes payable are repaid in full.
F-27
<PAGE> 63
Affinity International Travel Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Consulting Agreement
In August 2000, the Company entered into a consulting
agreement with Schoemann Venture Capital, LLC whereby
Schoemann Venture Capital, LLC will provide
consulting services with regard to certain investment
and business matters on an as-needed basis, and the
Company will pay Schoemann Venture Capital, LLC
payments of $2,005 per week and reimbursement for all
actual expenses incurred for services rendered on
behalf of the Company.
Conversion of Debentures
On September 15, 2000, the Company entered into
agreements 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.
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.
12. SUPPLEMENTAL Supplemental cash flow information is as follows:
CASH FLOW
INFORMATION
<TABLE>
<CAPTION>
Year ended June 30, 2000 1999
------------------------------------------------------------------------------------
<S> <C> <C>
Cash paid for interest $ 10,309 $ 19,570
Noncash financing and investing activities:
Conversion of debentures into common stock 25,000 --
Conversion of debentures into common stock
to related party -- 2,222,000
Common stock issued in connection with
service agreement 625,000 21,875
====================================================================================
</TABLE>
F-28
<PAGE> 64
Affinity International Travel Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
The following is a summary of noncash transactions
related to the Prestige acquisition disclosed in Note
1 (C):
<TABLE>
<CAPTION>
Year ended June 30, 1999
-------------------------------------------------------------------------------------
<S> <C>
Convertible preferred stock issued $ (1,600,000)
Accounts receivable acquired 62,915
Property and equipment acquired 30,999
Goodwill acquired 1,750,361
Acquisition costs capitalized (21,530)
-------------------------------------------------------------------------------------
Total noncash acquisition of assets 222,745
-------------------------------------------------------------------------------------
Notes payable assumed (61,889)
Accounts payable assumed (41,986)
Accrued expenses assumed (114,269)
Deferred revenue assumed (31,844)
-------------------------------------------------------------------------------------
Total noncash assumption of liabilities (249,988)
-------------------------------------------------------------------------------------
Net cash acquired (net of cash paid of $6,185) $ 27,243
=====================================================================================
</TABLE>
The following is a summary of noncash transactions
related to the sale of Prestige disclosed in Note 1
(C):
<TABLE>
<CAPTION>
Year ended June 30, 2000
-------------------------------------------------------------------------------------
<S> <C>
Ascribed value of common stock returned $ 1,554,777
-------------------------------------------------------------------------------------
Accounts receivable 45,252
Property and equipment 23,874
Goodwill 1,577,114
Notes payable (15,000)
Accounts payable (13,636)
Accrued expenses (34,671)
Deferred revenue (46,766)
-------------------------------------------------------------------------------------
Net noncash assets surrendered 1,536,167
-------------------------------------------------------------------------------------
Gain on sale of Prestige recognized 75,000
-------------------------------------------------------------------------------------
Net cash received (net of cash surrendered of $18,610) $ 56,390
=====================================================================================
</TABLE>
The noncash transactions related to the acquisition
and disposal disclosed in Notes 1(D), 1(E) and 1(F)
were not considered to be material.
F-29
<PAGE> 65
Affinity International Travel Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
13. SEGMENT During 1999, the Company adopted SFAS No. 131,
INFORMATION "Disclosures about Segments of an Enterprise and
Related Information." SFAS No. 131 requires that
public enterprises report certain information about
reporting segments in financial statements. It also
requires the disclosure of certain information
regarding services provided, geographic areas of
operation and major customers.
The accounting policies of the segments are the same
as those described in the summary of significant
accounting policies. Intercompany revenues are market
based. The Company evaluates performance based on
operating earnings of the respective business units.
The Company's continuing operations are classified
into three reportable segments. The wholesale
segments sell the Company's travel products to retail
travel agents and consumers from its corporate
offices in Florida. The retail segment consists of
travel agencies who sell the travel products directly
to the consumer in Florida.
The following table shows certain financial
information by reportable segment as of and for the
years ended June 30, 2000 and 1999:
<TABLE>
<CAPTION>
Corporate
Wholesale Retail and Other Combined
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
2000
Revenue from external customers $ 2,594,921 $ 947,202 $ 103,286 $ 3,645,409
Net loss (3,627,418) (238,629) (17,769,885) (21,635,932)
Depreciation and amortization 236,204 30,058 390,257 656,519
Compensation and service expense related to common
stock issued -- -- 387,634 387,634
Interest income 1,388 18 18,245 19,651
Interest expense 9,133 176 950,767 960,076
Finance charges to related party -- -- 14,886,000 14,886,000
Total assets 2,847,890 96,188 193,920 3,137,998
Capital expenditures 2,036,427 -- -- 2,036,427
1999
Revenue from external customers $ 1,363,300 $ 961,643 $ -- $ 2,324,943
Net income (loss) (1,493,827) 28,371 (4,124,626) (5,590,082)
Depreciation and amortization 38,325 22,678 90,610 151,613
Compensation and service expense related to common
stock issued 140,250 -- 66,405 206,655
Services expense related to common stock warrants
to related party -- -- 682,500 682,500
Interest income 1,775 -- -- 1,775
Interest expense 15,792 570 636,208 652,570
Interest expense to related party -- -- 2,222,000 2,222,000
Total assets 421,546 298,516 2,944,861 3,664,923
Capital expenditures 82,086 3,210 2,400 87,696
=========================================================================================================================
</TABLE>
F-30
<PAGE> 66
Affinity International Travel Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
A substantial portion of the Company's revenues are
derived from wholesale activities that include the
brokerages of rental cars and sales of vacation
packages to four main destinations as described
below:
<TABLE>
<CAPTION>
Wholesale
------------------------------------------------------------------------------------
2000
<S> <C>
Revenue from external customers $ 2,594,921
Percentage of revenue by destination:
Auto brokerage worldwide 32%
Florida 26%
Hawaii 29%
Caribbean 10%
Mexico 3%
====================================================================================
1999
Revenue from external customers $ 1,363,300
Percentage of revenue by destination:
Auto brokerage worldwide 34%
Florida 45%
Hawaii 14%
Caribbean 6%
Mexico 1%
====================================================================================
</TABLE>
F-31
