<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 14, 2000
Registration No. 333-32352
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
AFFINITY INTERNATIONAL TRAVEL SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
--------------------------
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<S> <C> <C>
NEVADA 4724 86-0885559
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
100 SECOND AVENUE SOUTH, SUITE 1100S
ST. PETERSBURG, FLORIDA 33701-4301 (727) 896-1513
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
DANIEL G. BRANDANO, JR.
CHIEF EXECUTIVE OFFICER
AFFINITY INTERNATIONAL TRAVEL SYSTEMS, INC.
100 SECOND AVENUE SOUTH, SUITE 1100S
ST. PETERSBURG, FLORIDA 33701-4301
(727) 896-1513
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:
JOHN G. NOSSIFF, JR., ESQ.
BROWN, RUDNICK, FREED & GESMER
ONE FINANCIAL CENTER
BOSTON, MASSACHUSETTS 02111
TEL: (617) 856-8200
FAX: (617) 856-8201
-----------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. /X/
<PAGE>
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
<PAGE>
PROSPECTUS SUBJECT TO COMPLETION, DATED JUNE ___, 2000
AFFINITY INTERNATIONAL TRAVEL SYSTEMS, INC.
20,353,094 SHARES OF COMMON STOCK
-----------------------
The selling stockholders identified on page 47 of this prospectus may
offer, sell or otherwise transfer under this prospectus up to 20,353,094 shares
of our common stock, which includes 9,940,000 shares that are being registered
for sale upon the private exercise of outstanding warrants. We will not receive
any of the proceeds from the sale of shares of common stock by the selling
stockholders.
Until May 4, 2000, our common stock was quoted on the National Association
of Securities Dealers Inc.'s OTC Bulletin Board under the symbol "AFFT." On May
4, 2000, the last quoted sale price of the common stock on the OTC Bulletin
Board was $1.65 per share. Since May 5, 2000, our common stock has been quoted
in the "pink sheets" on the over-the-counter market under the symbol "AFFT."
-----------------------
AN INVESTMENT IN THE COMMON STOCK OFFERED UNDER THIS PROSPECTUS INVOLVES A HIGH
DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 7.
----------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
-----------------------
THE DATE OF THIS PROSPECTUS IS JUNE ___, 2000.
<PAGE>
TABLE OF CONTENTS
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<S> <C>
PROSPECTUS SUMMARY.............................................................3
RISK FACTORS...................................................................7
USE OF PROCEEDS...............................................................15
DIVIDEND POLICY...............................................................15
PRICE RANGE OF COMMON STOCK...................................................15
SELECTED CONSOLIDATED FINANCIAL DATA..........................................16
PRO FORMA FINANCIAL DATA......................................................18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS....................................................................21
BUSINESS......................................................................31
MANAGEMENT....................................................................41
PRINCIPAL AND SELLING STOCKHOLDERS............................................47
DESCRIPTION OF CAPITAL STOCK AND OTHER MATTERS................................53
SHARES ELIGIBLE FOR FUTURE SALE...............................................55
PLAN OF DISTRIBUTION..........................................................56
LEGAL MATTERS.................................................................56
EXPERTS.......................................................................56
WHERE YOU CAN FIND MORE INFORMATION...........................................56
INDEX TO FINANCIAL STATEMENTS................................................F-1
</TABLE>
We maintain world wide web sites at WWW.AFFINITYINTERNATIONAL.COM,
WWW.SUNSTYLE.COM, WWW.FARAWAY.COM, WWW.AFFINITYRENTACAR.COM and
WWW.CRUISEAFFINITY.COM. Information contained on our web sites does not
constitute part of this prospectus.
ii
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION CONTAINED ELSEWHERE IN THIS
PROSPECTUS. THIS SUMMARY DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU SHOULD
CONSIDER BEFORE INVESTING IN OUR COMMON STOCK. YOU SHOULD READ THE ENTIRE
PROSPECTUS CAREFULLY, INCLUDING "RISK FACTORS" AND OUR FINANCIAL STATEMENTS AND
THE NOTES TO THE FINANCIAL STATEMENTS, BEFORE MAKING AN INVESTMENT DECISION.
ABOUT AFFINITY
Affinity International Travel Systems, Inc. was incorporated in Nevada in
1977 under the name Medanco, Inc. From 1977 through 1997, Medanco had no
revenues and limited operations. In 1997, Medanco changed its name to Pay Dirt,
Inc., which had no operations until it completed the acquisition of SunStyle
International Holidays, Inc. in July 1998, at which point it changed its name to
Affinity International Travel Systems, Inc.
Since 1998, we have been operating primarily through our wholly-owned
subsidiary, SunStyle International Holidays, Inc. Through SunStyle, we are
engaged in the business of marketing, selling and distributing a variety of
wholesale and retail travel related products and services. Specifically, we
market, sell and distribute vacation packages, tours, cruises, domestic and
international airline tickets, car rentals and accommodation products and
services to travel agencies and consumers. During the fiscal year ended June 30,
1999, we had consolidated revenues of $2.3 million, of which approximately
$69,000 were derived from Internet sales. In December 1999 we sold Prestige
Travel Services, II, which accounted for approximately 29.0% of our revenues
during the six months ended December 31, 1999. During the fiscal year ended June
30, 1999, we incurred net losses of $5.6 million. 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.
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 wholesale purchases 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.
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.
OUR BUSINESS STRATEGY
We have recently shifted the focus of our business strategy from
conventional sales of travel services and products to online sales of travel
services and products. We plan to offer wholesale and retail vacation packages
through our web sites and other linked internet web sites.
A key component of our Internet business strategy is to focus our resources
in two segments: the business to consumer and business to business travel arena.
We intend to concentrate our resources on the business to business online travel
arena, where our objective is to sell to other travel providers leisure travel
products that traditionally have had higher margins than airline ticket sales,
including, among others, vacation packages, tours and cruises. We also intend to
continue to sell our leisure travel products directly to consumers.
We intend to 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
3
<PAGE>
using the Internet as the delivery platform. We believe our Internet business
strategy is different from current online travel distribution organizations
which derive the majority of their revenue from airline tickets sales, the least
profitable but highest volume product in the travel services industry.
In order to implement our business strategies, we have undertaken the
following strategic initiatives:
- DEVELOPMENT AND ACQUISITION OF TECHNOLOGIES. We have developed and
acquired technologies and software relating to processing on-line
queries, vacation packaging, booking transactions, and making travel
reservations, all of which are currently available to travel agents
and consumers. Our software systems include TOURSCAPE, TOURWISE,
BOOKIT! and AND BOOKIT! PRO. Each of these software systems is
designed to assist us in developing and packaging customized travel
plans and reservations. We license these non-proprietary
technologies and software systems on a non-exclusive basis. Some of
our competitors also use these software systems.
- SPECIALIZED KNOWLEDGE AND EXPERTISE IN DESTINATION MARKETS. We have
primarily focused our marketing and selling efforts on the following
destinations: Caribbean, Hawaii, Florida and Mexico. We believe our
knowledge of these markets provides us with the expertise necessary
to provide high-quality service to our clients.
- STRATEGIC RELATIONSHIPS WITH SUPPLIERS. We have negotiated
arrangements with major hotels and resorts, airlines, cruise and
auto rental companies, which allow us to offer competitive pricing
and give us access to a broader inventory base than suppliers who
lack these relationships. We believe that these arrangements give us
a competitive advantage over suppliers and other travel agencies who
lack these relationships because our experience has shown that
travel providers are increasingly utilizing specialized
distributors, such as Affinity, as a preferred source of
distribution. These arrangements, however, are not exclusive and our
competitors may obtain similar arrangements.
We believe that our current infrastructure should enable us to take
advantage of the projected growth in online travel. Forrester Research reports
that online travel sales are projected to increase from $2.8 billion in 1999 to
$29.5 billion by 2003.
We plan to implement our Internet business strategy through the development
and implementation of our FarAway.com web site, which will utilize our existing
hardware and software infrastructure, strategic partnerships and existing vendor
contracts. This web site will be designed to attract a base of potential
customers in the United States, Europe, Asia and Latin America, and to convert
these potential customers into leisure travel buyers. We plan to implement our
strategy as follows:
- SALE OF SPECIALIZED LEISURE TRAVEL PACKAGES. We plan to have
specialized vacation package inventory available to consumers, which
can be accessed by our web site through the use of our online
software and tools that will help facilitate complex and specialized
leisure travel purchases. We expect that our established vendor
relationships will enable us to provide specialized packages at
rates that customers will find attractive.
- CUSTOMER SERVICE. Our customer service will be available to
customers to provide both on and offline assistance to ensure that
the customer is receiving the service that a customer would
generally receive through the use of an 800 number or a conventional
travel agent. We believe that because users of our site will have
access to our travel specialists through real time chat, Internet
telephony, 800 telephone service, and, in the future, Internet based
video communication, customers will begin to feel more comfortable
making online travel purchases.
- STRATEGIC PARTNERSHIPS AND ALLIANCES. In addition to traditional
types of online partnerships, such as those for content and
advertising, we intend to pursue online strategic partnerships and
alliances with other e-commerce companies. These relationships would
allow us to create a link from the online vendor's site to our site.
The online vendor would receive a commission for
4
<PAGE>
any sales generated on our site as a result of the link. We believe
that relationships with other e-commerce companies should generate
traffic to our web site, increase the number of our customers and
generate revenue.
- STRATEGIC ACQUISITIONS. We plan to seek strategic acquisitions
within the leisure travel industry. We believe the leisure travel
industry is highly fragmented, and includes numerous small,
specialized distributors. We believe growth opportunities are
available through acquisitions. We also believe that we will be able
to broaden our offering of specialized travel services, increase our
level of customer service, and improve our Internet and technology
infrastructure through strategic acquisitions.
- CREATE FARAWAY.COM REFERRAL PROGRAM. We plan to seek referral
relationships with other online vendors to increase our online
traffic and sales.
- TARGET EUROPEAN AND LATIN AMERICAN GEOGRAPHIC MARKETS. With the
rapid growth in the number of Internet users, especially in Europe
and Latin America, we plan to expand our target market beyond the
United States, to include more countries in Europe and Latin
America. In anticipation of expanding our international operations,
we have opened an office in the United Kingdom which is currently
being connected to our TOURSCAPE software system located in Florida.
We anticipate that our online booking engines and our primary web site,
WWW.FARAWAY.COM, will be developed and operational within the next three months.
We believe that we will need to raise $3 million of additional capital during
the next three months to complete the development of our booking engines and our
primary web site. We plan to raise this additional capital through additional
equity or debt financings.
Our principal executive offices are located at 100 Second Avenue South,
Suite 1100S, St. Petersburg, Florida 33701-4301, and our telephone number is
(727) 896-1513. Our web sites are located at WWW.AFFINITYINTERNATIONAL.COM,
WWW.SUNSTYLE.COM, WWW.FARAWAY.COM, WWW.AFFINITYRENTACAR.COM and
WWW.CRUISEAFFINITY.COM.
THE OFFERING
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<S> <C>
Common stock offered by the selling stockholders.... 20,353,094 shares
Use of proceeds .................................... We will not receive any proceeds
from the sale of common stock by
the selling stockholders.
Over-the-Counter Symbol............................. AFFT
</TABLE>
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
Statement of Operations Data: Year ended June 30,(1) Nine Months ended March 31,(1)
--------------------------------------------------------- ------------------------------------------
1997 1998 1999 1999(3) 1999 2000 2000(3)
---- ---- ---- ------- ---- ---- --------
(Pro Forma) (Unaudited) (Unaudited) (Pro Forma)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales $ 665,143 $ 1,328,577 $ 2,324,943 $ 1,698,862 $ 1,366,493 $ 2,749,729 $ 2,159,953
Cost of sales 541,751 769,667 1,585,807 1,439,686 937,836 1,802,520 1,628,410
------------ ------------ ------------ ------------ ------------ ------------ ------------
Gross profit 123,392 558,910 739,136 259,176 428,657 947,209 531,543
Operating expenses 436,981 1,702,818 3,469,797 2,932,374 1,398,111 4,672,180 4,121,926
------------ ------------ ------------ ------------ ------------ ------------ ------------
Operating loss (313,589) (1,143,908) (2,730,661) (2,673,198) (969,454) (3,724,971) (3,590,383)
Interest income (expense), net (785) (40,721) (2,872,795) (2,872,795) (475,391) (493,372) (493,372)
Gain on sale of subsidiary - - - - - 75,000 -
Financing charges - - - - (222,000) (10,431,000) (10,431,000)
Other income (expense), net (3,451) 16,128 13,374 13,374 1,984 (68,750) (68,750)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Net loss $(317,825) $(1,168,501) $(5,590,082) $(5,532,619) $(1,664,861) $(14,643,093) $(14,583,505)
============ =========== =========== =========== =========== ============ ============
Net loss per common share:
Basic and diluted $(.11) $(.27) $(.89) $(.88) $(.29) $(1.06) $(1.16)
Weighted average common shares
outstanding:
Basic and diluted (3) 2,848,718 4,249,506 6,290,174 6,290,174 5,812,076 13,756,542 12,558,492
</TABLE>
<TABLE>
<CAPTION>
Nine months ended
Balance Sheet Data: Year ended June 30,(1) March 31,(1)
-------------------------------------- ------------------------
1997 1998 1999 1999 2000
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $326,452 $64,061 $1,119,796 $51,091 $578,131
Working capital 193,468 (595,550) (294,631) (997,287) (1,587,086)
Total assets 547,086 395,165 3,664,923 2,464,342 2,609,467
Long-term debt, less current
maturities 9,063 - - - -
Capital lease obligation, less
current portion - 38,334 22,924 48,919 14,295
Convertible debentures 150,000 - 25,000 - -
Total liabilities 361,933 834,250 1,992,531 1,549,359 2,725,647
Stockholders' equity (deficit) 185,153 (439,085) (3,940,608) (4,698,017) (5,729,180)
</TABLE>
FOOTNOTES
---------------
(1) On July 31, 1998, Affinity acquired SunStyle in a transaction accounted
for as a purchase of Affinity by SunStyle (a reverse acquisition in which
SunStyle is considered the acquirer for accounting purposes). Therefore, the
historical financial statements herein are those of SunStyle. See Note 1 to
the Consolidated Financial Statements for the three years ended June 30, 1999.
In December 1999, we disposed of Prestige Travel Services, Inc. (acquired on
January 1, 1999) by selling all of its outstanding common stock to its
original stockholders. Prestige accounted for $626,000 and $590,000 of our
revenues for the year ended June 30, 1999 and the nine months ended March 31,
2000, respectively. Our revenues in future periods will be substantially less
than shown in our Consolidated Financial Statements for the year ended June
30, 1999 and the nine months ended March 31, 2000 if we are unable to replace
the revenues we previously received from Prestige's operations.
(2) The weighted average common shares outstanding for the year ended June 30,
1997, have been adjusted to reflect additional shares issued to the then sole
stockholder and a stock split which occurred during the year ended June 30,
1997.
(3) The unaudited pro forma combined statement of operations for the year
ended June 30, 1999 and the nine months ended March 31, 2000 give effect to
the sale of the subsidiary, Prestige Travel Services, II by reversing the
subsidiary's purchase on January 1, 1999 and eliminating its effects on
operations from January 1 to December 31, 1999. (See Pro Forma Financial
Data).
6
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RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS BEFORE DECIDING TO
INVEST IN THE SHARES OF COMMON STOCK.
WE MADE SALES OF SECURITIES UNDER RULE 504 OF REGULATION D THAT MAY NOT HAVE
COMPLIED WITH SUCH RULE AND, AS A RESULT, WE MAY BE SUBJECT TO SUBSTANTIAL
LIABILITY. OUR POSSIBLE NON-COMPLIANCE WITH RULE 504 MAY RESTRICT OUR ABILITY TO
RAISE CAPITAL. IF WE ARE UNABLE TO RAISE CAPITAL IT IS UNLIKELY THAT WE WILL BE
ABLE TO CONTINUE OUR OPERATIONS.
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. In addition, our ability to raise additional
capital may be severely restricted, as investors may be hesitant to invest in
our company because of this potential liability. Our inability to raise capital
when needed will have an adverse effect on our ability to continue 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 March 31, 2000, excluding
related accrued interest of $1,138,000 of which $505,000 has been charged to
interest expense during the nine month period ended March 31, 2000. These
amounts are shown on our balance sheet under the line item "Common Stock Subject
to Rescission."
WE HAVE A HISTORY OF NET LOSSES. IF WE ARE UNABLE TO BECOME PROFITABLE IT IS
UNLIKELY THAT WE WILL BE ABLE TO CONTINUE OUR OPERATIONS.
We have sustained substantial and recurring losses in each of the last
three fiscal years ended June 30, 1997, 1998 and 1999 and the nine months ended
March 31, 2000. For these periods, we had aggregate net losses of $21,720,000.
For the fiscal year ended June 30, 1999, we had a net loss of $5,590,000, and
for the nine months ended March 31, 2000, we had a net loss of $14,643,000.
We expect significant losses and negative cash flow to continue for the
foreseeable future. We anticipate our losses will increase significantly from
current levels due to start-up expenses and cash requirements to fund our
Internet business strategy. If we continue to sustain losses and negative cash
flow, it is unlikely that we will be able to continue our operations.
Our ability to become profitable primarily depends on our ability to
develop and implement our Internet business strategy. Specifically, we must
convert a large number of customers from traditional shopping methods to online
shopping for travel products and services and we must be able to generate
substantial sales from these customers on our web site.
7
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WE HAVE BEEN UNABLE TO FUND OUR OPERATIONS WITH INTERNALLY GENERATED FUNDS
BECAUSE OUR BUSINESS HAS GENERATED NEGATIVE CASH FLOW. WE WILL NEED TO RAISE
ADDITIONAL CAPITAL IMMEDIATELY TO FUND OUR OPERATIONS AND FUND CAPITAL
EXPENDITURES RELATED TO THE IMPLEMENTATION OF OUR INTERNET STRATEGY. WE WILL
NEED TO RAISE APPROXIMATELY $6.0 MILLION DURING THE CALENDAR YEAR 2000.
We have and will continue to require substantial capital to fund our
business operations. Since our inception, we have experienced and expect to
continue to experience for the foreseeable future negative cash flow from
operations. For the fiscal year ended June 30, 1999, we used $1,801,000 of cash
for our operating and investing activities and for the nine months ended March
31, 2000 we used $3,362,000 of cash for our operating and investing activities.
As of March 31, 2000, we had a working capital deficit of $1,587,000. From
January to March 2000, we raised additional net proceeds aggregating
approximately $2,433,000. We used a portion of this additional capital to reduce
our working capital deficit and the remainder is being used to fund negative
cash flow from operations and capital expenditures related to the implementation
of our Internet business strategy. 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 and
warrants. For more information regarding our working capital deficiency, please
see the liquidity and capital resources discussion contained in our management's
discussion and analysis of financial condition and results of operations.
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 may experience substantial additional
dilution. We cannot be certain that additional financing will be available to us
on favorable terms when required, or at all.
THERE IS SUBSTANTIAL DOUBT ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN.
Our auditor's report indicates that certain factors raise substantial
doubt about our ability to continue as a going concern. Our auditors issued a
going concern opinion because:
- 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 our company because of
this potential liability; thus we can provide no assurance that we
will be able to generate sufficient funds for our operations during
the next twelve 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.
8
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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.
SINCE WE WERE UNABLE TO BECOME A REPORTING COMPANY UNDER THE EXCHANGE ACT BY MAY
4, 2000, OUR COMMON STOCK WAS REMOVED FROM THE OTC BULLETIN BOARD AND IS NOW
QUOTED IN THE "PINK SHEETS" ON THE OVER-THE-COUNTER MARKET. THE REMOVAL OF OUR
COMMON STOCK FROM THE OTC BULLETIN BOARD MAY HAVE AN ADVERSE EFFECT ON OUR STOCK
PRICE AND ON OUR INVESTORS ABILITY TO TRADE OUR COMMON STOCK AND HAS HAD AN
ADVERSE EFFECT ON OUR ABILITY TO RAISE ADDITIONAL CAPITAL.
On May 4, 2000, our common stock was removed from quotation on the OTC
Bulletin Board, an automated quotation system administered by the National
Association of Securities Dealers, Inc., because we did not file periodic
reports with the SEC under the Exchange Act before the required date. Our common
stock is currently quoted in the "pink sheets" on the over-the-counter market.
We intend to register our common stock under the Exchange Act and commence
filing periodic reports with the SEC upon the effectiveness of the registration
statement of which this prospectus is a part. There are no assurances that the
SEC will declare our registration statement effective or that our stock will
resume quotation on the OTC Bulletin Board. If we are unable to resume quotation
on the OTC Bulletin Board, there will be a material adverse effect on the price
of and trading market for our common stock and on our ability to raise
additional capital.
WE EXPECT THAT A SUBSTANTIAL NUMBER OF OUR SECURITIES WILL BE SOLD IN THE MARKET
IN THE NEAR FUTURE. THIS COULD CAUSE OUR STOCK PRICE TO DECLINE SIGNIFICANTLY.
The market price of our common stock could decline as a result of sales by
our existing stockholders of shares of our common stock in the market after this
offering or the perception that such sales could occur. These sales also might
make it more difficult for us to sell equity securities in the future at a time
and at a price that we deem appropriate. As of May 4, 2000, we had approximately
15,550,210 shares of common stock outstanding, which does not include the
9,940,000 shares issuable upon exercise of outstanding warrants which are being
registered for sale on the registration statement of which this prospectus is a
part.
Upon the effectiveness of the registration statement of which this
prospectus is a part, assuming the prior exercise of the outstanding warrants
for which the underlying shares of common stock are being registered for sale
hereunder, approximately 24,660,496 shares will be freely tradable without
restriction under the Securities Act of 1933, as amended. In addition, subject
to certain volume and other limitations, approximately 79,156 shares will be
currently eligible for sale under Rule 144, and approximately 750,558 shares
will be eligible for public sale without registration at different times during
the next twelve months, pursuant to Rule 144.
In addition, we also have outstanding warrants to purchase 105,817 shares
of our common stock, which are not being registered on the registration
statement of which this prospectus is a part. The weighted average purchase
price of the outstanding warrants to purchase 10,045,817 shares of our common
stock is $0.33 per share. Further, up to an additional 500,000 shares of our
common stock are issuable upon conversion of outstanding convertible debentures
in the principal amount of $350,000.
We also have outstanding options to purchase 2,165,000 shares of our common
stock at a weighted average exercise price of approximately $0.54 per share.
Further, shortly after the effectiveness of the registration statement, of which
this prospectus is a part, we intend to file a Form S-8 registration statement
under the Securities Act registering 4,000,000 shares of common stock issuable
under our
9
<PAGE>
combination stock option plan, including the 2,165,000 options currently
outstanding. The sale of even a small number of the outstanding shares of common
stock may have a material adverse effect on the quoted price of our common stock
and on our ability to raise capital.
OUR BUSINESS IS DIFFICULT TO EVALUATE BECAUSE OUR NEW INTERNET BUSINESS MODEL IS
CURRENTLY IN THE EARLY STAGES OF DEVELOPMENT AND IMPLEMENTATION. IF A MARKET FOR
OUR PRODUCTS AND SERVICES DOES NOT DEVELOP, WE MAY BE UNABLE TO SUCCESSFULLY
IMPLEMENT OUR BUSINESS STRATEGY.
Our market may not develop as anticipated, and we may not successfully
execute our Internet business strategy. We have a limited operating history upon
which you can evaluate our business. Our new Internet business model is
currently in the early stages of development and implementation, including our
FarAway.com web site. In 1999, we began transitioning our way of doing business
to online sales of travel related products and services. If we are unable to
develop and upgrade our web sites, transaction-processing systems, fulfillment
infrastructure and inventory management systems, and generate revenues, then our
Internet business strategy may fail.
OUR LIMITED OPERATING HISTORY MAKES IT DIFFICULT TO FORECAST OUR FUTURE
REVENUES. ACCORDINGLY, WE MAY ACHIEVE A LEVEL OF REVENUES THAT IS LOWER THAN WE
EXPECT, WHICH WOULD RESULT IN GREATER THAN EXPECTED LOSSES.
As a result of our limited operating history with our current Internet
business model, it is difficult to accurately forecast future revenues. We may
be unable to adjust our spending in a timely manner to adjust for any unexpected
revenue shortfall. Also, we have limited meaningful historical financial data
upon which to base planned operating expenses. We base our current and future
expense levels on our operating plans and estimates of future revenue. Revenue
and operating results are difficult to forecast because they generally depend on
the volume and timing of the orders we receive. As a result, we may be unable to
adjust our spending in a timely manner to adjust for any unexpected revenue
shortfall, which would result in further substantial losses. We may also be
unable to expand our operations in a timely manner to adequately meet customer
demand to the extent it exceeds our expectations.
OUR HISTORICAL FINANCIAL RESULTS ARE NOT MEANINGFUL TO AN ANALYSIS OF OUR
CURRENT BUSINESS.
The financial data included in this document covers periods prior to the
transition to our current Internet business strategy and is not necessarily
meaningful to an analysis of our current and future business operations. For
example, Prestige Travel Services II, Inc., a business we acquired in January
1999 and subsequently sold in December 1999, accounted for 21.4% of our total
revenue during the nine months ended March 31, 2000. Because we will no longer
receive revenues from the Prestige operations, our revenues in future periods
will be substantially less than prior periods, unless we are able to replace the
lost revenues from the Prestige business with new business.
IF OUR TECHNOLOGY OR THE TECHNOLOGY OF THIRD PARTIES UPON WHICH OUR SYSTEMS RELY
EITHER FAIL OR MALFUNCTION, OUR ABILITY TO PROCESS TRANSACTIONS WOULD BE HARMED,
WHICH WOULD HAVE A MATERIAL AND ADVERSE AFFECT ON OUR BUSINESS.
We are currently dependent upon a number of different information and
telecommunication technologies which provide us access to information and manage
a high volume of inbound and outbound calls. We are also dependent upon certain
third party vendors, including central reservation systems (also known as global
distribution systems), such as SABRE. Any failure or malfunction of these
systems or technologies or restricted access by us would have a material adverse
effect on our
10
<PAGE>
business, financial condition and results of operations because we would be
unable to process transactions.
OUR NEW TECHNOLOGY MAY NOT BE SUCCESSFULLY DEVELOPED, INSTALLED OR IMPLEMENTED
WITHOUT DISRUPTING OUR BUSINESS.
We are currently replacing many of our existing computer systems and web
sites with systems designed to operate with our new web site, FarAway.com. There
can be no assurance that these new systems will be successfully developed,
installed according to the expected time frame or within the anticipated budget,
implemented without any disruption to our business or result in the intended
operational benefits and cost efficiencies.
IF WE DO NOT RESPOND TO RAPID TECHNOLOGICAL CHANGES, OUR SERVICES COULD BECOME
OBSOLETE AND WE COULD LOSE CUSTOMERS.
To be competitive, we must enhance and improve the functionality and
features of our online technology and our web sites. The Internet and the online
commerce industry are rapidly changing. If competitors introduce new products
and services embodying new technologies, or if new industry standards and
practices emerge, our existing web sites, technology and systems may become
obsolete. Ongoing development of our web sites and other technology entails
significant expense and technical risks. We need to raise additional capital
over the next three months in the amount of $3 million to fund the development
of our booking engines and our primary web sites. Our failure to raise
additional capital may render our services and web sites obsolete.
IF WE FAIL TO COMPETE EFFECTIVELY IN OUR MARKET, WE WILL BE UNABLE TO GENERATE
SALES WHICH WILL HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, RESULTS OF
OPERATIONS AND FINANCIAL CONDITION.
The travel service industry is extremely competitive and has relatively low
barriers to entry. We primarily compete with:
- other distributors of travel services;
- travel providers;
- travel agents;
- tour operators; and
- central reservation service providers.
Many of our competitors have greater experience, brand name recognition
and/or financial resources than we do. Our major competitors include:
Travelocity, Expedia, Preview Travel, Get There.com and Trip.com, Travel
Network, Uniglobe Travel and Lowestfare.com.
There is the risk that our travel providers may decide to compete more
directly with us and restrict the availability of their product
offerings/services and/or preferential pricing. In addition, other distributors
may have relationships with travel providers that enable them to provide better
product offerings or more competitive pricing than that offered by us.
Furthermore, some travel agents have a strong presence in their geographic area
that may make it difficult for us to attract customers in those areas.
Competition within the travel service industry is increasing as some of our
competitors are expanding their size and financial resources through
consolidation. Consolidation among travel suppliers
11
<PAGE>
has left the remaining suppliers in a stronger position relative to providers
of travel products and services such as Affinity.
As a result of competitive pressures, we may suffer reduced revenues and
operating margins, loss of market share and diminished brand awareness.
OUR FAILURE TO MAINTAIN OUR RELATIONSHIPS WITH TRAVEL SUPPLIERS WOULD MATERIALLY
AND ADVERSELY AFFECT OUR BUSINESS.
We are dependent upon travel suppliers for access to their products and
services. Our travel suppliers generally can cancel or modify their agreements
with us upon no or relatively short notice. In addition, 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 affect our reputation.
The untimely loss of important supplier contracts or a change in any of our
favorable pricing agreements with a supplier would negatively impact the cash
flow we receive from our operations.
IF WE ARE UNABLE TO MANAGE ANY FUTURE GROWTH AND THE RELATED EXPANSION IN OUR
OPERATIONS EFFECTIVELY, OUR BUSINESS MAY BE HARMED.
We plan to grow internally and through acquisitions. We also plan to spend
significant time, effort and working capital with the objective of expanding our
existing businesses and identifying, completing and integrating acquisitions.
There can be no assurance that our systems, procedures and controls will be
adequate to support any expansion of our operations. Any future growth also will
impose significant added responsibilities on members of our senior management,
including the need to identify, recruit and integrate new senior level managers
and executives. There can be no assurance that such additional management will
be identified or retained by us. To the extent that we are unable to manage our
growth efficiently and effectively, or are unable to attract and retain
qualified management, our business, financial condition and results of
operations could be materially adversely affected.
Factors affecting our ability to grow internally include, but are not
limited to:
- customer acceptance of our travel services and products;
- the ability to expand our customer base;
- the ability to expand the travel services offered;
- continued relationships with certain travel providers and travel
agents;
- the ability to recruit and retain qualified sales personnel;
- the ability to cross-sell services; and
- continued access to capital.
THE SUCCESS OF OUR BUSINESS DEPENDS ON THE CONTINUING CONTRIBUTION OF OUR KEY
PERSONNEL, INCLUDING MR. DANIEL BRANDANO, OUR PRESIDENT AND CHIEF EXECUTIVE
OFFICER, AND OUR OTHER EXECUTIVE OFFICERS, WHOSE KNOWLEDGE OF OUR BUSINESS WOULD
BE DIFFICULT TO REPLACE IN THE EVENT WE LOSE THEIR SERVICES.
Our operations are dependent on the efforts and relationships of Daniel
Brandano and the other executive officers as well as the senior management of
our organization. We will likely be dependent on the senior management of our
organization for the foreseeable future. If any of these individuals becomes
unable to continue in their role, our business or prospects could be adversely
affected. For example, the loss of Mr. Brandano could inhibit the development
and enhancement of our web sites and could damage customer relations and our
brand and could restrict our ability to raise additional working capital if and
when needed. Although we have entered into an employment agreement with Mr.
Brandano, there can
12
<PAGE>
be no assurance that he will continue in his present capacity for any particular
period of time. Although we do not maintain key man life insurance covering any
of our executive officers or other members of senior management, we are
currently in the process of securing it for Mr. Brandano.
OUR OPERATING RESULTS MAY FLUCTUATE DUE TO SEASONALITY AND OTHER FACTORS BEYOND
OUR CONTROL.
The domestic and international leisure travel industry is seasonal. Our
historical results have been subject to quarterly fluctuations caused primarily
by the seasonal variations in the travel industry, especially the leisure travel
segment. We expect seasonality to continue in the future. Our quarterly results
of operations have also fluctuated and may continue to fluctuate because of fare
wars by travel providers, extreme weather conditions and other factors beyond
our control.
CHANGES IN CONSUMER PREFERENCES OR DISCRETIONARY CONSUMER SPENDING COULD
NEGATIVELY IMPACT OUR SALES AND RESULTS OF OPERATIONS.
Our continued success depends, in part, upon the popularity of our
wholesale vacation packages to Hawaii, Mexico, the Caribbean and Florida. For
the fiscal year ended June 30, 1999, we derived approximately 80% our revenues
from products and services associated with vacations to these destinations.
Because vacation packages are a luxury item, a downturn in the overall United
States economy or shifts in consumer vacation preferences could materially and
adversely affect our business, financial condition and results of operations.
Also, our success depends to a significant extent on numerous factors affecting
discretionary consumer spending, including economic conditions, disposable
consumer income and consumer confidence. Adverse changes in these factors could
reduce our sales or impose practical limits on pricing, either of which could
have a material adverse effect on our business and results of operations.
FINANCING OF FUTURE ACQUISITIONS WILL DILUTE EXISTING STOCKHOLDER OWNERSHIP.
We intend to finance future acquisitions by using shares of 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.
WE HAVE NEVER PAID DIVIDENDS AND WE DO NOT EXPECT TO PAY ANY DIVIDENDS IN THE
NEAR FUTURE. AN INVESTOR SHOULD NOT RELY ON DIVIDENDS TO BE PAID ON THE COMMON
STOCK AS A SOURCE OF INCOME.
We intend to retain any future earnings in order to finance our planned
operations and to implement our business plan. A potential purchaser of the
common stock should not rely on dividends from the common stock offered hereby
as a possible source of income.
THE MARKET PRICE OF OUR COMMON STOCK FLUCTUATES SUBSTANTIALLY. YOU MAY BE UNABLE
TO SELL YOUR COMMON STOCK QUICKLY AT THE CURRENT MARKET PRICE.
The market price of our common stock has been highly volatile and will
likely fluctuate significantly. Attempts to purchase or sell relatively small
amounts of our common stock could cause the market price of our common stock to
fluctuate significantly. Low trading volume levels may also affect our
stockholders' ability to sell shares of our common stock quickly at the current
market price. In addition, sales of substantial amounts of our common stock, or
the perception that such sales could occur, would adversely affect the
prevailing market prices for our common stock.
13
<PAGE>
THE INTERESTS OF OUR CONTROLLING STOCKHOLDER MAY CONFLICT WITH YOUR INTERESTS.
As of April 25, 2000, Schoemann Venture Capital, LLC, trusts controlled by
Mr. Rodney Schoemann and/or his spouse, and trusts formed by Mr. Schoemann,
beneficially owned approximately 53.6% of our outstanding common stock, which
includes outstanding warrants to purchase 6,450,000 shares of our common stock
at a purchase price of $.25 per share. As a result, in practical effect,
Schoemann Venture Capital, LLC and the trusts control the election of our board
of directors, all matters requiring approval by our stockholders, including
approval of significant corporate transactions, and the direction of our
business. Schoemann Venture Capital, LLC and the trusts could exercise their
voting control in ways that could adversely affect your interests.
PROVISIONS IN OUR ARTICLES OF INCORPORATION COULD PREVENT OR DELAY A CHANGE IN
CONTROL OF OUR COMPANY.
Our articles of incorporation may discourage, delay or prevent a merger or
acquisition that a stockholder may consider favorable because the board of
directors alone may, without further stockholder approval, 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 would give control of
the company to the holders of preferred stock. Furthermore, an 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 existence of this type of preferred stock
could facilitate the issuance of stock which could discourage or delay a merger
or acquisition.
14
<PAGE>
USE OF PROCEEDS
We will not receive any proceeds from the sale of common stock by the
selling stockholders.
DIVIDEND POLICY
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 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.
PRICE RANGE OF COMMON STOCK
Until May 4, 2000, our common stock was quoted on the National Association
of Securities Dealer's OTC Bulletin Board under the symbol "AFFT." Since May 5,
2000, our common stock has been quoted in the "pinksheets" on the
over-the-counter market. The following table sets forth the range of high and
low bid prices as quoted on the OTC Bulletin Board for the period from September
3, 1998, when public trading for our common stock commenced under the symbol
"TRIP", through May 4, 2000. The over-the-counter market quotations below
reflect inter-dealer prices, without retail mark-up, mark-down or commission and
may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
FISCAL YEAR ENDING JUNE 30, 1999 HIGH LOW
---- ---
<S> <C> <C>
First Quarter.................................... $3.500 $1.250
Second Quarter................................... $2.250 $0.500
Third Quarter.................................... $4.000 $0.875
Fourth Quarter................................... $2.000 $0.687
FISCAL YEAR ENDING JUNE 30, 2000
First Quarter.................................... $1.562 $0.300
Second Quarter................................... $2.490 $0.156
Third Quarter.................................... $7.093 $1.250
Fourth Quarter (through May 4, 2000)............. $2.937 $1.031
</TABLE>
The last reported sale price of our common stock on the OTC Bulletin Board
on May 4, 2000 was $1.65 per share.
For a discussion on shares of our common stock that are or will become
eligible for future sale in the public market, which may impact the trading
price or trading market for our common stock, please see the discussion
contained under the heading "Shares Eligible for Future Sale" beginning on page
55.
HOLDERS. As of May 4, 2000, there were approximately 125 holders of record
of the common stock.
DIVIDENDS. We have never declared or paid any dividends on our common stock
and we do not intend to pay dividends on our common stock in the foreseeable
future. We anticipate that we will retain any earnings to finance the growth and
development of our business and for general corporate purposes.
15
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table contains certain selected consolidated financial
data and it is qualified in its entirety by the more detailed consolidated
financial statements and notes included elsewhere in this prospectus. We derived
the statement of operations data for the years ended June 30, 1999, 1998 and
1997, and the balance sheet data as of June 30, 1999 and June 30, 1998 from our
consolidated financial statements, which statements have been audited by BDO
Seidman, LLP, independent accountants, and are included elsewhere in this
prospectus. The unaudited financial data as of June 30, 1995 and 1996 and as of
March 31, 1999 and 2000 have been prepared on a basis consistent with the
audited consolidated financial statements and, in our opinion, include all
adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the financial condition and results of operations for the periods
presented. The results for the nine-month period ended March 31, 2000 are not
necessarily indicative of the results that may be expected for the fiscal year
ending June 30, 2000. You should read this data in conjunction with the
consolidated financial statements and related notes thereto and with
Management's Discussion and Analysis of Financial Condition and Results of
Operations appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
Statement of Operations Data: Year ended June 30,(1)
-------------------------------------------------------------------------------
1995(2) 1996 1997 1998 1999 1999(4)
----------- ---------- --------- ----------- ----------- -----------
(Unaudited) (Unaudited) (Pro Forma)
<S> <C> <C> <C> <C> <C> <C>
Net sales $- $69,291 $665,143 $1,328,577 $2,324,943 $1,698,862
Cost of sales - 34,722 541,751 769,667 1,585,807 1,439,686
--------- --------- --------- ----------- ----------- -----------
Gross profit - 34,569 123,392 558,910 739,136 259,176
Operating expenses 5 85,999 436,981 1,702,818 3,469,797 2,932,374
--------- --------- --------- ----------- ----------- -----------
Operating loss (5) (51,430) (313,589) (1,143,908) (2,730,661) (2,673,198)
Interest income (expense), net - - (785) (40,721) (2,872,795) (2,872,795)
Gain on sale of subsidiary - - - - - -
Financing charges - - - - - -
Other income (expense), net - - (3,451) 16,128 13,374 13,374
--------- --------- --------- ----------- ----------- -----------
Net loss $(5) $(51,430) $(317,825) $(1,168,501) $(5,590,082) $(5,532,619)
========= ======== ========= =========== =========== ===========
Net loss per common share:
Basic and diluted $(-) $(.02) $(.11) $(.27) $(.89) $(.88)
Weighted average common
shares outstanding:
Basic and diluted(3) 2,800,000 2,800,000 2,848,718 4,249,506 6,290,174 6,290,174
<CAPTION>
Nine months ended
Statement of Operations Data: March 31,(1)
--------------------------------------------
1999 2000 2000(4)
----------- ------------ -------------
(Unaudited) (Unaudited) (Pro Forma)
<S> <C> <C> <C>
Net sales $1,366,493 $2,749,729 $2,159,953
Cost of sales 937,836 1,802,520 1,628,410
----------- ------------ ------------
Gross profit 428,657 947,209 531,543
Operating expenses 1,398,111 4,672,180 4,121,926
----------- ------------ ------------
Operating loss (969,454) (3,724,971) (3,590,383)
Interest income (expense), net (475,391) (493,372) (493,372)
Gain on sale of subsidiary - 75,000 -
Financing charges (222,000) (10,431,000) (10,431,000)
Other income (expense), net 1,984 (68,750) (68,750)
----------- ------------ ------------
Net loss $(1,664,861) $(14,643,093) $(14,583,505)
=========== ============ ============
Net loss per common share:
Basic and diluted $(.29) $(1.06) $(1.16)
Weighted average common
shares outstanding:
Basic and diluted(3) 5,812,076 13,756,542 12,758,492
</TABLE>
<TABLE>
<CAPTION>
Nine months ended
Balance Sheet Data: Year ended June 30, (1) March 31, (1)
------------------------------------------------------------ -----------------------
1995(2) 1996 1997 1998 1999 1999 2000
----------- ----------- ----------- ------------ ----------- ----------- -----------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents - $20,913 $326,452 $64,061 $1,119,796 $ 51,091 $ 578,131
Working capital - (102,054) 193,468 (595,550) (294,631) (997,287) (1,587,086)
Total assets - 95,472 547,086 395,165 3,664,923 2,464,342 2,609,467
Long-term debt, less current maturities - - 9,063 - - - -
Capital lease obligation, less current
portion - - - 38,334 22,924 48,919 14,295
Convertible debentures - - 150,000 - 25,000 - -
Total liabilities - 146,602 361,933 834,250 1,992,531 1,549,359 2,725,647
Stockholder's equity (deficit) - (51,130) 185,153 (439,085) (3,940,608) (4,698,017) (5,729,180)
</TABLE>
16
<PAGE>
FOOTNOTES
-------------
(1) On July 31, 1998, Affinity acquired SunStyle in a transaction accounted for
as a purchase of Affinity by SunStyle (a reverse acquisition in which SunStyle
is considered the acquirer for accounting purposes) Therefore, the historical
financial statements herein are those of SunStyle. See Note 1 to the
Consolidated Financial Statements for the three years ending June 30, 1999. In
December 1999, we disposed of Prestige Travel Services, Inc. (acquired on
January 1, 1999) by selling all of its outstanding common stock to its original
stockholders. Prestige accounted for $626,000 and $590,000 of our revenues for
the year ended June 30, 1999 and the nine months ended March 31, 2000,
respectively. Our revenues in future periods will be substantially less than
shown in our Consolidated Financial Statements for the year ended June 30, 1999
and the nine months ended March 31, 2000 if we are unable to replace the
revenues we previously received from Prestige's operations.
(2) SunStyle commenced operations in May 1995 and had no revenues, insignificant
operating activity and minimal capitalization for the period from inception to
June 30, 1995.
(3) The weighted average common shares outstanding for the years ended June 30,
1995, 1996 and 1997 have been adjusted to reflect additional shares issued to
the then sole stockholder and a stock split which occurred during the year ended
June 30, 1997.
(4) The unaudited pro forma combined statement of operations for the year ended
June 30, 1999 and the nine months ended March 31, 2000 give effect to the sale
of the subsidiary, Prestige Travel Services, II by reversing the subsidiary's
purchase on January 1, 1999 and eliminating its effects on operations from
January 1 to December 31, 1999. (See Pro Forma Financial Data).
17
<PAGE>
PRO FORMA FINANCIAL DATA
INTRODUCTION
The following pro forma financial data are based upon the historical
financial statements of Affinity and have been prepared to illustrate the
effects of the Prestige Acquisition on such historical financial data.
The pro forma financial data is provided for comparative purposes only and
does not purport to represent the actual financial position or results of
operations of Affinity that actually would have been obtained if the Prestige
Acquisition had been consummated on the date specified, nor is it necessarily
indicative of the results of operations that may be achieved in the future. In
fact, on December 31, 1999, we sold all of the outstanding capital stock of
Prestige Travel Services II back to the former owners. The unaudited pro forma
combined statement of operations for the year ended June 30, 1999 and the nine
months ended March 31, 2000 gives effect to the sale of the subsidiary by
reversing the subsidiary's purchase on January 1, 1999 and eliminating its
effect on operations from January 1, 1999 through December 31, 1999.
The pro forma financial data are based on certain assumptions and
adjustments described in the notes thereto and should be read in conjunction
therewith. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the financial statements, including the notes
thereto, appearing elsewhere herein.
18
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
Historical Pro Forma
-------------- --------------------------------------
Disposal
Affinity Adjustments As Adjusted
-------------- ---------------- ----------------
<S> <C> <C> <C>
Net sales $2,324,943 $(626,081)(A) $1,698,862
Cost of sales 1,585,807 (146,121)(B) 1,439,686
--------------- --------------- ----------------
Gross profit 739,136 (479,960) 259,176
Operating expenses 3,469,797 (537,423)(C) 2,932,374
--------------- --------------- ----------------
Operating income (loss) (2,730,661) 57,463 (2,673,198)
Interest expense, net (2,872,795) - (2,872,795)
Other income 13,374 - 13,374
--------------- --------------- ----------------
Net income (loss) $(5,590,082) $57,463 $(5,532,619)
=============== =============== ================
Net loss per common share:
Basic and diluted $(.89) $ (.88)
Weighted average common shares outstanding:
Basic and diluted 6,290,174 - (D) 6,290,174
</TABLE>
(A) To eliminate the revenues of Prestige.
(B) To eliminate the cost of sales of Prestige.
(C) To eliminate the selling, general and administrative expenses of Prestige,
including the amortization of goodwill from the acquisition.
(D) As of June 30, 1999, the common stock that was returned to Affinity upon
the sale of Prestige had not been converted from preferred stock. The
preferred stock was considered anti-dilutive as of June 30, 1999.
19
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED MARCH 31, 2000
<TABLE>
<CAPTION>
Historical Pro Forma
---------------- --------------------------------------
Affinity Disposal
(Unaudited) Adjustments As Adjusted
---------------- -------------- ----------------
<S> <C> <C> <C>
Net sales $2,749,729 $(589,776)(A) $2,159,953
Cost of sales 1,802,520 (174,110)(B) 1,628,410
---------------- -------------- ----------------
Gross profit 947,209 (415,666) 531,543
Operating expenses 4,672,180 (550,254)(C) 4,121,926
---------------- -------------- ----------------
Operating income (loss) (3,724,971) 134,588 (3,590,383)
Interest income, net (493,372) - (493,372)
Gain on sale of subsidiary 75,000 (75,000)(D) -
Financing charges (10,431,000) - (10,431,000)
Other expense, net (68,750) - (68,750)
---------------- -------------- ----------------
Net loss $(14,643,093) $59,588 $(14,583,505)
================ ============== ================
Net loss per common share:
Basic and diluted $(1.06) $(1.16)
Weighted average common shares outstanding:
Basic and diluted 13,756,542 (998,050)(E) 12,758,492
</TABLE>
(A) To eliminate the revenues of Prestige.
(B) To eliminate the cost of sales of Prestige.
(C) To eliminate the selling, general and administrative expenses of Prestige,
including the amortization of goodwill from the acquisition.
(D) To eliminate the gain on the sale of Prestige.
(E) To eliminate the common stock that was returned to Affinity upon the sale
of Prestige.
20
<PAGE>
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 "RISK FACTORS" AS WELL AS OTHER RISKS
AND UNCERTAINTIES REFERENCED IN THIS PROSPECTUS.
THE NINE MONTHS ENDED MARCH 31, 2000 VERSUS THE NINE MONTHS ENDED MARCH 31, 1999
--------------------------------------------------------------------------------
The discussion that follows is based on the Consolidated Statement of
Operations and compares the results of our operations for the nine months ended
March 31, 2000 to our operations for the nine months ended March 31, 1999.
NET LOSS
During the nine months ended March 31, 2000, we had a net loss of
$14,643,000, compared to a $1,665,000 net loss during the comparable prior
period.
REVENUES
Revenues increased $1,383,000 or 101.2% during the nine month period ended
March 31, 2000, compared to the same period in the prior year. Of this
$1,383,000 increase in revenue, $441,000 is attributable to an increase in
revenue related to retail travel business resulting primarily from the
acquisition of Prestige Travel Services II, Inc. (Prestige) in January 1999, and
$942,000 is related to growth in our wholesale travel package business. Because
we sold Prestige in December 1999, we no longer realize revenues from Prestige's
operations. During the nine months ended March 31, 2000, Prestige accounted for
21.4% of our total revenue. Accordingly, we expect our future revenues to be
lower, unless we are able to replace the lost revenue from the results of our
Internet based strategy implementation.
The domestic and international leisure travel industry is seasonal. We have
not experienced significant seasonality because of our continued growth in
revenues. However, we expect our future results to be subject to quarterly
fluctuations caused primarily by the seasonal variations in the travel industry,
especially the leisure travel segment.
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.
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<PAGE>
GROSS PROFIT
Gross profit for the nine months ended March 31, 2000 increased $519,000 or
121%, compared to the same period in the prior year. The increase in gross
profit was primarily attributable to a $364,000 increase in gross profit
relating to retail travel business resulting from the acquisition of Prestige,
and a $155,000 increase in gross profit resulting from growth in the wholesale
travel package business. As a percentage of sales, gross profit was 34.4% during
the nine months ended March 31, 2000, compared with 31.4%, during the comparable
prior period. The increase in the gross profit percentage was primarily
attributable to the increase in retail travel business. Revenues from retail
travel sales have almost no direct costs of sales and therefore gross profit on
retail sales approximately equals the related revenue. As noted above, since we
sold Prestige in December 1999, we will no longer realize revenue or gross
profit from Prestige's operations. Accordingly, we expect future gross profit to
be lower unless we are able to replace the lost gross profit. Management expects
that gross profit on the wholesale travel package business as a percentage of
total gross profit will increase as the company establishes itself in the
wholesale travel package business. Accordingly, management expects gross profit
as a percentage of sales to decrease in the future.
OPERATING EXPENSES
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - Selling, general and
administrative expenses increased $1,175,000 or 190.5% during the nine month
period ended March 31, 2000, compared to the prior year. The increase in
selling, general and administrative expenses was primarily attributable to the
following: a $435,000 increase in costs relating to audit, legal, and other
professional fees related primarily to the preparation of our registration
statement; $97,000 in costs related to the Prestige operation; and $643,000 in
expenses related to investor relations, depreciation and amortization, travel,
printing and brochures, computer expense, trade shows, equipment rental, office
supplies, telephone, director compensation, and other miscellaneous expenses in
support of our expanded operations.
SALARIES AND WAGES - Salaries and wages increased $1,853,000 or 296.8% during
the nine month period ended March 31, 2000, compared to the same period in the
prior year. Such increase was primarily attributable to a $1,103,000 increase in
salaries and wages due to the expansion of personnel in both the retail travel
business and the wholesale travel package business, of which $146,000 related to
the Prestige operation, and a $750,000 non-cash charge to operations related to
stock options granted to an officer with an exercise price below the trading
value on the date of grant.
CONSULTING FEES - Consulting fees increased $105,000 or 128.0% during the nine
month period ended March 31, 2000, compared to the same period in the prior
year. This increase was principally related to consulting fees paid to a
significant shareholder for financial advisory services.
RENT - Rent expense increased $139,000 or 187.8% during the nine month period
ended March 31, 2000, compared to the same period in the prior year. Such
increase was primarily attributable to the expansion of our office space during
fiscal 2000.
INTEREST
Interest expense, net of interest income, increased $18,000 or 3.8% during
the nine month period ended March 31, 2000, compared to the same period in the
prior year. The increase in net interest expense was not material.
22
<PAGE>
GAIN ON SALE OF SUBSIDIARY
We recognized a gain of $75,000 on the sale of Prestige back to its
original owners on December 29, 1999. There were no sales during the comparable
period last year.
FINANCING CHARGES
Financing charges totaled $10,431,000 during the nine month period ended
March 31, 2000, compared to $222,000 the same period in the prior year. The
increase in financing charges is attributable to a charge of $9,222,000,
relating to the issuance of new common stock warrants and the re-pricing of
existing common stock warrants in connection with a financing transaction, and a
charge of $1,209,000 related to the issuance of common stock for our failure to
meet certain provisions of existing financing agreements and consulting
agreement.
PROVISION FOR INCOME TAXES
There is no provision for income taxes in the nine month periods ended
March 31, 2000 and 1999 due to the net operating loss for those periods.
FISCAL 1999 VERSUS FISCAL 1998
--------------------------------------------------------------------------------
The discussion that follows is based on the Consolidated Statement of
Operations and compares the results of the Company's operations for the year
ended June 30, 1999 to the Company's operations for the year ended June 30,
1998.
NET LOSS
During the year ended June 30, 1999, we incurred a net loss of $5,590,000,
compared with a net loss of $1,169,000 for the prior year.
REVENUES
Revenues increased $996,000 or 75% during the year ended June 30, 1999,
compared to the prior year. Such increase in revenue was primarily attributable
to a $626,000 increase in our retail travel business which resulted from our
acquisition of Prestige in January, 1999 and a $315,000 increase in our
wholesale travel package business. As we disposed of Prestige in December 1999,
we will no longer realize revenues from Prestige's operations. Accordingly, we
expect our future revenues to be lower, unless we are unable to replace the lost
revenue.
GROSS PROFIT
Gross profit for the year ended June 30, 1999, increased $180,000, or
32.2%, compared to the prior year. During the year ended June 30, 1999, gross
profit, as a percentage of revenue, was 31.8%, compared with 42.1% during the
comparable prior period. The decrease in gross profit as a percentage of sales
was attributable to greater sales of wholesale travel packages which have lower
gross margins than from retail travel sales, partially offset by an increase in
retail travel business. Revenues from retail travel sales have almost no direct
costs of sales and therefore gross profit on retail sales equals approximately
the related revenue. The increase in gross profit was primarily attributable to
a $480,000 increase related to the growth in our retail travel business which
resulted from our acquisition of
23
<PAGE>
Prestige. This increase was partially offset by a $306,000 decrease in gross
profit resulting from the higher costs of travel packages initially purchased
during our expansion into the wholesale travel package business. As noted above,
since we sold Prestige in December 1999, we will no longer realize revenue or
gross profit from Prestige's operations. Accordingly, we expect future gross
profit to be lower unless we are able to replace the lost gross profit.
Management expects that gross profit on the wholesale travel package business as
a percentage of total gross profit will increase as the company establishes
itself in the wholesale travel package business. Accordingly, management expects
gross profit as a percentage of sales to decrease in the future.
OPERATING EXPENSES
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - Selling, general and
administrative expenses increased slightly during the year ended June 30, 1999,
compared to the prior year. Expenses increased $245,000 related to the Prestige
operation that was acquired in January 1999, offset by a $245,000 decrease in
all other selling, general and administrative expenses.
SALARIES AND WAGES - Salaries and wages increased $742,000 or 178.2% during the
year ended June 30, 1999, compared to the prior year. The increase in salaries
and wages was primarily attributable to a $292,000 increase related to the
Prestige operation that was acquired in January 1999 and a $450,000 increase
related to expansion of personnel in both the retail and the wholesale travel
package businesses.
CONSULTING FEES - Consulting fees increased $937,000 during the year ended June
30, 1999, compared to the prior year. This increase was principally related to
consulting fees paid to a significant shareholder for financial advisory
services during fiscal year 1999, which we paid primarily through the issuance
of common stock and warrants.
RENT - Rent expense increased $87,000 or 108.1% during the year ended June 30,
1999, compared to the prior year, of which $31,000 related to the Prestige
operation that was acquired in January 1999, and the balance of the increase
($56,000) related to the expansion of our office space.
INTEREST
Interest expense, net of interest income, increased $2,832,000 during the year
ended June 30, 1999, compared to the prior year. During fiscal 1999, we recorded
interest expense totaling $2,222,000 resulting from issuance during the year of
certain convertible debentures where the conversion price was below the quoted
market price of our stock on the date of issuance. In addition, we recorded
interest expense totaling $503,000 during fiscal 1999 as a result of determining
that certain issuances of common stock were subject to possible rescission.
Interest expense was recorded on the potential rescission amount from the date
the stock was issued. (See Notes 6 and 7. "Convertible Debt and Warrants" and
"Common Stock subject to Rescission" in the "Notes to the Consolidated Financial
Statements" of Affinity International Travel Systems, Inc. and Subsidiaries).
There were no comparable costs in the prior year.
PROVISION FOR INCOME TAXES
There is no provision for income taxes in fiscal 1999 or 1998 due to the
net operating loss for those periods (See Note 10 "Income Taxes" in the "Notes
to the Consolidated Financial Statements" of Affinity International Travel
Systems, Inc. and Subsidiaries).
24
<PAGE>
FISCAL 1998 VERSUS FISCAL 1997
--------------------------------------------------------------------------------
The discussion that follows is based on the Consolidated Statement of
Operations and compares the results of the Company's operations for the year
ended June 30, 1998 to our operations for the year ended June 30, 1997.
REVENUES
Revenues increased $663,000 or 99.7% during the year ended June 30, 1998,
compared to the prior year, of which $407,000 related to an increase in revenues
from wholesale travel packages and $256,000 related to revenue from the initial
year of retail travel sales.
GROSS PROFIT
Gross profit for the year ended June 30, 1998 increased $435,000, or
353.0%, compared to the prior year, of which $183,000 related to an increase in
revenues from wholesale travel packages and $252,000 related to gross profit on
retail travel sales. Revenues from retail travel sales have almost no direct
costs of sales and therefore gross profit on retail travel sales equals
approximately the related revenue.
OPERATING EXPENSES
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - Selling, general and
administrative expenses increased $896,000 or 338.5% during the year ended June
30, 1998, compared to the prior year. This increase was primarily attributable
to a $187,000 increase in audit, legal, consulting and director fees, and the
balance of the increase relates to various marketing and operating costs that
increased as a result of the growth in our business and corporate
infrastructure.
SALARIES AND WAGES - Salaries and wages increased $274,000 or 191.6% during the
year ended June 30, 1998, compared to the prior year. This increase was due to
the expansion of our personnel in both the retail and the wholesale travel
package businesses.
CONSULTING FEES - Consulting fees increased $45,000 or 100.0% during the year
ended June 30, 1998, compared to the same prior year. There were no comparable
expenditures during fiscal 1997.
RENT - Rent expense increased $51,000 or 173.9% during the year ended June 30,
1998, compared to the prior year, principally as result of the expansion of our
business during fiscal 1998 compared to the prior year.
INTEREST
Interest expense, net of interest income, increased $40,000 during the year
ended June 30, 1998, compared to the prior year, principally as a result of
additional borrowings.
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<PAGE>
PROVISION FOR INCOME TAXES
There is no provision for income taxes in fiscal 1998 or 1997 due to the
net operating loss for those periods. We elected and filed our corporate tax
returns as a Subchapter S Corporation through June 3, 1997. No pro forma income
tax computation has been included as we incurred a net loss in fiscal year 1997
and there were no material differences between our book and tax net loss. (See
Note 10 "Income Taxes" in the "Notes to the Consolidated Financial Statements"
of Affinity International Travel Systems, Inc. and Subsidiaries).
PRO FORMA FINANCIAL INFORMATION
--------------------------------------------------------------------------------
We have included pro forma financial information related to our acquisition
of Prestige in January 1999 and the subsequent sale of Prestige to its former
owners on December 29, 1999.
Further discussion of the effects of the Prestige acquisition and its pro
forma effects on our operations for the years ended June 30, 1998 assuming the
acquisition would have occurred on July 1, 1997, as presented in the pro forma
financial information, has been excluded. There is only one pro forma adjustment
to arrive at combined pro forma financial information which relates to the
amortization of acquisition goodwill. Additionally, Affinity, through SunStyle,
is predominately a wholesale travel package operation and Prestige was
exclusively a retail travel business and all discussion related to the changes
in pro forma revenues and expenses would relate to combination of these two
lines of business.
The effects of the Prestige acquisition on our operations for the year
ended June 30, 1999 and the nine months ended March 31, 2000, have been
discussed in the preceding Management's Discussion and Analysis section,
therefore further discussion in this section has been excluded.
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. In addition, our ability to raise additional
capital may be severely restricted, as investors may be hesitant to invest in
our company because of this potential liability. Our inability to raise capital
when needed will have an adverse effect on our ability to continue 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 March 31, 2000, excluding
related accrued interest of $1,138,000 of which $505,000 has been charged to
interest expense during the nine month period ended March 31, 2000. These
amounts are shown on our balance sheet under the line item "Common Stock Subject
to Rescission."
26
<PAGE>
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 been unable to fund our operations with the cash generated from our
business and currently require substantial capital to fund operations and our
Internet business strategy. Since our inception, we have experienced and expect
to continue to experience, for the foreseeable future, negative cash flow from
operations.
We have had net losses in each of the three fiscal years ending June 30,
1997, 1998 and 1999 that cumulatively total $7,076,000. For the fiscal year
ended June 30, 1999, we had a net loss of $5,590,000, of which $3,970,000 was
attributable to non-cash expenses related to the issuance of convertible debt
and equity securities at a discount ($2,222,000), compensation for services
($1,115,000) and accrued interest expense related to common stock subject to
rescission ($633,000). For the nine months ended March 31, 2000, we had a net
loss of $14,643,000, of which $11,181,000 was attributable to non-cash expenses
related to the issuance of options to an employee with a below market exercise
prices ($750,000) the issuance of new common stock warrants and the repricing of
existing warrants ($9,222,000) and the issuance of common stock as a penalty for
not having a registration statement declared effective by the SEC by certain
dates ($1,209,000).
We have been experiencing and expect to continue to experience significant
negative cash flow. For the year ended June 30, 1999 and the nine months ended
March 31, 2000, our operations used $1,515,000 and $2,194,000 in cash,
respectively, and our investing activities used $286,000 and $1,169,000 in cash,
respectively. The use of cash for investing activities in fiscal 1999 includes
the purchase of restricted use certificates of deposit and the purchase of
equipment. Cash used for investing activities during the nine months ended March
31, 2000 included the expenditure of $1,112,000 for computer equipment.
As of March 31, 2000, we had a working capital deficit of $1,587,000, total
stockholders' deficit of $5,729,000, a total of 15,550,210 shares outstanding
and outstanding warrants and options to purchase 12,175,817 shares of our common
stock with an average exercise price of $.37 per share.
Our auditor's report indicates that certain factors raise substantial
doubt about our ability to continue as a going concern. Our auditors issued a
going concern opinion because:
- 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 our company because of this
potential liability; thus we can provide no assurance that we will be able
to generate sufficient funds for our operations during the next twelve
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.
27
<PAGE>
During fiscal 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. Net cash provided from financing activities for the
nine months ended March 31, 2000 of $2,821,000 related primarily to proceeds
from the issuance of common stock and warrants totaling $2,842,000 and the
repayment of short-term debt.
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 significantly
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 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 1, 2000, we had warrants and options outstanding to purchase 10,045,817
and 2,165,000 shares of our common stock with average per share exercise prices
of $.33 and $.54, respectively. If all currently outstanding warrants and
options were exercised, we would receive gross proceeds of $4,582,000. 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. In
addition, in the event that the registration statement, of which this prospectus
is a part, is not declared effective by the SEC by June 20, 2000, then it is
unlikely that we will receive $2,187,500 of proceeds from the exercise of
warrants to purchase an aggregate of 8,750,000 shares of common stock, because
the shares of common stock underlying those warrants may, in such event, be
acquired through a cashless exercise of those warrants.
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
$2,187,000 of proceeds from the exercise of outstanding warrants because of the
cashless exercise provisions contained in outstanding warrants to purchase
8,750,000 shares.
28
<PAGE>
<TABLE>
<CAPTION>
Total Exercise Price
Fiscal Year Less Options With
ENDED JUNE 30, TOTAL EXERCISE PRICE CASHLESS FEATURE
<S> <C> <C>
2003 $1,057,500 $1,057,500
2004 1,125,000 -
2005 1,399,500 337,000
2010 1,000,000 1,000,000
---------- ----------
Total $4,582,000 $2,394,500
========== ==========
</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. Additionally, we cannot be certain that this additional financing
will be sufficient to fund the implementation of our Internet business strategy.
We anticipate incurring capital expenditures of approximately $1.5 million
over the next twelve months as follows: approximately $200,000 for the purchase
of property and equipment, approximately $800,000 for website development, and
approximately $500,000 for software and other capital expenditures.
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, 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 results of
operations will depend upon factors affecting the vacation industry in general.
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;
- armed hostilities;
- international terrorism;
29
<PAGE>
- 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;
- currency fluctuations;
- extreme weather conditions; and
- concerns about passenger safety.
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.
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 increases in fuel prices which are
uncertain at this time.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are not subject to material market risk exposure due to interest rate
risk, foreign currency exchange rate risk, commodity price risk or other
relevant market risk.
FUTURE ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities" (SFAS 133). SFAS
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 133, as amended by SFAS 137,
is effective for all fiscal quarters of fiscal years beginning after June 15,
2000.
Historically, we have not entered into derivatives contract either to hedge
existing risks or for speculative purposes. Accordingly, we do not expect
adoption of the new standard on July 1, 2000 to affect our financial statements.
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use." SOP 98-1 provides
guidance on accounting for the various types of costs incurred for computer
software developed or obtained for internal use. Also in June 1998, the AICPA
issued SOP 98-5, "Reporting on the Costs of Start-Up Activities." SOP 98-5
requires costs of start-up activities and organizational costs, as defined, to
be expensed as incurred. We have elected early adoption of these SOPs, and they
did not materially impact our financial statements.
30
<PAGE>
BUSINESS
OVERVIEW
Affinity International Travel Systems, Inc., operating primarily through
its wholly-owned subsidiary, SunStyle International Holidays, Inc., is engaged
in the business of marketing, selling and distributing a variety of wholesale
and retail travel related products and services. Specifically, we market, sell
and distribute vacation packages, tours, cruises, domestic and international
airline tickets, car rentals and accommodation products and services to travel
agencies and consumers. We are currently implementing a business strategy to
utilize the Internet as a delivery platform for our inventory of travel related
products and services.
We intend to 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 believe we have developed and acquired the infrastructure necessary to
implement our Internet business strategy. Specifically, we have:
- developed and acquired technologies;
- developed specialized knowledge and experience concerning certain
geographic destinations; and
- established relationships with travel suppliers that enable us to offer
a large inventory base at competitive prices.
A key component of our Internet business strategy is to focus our resources
in two segments: the business to consumer and business to business travel arena.
We intend to concentrate our resources on the business to business online travel
arena, where our objective is to sell to other travel providers leisure travel
products that traditionally have had higher margins than airline ticket sales,
including, among others, vacation packages, tours and cruises. We also intend to
continue to sell our leisure travel products directly to consumers.
With our current infrastructure, we believe we are well-positioned to take
advantage of the potential growth in the domestic and international travel
industries and in online travel. Our strategy is to focus on the sale and
distribution of travel products, such as vacation packages, tours and cruises,
which traditionally have had higher margins than airline ticket sales.
Our Internet business strategy is centered on the development and
implementation of our FarAway.com web site. This site, currently in development,
will be designed to attract a loyal customer base in the United States, Europe,
Asia and Latin America, and to convert these potential customers into leisure
travel buyers. We anticipate that our online booking engines and our primary web
site, WWW.FARAWAY.COM, will be developed and operational within the next three
months. We believe that we will need to raise $3 million of additional capital
during the next three months to complete the development of our booking engines
and our primary web site. We plan to raise this additional capital through
additional equity or debt financings.
HISTORY AND BACKGROUND
Affinity International Travel Systems, Inc. was incorporated in Nevada in
1977 under the name Medanco, Inc. From 1977 through 1997, Medanco had no
revenues and limited operations. In 1997, Medanco changed its name to Pay Dirt,
Inc., which had no operations until it completed the acquisition
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of SunStyle International Holidays, Inc. in July 1998, at which point it
changed its name to Affinity International Travel Systems, Inc. Since 1998, we
have been primarily engaged in marketing and selling 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. 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% of our revenues during fiscal 1999.
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
In July 1998, we acquired all of the outstanding common stock of SunStyle
International Holidays, Inc. in exchange for 4,902,894 shares of our common
stock. SunStyle is now a wholly-owned subsidiary through which we conduct our
primary business operations. SunStyle is a wholesale tour operator focused on
travel to Hawaii, Florida, Mexico, and the Caribbean. SunStyle vacation packages
include accommodations, airfare, rental cars, and other services such as theme
park vouchers. SunStyle also provides air transportation through contracts with
major airlines such as Northwest Airlines, TWA, and Hawaiian Air Lines and Air
Jamaica and is an official wholesaler for Walt Disney World Attractions and
official tour operator for Universal Studios Escape Vacation Packages.
On January 1, 1999, we acquired all of the outstanding common stock of
Prestige Travel Services II, Inc. 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 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. Prestige accounted for approximately 21.4%
of our total revenues for the nine months ended March 31, 2000.
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.
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INDUSTRY BACKGROUND
GROWTH OF THE INTERNET
Because of the inherent limitations of traditional retail channels of
distribution, the Internet is dramatically affecting 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 expected to eclipse those of every other e-commerce category.
In addition, online use in Europe and Latin America is poised for explosive
growth.
In Europe, the number of Internet users is predicted to grow from 38
million to 150 million by 2003, with online sales to consumers expected 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 expected to grow from 4.8 million
in 1998 to 7.5 million this year and 19 million by 2003, according to
International Data Corporation. During this time, Latin American e-commerce
sales are expected to soar from a mere $167 million in 1998 to $8 billion within
five years.
GROWTH OF ELECTRONIC COMMERCE IN ONLINE TRAVEL
To date, the travel industry has been very successful in taking advantage
of the 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 expect
the U.S. online travel marketplace to increase from the current $2.8 billion to
$29.5 billion within the next four years. Similarly, online travel research firm
PhoCusWright expects 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 have 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.
CURRENT RESULTS OF ELECTRONIC COMMERCE IN ONLINE TRAVEL
According to the 1999 Online Travel Report, the top four online travel
sites are currently generating about $12 to 16 million each in weekly sales.
Despite these impressive sales figures, however, all of these sites are losing
money. We believe the lack of profit can be attributed primarily to the reliance
of each site on airline ticket sales to generate revenue. Most major airlines
have capped the commissions they pay online travel agencies at 5 percent, or $10
maximum per ticket. According to the online agencies, the cost associated with
selling the average airline ticket is $21. Additionally, a typical
non-productive session on an online travel site, where a consumer makes fare
inquiries without purchasing any of them online, costs the agency about $4 in
fees it pays to the airline-owned computer reservation services. Thus, online
agencies lose money on virtually all airline-ticket purchases or queries. We
believe that because airline ticket purchases make up approximately 80% of
online travel transactions, online agencies that continue to operate under their
current business models will have a difficult time generating a profit in
today's marketplace. These limitations of traditional online travel agencies
create a significant opportunity for a company like ours that can combine our
existing infrastructure with the Internet.
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OUR INTERNET BUSINESS STRATEGY
We believe that in order to become profitable we must begin selling travel
products such as vacation packages, tours and cruises, which traditionally have
had higher margin than airline ticket sales. Our Internet business strategy,
which is centered on the development of our FarAway.com web site and is focused
on the online sale of specialized vacation and tour packages, is designed to
sell such traditionally higher margin products.
Specifically, our strategy is designed 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
- Convert customers into leisure travel buyers by offering attractive
prices on personalized vacation packages, tours and cruises utilizing
our TOURSCAPE operating system.
To achieve the goals of our business strategy, however, we need to
successfully develop our web site, FarAway.com, into a full-service web site
that will use our existing hardware and software infrastructure, as well as our
strategic partnerships and existing vendor contracts.
OUR INFRASTRUCTURE
We believe we are acquiring and developing the infrastructure necessary to
effectively carry out our Internet business strategy. This infrastructure is
comprised of our network architecture, Internet-enabled software engines,
back-end operations and strategic and contract-based relationships.
NETWORK ARCHITECTURE. We are developing and implementing a network
architecture designed to support our Internet and enterprise-based activities.
This architecture takes advantage of, and builds upon, our existing
technologies. Our systems are being designed and developed by a series of
vendors, including: Quest Technologies, Inc, Datalex, Convergent Technologies,
SABRE and Logibro, and with our internal technology staff. 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 superior customer service; and
- A means to support expansion that meets growing corporate needs and
consumer demands.
INTERNET-ENABLED SOFTWARESYSTEMS. We have made significant investments in
the software infrastructure that will be integrated into the FarAway.com 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,
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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 an online booking engine 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. At a minimum, this involves physically handling and mailing paper
airline tickets to customers, where applicable, and manually reviewing tour
package transactions for accuracy and completeness. Under our Internet business
strategy, we plan to provide live agent customer support to those customers
requiring it. Because of our expertise as a wholesale distributor as well as a
telephone-based travel operator, we believe we are well-positioned to expand
these operational capabilities to our Internet activities.
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. As a travel wholesaler, we believe we have a competitive advantage over
suppliers and other online travel agencies that lack such relationships. 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.
OUR MARKETING STRATEGY
We are employing the following marketing strategies:
FOCUSING ON THE SALE OF SPECIALIZED LEISURE TRAVEL PACKAGES. As noted by
industry analysts from Jupiter Communications and Forrester Research, it is
imperative that online travel agencies begin selling products that traditionally
have had higher margins than airline ticket sales, such as vacation packages,
tours and cruises in order to generate profitable operations. We believe that,
in order to be profitable, online agencies, must:
- have specialized vacation package inventory available to consumers;
- utilize online tools that help facilitate complex leisure travel
purchases; and
- provide the customer service, both online and off, that is necessary to
make the customer feel comfortable booking these types of transactions
online.
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We believe we are well positioned to compete in the online travel business
for the following reasons:
- Our TOURSCAPE booking technology will provide consumers with a
user-friendly mechanism for booking complex and specialized travel
packages. We expect to have this technology operational for online
travel around August 1, 2000.
- Our existing base of travel specialists can provide the requisite
e-travel personal assistance through real-time chat, Internet
telephony, 800 telephone service, and, in the near future,
Internet-based video communication.
- Finally, because of our status as a travel wholesaler and distributor,
with established travel vendor relationships, we expect that
FarAway.com will offer a wide variety of specialized packages at rates
that travel consumers will find attractive. We expect that our
Faraway.com web site will be operational by August 1, 2000.
COMBAT THE TRADITIONALLY HIGH "LOOK-TO-BOOK" RATIO. According to research
from PhoCusWright, approximately 57 percent of online travel visitors have
looked, but not booked, online. Of those, approximately 70 percent have bought
their tickets through an 800 number or conventional travel agent after
researching online. Therefore, as a means of capturing maximum revenue,
FarAway.com customers will be encouraged to utilize the services of our travel
agent staff through live chat, Internet call button, or an 800 number if, for
some reason, they are not inclined to purchase online. To further combat this
trend, personalization technology, which will store a customer's travel
preferences, will be implemented into the FarAway.com site. By combining our
agent-based customer service and personalization technology, we believe
FarAway.com will be positioned to improve on the industry's current
"look-to-book" ratio.
FOSTER STRATEGIC PARTNERSHIPS AND PRIVATE LABEL PROGRAMS. We believe that
one of the most important aspects of developing a successful online travel web
site is the process of creating and managing the requisite strategic
partnerships and alliances. Strategic partnerships with web portals, e-commerce
companies and content providers have the potential to generate revenue from
transactions and advertisements, and also places the brand in front of Internet
users.
We intend to pursue these types of strategic online partnerships as a
means to generate traffic, customer acquisition and revenue. We intend to enter
into private label agreements to provide fulfillment on all travel purchased on
several heavily trafficked e-commerce web sites. To date we have established two
strategic partnerships with e-commerce companies.
In a less conventional effort, we also plan to work with large corporations
to establish programs that provide incentives for the corporation's employees to
book travel through the FarAway.com Web site or through our network of travel
agents. Employees of each corporation will be issued a member ID number that,
when entered from the FarAway.com home page, will take them to a customized page
within FarAway.com offering special travel discounts and incentives. This
customized home page may alternatively be accessed directly from the employer's
corporate intranet. Corporate members will also have full access to our travel
specialists through special 800 numbers, where the same discounts and incentives
will be available. A goal of this effort is to utilize the corporate
communication infrastructure to promote and market these programs, which are, in
effect, employee benefits programs. To date, we negotiated one of these
programs. We are currently implementing this program.
ESTABLISH A FARAWAY.COM AFFILIATE PROGRAM. Thousands of Web sites are
currently utilizing the affiliate (also known as associate or referral) programs
of online vendors such as CDNOW, Amazon.com, BarnesandNoble.com,
LendingTree.com, FogDog.com and CarPrices.com, to offer their visitors the
opportunity to buy everything from books to sporting goods to cars. These
programs allow
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any web site owner to create banner links that transport visitors to the
affiliated e-commerce web site in the hope they will make a purchase, thereby
entitling the web site owner to a commission.
By establishing and promoting a FarAway.com affiliate program, we believe
we will create an opportunity to sell travel products in appropriate contextual
settings on complementary web sites. We are currently identifying e-commerce
companies to establish our affiliate program.
TARGET UNTAPPED INTERNATIONAL MARKETS. We believe online travel agencies
have, up to now, virtually ignored the non-U.S. travel market. Recognizing the
opportunities presented by rapid growth in use of the Internet abroad, we have
formed Affinity International Travel Systems, Ltd., a wholly-owned subsidiary
located in London, England, in an effort to expand our target market. We believe
the European market is a potentially large source of business for the U.S.
vacation accommodation product and that our presence in the market provides a
base for potential expansion and a hub for customer service in the European
online and offline market. We expect our United Kingdom office will become fully
functional once it is linked to the TOURSCAPE software system, which is expected
to occur by September 1, 2000.
COMPETITION
Our competitors in the online travel industry include travel suppliers and
travel agencies. Each of these types of competitors and factors upon which we
compete are described below. Many of our competitors have greater experience,
brand name recognition and/or financial resources than we do. We may be unable
to compete successfully and our failure to compete successfully may have a
material adverse effect on our business, financial condition and results of
operation.
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.
Advantages of suppliers over their agency counterparts include, among
others:
- Well-established brands and consumer confidence in those brands;
- Customer loyalty;
- Existing operational infrastructure and fulfillment capabilities;
- Access to additional inventories and pricing incentives;
- Other incentives such as frequent flyer miles programs; and
- Availability of extensive financial resources to invest in Internet
initiatives.
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
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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 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.
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 plan to enter 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. There is a substantial risk that the owner of other
marks would overcome any defenses that we could raise. 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.
We have licensed in the past, and expect that we may license in the future,
certain of our intellectual property rights, such as trademarks or copyrighted
material, to third parties. While we attempt to ensure that the quality of the
our brand is maintained by such licensees, we cannot assure you that such
licensees will not take actions that might materially adversely affect the value
of our intellectual property rights or reputation, which could harm our
business.
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
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.
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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 recently
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 expect to have 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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EMPLOYEES
As of March 7, 2000, we had 42 full-time employees, including 20 in the
reservation and customer service departments, and 22 serving in operations,
sales and marketing, information systems, management, accounting and
administration. Our employees are not represented by a union, and we believe our
employee relations are good.
FACILITIES
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. We have also entered into a sublease agreement with an
adjacent tenant for an additional 5,683 square feet of office space to
accommodate our Internet expansion strategy.
Our Design-A-Tour division leases office space in Atlanta, Georgia, and our
Intrepid Travel division leases office space in a suburban office complex
located in Seminole, Florida. We believe that our facilities are adequate to
meet our current requirements and that suitable additional or substitute space
will be available as needed.
LEGAL PROCEEDINGS
As of the date of this prospectus, we are not party to any material
proceedings.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information about our executive
officers and directors.
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Daniel G. Brandano 50 President, Chief Executive Officer and Director
Joan C. Brandano 49 Secretary and Director
John E. Vahl 64 Vice President and Director
Gerard J. LaMontagne 52 Vice President - Finance and Controller
</TABLE>
DANIEL G. BRANDANO has served as our President, Chief Executive Officer and
Chairman of the Board since August 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 has 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.
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.
GERARD J. LAMONTAGNE has served as our Vice President - Finance and Controller
since May 2000 and served as our Chief Financial Officer from October 1998 to
April 2000. Prior to joining us, he served as vice president and chief financial
officer of Goddard Medical Associates, a multi-specialty health care provider,
in southeastern Massachusetts from February 1984 to September 1998. Mr.
LaMontagne is a certified public accountant.
ELECTION OF OFFICERS AND DIRECTORS
Our Board of Directors currently consists of three members. Each director
is serving as a director until the next annual meeting of stockholders and until
his successor is elected and qualified or until his earlier resignation or
removal. Each of our executive officers has been chosen for a term which
continues until the meeting of the Board of Directors which follows the next
annual meeting of stockholders and until his successor is chosen and qualified.
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COMMITTEES OF THE BOARD OF DIRECTORS
We currently do not have any committees of the Board of Directors.
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 May 1999
through July 2000. The exercise price of these options on the date of grant was
greater than the last 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 a director of Affinity.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
We do not have a formal compensation committee. Executive compensation
matters are determined by the Board of Directors as a group. Mr. Brandano, our
President and Chief Executive Officer, does not, however, participate in
discussions concerning his compensation.
EXECUTIVE COMPENSATION
The following summary compensation table sets forth certain information
concerning the compensation awarded to, earned by or paid to our Chief Executive
Officer and each of our other executive officers whose total annual salary and
bonuses exceeded $100,000 for all services rendered in all capacities to us for
each of our last three fiscal years. The officers listed in the table below are
sometimes referred to as the named executive officers.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Compensation
Annual Compensation Awards
------------------------------ -----------
Fiscal Other Securities
Name and Year Annual Underlying All Other
Principal Ended Salary Bonus Compensation Options Compensation
Position 6/30 ($) ($) ($) (#) ($)
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Daniel G. Brandano
President and Chief 1999 $62,000 -- -- -- --
Executive Officer(1) 1998 52,500 -- -- -- --
1997 36,479 -- -- -- --
Gerard J. LaMontagne
Chief Financial Officer(2) 1999 $48,500 -- $66,563(3) -- --
-------------------------------------------------------------------------------------------------
</TABLE>
(1) The compensation shown for the fiscal years ended June 30, 1998 and June
30, 1997 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 currently serves as our Vice President - Finance and
Controller.
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<PAGE>
(3) 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 1999. Such shares were valued at the closing 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 are earned by Mr. LaMontagne.
OPTION GRANTS IN LAST FISCAL YEAR
No named executive officer was granted options during the fiscal year ended
June 30, 1999. In July 1999, we granted Mr. Brandano, our chief executive
officer, an option to purchase 2,000,000 shares of our common stock at an
exercise price of $0.50 per share. These options are immediately exercisable and
expire 10 years from the date of grant. In August 1999, we also granted Mr.
LaMontagne, then our chief financial officer, an option to purchase 15,000
shares of our common stock at an exercise price of $1.00 per share. Mr.
LaMontagne's options expire 3 years from the date of grant.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION VALUES
No named executive officer had any options through the fiscal year ended
June 30, 1999.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AGREEMENTS AND CHANGE IN CONTROL
ARRANGEMENTS
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, formerly our chief financial officer and
currently our Vice President - Finance and Controller, had an arrangement with
us pursuant to which he received $6,500 in cash and 5,000 shares of our common
stock each month for services rendered. The shares we issued to Mr. LaMontagne
were valued at the closing price of our common stock as quoted on the OTC
Bulletin Board on the last day of each month for which he provided services.
Under our current arrangement with Mr. LaMontagne, he will receive an annual
salary of $75,000 and will receive an option to purchase 50,000 shares of our
common stock.
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 April 14, 2000,
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<PAGE>
options to purchase 2,165,000 shares of common stock were outstanding or
committed for issuance under the stock option plan.
CERTAIN TRANSACTIONS
In July 1998, we entered into an acquisition agreement with all of the
stockholders of SunStyle International Holidays, Inc. pursuant to which we
purchased 4,902,894 shares of SunStyle International Holidays, which represented
all of the issued and outstanding shares of SunStyle, in exchange for 4,902,894
shares of our common stock. Although we acquired SunStyle, 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. For accounting purposes, the reverse
acquisition is treated as a recapitalization of SunStyle and not as a business
combination, therefore, no value was allocated to the common stock issued for
the acquisition. Mr. Brandano, our President and a Director, was a stockholder
and the founder of SunStyle International Holidays, Inc. Following the
acquisition, Mr. Brandano became an officer and director of Affinity.
Between December 1998 and January 2000, we entered into a series of
agreements with Schoemann Venture Capital, LLC, a five percent beneficial holder
of our securities, pursuant to which Schoemann Venture Capital, LLC purchased or
received as penalty shares in connection with such financings an aggregate of
7,357,143 shares of our common stock and warrants to purchase 6,450,000 shares
of our common stock at a current exercise price of $.25 per share, for an
aggregate purchase price of $2,872,000. These transactions are as follows:
- 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. The shares acquired in this transaction are not being registered
in the registration statement, of which this prospectus is a part;
- 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;
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<PAGE>
- 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 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 also 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.
On January 1, 1999, we acquired all of the outstanding capital stock of
Prestige Travel Services II, Inc., a retail travel agency with an independent
agent sales program and an internet cruise brokerage operation, for $1,600,000,
which we paid through the issuance of 800,000 shares of Series A Convertible
Preferred Stock. The conversion price of the Series A Convertible Preferred
Stock was $1.06875 per share based on the 20 day average trading price preceding
August 1, 1999 as provided for in the purchase agreement. The holders of the
Series A Convertible Preferred Stock subsequently converted their shares
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<PAGE>
of preferred stock into 1,497,076 shares of common stock, thereby resulting in
their becoming a greater than five percent owner of our company.
In December 1999, we entered into an agreement with the former owners of
Prestige Travel Services II, who were then five percent beneficial owners of our
stock, pursuant to which the former owners repurchased all of the outstanding
capital stock of Prestige Travel Services from us. The former owners paid us a
purchase price of $75,000 in cash and transferred to us the 1,497,076 shares of
our common stock which the owners received upon conversion of the Series A
Convertible Preferred Stock issued to them in the acquisition.
In July 1999, we entered into an employment agreement with Daniel Brandano,
our president and chief executive officer. 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. For a more detailed description of Mr. Brandano's
employment agreement, please see the section entitled "Employment Contracts,
Termination of Employment Agreements and Change in Control Arrangements".
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<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information known to us regarding
beneficial ownership of our common stock as of May 31, 2000 by:
- The named executive officers;
- Each of our directors;
- Each person, other than those officers or directors who are 5%
holders who are listed elsewhere in the table, known by us to be
the beneficial owner of more than 5% of our common stock;
- All executive officers and directors as a group; and
- Each selling stockholder, other than those officers or directors
or 5% holders who are listed elsewhere in the table, who is
offering shares of our common stock under this prospectus.
Unless otherwise noted below, the address of each person listed in the
table is c/o Affinity International Travel Systems, Inc., 100 Second Avenue
South, 1100S, St. Petersburg, Florida 33701-4301, and each person has the sole
voting and investment power over the shares as beneficially owned except to the
extent authority is shared by spouses under applicable law and except as set
forth in the footnotes to the table.
We have determined beneficial ownership in accordance with the rules of the
SEC. Shares of common stock subject to warrants or options that are either
currently exercisable or exercisable within 60 days of May 31, 2000 are treated
as outstanding and beneficially owned by the warrant or option holder for the
purpose of computing the percentage ownership of the option/warrant holder.
However, these shares are not treated as outstanding for the purpose of
computing the percentage ownership of any other person. For purposes of
determining beneficial ownership after the offering, we have assumed that each
selling stockholder will sell all shares they are offering. For purposes of
calculating the percentage of beneficial ownership prior to the offering, the
number of outstanding shares is 15,550,210. For purposes of calculating
beneficial ownership after the offering, the number of outstanding shares is
25,490,210 (which includes the shares issuable upon the exercise of the warrants
and registered for sale hereunder).
All shares of common stock being offered by selling stockholders are being
registered by this prospectus pursuant to contractual registration rights or
similar obligations on behalf of Affinity or are being registered voluntarily by
Affinity.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO OFFERING AFTER OFFERING
-------------------- --------------------
NUMBER OF
NAME AND ADDRESS NUMBER OF PERCENTAGE OF SHARES NUMBER OF PERCENTAGE OF
OF BENEFICIAL OWNER SHARES OWNERSHIP BEING OFFERED SHARES OWNERSHIP
---------------------------------- --------- ------------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C>
DIRECTORS AND OFFICERS
Daniel G. Brandano (1) ........... 4,950,000 28.04% 25,000 2,100,000 7.61%
Joan C. Brandano(2) .............. 4,950,000 28.04% 2,825,000 2,100,000 7.61%
John E. Vahl(3) .................. 50,000 0.32% -0- 50,000 0.20%
Gerard J. LaMontagne(4) .......... 100,000 0.64% 85,000 15,000 0.06%
ALL EXECUTIVE OFFICERS AND ....... 5,100,000 28.79% 2,935,000 2,165,000 7.83%
DIRECTORS AS A GROUP
(4 PERSONS)(5)
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO OFFERING AFTER OFFERING
-------------------- --------------------
NUMBER OF
NAME AND ADDRESS NUMBER OF PERCENTAGE OF SHARES NUMBER OF PERCENTAGE OF
OF BENEFICIAL OWNER SHARES OWNERSHIP BEING OFFERED SHARES OWNERSHIP
---------------------------------- -------- ------------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C>
5% BENEFICIAL OWNERS
Gordon Dumont, Manager(6) 2,300,000 12.89% 2,300,000 -0- 0.00%
4821 Sheridan
Metairie, LA 70002
Bradley S. Johnson(7) 2,550,000 14.57% 2,550,000 -0- 0.00%
c/o David Lukinovich
3333 W. Napoleon Ave.
Suite 101
Metairie, LA 70001
Gina M. Music(8) 2,856,706 16.75% 2,856,706 -0- 0.00%
c/o David Lukinovich
3333 W. Napoleon Ave.
Suite 101
Metairie, LA 70001
Claire M. Olivier(9) 320,000 0.21% 320,000 -0- 0.00%
2401 Jay St.
New Orleans, LA 70122
Marcus A. Pelletteri(10) 2,750,000 15.03% 2,750,000 -0- 0.00%
c/o David Lukinovich
3333 W. Napoleon Ave.
Suite 101
Metairie, Louisiana 70001
Florence M. Schoemann(11) 3,103,294 19.96% 3,103,294 -0- 0.00%
3904 Wheat Dr.
Metairie, Louisiana 70002
Rodney R. Schoemann, Sr.(12) 1,092,205 6.91% 884,286 207,919 0.01%
3904 Wheat Dr.
Metairie, Louisiana 70002
SELLING STOCKHOLDERS
Cliff Barnett(13) 40,000 0.26% 40,000 -0- 0.00%
Linster E. Brinkley, Jr. 74,854 0.48% 74,854 -0- 0.00%
Carrollton Golf Partners(14) 330,000 2.10% 330,000 -0- 0.00%
David Comstock(15) 100,000 0.64% 100,000 -0- 0.00%
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO OFFERING AFTER OFFERING
-------------------- --------------------
NUMBER OF
NAME AND ADDRESS NUMBER OF PERCENTAGE OF SHARES NUMBER OF PERCENTAGE OF
OF BENEFICIAL OWNER SHARES OWNERSHIP BEING OFFERED SHARES OWNERSHIP
---------------------------------- -------- ------------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Peter Thomas Dazzio, Jr.(16) 50,000 0.32% 50,000 -0- 0.00%
Dan T. Dickerson(17) 50,000 0.32% 50,000 -0- 0.00%
Kim and Maria Greene(18) 20,000 0.13% 20,000 -0- 0.00%
James Hanner(19) 40,000 0.26% 40,000 -0- 0.00%
David Heideman(20) 100,000 0.64% 100,000 -0- 0.00%
George B. Juneman(21) 150,000 0.96% 150,000 -0- 0.00%
Brian Kessler 168,954 1.09% 168,954 -0- 0.00%
Charles Kessler 65,000 0.42% 65,000 -0- 0.00%
Mark S. Mandula 140,000 0.90% 140,000 -0- 0.00%
David Matheny(22) 30,000 0.19% 30,000 -0- 0.00%
John Rasmussen(23) 50,000 0.32% 50,000 -0- 0.00%
Charles Schwab f/b/o Robert 100,000 0.64% 100,000 -0- 0.00%
Clayton Pritchard and Beth
Pritchard(24)
Charles Schwab f/b/o Howard R. 615,000 3.86% 615,000 -0- 0.00%
Pritchard(25)
Gary M. Smith(26) 70,000 0.45% 70,000 -0- 0.00%
Mark and Cathy Sommer(27) 180,000 1.15% 180,000 -0- 0.00%
Neal Tourdo(28) 60,000 0.39% 60,000 -0- 0.00%
Dennis Travis(29) 50,000 0.32% 50,000 -0- 0.00%
G.K. Ulrich(30) 115,000 0.73% 115,000 -0- 0.00%
R. Trent Ulrich(31) 30,000 0.19% 30,000 -0- 0.00%
Mark Young 25,000 0.16% 25,000 -0- 0.00%
</TABLE>
---------------------------
* Less than 1% of the outstanding common stock.
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<PAGE>
(1) Includes 2,050,000 shares issuable upon the exercise of options
exercisable within 60 days of May 31, 2000. Also includes 2,875,000
held of record by Mr. Brandano's spouse, Joan Brandano, our secretary
and a director. Mr. Brandano disclaims beneficial ownership of the
shares held by Ms. Brandano.
(2) Includes 50,000 shares issuable upon the exercise of options
exercisable within 60 days of May 31, 2000. Also includes 2,075,000
shares held of record by Ms. Brandano's spouse, Daniel Brandano, our
chief executive officer and president. Ms. Brandano disclaims
beneficial ownership of the shares held by Mr. Brandano.
(3) Includes 50,000 shares issuable upon the exercise of options
exercisable within 60 days of May 31, 2000.
(4) Includes 15,000 shares issuable upon the exercise of options
exercisable within 60 days of May 31, 2000.
(5) Includes 2,140,000 shares issuable upon the exercise of options
exercisable within 60 days of May 31, 2000.
(6) Includes 2,300,000 shares issuable upon the exercise of immediately
exercisable warrants to purchase 2,300,000 shares of our common stock.
(7) 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. Of the amounts beneficially owned
by Mr. Johnson, 1,950,000 shares are issuable upon the exercise of
immediately exercisable warrants to purchase 1,950,000 shares of our
common stock.
(8) Includes 750,000 shares of common stock held in the Affinity 1R Trust;
678,353 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. Of the amounts beneficially
owned by Ms. Music, 1,500,000 shares are issuable upon the exercise of
immediately exercisable warrants to purchase 1,500,000 shares of our
common stock.
(9) Includes 160,000 shares of common stock held in the Rodney Ryan
Schoemann, Sr. Grantor Retained Annuity Trust UAD 6/20/97; and 160,000
shares of common stock held in the Carol Lynn Henry Schoemann Grantor
Retained Annuity Trust UAD 6/20/97. Ms. Olivier serves as the trustee
for such trusts.
(10) 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 such trusts. Of the amounts beneficially
owned by Mr. Pelletteri, 2,750,000 shares are issuable upon the
exercise of immediately exercisable warrants to purchase 2,750,000
shares of our common stock.
(11) 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
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<PAGE>
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.
(12) Includes 160,000 shares of common stock held in the Ryan Schoemann, Sr.
Foundation. Mr. Schoemann serves as director of the foundation. Of the
amounts beneficially owned by Mr. Schoemann, 250,000 shares are
issuable upon the exercise of immediately exercisable warrants to
purchase 250,000 shares of our common stock. Mr. Schoemann's beneficial
ownership has been calculated as of May 31, 2000.
(13) Includes 20,000 shares issuable upon the exercise of immediately
exercisable warrants to purchase 20,000 shares of our common stock.
(14) Includes 165,000 shares issuable upon the exercise of immediately
exercisable warrants to purchase 165,000 shares of our common stock.
(15) Includes 50,000 shares issuable upon the exercise of immediately
exercisable warrants to purchase 50,000 shares of our common stock.
(16) Includes 25,000 shares issuable upon the exercise of immediately
exercisable warrants to purchase 25,000 shares of our common stock.
(17) Includes 25,000 shares issuable upon the exercise of immediately
exercisable warrants to purchase 25,000 shares of our common stock.
(18) Includes 10,000 shares issuable upon the exercise of immediately
exercisable warrants to purchase 10,000 shares of our common stock.
(19) Includes 20,000 shares issuable upon the exercise of immediately
exercisable warrants to purchase 20,000 shares of our common stock.
(20) Includes 50,000 shares issuable upon the exercise of immediately
exercisable warrants to purchase 50,000 shares of our common stock.
(21) Includes 25,000 shares issuable upon the exercise of immediately
exercisable warrants to purchase 25,000 shares of our common stock
which are held in the Frances B. Juneman Trust, a trust for which Mr.
Juneman serves as trustee. Also includes 50,000 shares issuable upon
the exercise of immediately exercisable warrants to purchase 50,000 of
our common stock which are held in Mr. Juneman's name.
(22) Includes 15,000 shares issuable upon the exercise of immediately
exercisable warrants to purchase 15,000 shares of our common stock.
(23) Includes 25,000 shares issuable upon the exercise of immediately
exercisable warrants to purchase 25,000 shares of our common stock.
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<PAGE>
(24) Includes 50,000 shares issuable upon the exercise of immediately
exercisable warrants to purchase 50,000 shares of our common stock.
(25) Includes 365,000 shares issuable upon the exercise of immediately
exercisable warrants to purchase 365,000 shares of our common stock.
(26) Includes 35,000 shares issuable upon the exercise of immediately
exercisable warrants to purchase 35,000 shares of our common stock.
(27) Includes 90,000 shares issuable upon the exercise of immediately
exercisable warrants to purchase 90,000 shares of our common stock.
(28) Includes 30,000 shares issuable upon the exercise of immediately
exercisable warrants to purchase 30,000 shares of our common stock.
(29) Includes 25,000 shares issuable upon the exercise of immediately
exercisable warrants to purchase 25,000 shares of our common stock.
(30) Includes 100,000 shares issuable upon the exercise of immediately
exercisable warrants to purchase 100,000 shares of our common stock.
(31) Includes 15,000 shares issuable upon the exercise of immediately
exercisable warrants to purchase 15,000 shares of our common stock.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK AND OTHER MATTERS
Our authorized capital stock consists of 100,000,000 shares of common
stock, $.001 par value, and 100,000,000 shares of preferred stock, $.001 par
value per share.
COMMON STOCK
As of May 31, 2000, there were 15,550,210 shares of common stock
outstanding, held of record by approximately 125 stockholders.
Holders of common stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Directors are elected by a plurality of the votes of the shares present
in person or by proxy at the meeting and entitled to vote in such election.
Holders of common stock are entitled to receive ratably such dividends, if any,
as may be declared by the Board of Directors out of funds legally available
therefor, after provision has been made for any preferential dividend rights of
outstanding preferred stock. Upon our liquidation, dissolution or winding up,
the holders of common stock are entitled to receive ratably the net assets
available after the payment of all of our debts and other liabilities, and after
the satisfaction of the rights of any outstanding preferred stock. Holders of
the common stock have no preemptive, subscription, redemption or conversion
rights, nor are they entitled to the benefit of any sinking fund. The
outstanding shares of common stock are validly issued, fully paid and
non-assessable. The rights, powers, preferences and privileges of holders of
common stock are subordinate to, and may be adversely affected by, the rights of
the holders of shares of any series of preferred stock which we may designate
and issue in the future.
PREFERRED STOCK
The Board of Directors has the authority, without action by the
stockholders, to create one or more series of preferred stock and determine the
number of shares, designation, price, redemption terms, conversion and voting
rights with respect to any such series.
Our stockholders have granted the Board of Directors authority to issue the
preferred stock and to determine the rights and preferences of the preferred
stock in order to eliminate delays associated with a stockholder vote on
specific issuances. The rights of the holders of common stock will be
subordinate to the rights of holders of any preferred stock issued in the
future. The issuance of preferred stock, while providing desirable flexibility
in connection with possible acquisitions and other corporate purposes, could
adversely affect the voting power or other rights of the holders of common
stock, and 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. We have previously issued shares of Series A
Convertible Preferred Stock, but such shares have since been converted into
common stock and the shares of Series A Convertible Preferred Stock have been
canceled and are not subject to reissuance. Accordingly, to date, there are no
shares of preferred stock outstanding and we have no present plans to issue any
shares of preferred stock.
WARRANTS
As of May 31, 2000, there were outstanding warrants to purchase an
aggregate of 10,045,817 shares of our common stock, of which 9,940,000 shares
underlying such warrants are being registered for sale by the registration
statement of which this prospectus is a part.
53
<PAGE>
CONVERTIBLE DEBENTURES
IN MAY 2000, WE ISSUED 9.5% CONVERTIBLE DEBENTURES IN THE PRINCIPAL AMOUNT
OF $350,000. THE DEBENTURES ARE CONVERTIBLE INTO RESTRICTED SHARES OF COMMON
STOCK AT $1.00 PER SHARE ONLY AFTER THE REGISTRATION STATEMENT OF WHICH THIS
PROSPECTUS IS A PART IS DECLARED EFFECTIVE BY THE SEC. THE CONVERSION PRICE IS
REDUCED BY 30% IF THE AVERAGE CLOSING BID PRICE OF OUR COMMON STOCK FOR THE
FIVE-DAY TRADING PERIOD ENDING ON THE DAY PRIOR TO THE 30TH DAY AFTER THE
CLOSING OF THE SALE OF THE DEBENTURES IS LESS THAN $2.00 PER SHARE. THE
DEBENTURES MAY ONLY BE CONVERTED FOR A PERIOD OF THREE MONTHS AFTER THEIR DATE
OF ISSUANCE.
REGISTRATION RIGHTS
All of the shares being registered for sale by the selling stockholders,
including the 9,940,000 shares issuable upon exercise of the warrants which are
being registered for sale by certain stockholders, are being registered,
pursuant to contractual obligations and registration rights granted to such
selling stockholders.
LIMITATION OF OUR OFFICERS' AND DIRECTORS' LIABILITY
Our articles of incorporation, as amended, and by-laws include provisions
to eliminate the personal liability of our directors for monetary damages
resulting from breaches of their fiduciary duty and require us to indemnify our
directors and officers to the fullest extent permitted by law.
ADDITIONAL PROVISIONS IN OUR CHARTER AND BYLAWS
Our articles of incorporation may discourage, delay or prevent a merger or
acquisition that a stockholder may consider favorable because the board of
directors alone may, without further stockholder approval, 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 would give control of
the company to the holders of preferred stock. Furthermore, an 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 existence of this type of preferred stock
could facilitate the issuance of stock which could discourage or delay a merger
or acquisition.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is Interwest
Transfer, Inc. located in Salt Lake City, Utah.
54
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
As of May 31, 2000, we had approximately 15,550,210 shares of common stock
outstanding, which does not include the 9,940,000 shares issuable upon exercise
of outstanding warrants and registered for sale pursuant to the registration
statement of which this prospectus is a part.
Upon the effectiveness of the registration statement of which this
prospectus is a part, assuming the prior exercise of all outstanding warrants
for which the underlying shares of common stock are being registered for sale
hereunder, approximately 24,660,496 shares will be freely tradable without
restriction under the Securities Act of 1933, as amended. Subject to certain
volume and other limitations, approximately 79,156 shares are currently eligible
for sale under Rule 144, and approximately 750,558 shares will be eligible for
public sale without registration at different times during the next twelve
months, pursuant to Rule 144.
In addition to the shares issuable upon exercise of outstanding warrants
for which we are registering for sale, we also have outstanding warrants to
purchase 105,817 shares of our common stock, which are not being registered
under the registration statement of which this prospectus is a part. The
weighted average purchase price of the outstanding warrants to purchase
10,045,817 shares of our common stock is $0.33 per share. Further, up to an
additional 500,000 shares of our common stock are issuable upon conversion of
outstanding convertible debentures in the principal amount of $350,000.
We also have outstanding options to purchase 2,165,000 shares of our common
stock at a weighted average exercise price of $0.54 per share. Further, shortly
after the effectiveness of the registration statement, of which this prospectus
is a part, we intend to file a Form S-8 registration statement under the
Securities Act registering 4,000,000 shares of common stock issuable under our
combination stock option plan, including the 2,165,000 options currently
outstanding. The sale of even a small number of the outstanding shares of common
stock may have a material adverse effect on the quoted price of our common
stock. The sale of any such shares may also have a material adverse effect on
our ability to raise capital and/or materially adversely affect the quoted price
of our common stock.
In general, under Rule 144, a person who has beneficially owned restricted
securities for at least one year would be entitled to sell within any
three-month period a number of shares that does not exceed the greater of:
- one percent of the number of shares of common stock then outstanding; or
- the average weekly trading volume of the common stock during the four
calendar weeks preceding the sale.
Sales under Rule 144 are also subject to requirements with respect to
manner of sale, notice and the availability of current public information about
us. Under Rule 144(k), a person who is not deemed to have been our affiliate at
any time during the three months preceding a sale and who has beneficially owned
the shares proposed to be sold for at least two years, is entitled to sell such
shares without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144.
55
<PAGE>
PLAN OF DISTRIBUTION
The selling stockholders are selling an aggregate of 20,353,094 shares,
which includes 9,940,000 shares of common stock being registered for sale upon
the private exercise of outstanding warrants to purchase 9,940,000 shares of
common stock. The price and manner of sale of the shares of common stock offered
by the selling stockholders hereunder by this prospectus are in the sole
discretion of the selling stockholders. The shares of common stock offered by
this prospectus may be offered through any of several methods, such as ordinary
brokerage transactions at market prices or in privately negotiated transactions
at prices agreed upon by the parties. We do not have, nor, to our knowledge, do
the selling stockholders have, any agreement, arrangement or understanding with
any broker or dealer entered into prior to the effective date of the
registration statement of which this prospectus is a part with respect to the
sale of the common stock offered by this prospectus.
LEGAL MATTERS
Brown Rudnick Freed & Gesmer, Boston, Massachusetts will pass upon certain
legal matters in connection with this offering for us.
EXPERTS
The consolidated financial statements of Affinity International Travel
Systems, Inc. and subsidiaries as of June 30, 1999 and 1998 and for the three
years then ended, included in this prospectus and in the registration statement
have been audited by BDO Seidman, LLP, independent certified public accountants,
to the extent and for the periods set forth in their reports appearing elsewhere
herein and in the registration statement, and are included in reliance upon such
reports given upon the authority of said firm as experts in auditing and
accounting.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act registering the common stock to be sold in this offering. As
permitted by the rules and regulations of the SEC, this prospectus omits certain
information contained in the registration statement and the exhibits and
schedules filed as a part of the registration statement. For further information
concerning us and the common stock to be sold in this offering, you should refer
to the registration statement and to the exhibits and schedules filed as part of
the registration statement. Statements contained in this prospectus regarding
the contents of any agreement or other document filed as an exhibit to the
registration statement are not necessarily complete, and in each instance
reference is made to the copy of the agreement filed as an exhibit to the
registration statement, each statement being qualified by this reference. The
registration statement, including the exhibits and schedules filed as a part of
the registration statement, may be inspected at the public reference facilities
maintained by the SEC at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at its regional offices located at Seven World Trade
Center, New York, New York 10007 and 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661, and copies of all or any part thereof may be obtained
from such offices upon payment of the prescribed fees.
Upon effectiveness of the registration statement, we will become subject to
the reporting requirements of the Exchange Act of 1934, as amended. As a
reporting company, we will be filing quarterly, annual and other periodic and
current reports and proxy statements with the SEC. You may
56
<PAGE>
call the SEC at 1-800-SEC-0330 for further information on the operation of
the public reference rooms, and you can request copies of the documents upon
payment of a duplicating fee by writing to the SEC. In addition, the SEC
maintains a web site that contains reports, proxy and information statements
and other information regarding registrants (including us) that file
electronically with the SEC which can be accessed at http://www.sec.gov.
57
<PAGE>
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 Sheets as of June 30, 1998 and June 30, 1999 F-3
Consolidated Statements of Operations for the years ended June 30, 1997,
June 30, 1998 and June 30, 1999 F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the
years ended June 30, 1997, June 30, 1998 and June 30, 1999 F-5
Consolidated Statements of Cash Flows for the years ended June 30, 1997,
June 30, 1998 and June 30, 1999 F-6
Notes to consolidated financial statements F-7 - F-25
AFFINITY INTERNATIONAL TRAVEL SYSTEMS, INC. AND SUBSIDIARIES
FINANCIAL STATEMENTS
Unaudited Consolidated Balance Sheet as of March 31, 2000 F-26 - F-27
Unaudited Consolidated Statements of Operations for the periods
ended March 31, 1999 and March 31, 2000 F-28
Unaudited Consolidated Statement of Capital Deficit for the period
ended March 31, 2000 F-29
Unaudited Consolidated Statements of Cash Flows for the periods
ended March 31, 1999 and March 31, 2000 F-30
Notes to consolidated financial statements F-31 - F-40
</TABLE>
F-1
<PAGE>
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 sheets of Affinity
International Travel Systems, Inc. and subsidiaries as of June 30, 1999 and 1998
and the related consolidated statements of operations, stockholders' equity
(deficit) and cash flows for each of the three years in the period ended June
30, 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, 1999 and 1998
and the results of their operations and their cash flows for each of the three
years in the period ended June 30, 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
continue to raise capital when needed and on terms that are acceptable to the
Company that may be required to continue to fund the Company's operations. 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
Orlando, Florida
September 3, 1999, except for Notes 1[A] and 13,
as to which the dates are May 24, 2000
and September 15, 1999, respectively
F-2
<PAGE>
Affinity International Travel Systems, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
JUNE 30, 1999 1998
---------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT:
Cash and cash equivalents $ 1,119,796 $ 64,061
Restricted certificates of deposit (Note 9) 195,280 32,132
Accounts receivable 158,156 35,403
Prepaid accommodations 128,471 31,520
Prepaid expenses 48,273 37,250
---------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 1,649,976 200,366
PROPERTY AND EQUIPMENT, net (Note 4) 268,464 139,395
GOODWILL, net of accumulated amortization of $90,210 1,688,309 -
DEPOSITS 40,230 29,180
OTHER ASSETS 17,944 26,224
---------------------------------------------------------------------------------------------
TOTAL ASSETS $ 3,664,923 $ 395,165
=============================================================================================
LIABILITIES AND CAPITAL DEFICIT
CURRENT LIABILITIES:
Notes payable $ 27,000 $ -
Accounts payable 621,227 543,474
Accrued expenses (Note 7) 972,152 92,405
Deferred revenue 294,953 65,539
Due to customers 13,865 68,066
Current portion of long-term debt (Note 5) - 13,984
Current portion of capital lease obligations (Note 9) 15,410 12,448
---------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 1,944,607 795,916
CAPITAL LEASE OBLIGATIONS, less current portion (Note 9) 22,924 38,334
CONVERTIBLE DEBENTURE (Note 6) 25,000 -
---------------------------------------------------------------------------------------------
TOTAL LIABILITIES 1,992,531 834,250
---------------------------------------------------------------------------------------------
COMMON STOCK SUBJECT TO RESCISSION (Note 7) 5,613,000 -
COMMITMENTS AND CONTINGENCIES (Notes 7, 8 and 9)
CAPITAL DEFICIT (Notes 1, 6, 8, 9 and 10):
Common stock, $.001 par value, shares authorized
100,000,000, issued and outstanding 12,263,165
and 4,902,894 5,494 4,903
Convertible preferred stock, $.001 par value,
shares authorized 100,000,000, issued and
outstanding 800,000 and -0- 800 -
Additional paid-in capital 3,185,682 1,098,514
Accumulated deficit (7,132,584) (1,542,502)
---------------------------------------------------------------------------------------------
TOTAL CAPITAL DEFICIT (3,940,608) (439,085)
---------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND CAPITAL DEFICIT $ 3,664,923 $ 395,165
=============================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
Affinity International Travel Systems, Inc. and Subsidiaries
Consolidated Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1999 1998 1997
------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET SALES $ 2,324,943 $ 1,328,577 $ 665,143
COST OF SALES 1,585,807 769,667 541,751
------------------------------------------------------------------------------------------------
Gross profit 739,136 558,910 123,392
------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Selling, general and administrative 1,160,678 1,160,623 264,682
Salaries and wages 1,159,709 416,917 142,986
Consulting fees 276,670 44,997 -
Consulting fees to related party (Note 8) 705,682 -- --
Rent 167,058 80,281 29,313
------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 3,469,797 1,702,818 436,981
------------------------------------------------------------------------------------------------
Operating loss (2,730,661) (1,143,908) (313,589)
------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest income 1,775 6,221 1,440
Interest expense (Notes 7 and 12) (652,570) (46,942) (2,225)
Interest expense to related party (Notes 6 and 12) (2,222,000) -- --
Other income (expense) 13,374 16,128 (3,451)
------------------------------------------------------------------------------------------------
TOTAL OTHER EXPENSE (2,859,421) (24,593) (4,236)
------------------------------------------------------------------------------------------------
NET LOSS $(5,590,082) $(1,168,501) $ (317,825)
================================================================================================
NET LOSS PER COMMON SHARE $ (.89) $ (.27) $ (.11)
================================================================================================
WEIGHTED AVERAGE SHARES OUTSTANDING 6,290,174 4,249,506 2,848,718
================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
Affinity International Travel Systems, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity (Deficit)
<TABLE>
<CAPTION>
CONVERTIBLE
COMMON STOCK PREFERRED STOCK
-------------------- --------------- ADDITIONAL
PAR PAR PAID-IN
SHARES VALUE SHARES VALUE CAPITAL
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, July 1, 1996 187 - - $ - $ 5,046
Advances from stockholder converted to common stock 2,799,813 2,800 - - 12,199
Advances from related party contributed to capital - - - - 68,859
Sale of common stock 1,400,003 1,400 - - 468,850
Net loss - - - - -
------------------------------------------------------------------------------------------------------------------------
BALANCE, June 30, 1997 4,200,003 4,200 - - 554,954
Issuance of common stock for acquisition 6,667 7 - - 19,993
Issuance of common stock for compensation 75,000 75 - - 74,925
Issuance of common stock for conversion of debentures 371,224 371 - - 198,892
Sale of common stock 250,000 250 - - 249,750
Net loss - - - - -
------------------------------------------------------------------------------------------------------------------------
BALANCE, June 30, 1998 4,902,894 4,903 - - 1,098,514
Record issuance of common stock related to reverse acquisition 330,840 331 - - (331)
Beneficial conversion feature in convertible debentures and
common stock warrants to related party - - - - 2,222,000
Issuance of common stock for conversion of debentures to related
party 4,934,286 4,934 - - 2,217,066
Issuance of preferred stock for acquisition - - 800,000 800 1,599,200
Issuance of common stock for acquisition 36,320 36 - - 74,964
Issuance of common stock for warrants 200,000 200 - - 69,800
Issuance of common stock for compensation and services 182,433 182 - - 228,348
Issuance of common stock warrants for services to related party - - - - 682,500
Sale of common stock 1,676,392 1,677 - - 599,852
Reclassification of common shares subject to rescission - (6,769) - - (5,606,231)
Net loss - - - - -
------------------------------------------------------------------------------------------------------------------------
BALANCE, June 30, 1999 12,263,165 5,494 800,000 $ 800 $ 3,185,682
========================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
TOTAL
STOCKHOLDERS
ACCUMULATED EQUITY
DEFICIT (DEFICIT)
------------------------------------------------------------------------------------------------
<S> <C> <C>
BALANCE, July 1, 1996 $ (56,176) $ (51,130)
Advances from stockholder converted to common stock - 14,999
Advances from related party contributed to capital - 68,859
Sale of common stock - 470,250
Net loss (317,825) (317,825)
------------------------------------------------------------------------------------------------
BALANCE, June 30, 1997 (374,001) 185,153
Issuance of common stock for acquisition - 20,000
Issuance of common stock for compensation - 75,000
Issuance of common stock for conversion of debentures - 199,263
Sale of common stock - 250,000
Net loss (1,168,501) (1,168,501)
------------------------------------------------------------------------------------------------
BALANCE, June 30, 1998 (1,542,502) (439,085)
Record issuance of common stock related to reverse acquisition - -
Beneficial conversion feature in convertible debentures and
common stock warrants to related party - 2,222,000
Issuance of common stock for conversion of debentures to related
party - 2,222,000
Issuance of preferred stock for acquisition - 1,600,000
Issuance of common stock for acquisition - 75,000
Issuance of common stock for warrants - 70,000
Issuance of common stock for compensation and services - 228,530
Issuance of common stock warrants for services to related party - 682,500
Sale of common stock - 601,529
Reclassification of common shares subject to rescission - (5,613,000)
Net loss (5,590,082) (5,590,082)
------------------------------------------------------------------------------------------------
BALANCE, June 30, 1999 $(7,132,584) $(3,940,608)
================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
Affinity International Travel Systems, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1999 1998 1997
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
RECONCILIATION OF NET LOSS TO NET CASH USED FOR OPERATING ACTIVITIES:
Net loss $(5,590,082) $(1,168,501) $(317,825)
Adjustments to reconcile net loss to net cash used for operating
activities:
Depreciation and amortization 151,613 47,926 10,368
Loss on disposals of property and equipment 3,623 - 4,000
Write off of notes receivable 10,000 9,896 -
Write off of goodwill - 66,681 -
Write off of organization costs - 30,246 -
Issuance of common stock for interest - 44,263 -
Issuance of common stock for compensation and services 206,655 43,750 -
Issuance of common stock warrants for services to related party 682,500 - -
Issuance of convertible debt and common stock warrants at a -
discount to a related party 2,222,000 -
Changes in assets and liabilities, net of effects of acquisitions:
Accounts receivable (59,838) (14,993) (4,049)
Prepaid accommodations (96,951) (4,719) -
Prepaid expenses 10,852 (6,000) (14,526)
Note receivable - 3,887 (13,783)
Accounts payable 35,767 458,719 20,811
Accrued expenses 765,478 43,527 48,878
Deferred revenue 197,570 7,239 21,303
Due to customers (54,201) 68,066 -
--------------------------------------------------------------------------------------------------------------------
Net cash used for operating activities (1,515,014) (370,013) (244,823)
--------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of restricted certificate of deposit (163,148) (12,132) (20,000)
Purchase of property and equipment (87,696) (38,589) (50,820)
Cash paid for acquisition of SunStyle (28,558) - -
Cash paid for acquisition of Ritter-Witt - (55,000) -
Cash paid for acquisition of Prestige Travel (6,185) - -
Cash obtained from acquisition of Prestige Travel 33,428 - -
Increase in organizational costs - - (13,872)
Increase (decease) in deposits (11,050) 9,126 (21,806)
Net increase in other assets (23,250) (21,495) (1,487)
--------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (286,459) (118,090) (107,985)
--------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from stockholder - - 38,097
Principal payments of notes payable (34,889) - -
Principal payments of long-term debt (13,984) (23,295) -
Principal payments of capital lease obligations (12,448) (5,993) -
Proceeds from issuance of convertible debentures 25,000 5,000 150,000
Proceeds from issuance of convertible debentures to related party 2,222,000 -- --
Net proceeds from sale of common stock 671,529 250,000 470,250
--------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 2,857,208 225,712 658,347
--------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH 1,055,735 (262,391) 305,539
CASH AND CASH EQUIVALENTS, beginning of year 64,061 326,452 20,913
--------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, end of year $ 1,119,796 $ 64,061 $ 326,452
====================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
Affinity International Travel Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. NATURE OF NATURE OF ORGANIZATION
ORGANIZATION
Affinity International Travel Services, Inc., 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.; and SunStyle
International Holidays, Inc. ("SunStyle") and its
wholly-owned subsidiaries, SunStyle International Holidays,
Ltd.; SunStyle International Holidays of California, Inc.;
and Air Travel Trust, Inc. All material intercompany
accounts and transactions have been eliminated.
(A) GOING CONCERN
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 7 may have been in violation of
Rule 504 of Regulation D, of the Securities Act of 1933,
as amended. Accordingly, the Company has recorded common
stock subject to possible rescission separately from the
equity section of the balance sheet in the amount of
$5,613,000 which resulted in the Company having a
capital deficit of $3,940,608 as of June 30, 1999.
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. 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. The Company does not have sufficient cash
reserves to repurchase its common stock subject to
possible rescission. In addition, the potential
violation may negatively affect the Company's ability
to continue to raise capital when needed and on terms
that are acceptable to the Company, because investors
may be hesitant to invest in the Company because of
this potential liability.
The existence of the possible rescission liability
without sufficient working capital to satisfy this
potential obligation may restrict the Company's access
to capital, which raises 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
F-7
<PAGE>
Affinity International Travel Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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, the pro forma information assuming the
acquisition had taken place at the beginning of the
respective periods 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 of Ritter-Witt, Inc.
On October 10, 1997 the Company purchased certain
assets of Ritter-Witt, Inc. d/b/a Mariner's Travel,
a retail travel agency located in
F-8
<PAGE>
Affinity International Travel Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Newport Beach, California, with $55,000 in cash, 6,667
shares of the Company's common stock valued at $20,000
($3.00 per share based on the value negotiated between
the Company and Ritter-Witt, Inc.) and promissory notes
of $105,000 for a total purchase price of $180,000. The
transaction was accounted for as a purchase, and the
purchase price was allocated to the assets acquired
based on their estimated fair market values on the date
of the transaction. The excess of the purchase price
over the fair value of the net assets acquired was
$159,402 and was recorded as goodwill.
In July 1998, a key employee of this operation
resigned, and as a result, a lawsuit was filed by the
Company that alleged the employee breached her
employment and non-compete agreements. The lawsuit was
settled in February 1999 and resulted in the outstanding
debt payable to the former owners that arose through the
acquisition of approximately $93,000 being forgiven and
recorded as a purchase price adjustment, along with a
$5,000 judgment against the employee's new employer.
The remaining goodwill of approximately $67,000 was
charged to operations for the year ended June 30, 1998
as it was determined to be impaired as a result of the
breached employment agreement and its related effect on
the acquired business. The California operation
continued on a limited basis until it was relocated in
July 1999 to Marietta, Georgia, where its operations
were consolidated with Design-A-Tour, Inc.
(See Note 1[E]).
(D) Acquisition of Prestige Travel Services II, Inc.
On January 1, 1999, the Company acquired all of the
outstanding stock of Prestige Travel Services II, Inc.,
a retail travel agency 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 Series A convertible
preferred stock. Prestige operates 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.
The excess of 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 $1,746,828, was recorded as goodwill and is
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
F-9
<PAGE>
Affinity International Travel Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
remaining $80,000 was accrued as of June 30, 1999 and
was converted into 74,854 shares of the Company's
common stock after June 30, 1999. The conversion price
was determined at August 1, 1999 based on the average
trading price of the Company's common stock for the
preceding 20 days.
(E) 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 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 Company's financial
statements reflect the issuance of these shares although
the certificate had not been released to the seller
pending the execution of the amendment to the purchase
agreement which occurred in August 1999.
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 are being depreciated and amortized
over their estimated useful lives of three to
five years.
The operating results of the significant acquired
businesses have been included in the consolidated
statement 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
at the beginning of the respective periods. The pro
forma information includes adjustments for interest
expense that would have 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 the
assumed dates.
<TABLE>
<CAPTION>
Unaudited
YEAR ENDED JUNE 30, 1999 1998 1997
-------------------------------------------------------------------------------
<S> <C> <C> <C>
Total revenues $ 3,588,584 $ 2,416,290 $1,597,208
Net loss applicable to common stock (5,722,932) (1,229,808) (483,772)
Net loss per common share (.91) (.29) (.29)
================================================================================
</TABLE>
F-10
<PAGE>
Affinity International Travel Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
The results of operations of the insignificant
acquisitions were not material to the Company's
consolidated results of operations.
2. SUMMARY OF (A) Revenue Recognition
SIGNIFICANT
ACCOUNTING The Company sells travel packages through both wholesale
POLICIES 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.
(B) Property, 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.
(C) Advertising Costs
The Company expenses advertising costs as incurred. The
total advertising costs charged to expense were
approximately $44,000, $31,000 and $36,000 for the years
ended June 30, 1999, 1998 and 1997, respectively.
(D) Income Taxes
The Company accounts for income taxes on the liability
method. Under
F-11
<PAGE>
Affinity International Travel Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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 tax 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 income tax assets being reduced by available
tax benefits not expected to be realized.
(E) Net Loss per Share
Potential common shares are not considered in the
calculation of loss per share because their inclusion
would be antidilutive. Potential common shares consist of
4,505,000 common stock warrants and 800,000 shares of
convertible preferred stock. The 74,854 shares of common
stock to be issued as finder's fees (see Note 1[D]) and
40,000 shares of common stock to be issued as employee
compensation (see Note 9) have been included in the
calculation of loss per share since their issuance is not
dependent upon a future contingency.
(F) 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.
(G) Financial Instruments
Statement of Financial Accounting Standards No. 107,
"Disclosures about Fair Value of Financial Instruments,"
requires disclosure of fair value information about
financial instruments. Fair value estimates discussed
herein are based upon certain market assumptions and
pertinent information available to management as of June
30, 1999.
The respective carrying value of certain on-balance-sheet
financial instruments approximated their fair values.
These financial instruments include cash and cash
equivalents, accounts receivable, notes payable, accounts
payable, accrued expenses, long-term debt 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.
F-12
<PAGE>
Affinity International Travel Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(H) 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. As discussed in Note 1(C),
the Company recorded a write-down of goodwill of
approximately $67,000 during the year ended June 30,
1998.
(I) Stock-Based Compensation
Statement of Financial Accounting Standard No. 123,
"Accounting for Stock-Based Compensation," issued by the
Financial Accounting Standards Board, encourages a fair
value method of accounting for stock-based compensation
plans. This statement provides a choice to either adopt
the fair value based method of accounting or continue to
apply APB Opinion No. 25, which would require only
disclosure of the pro forma net income and earnings per
share, determined as if the fair value based method has
been applied. The Company continued to apply APB Opinion
No. 25 when adopting this statement, and accordingly,
this statement did not have a material impact on the
Company.
(J) Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board
issued SFAS 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS 133). SFAS 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 133, as amended
by SFAS 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 1998, the American Institute of Certified Public
Accountants ("AICPA") issued Statement of Position
("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SOP
98-1 provides guidance on accounting for the various
types of costs incurred for computer software developed
or obtained for internal use. Also in June 1998, the
AICPA issued SOP 98-5, "Reporting
F-13
<PAGE>
Affinity International Travel Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
on the Costs of Start-Up Activities." SOP 98-5 requires
costs of start-up activities and organizational costs, as
defined, to be expensed as incurred. The Company has
elected early adoption of these SOPs, and they did not
materially impact the Company's financial statements.
3. NOTE
RECEIVABLE In July 1996, the Company sold a license for $22,406 to a
Canadian corporation to allow that corporation to use one of
its trade names. The Company had recorded this note using an
imputed interest rate of 10%. Under the terms of the
agreement, the Company is to receive monthly installment
payments of $741 for 35 months. The unpaid balance on this
note of $9,896 was written off due to uncollectibility during
the year ended June 30, 1998.
3. PROPERTY AND
EQUIPMENT
Property and equipment are summarized as follows:
<TABLE>
<CAPTION>
USEFUL
JUNE 30, LIVES 1999 1998
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Leasehold improvements 3-5 yrs. $ 4,100 $ 5,435
Furniture and equipment 5-7 yrs. 242,728 129,583
Computer software 3 yrs. 152,270 60,930
---------------------------------------------------------------------------------------
399,098 195,948
Less accumulated depreciation (130,634) (56,553)
---------------------------------------------------------------------------------------
$ 268,464 $ 139,395
==============================
</TABLE>
5. LONG-TERM
DEBT Long-term debt at June 30, 1998 consists of a note payable to
Sabre Group, Inc. DEBT related to a licensing agreement under
which the Company acquired the right to use certain
reservation software. The note was payable in monthly
installments of $970 including principal and interest at 15%
and was paid off in March 1999.
6. CONVERTIBLE The Company issued $150,000 of 8% subordinated convertible
DEBTS AND debentures during 1997 with a conversion price of
WARRANTS $.5357 per share. These debentures had a term of 18 months
and matured from July to November 1998. The Company
issued an additional 5,000 of these debentures in May 1998
with essentially the same terms. On June 30, 1998, the
debentures, including approximately $44,000 of accrued
interest, were converted into 371,224 shares of common stock.
On January 15, 1999, the Company issued a convertible note to
a significant shareholder 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. 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.
F-14
<PAGE>
Affinity International Travel Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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 were not recorded
as the maximum debt discount related to the convertible note
had previously been recorded. These warrants were outstanding
as of June 30, 1999.
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 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 a warrant 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. As of June 30, 1999, the debenture
had not been converted and the warrants had not been
exercised.
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. 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 outstanding as
of June 30, 1999.
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
F-15
<PAGE>
Affinity International Travel Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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 outstanding as
of June 30, 1999.
7. COMMON STOCK From July 1998 to January 1999, the Company sold an aggregate
SUBJECT TO of 6,768,572 shares of common stock in reliance upon the
RESCISSION 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. The Company does not
have sufficient cash reserves to repurchase the shares of its
common stock that are subject to possible rescission. In
addition, its ability to raise additional capital may be
severely restricted, as investors may be hesitant to invest
in the Company because of this potential liability. The
Company's inability to raise capital when needed will have an
adverse effect on its ability to continue a going concern.
Although there is no definitive answer as to whether the
Company violated Rule 504, the Company has 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, 1999, excluding related accrued
interest of $633,000 which has been charged to interest
expense during the year ended June 30, 1999. These amounts
are shown on our balance sheet under the line item "Common
Stock Subject to Rescission."
8. RELATED SALE OF DEBENTURES
PARTY
TRANSACTIONS During 1997, the Company sold $35,000 of debentures to an
officer of the Company and $5,000 of debentures to a relative
of a director of the Company.
F-16
<PAGE>
Affinity International Travel Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
CONSULTING AGREEMENT
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 is to provide business and
financial advisory services in exchange for monthly
consulting fees of $6,666. The Consultant is 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. This agreement remains in effect until
such time as either party terminates it with 10 days' written
notice.
On June 1, 1999, the consulting agreement was amended
providing for a monthly consulting fee of $13,333 and the
granting of warrants to purchase 750,000 shares of the
Company's common stock with an exercise price of $2.00 per
share. The warrants were immediately exercisable and expire
five years from the date of the amendment. 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.
9. COMMITMENTS LETTERS OF CREDIT
AND
CONTINGENCIES The Company has three letters of credit which total $42,400
in connection with the certifications enabling the Company to
issue airline tickets. Each letter of credit is secured by
restricted certificates of deposit which total $45,280 as of
June 30, 1999 and mature from September 1999 to June 2000. As
of June 30, 1999, there were no outstanding balances under
these lines of credit.
The Company also has a $150,000 letter of credit in
connection with the lease for its corporate office space. The
letter of credit is secured by a $150,000 restricted
certificate of deposit as of June 30, 1999 which matures in
May 2000. As of June 30, 1999, there was no outstanding
balance under this line of credit.
LEASES
The Company leases various equipment under lease agreements
which are classified as capital leases. Total monthly
payments under these capital leases was $1,472, which
includes interest at rates ranging from 11% to 14%. The
equipment was recorded at a cost of $57,334 and had
accumulated depreciation of $24,259 as of June 30, 1999.
The Company leases various equipment and office space under
leases classified as operating leases. Rental expense under
all operating leases amounted to approximately $158,000,
$137,000, and $47,000 for the years ended June 30, 1999, 1998
and 1997, respectively.
F-17
<PAGE>
Affinity International Travel Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of June 30, 1999, future minimum rental payments required
under capital and operating leases 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>
1999 $17,664 $294,042
2000 11,784 301,072
2001 10,836 195,385
2002 4,428 193,376
--------------------------------------------------------------------------------
Total net minimum lease payments 44,712 $983,875
===========
Less amount representing interest (6,378)
------------
Present value of net minimum lease payments $38,334
============
</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 paid $25,000 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 has 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 not commenced pending resolution of the payment terms for
the balance due Weblink under the service agreement, and the
Company had recorded the advance payments to Weblink as a
prepaid expense. The service agreement expires three years
from the date that the web site is launched on the Internet.
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.
MANAGEMENT AGREEMENT WITH TRAVEL SYSTEMS, INC.
On April 5, 1999, the Company entered into a management
agreement with an option to purchase the assets of Travel
Systems International, Inc. ("TSI"). Under the terms of the
agreement, the Company advanced TSI $10,000 under a
promissory note. The Company subsequently terminated its
management agreement and agreed to a termination fee equal to
the balance on the outstanding promissory note. As a result,
the Company charged the $10,000 promissory note to operations
during the year ended June 30, 1999.
F-18
<PAGE>
Affinity International Travel Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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
immaterial.
EMPLOYMENT AGREEMENTS
As of June 30, 1999, accrued compensation of $40,000 is
recorded pursuant to an employment agreement with an officer
of the Company. Under the terms of this agreement, the
officer is to receive 5,000 shares of common stock per month.
The employment agreement is on a month-to-month basis. The
amount accrued represents 40,000 shares of common stock based
on the estimated market value of $1.00 per share.
On July 1, 1999, the Company entered into an employment
agreement with its President. The agreement provides for
payment of salary through June 2006 and the establishment of
a bonus program.
10. STOCKHOLDERS' COMMON STOCK
EQUITY
In February 1997, the Company converted advances from its
sole stockholder into 2,799,813 shares of common stock at a
price of $.01 per share, and subsequently, the stockholder
contributed an additional $68,859 to capital.
During 1997, the Company issued a total of 1,400,003 shares
of its common stock in connection with two private placements
for net proceeds of $470,250 at prices per share ranging from
$.35 to $1.00 (the estimated fair market values on the dates
of issuance). The Company paid $62,250 in cash and granted
250,000 shares of common stock included in the above total
shares issued for offering costs related to these private
placements.
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 expired two years from the date of the
agreement. These warrants were exercised on January 25, 1999.
F-19
<PAGE>
Affinity International Travel Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
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. (See Note 1[D]).
STOCK OPTION PLAN
On July 1, 1999, The Company adopted a stock option 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 will
account for these options in fiscal year 2000.
RESERVED SHARES
The Company has reserved 4,505,000 shares of common stock as
of June 30, 1999 for issuance in connection with the
convertible debt and common stock warrants (see Note 6).
11. INCOME
TAXES
From the Company's inception through June 3, 1997, the
Company, with the consent of its stockholders, was treated as
an S Corporation, and the results of operations were included
in the tax returns of the stockholders. On June 3, 1997, the
Company terminated its S Corporation election and became a C
Corporation. In addition, the Company has changed its tax
year end from December 31 to June 30. Therefore, the Company
filed an S Corporation income tax return for the year ended
December 31, 1996 and for the short period from January 1,
1997 to June 2, 1997. The absence of a pro forma provision
for income taxes for the period prior to June 3, 1997 and a
provision for income taxes for the period subsequent to June
2, 1997 is due to net operating losses.
The components of the net deferred income tax assets consist
of the following:
<TABLE>
<CAPTION>
1999 1998
========================================================================================
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 1,179,000 $ 437,000
Warrants issued 257,000 -
Other 10,000 13,000
----------------------------------------------------------------------------------------
Gross deferred income tax assets 1,446,000 450,000
Valuation allowance (1,432,000) (444,000)
----------------------------------------------------------------------------------------
Total deferred income tax assets 14,000 6,000
----------------------------------------------------------------------------------------
Deferred income tax liabilities:
Depreciation (14,000) (6,000)
----------------------------------------------------------------------------------------
Net deferred income tax assets $ - $ -
========================================================================================
</TABLE>
F-20
<PAGE>
Affinity International Travel Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
The change in the valuation allowance for deferred tax assets
was an increase of $988,000 and $413,800 during 1999 and
1998, respectively.
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, 1999 1998 1997
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income taxes at federal statutory rates (34%) (34%) (34%)
Discount on convertible debt 15 -- --
Amortization of goodwill 1 2 --
Net operating loss with no tax benefit 18 32 34
----------------------------------------------------------------------------------------
Income taxes at effective rates --% --% --%
========================================================================================
</TABLE>
The Company had unused net operating losses for income tax
purposes, expiring in various amounts from 2012 through 2018,
of approximately $3,132,000 at June 30, 1999 for carryforward
against future years' taxable income.
12. INTEREST
EXPENSE
Interest expense consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1999 1998 1997
----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Discount on convertible debt to
related party $ 2,222,000 $ -- $ --
Interest on common stock subject to
rescission 633,000 -- --
Interest on debentures -- 42,038 2,225
Other 19,570 4,904 --
----------------------------------------------------------------------------------------
$ 2,874,570 $ 46,942 $ 2,225
========================================================================================
</TABLE>
13. SUBSEQUENT ACQUISITION OF INTEGRITY CREDIT SERVICES, INC.
EVENT
On July 5, 1999, the Company entered into an asset purchase
agreement in which it acquired certain assets of Integrity
Credit Services, Inc. ("Integrity") in exchange for 140,000
shares of the Company's common stock. Integrity operates 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-21
<PAGE>
Affinity International Travel Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
EQUIPMENT UNDER CAPITAL LEASE OBLIGATION
On September 15, 1999, the Company entered into a lease
agreement for certain computer equipment. The terms of the
lease provide for monthly lease payments of $16,451 for a
five-year period. The lease will be accounted for as a
capital lease.
14. SUPPLEMENTAL Supplemental cash flow information is as follows:
CASH FLOW
INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1999 1998 1997
=======================================================================================
<S> <C> <C> <C>
Cash paid for interest $ 19,570 $ 5,149 $ -
Noncash financing and investing activities:
Conversion of debentures into common stock - 155,000 -
Conversion of debentures into common stock to
related party 2,222,000 -
Common stock issued in connection with service
agreement 21,875 - -
Capital lease obligation incurred in connection
with the acquisition of equipment - 56,775 -
Purchase of software license with debt - - 20,000
Advances from stockholder converted to common
stock - - 14,999
Amounts due to related party contributed to
capital - - 68,859
Common stock issued as offering costs - - 56,875
=======================================================================================
</TABLE>
The following is a summary of noncash transactions
related to the acquisition of Ritter-Witt, Inc.
disclosed in Note 1 (C):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1998
---------------------------------------------------------------------------------------
<S> <C>
Common stock issued $ (20,000)
Property, plant and equipment acquired 20,598
Goodwill acquired 159,402
---------------------------------------------------------------------------------------
Total noncash acquisition of assets 160,000
Long-term debt issued (105,000)
---------------------------------------------------------------------------------------
Net cash paid $ 55,000
=======================================================================================
</TABLE>
F-22
<PAGE>
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 (D):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1999
---------------------------------------------------------------------------------------
<S> <C>
Convertible preferred stock issued $ (1,600,000)
Accounts receivable acquired 62,915
Property, plant 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>
15. SEGMENT
INFORMATION During 1999, the Company adopted Statement of Financial
Accounting Standards No. 131 (SFAS 131), "Disclosures about
Segments of an Enterprise and Related Information." SFAS 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, Georgia and
California.
F-23
<PAGE>
Affinity International Travel Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
The following table shows certain financial information by
reportable segment as of and for the years ended June 30,
1999, 1998 and 1997:
<TABLE>
<CAPTION>
CORPORATE
WHOLESALE RETAIL AND OTHER COMBINED
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1999
Revenue from external customers $ 1,363,300 $ 961,643 $ - $ 2,324,943
Net income (loss) (1,493,827) 28,371 (5,590,082) (7,055,538)
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
1998
Revenue from external customers $ 1,071,833 $ 256,744 $ - $ 1,328,577
Net loss (836,362) (53,951) (278,188) (1,168,501)
Depreciation and amortization 45,238 2,688 - 47,926
Compensation and service expense related to common
stock issued - - 43,750 43,750
Interest income 6,221 - - 6,221
Interest expense 4,486 418 42,038 46,942
Total assets 317,670 77,495 - 395,165
Capital expenditures (exclusive of acquisitions) 38,589 - - 38,589
1997
Revenue from external customers $ 665,143 $ - $ - $ 665,143
Net loss (269,864) - (47,961) (317,825)
Depreciation and amortization 10,638 - - 10,638
Interest income 1,440 - - 1,440
Interest expense 2,225 - - 2,225
Total assets 547,086 - - 547,086
Capital expenditures 50,820 - - 50,820
==================================================================================================================
</TABLE>
F-24
<PAGE>
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
---------------------------------------------------------------------------------------
<S> <C>
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%
=======================================================================================
1998
Revenue from external customers $1,071,833
Percentage of revenue by destination:
Auto brokerage worldwide 83%
Florida 17%
=======================================================================================
1997
Revenue from external customers $ 665,143
Percentage of revenue by destination:
Auto brokerage worldwide 33%
Florida 67%
=======================================================================================
</TABLE>
F-25
<PAGE>
Affinity International Travel Systems, Inc. and Subsidiaries
Consolidated Balance Sheet (Unaudited)
<TABLE>
<CAPTION>
MARCH 31, 2000
--------------------------------------------------------------------------
(UNAUDITED)
<S> <C>
ASSETS
CURRENT:
Cash and cash equivalents $ 578,131
Restricted certificates of deposit 184,038
Accounts receivable 237,225
Prepaid accommodations 124,097
Prepaid expenses 775
--------------------------------------------------------------------------
TOTAL CURRENT ASSETS 1,124,266
PROPERTY AND EQUIPMENT, net 1,356,658
GOODWILL, net of accumulated amortization of $9,181 54,745
DEPOSITS 56,718
OTHER ASSETS 17,080
--------------------------------------------------------------------------
TOTAL ASSETS $2,609,467
==========================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-26
<PAGE>
Affinity International Travel Systems, Inc. and Subsidiaries
Consolidated Balance Sheet (Unaudited)
<TABLE>
<CAPTION>
MARCH 31, 2000
----------------------------------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C>
LIABILITIES AND CAPITAL DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 896,036
Accrued expenses (Note 3) 1,392,185
Deferred revenue 409,461
Current portion of capital lease obligations 13,670
----------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 2,711,352
CAPITAL LEASE OBLIGATIONS, less current portion 14,295
----------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 2,725,647
----------------------------------------------------------------------------------------------------------------
COMMON STOCK SUBJECT TO RESCISSION (NOTE 7) 5,613,000
----------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 7 and 8)
CAPITAL DEFICIT (Notes 1, 3, 4, 5 and 6):
Common stock, $.001 par value, shares authorized 100,000,000, issued and
outstanding 15,550,210 8,781
Additional paid-in capital 16,037,716
Accumulated deficit (21,775,677)
----------------------------------------------------------------------------------------------------------------
TOTAL CAPITAL DEFICIT (5,729,180)
----------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND CAPITAL DEFICIT $ 2,609,467
================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-27
<PAGE>
Affinity International Travel Systems, Inc. and Subsidiaries
Consolidated Statements of Operations (Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED MARCH 31, 2000 1999
-------------------------------------------------------------------------------------------------------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
NET SALES $ 2,749,729 $ 1,366,493
COST OF SALES 1,802,520 937,836
-------------------------------------------------------------------------------------------------------------------
Gross profit 947,209 428,657
-------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Selling, general and administrative 1,793,103 617,295
Salaries and wages 2,477,488 624,323
Consulting fees 67,948 82,246
Consulting fees to related party 120,018 -
Rent 213,623 74,247
-------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 4,672,180 1,398,111
-------------------------------------------------------------------------------------------------------------------
Operating loss (3,724,971) (969,454)
-------------------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest income 16,290 1,027
Interest expense (509,662) (476,418)
Gain on sale of subsidiary (Note 6) 75,000 -
Financing charges (Note 8) (10,431,000) (222,000)
Other income (expense), net (68,750) 1,984
-------------------------------------------------------------------------------------------------------------------
TOTAL OTHER INCOME (EXPENSE) (10,918,122) (695,407)
-------------------------------------------------------------------------------------------------------------------
NET LOSS $(14,643,093) $(1,664,861)
===================================================================================================================
NET LOSS PER COMMON SHARE $ (1.06) $ (.29)
===================================================================================================================
WEIGHTED AVERAGE SHARES OUTSTANDING 13,756,542 5,812,076
===================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-28
<PAGE>
Affinity International Travel Systems, Inc. and Subsidiaries
Consolidated Statement of Capital Deficit (Unaudited)
<TABLE>
<CAPTION>
CONVERTIBLE
COMMON STOCK PREFERRED STOCK
-------------------------- -------------------------- ADDITIONAL
PAR PAR PAID-IN
SHARES VALUE SHARES VALUE CAPITAL
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, June 30, 1999 12,263,165 $ 5,494 800,000 $ 800 $ 3,185,682
Issuance of common stock for acquisition 140,000 140 - - 117,992
Issuance of common stock options as compensation - - - - 750,000
Issuance of common stock for conversion of
preferred stock 1,497,076 1,497 (800,000) (800) (697)
Sale of common stock 1,723,237 1,723 - - 2,186,174
Issuance of common stock for compensation and
services 313,808 314 - - 261,991
Issuance and repricing of common stock warrants - - - - 9,851,964
Issuance of common stock for conversion of
debentures 25,000 25 - - 24,975
Return of common stock through disposal of
subsidiary (1,497,076) (1,497) - - (1,553,280)
Issuance of common stock for financing charges 1,080,000 1,080 - - 1,207,920
Issuance of common stock for warrants 5,000 5 - - 4,995
Net loss - - - - -
-----------------------------------------------------------------------------------------------------------------------------------
BALANCE, March 31, 2000 15,550,210 $ 8,781 - $ - $16,037,716
===================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
TOTAL
ACCUMULATED CAPITAL
DEFICIT DEFICIT
---------------------------------------------------------------------------------------
<S> <C> <C>
BALANCE, June 30, 1999 $ (7,132,584) $ (3,940,608)
Issuance of common stock for acquisition - 118,132
Issuance of common stock options as compensation - 750,000
Issuance of common stock for conversion of
preferred stock - -
Sale of common stock - 2,187,897
Issuance of common stock for compensation and
services - 262,305
Issuance and repricing of common stock warrants - 9,851,964
Issuance of common stock for conversion of
debentures - 25,000
Return of common stock through disposal of
subsidiary - (1,554,777)
Issuance of common stock for financing charges - 1,209,000
Issuance of common stock for warrants - 5,000
Net loss (14,643,093) (14,643,093)
---------------------------------------------------------------------------------------
BALANCE, March 31, 2000 $(21,775,677 $ (5,729,180)
=======================================================================================
</TABLE>
F-29
<PAGE>
Affinity International Travel Systems, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED MARCH 31, 2000 1999
--------------------------------------------------------------------------------------------------------------------
(unaudited) (unaudited)
<S> <C> <C>
RECONCILIATION OF NET LOSS TO NET CASH USED FOR OPERATING ACTIVITIES:
Net loss $(14,643,093) $(1,664,861)
Adjustments to reconcile net loss to net cash used for operating activities:
Depreciation and amortization 260,311 92,566
Loss on disposals of property and equipment 18,639 -
Gain on sale of Prestige Travel (75,000) -
Loss on sale of Goldmark 5,265 -
Write off of Investments 48,273
Issuance of options for compensation 750,000 231,567
Issuance of convertible debt at a discount - 222,000
Repricing of common stock warrants per warrant agreements and issuance of
common stock for financing charges to a related party 10,410,915
Issuance of common stock for compensation and services 262,305
Changes in assets and liabilities, net of effects of acquisitions and
dispositions:
Accounts receivable (125,321) (215,115)
Prepaid expenses (775) (49,977)
Prepaid accommodations 4,374 12,250
Accounts payable 288,445 66,357
Accrued expenses 454,704 367,260
Deferred revenue 161,274 22,765
Due to customers (13,865) (56,619)
--------------------------------------------------------------------------------------------------------------------
Net cash used for operating activities (2,193,549) (971,807)
--------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Redemption of restricted certificate of deposit 11,242 -
Purchase of property and equipment (1,247,970) (24,713)
Decrease in acquisition costs - 29,180
Increase in deposits (16,488) -
Cash paid in acquisition of SunStyle - (28,558)
Cash paid in acquisition of Prestige - (6,185)
Cash received in acquisition of Prestige 33,428
Net proceeds from sale of Goldmark 30,000 -
Net proceeds from sale of Prestige Travel 56,390 -
Increase (decease) in other assets (1,867) (35)
--------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (1,168,693) 3,117
--------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from ( payments on) notes payable (12,000) 81,205
Principal payments of capital lease obligations (10,369) (1,863)
Principal payments of capital lease obligations - (13,984)
Proceeds from issuance of convertible debentures to a related party - 222,000
Proceeds from issuance of common stock warrants 650,049 -
Net proceeds from sale of common stock 2,192,897 668,362
--------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 2,820,577 955,720
--------------------------------------------------------------------------------------------------------------------
Net decrease in cash (541,665) (12,970)
CASH AND CASH EQUIVALENTS, beginning of period 1,119,796 64,061
--------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, end of period $ 578,131 $ 51,091
--------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-30
<PAGE>
Affinity International Travel Systems and Subsidiaries
Notes to Consolidated Financial Statements
1. FINANCIAL
STATEMENTS The financial statements included herein have been prepared
without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial
statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant
to such rules and regulations; however, management believes
that the disclosures are adequate to make the information
presented not misleading.
The financial statements for the interim periods included
herein, which are unaudited, include, in the opinion of
management, all adjustments (consisting only of normal
recurring adjustments) necessary to present fairly the
financial statements and results of operations of Affinity
International Travel Systems, Inc. and Subsidiaries for the
periods presented. The results of operations for interim
periods should not be considered indicative of results to be
expected for the full year.
2. NATURE OF Affinity International Travel Services, Inc., formerly
ORGANIZATION 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.; and SunStyle International
Holidays, Inc. ("SunStyle") and its wholly-owned
subsidiaries, SunStyle International Holidays, Ltd.; SunStyle
International Holidays of California, Inc.; and Air Travel
Trust, Inc. All material intercompany accounts and
transactions have been eliminated.
3. COMMON STOCK From July 1998 to January 1999, the Company sold an aggregate
SUBJECT TO of 6,768,572 RESCISSION shares of common stock in reliance
RESCISSION 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
F-31
<PAGE>
Affinity International Travel Systems and Subsidiaries
Notes to Consolidated Financial Statements
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. The Company does not have sufficient cash reserves
to repurchase the shares of our common stock that are subject
to possible rescission. In addition, the Company's ability to
raise additional capital may be severely restricted, as
investors may be hesitant to invest in the Company because of
this potential liability. The Company's inability to raise
capital when needed will have an adverse effect on its
ability to continue a going concern.
Although there is no definitive answer as to whether the
Company violated Rule 504, the Company has 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 March 31, 2000, excluding related accrued
interest of $1,138,000 of which $505,000 has been charged to
interest expense during the nine month period ended March 31,
2000. These amounts are shown on the Company's balance sheet
under the line item "Common Stock Subject to Rescission."
4. GOING The Company's consolidated financial statements are presented
CONCERN on the going concern basis, which contemplates the
AND realization of assets and satisfaction of liabilities in the
LIQUIDITY normal course of business. The Company has been advised that
certain transactions described in Note 3 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.
F-32
<PAGE>
Affinity International Travel Systems and Subsidiaries
Notes to Consolidated Financial Statements
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
its equity securities or debentures to fund negative cash
flow from operations and capital expenditures related to the
implementation of its Internet strategies.
The Company had a net loss for the nine months ended March
31, 2000 of approximately $14,643,000, of which $10,356,000
was attributable to non-cash expenses as follows: $750,000
related to the issuance of options to an employee with a
below market exercise prices, $9,222,000 related to the
repricing of existing warrants and the issuance of new
warrants and $384,000 related to the issuance of common stock
as a penalty for not having a registration statement declared
effective by the SEC by certain dates.
For the nine months ended March 31, 2000, the Company's
operations used $2,194,000 and the Company's investing
activities used $1,169,000 in cash. Cash used for investing
activities during the nine months ended March 31, 2000
included the expenditure of approximately $1,248,000 for
computer equipment. Net cash provided from financing
activities for the nine months ended March 31, 2000 of
$2,820,000 related primarily to proceeds from the issuance of
common stock and warrants totaling $2,843,000 and the
repayment of short-term debt.
As of March 31, 2000, the Company had a working capital
deficit of approximately $1,587,000, total stockholders'
deficit of approximately $5,729,000, a total of 15,550,210
shares outstanding and outstanding warrants and options to
purchase 12,175,817 shares of its common stock with an
average exercise price of $.37 per share.
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 May 31, 2000, the Company had warrants and options
outstanding to purchase 10,045,817 and 2,165,000 shares of
our common stock with
F-33
<PAGE>
Affinity International Travel Systems and Subsidiaries
Notes to Consolidated Financial Statements
average per share exercise prices of $.33 and $.54,
respectively. If all currently outstanding warrants and
options were exercised, the Company would receive gross
proceeds of approximately $4,582,000. 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 the event that a registration statement filed by the
Company, is not declared effective by the SEC by June 20,
2000, then it is unlikely that the Company will receive
$2,187,500 of proceeds from the exercise of warrants to
purchase an aggregate of 8,750,000 shares of common stock,
because the shares of common stock underlying those warrants
may, in such event, be acquired through a cashless exercise
of those warrants.
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 $6.0 million
in additional capital during the remainder of calendar year
2000. The Company anticipates that its online booking engines
and primary web site, www.faraway.com, will be developed and
operational within the next four months. The Company believes
that it will need to raise $3 million of additional capital
during the next three months to complete the development of
the booking engines and primary web site. 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 our 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 hesitant 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 Company's access to capital
raises 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.
F-34
<PAGE>
Affinity International Travel Systems and Subsidiaries
Notes to Consolidated Financial Statements
5. ACQUISITION 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. Integrity
operates 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.
6. SALE OF SALE OF PRESTIGE TRAVEL SERVICES, II, INC.
SUBSIDIARY
On January 1, 1999, the Company acquired all of the
outstanding stock of Prestige Travel Services II, Inc., a
retail travel agency, for $1,600,000, paid through the
issuance of 800,000 shares of Series A convertible preferred
stock. The transaction was accounted for as a purchase. On
August 1, 1999, the preferred shares were converted to
1,497,076 shares of common stock based on the average trading
price of the Company's common stock for the preceding 20
days' average trading price in accordance with the purchase
agreement.
On December 29, 1999, the Company sold all the outstanding
common stock of Prestige Travel Services II, Inc. 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
$2,573,174, or approximately $1.72 per share. The Company
recorded a gain of $75,000 on the transaction.
The operating results of Prestige Travel Services II, Inc.
have been included in the consolidated statement 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 Travel Services II,
Inc., which was deemed to be a significant disposal of
assets, had taken place immediately prior to the nine-month
period ending March 31, 2000. The pro forma information
includes adjustments to remove the operating results of the
subsidiary, 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.
F-35
<PAGE>
Affinity International Travel Systems and Subsidiaries
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
NINE MONTHS ENDED MARCH 31, 2000
--------------------------------------------------------------------------------
(UNAUDITED)
<S> <C>
Total revenues $ 2,159,953
Net loss (14,583,505)
Net loss per common share (1.06)
================================================================================
</TABLE>
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 (Note 5)
for $30,000 in cash and recognized a loss of approximately
$5,265 on the transaction. Revenues and related expenses from
this business unit were insignificant to the Company's
consolidated operations during the nine months ended March
31, 2000.
7. STOCK On July 1, 1999, the Company adopted a stock option plan
OPTIONS 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 or market value at 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.
All of the foregoing options were fully vested and
exercisable on the dates of grant.
F-36
<PAGE>
Affinity International Travel Systems and Subsidiaries
Notes to Consolidated Financial Statements
8. EQUITY 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 nine month
period ended March 31, 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
operations during the nine months ended March 31, 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 majority
stockholder and another investor in exchange for 714,286 and
1,458,571 shares of common stock at a price of $.35 per
share. The Company received $650,049 in net proceeds from
these agreements. The majority stockholder also agreed to the
repricing of 4,250,000 common stock warrants to $.50 per
share. The fair 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.
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.
On January 26, 2000, the majority 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.
F-37
<PAGE>
Affinity International Travel Systems and Subsidiaries
Notes to Consolidated Financial Statements
In January 2000 an officer of the Company received 30,000
shares of common stock as compensation. The Company recorded
a compensation expense of $23,594 to reflect the market value
of the stock at that time.
During January 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, which
expire five years from the date of issuance.
During February 2000, 990,000 shares of common stock were
sold 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, 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 $2.02 per share. In connection with
this offering, 36,282 common stock warrants were issued at
exercise prices from $4.00 to $5.50 which expire 5 years from
the date of issuance.
9. COMMITMENTS 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 paid $25,000 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 not commenced pending resolution of the payment terms for
the balance due Weblink under the service agreement, and the
Company had recorded the advance payments to Weblink as a
prepaid expense.
F-38
<PAGE>
Affinity International Travel Systems and Subsidiaries
Notes to Consolidated Financial Statements
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 under
the contract.
FARAWAY.COM WEB SITE DEVELOPMENT
In December 1999, the Company entered into two software
development and integration agreements for the design of
their Faraway.com web site and related software. The
agreements provide for total payments of approximately
$873,000 to be paid as work progresses on the web site. A
$25,000 advance deposit was paid prior to December 31, 1999.
EMPLOYMENT AGREEMENT
On July 1, 1999, the Company entered into an employment
agreement with its President. The agreement provides for
payment of salary through June 2006 and the establishment of
a bonus program.
10. SUBSEQUENT On May 22 and May 26, 2000, the Company issued 9.5%
EVENTS convertible debentures in the principal amount of $350,000
and warrants to purchase 35,000 shares of common stock at
$2.00 per share, for aggregate consideration of $350,000. The
debentures are convertible into common stock at $1.00 per
share only after Company's registration statement on file
with the SEC is declared effective and the conversion feature
expires three months for the debentures issue date. The
conversion price and exercise price are reduced by 30% if the
average closing bid price of Company's common stock for the
five-day trading period ending on the day prior to the 30th
day after the closing is less than $2.00.
11. SUPPLEMENTAL Supplemental cash flow information is as follows:
CASH FLOW
INFORMATION
<TABLE>
<CAPTION>
NINE MONTHS ENDED MARCH 31, 2000 1999
----------------------------------------------------------------------------------
<S> <C> <C>
Cash paid for interest $ 4,662 $11,418
Noncash financing and investing activities:
Conversion of debentures into common stock 25,000 -
==================================================================================
</TABLE>
F-39
<PAGE>
Affinity International Travel Systems and Subsidiaries
Notes to Consolidated Financial Statements
The following is a summary of noncash transactions related to
the sale of Prestige disclosed in Note 4:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1999
----------------------------------------------------------------------------------
<S> <C>
Fair market value of common stock returned $2,573,174
----------------------------------------------------------------------------------
Accounts receivable 45,252
Property, plant 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 recognized 75,000
----------------------------------------------------------------------------------
Net cash received (net of cash surrendered of $18,610) $ 56,390
==================================================================================
</TABLE>
12. SEGMENT During 1999, the Company adopted Statement of Financial
INFORMATION Accounting Standards No. 131 (SFAS 131), "Disclosures about
Segments of an Enterprise and Related Information." SFAS 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, Georgia and
California.
F-40
<PAGE>
Affinity International Travel Systems and Subsidiaries
Notes to Consolidated Financial Statements
The following table shows certain financial information by
reportable segment as of and for the nine months ended March
31, 2000 and 1999:
<TABLE>
<CAPTION>
CORPORATE
NINE MONTHS ENDED MARCH 31, 2000 WHOLESALE RETAIL AND OTHER COMBINED
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue from external customers $ 1,875,051 $ 874,678 $ -- $ 2,749,729
Net income (loss) (2,031,333) (223,992) (12,387,768) (14,643,093)
============================================================================================
</TABLE>
<TABLE>
<CAPTION>
CORPORATE
NINE MONTHS ENDED MARCH 31, 1999 WHOLESALE RETAIL AND OTHER COMBINED
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue from external customers $ 867,480 $499,013 $ -- $ 1,366,493
Net income (loss) (857,197) 118 (807,782) (1,664,861)
============================================================================================
</TABLE>
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
----------------------------------------------------------------------------------
<S> <C>
FOR THE NINE MONTHS ENDED MARCH 31, 2000
----------------------------------------------------------------------------------
Revenue from external customers $2,749,729
Percentage of revenue by destination:
Auto brokerage worldwide 39%
Florida 25%
Hawaii 27%
Caribbean 8%
Mexico 1%
==================================================================================
FOR THE NINE MONTHS ENDED MARCH 31, 1999
----------------------------------------------------------------------------------
Revenue from external customers $1,366,493
Percentage of revenue by destination:
Auto brokerage worldwide 38%
Florida 48%
Hawaii 6%
Caribbean 5%
Mexico 3%
==================================================================================
</TABLE>
F-41
<PAGE>
===============================================================================
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. NO
DEALER, SALESPERSON OR OTHER PERSON IS AUTHORIZED TO GIVE INFORMATION THAT IS
NOT CONTAINED IN THIS PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER TO SELL NOR IS
IT SEEKING AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER
OR SALE IS NOT PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS
CORRECT ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF THE
DELIVERY OF THIS PROSPECTUS OR ANY SALE OF THE SECURITIES.
===============================================================================
===============================================================================
AFFINITY INTERNATIONAL
TRAVEL SYSTEMS, INC.
20,353,094 SHARES
COMMON STOCK
------------------
PROSPECTUS
------------------
JUNE ___, 2000
===============================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<CAPTION>
TOTAL EXPENSES
<S> <C>
SEC Registration Fee.......................................... $ 36,972
Blue Sky Fees and Expenses.................................... NA
Transfer Agent and Registrar Fees ............................ NA
Accounting Fees and Expenses.................................. 15,000*
Legal Fees and Expenses....................................... 250,000*
Printing and Engraving ....................................... 30,000*
Miscellaneous................................................. 30,000*
TOTAL................................................... $496,972*
=========
</TABLE>
* Estimated
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The corporation law of the State of Nevada and our articles of
incorporation, as amended, and by-laws provide for indemnification of our
directors and officers for liabilities and expenses that they may incur in such
capacities. In general, directors and officers are indemnified with respect to
actions taken in good faith in a manner reasonably believed to be in, or not
opposed to, our best interests and, with respect to any criminal action or
proceeding, actions that the indemnitee had no reasonable cause to believe were
unlawful. Reference is made to our articles and bylaws filed as Exhibits 3.1 and
3.2 to this registration statement, respectively.
In addition, we intend to apply for directors and officers liability
insurance policy.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following information is furnished with regard to all securities that
we issued within the past three years which were not registered under the
Securities Act.
From 1997 through July 1998, we had no issuances of unregistered
securities.
In July 1998, we entered into an acquisition agreement with all of the
stockholders of SunStyle International Holidays, Inc. pursuant to which we
purchased 4,902,894 shares of SunStyle International Holidays, which
represented all of the issued and outstanding shares of SunStyle, in exchange
for 4,902,894 shares of our common stock. Although we acquired SunStyle, the
transaction was accounted for as a purchase of Affinity by SunStyle, because
the previous stockholders of SunStyle obtained a majority of our voting
rights as a result of the acquisition. For accounting purposes, the reverse
acquisition is treated as a recapitalization of SunStyle and not as a
business combination, therefore, no value was allocated to the common stock
issued in connection with the acquisition. The issuance of the shares was
effected without registration under the Securities Act of 1933, as amended,
in reliance upon the exemption from registration contained in Rule 504 of
Regulation D promulgated under the Securities Act.
II-1
<PAGE>
In July 1998 and August 1998 we sold an aggregate of 35,000 shares of our
common stock to two investors for an aggregate purchase price of $35,000.
In October 1998, we issued 25,000 shares of our common stock to a
consulting services firm in consideration of services to be rendered by such
firm. Such services were valued at $25,000. The issuance of the shares was
effected without registration under the Securities Act of 1933, as amended, in
reliance upon the exemption from registration contained in Rule 504 of
Regulation D promulgated under the Securities Act.
In November 1998, we sold an aggregate of 10,000 shares of our common stock
to one investor for an aggregate purchase price of $10,000.
Between October 1998 and January 1999, we sold an aggregate of 1,621,392
shares of our common stock in a private placement for an aggregate consideration
of $657,000. In connection with this private placement, in December 1998,
Schoemann Venture Capital, LLC purchased, for an aggregate consideration of
$400,000, 1,142,857 shares of our common stock and received 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 an aggregate consideration of $70,000.
The issuance of the shares was effected without registration under the
Securities Act of 1933, as amended, in reliance upon the exemption from
registration contained in Rule 504 of Regulation D promulgated under the
Securities Act.
In January 1999, we issued 94,286 shares of our common stock in
consideration of services rendered, such services were valued at approximately
$33,000. The issuance of the shares was effected without registration under the
Securities Act of 1933, as amended, in reliance upon the exemption from
registration contained in Rule 504 of Regulation D promulgated under the
Securities Act.
With respect to the foregoing transactions made in reliance upon the
exemption contained in Rule 504 of Regulation D, it has since come to our
attention that such transactions may not have been made in compliance with Rule
504. Although there is no definitive answer as to whether we violated Rule 504,
we have reclassified amounts previously recorded as stockholders' equity to a
liability line item on our balance sheet. More specifically, the recorded amount
of shares subject to rescission is $5,613,000 as of March 31, 2000, excluding
related accrued interest of $1,138,000 of which $505,000 has been charged to
interest expense during the nine month period ended March 31, 2000. These
amounts are shown on our balance sheet under the line item "Common Stock Subject
to Rescission."
In January 1999, we acquired all of the outstanding capital stock of
Prestige Travel Services II, Inc., a retail travel agency with an independent
agent sales program and an internet cruise brokerage operation, for $1,600,000,
which we paid through the issuance of 800,000 shares of Series A Convertible
Preferred Stock, or $2.00 per share of preferred stock. The conversion price of
the Series A Convertible Preferred Stock was $1.06875 per share. In August 1999,
the holders of the Series A Convertible Preferred Stock converted their shares
of preferred stock into 1,497,076 shares of common stock. In connection with
this acquisition, we issued 74,854 shares of common stock in payment of a
finder's fee to a third party.
II-2
<PAGE>
In January 1999, Schoemann Venture Capital, LLC, purchased 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, for an aggregate
consideration of $222,000. In February 1999, Schoemann Venture Capital, LLC
subsequently converted its note into 634,286 shares of our common stock.
In January 1999, we issued an aggregate of 51,000 shares of our common
stock to employees and consultants in full and complete satisfaction and in
payment of services rendered. The fair market value of the common stock on the
date of issuance was $140,250.
In January 1999, we issued an aggregate of 12,147 shares of our common
stock to four vendors in full and complete satisfaction of accounts payable to
such vendors. The fair market value of the common stock on the date of issuance
was $33,404.
In February 1999, we sold an aggregate of 10,000 shares of our common stock
to one investor for an aggregate purchase price of $10,000.
In February 1999, we entered into an asset purchase agreement with
Design-A-Tour pursuant to which we acquired certain assets of Design-A-Tour
valued at approximately $75,000. We issued an aggregate of 36,320 shares of our
common stock as payment for the acquired assets.
In April 1999, we sold, for an aggregate consideration of $25,000, a
convertible debenture in the principal amount of $25,000 and warrants to
purchase 5,000 shares of our common stock at a purchase price of $1.00 per
share. The holder of the convertible note converted its note into 25,000 shares
of our common stock in December 1999. In March 2000, the investor exercised the
warrant to purchase 5,000 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 a
purchase price of $1.75 per share. In May 1999, Schoemann Venture Capital, LLC
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. This agreement was amended in June 1999 to provide, among
other things, 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. In June 1999, Schoemann Venture Capital, LLC
converted its note into 2,000,000 shares of our common stock. The convertible
note, the warrants and the shares issued upon conversion of the convertible note
were issued in connection with a private placement in reliance upon the
exemption from registration contained in Rule 506 of Regulation D promulgated
under the Securities Act of 1933, as amended.
In July 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 an
aggregate of 140,000 shares of our common stock in payment for the assets we
acquired. The assets were valued at approximately $67,000.
II-3
<PAGE>
In July 1999, we issued incentive stock options to purchase an aggregate of
2,000,000 shares of our common stock at an exercise price of $.50 per share to
our chief executive officer in consideration of services provided and to be
provided. These options expire ten years from the date of grant.
In August 1999, we issued an aggregate of 40,000 shares of our common stock
in consideration of services provided by an employee. The fair market value of
the common stock on the date of issuance was $66,563.
In August 1999, we issued incentive stock options to an employee to
purchase 15,000 shares of our common stock at an exercise price of $1.00 per
share. These options expire three years from the date of grant.
In October 1999, we issued an aggregate of 168,954 shares of our common
stock to a consultant in consideration and in payment for expenses and services
rendered. Such expenses and services were valued at approximately $134,000.
In December 1999, we sold 25,000 shares of our common stock to one investor
for a purchase price of $.40 per share, or an aggregate consideration of
$10,000.
In December 1999, we issued 840,000 shares of our common stock to Schoemann
Venture Capital, LLC in consideration of the payment of penalties resulting from
not having a registration statement declared effective by the SEC prior to a
specified date in the prior financing agreements with Schoemann Venture Capital,
LLC.
In December 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 one of our
employee/directors. 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 a non-employee director and to an employee/director at an exercise
price of $1.00 per share. These options also expire three years from the date of
grant.
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 240,000 shares of our common stock to Schoemann
Venture Capital, LLC in consideration of the payment of penalties resulting from
not having a registration statement declared effective by the SEC prior to a
specified date in the prior financing agreements with Schoemann Venture Capital,
LLC.
In January 2000, we terminated the December agreements with Schoemann
Venture Capital, LLC and GCD Investments, LLC and entered into an agreement with
Schoemann Venture Capital, LLC, pursuant to which we sold warrants to purchase
1,150,000 shares of our common stock at an exercise price of $0.25 per share,
for an aggregate consideration of $250,000. In addition, we also 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 not having a registration statement declared
effective by the SEC prior to a specified date in the prior agreements with
II-4
<PAGE>
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, we entered into an agreement with GCD Investments, LLC,
which replaced an existing agreement dated December 20, 1999, pursuant to which
we sold warrants to purchase 2,300,000 shares of our common stock at an exercise
price of $0.25 per share, for an aggregate consideration of $500,000.
In January 2000, we issued warrants to purchase 200,000 shares of our
common stock at an exercise price of $0.75 per share to three consultants for
services provided and to be provided by such consultants.
In January 2000, we issued an aggregate of 30,000 shares of our common
stock in consideration of services provided by an employee.
In January and February 2000, we issued an aggregate of 1,335,401 shares of
our common stock for net proceeds of $1,444,345 in a private placement. In
addition, in connection with the private placement, we issued warrants to
purchase an aggregate of 1,024,535 shares of our common stock at a weighted
average exercise price of $0.82 per share.
In March 2000, we issued an aggregate of 362,836 shares of common stock for
net proceeds of $733,552 in private placement. In addition, in connection with
the private placement, we issued warrants to purchase an aggregate of 36,282
shares of our common stock as a weighted average exercise price of $4.56 per
share.
In May 2000, we issued 9.5% convertible debentures in the principal amount
of $350,000 and warrants to purchase 35,000 shares of common stock at $2.00 per
share, for aggregate consideration of $350,000.
Except as otherwise specified, to the extent that the foregoing
transactions constituted "sales" within the meaning of the Securities Act, the
securities issued in such transactions were not registered under the Securities
Act in reliance upon the exemption from registration set forth in Section 4(2)
thereof, relating to sales by an issuer not involving any public offering. Each
of the foregoing transactions, to the extent constituting "sales" within the
meaning of the Securities Act, were exempt under the applicable exemption based
on the following facts: to our knowledge, there was no general solicitation,
there were a limited number of purchasers, the purchasers were provided with or
had access to information about our company, and either the purchasers or their
respective representatives were sophisticated about business and financial
matters; and, as applicable, the purchasers were "accredited investors" within
the meaning of Rule 501 under the Securities Act and the Company took reasonable
steps to assure that the purchasers were not underwriters within the meaning of
Section 2(11) under the Securities Act.
None of the foregoing transactions, either individually or in the
aggregate, involved a public offering.
II-5
<PAGE>
ITEM 16(a). EXHIBITS
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
EXHIBIT NO. DESCRIPTION
----------------------------------------------------------------------------------------------------------------------------
<C> <C>
2.1 Agreement and Plan of Acquisition Agreement dated July 14, 1999 between Affinity International
Systems, Inc. ("Affinity") and SunStyle International Holidays, Inc.*
----------------------------------------------------------------------------------------------------------------------------
2.2 Affinity/Prestige Acquisition Agreement dated January 1, 1999*
----------------------------------------------------------------------------------------------------------------------------
2.3 Asset Purchase Agreement between Affinity Design-A-Tour, Inc. dated February 3, 1999*
----------------------------------------------------------------------------------------------------------------------------
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*
----------------------------------------------------------------------------------------------------------------------------
2.5 Agreement dated December 29, 1999 between Affinity, Prestige Travel Services II, Anita LaScala,
Ron LaScala, Kimberly LaScala and Prestige Travel Systems*
----------------------------------------------------------------------------------------------------------------------------
3.1 Articles of Incorporation, as amended*
----------------------------------------------------------------------------------------------------------------------------
3.2 Bylaws of Affinity International Travel Systems, Inc.*
----------------------------------------------------------------------------------------------------------------------------
4.1 Specimen Certificate of Common Stock*
----------------------------------------------------------------------------------------------------------------------------
4.2 Subscription Agreement between Affinity and Schoemann Venture Capital, LLC dated December 2,
1998*
----------------------------------------------------------------------------------------------------------------------------
4.3 Warrant Subscription Agreement between Affinity and Schoemann Venture Capital, LLC dated
December 2, 1998*
----------------------------------------------------------------------------------------------------------------------------
4.4 Amendment to Subscription Agreement between Affinity and Schoemann Venture Capital, LLC dated
January 21, 1999*
----------------------------------------------------------------------------------------------------------------------------
4.5 Warrant Subscription Agreement between Affinity and Schoemann Venture Capital, LLC dated January
15, 1999*
----------------------------------------------------------------------------------------------------------------------------
4.6 Restatement of Subscription Agreement between Affinity and Schoemann Venture Capital, LLC dated
January 31, 1999*
----------------------------------------------------------------------------------------------------------------------------
4.7 Subscription Agreement between Affinity and Schoemann Venture Capital, LLC dated April 23, 1999*
----------------------------------------------------------------------------------------------------------------------------
4.8 Warrant Subscription Agreement between Affinity and Schoemann Venture Capital, LLC dated April
23, 1999*
----------------------------------------------------------------------------------------------------------------------------
4.9 Consulting Agreement between Affinity and Schoemann Venture Capital, LLC dated April 23, 1999*
----------------------------------------------------------------------------------------------------------------------------
4.10 Subscription Agreement between Affinity and Schoemann Venture Capital, LLC dated June 10, 1999*
----------------------------------------------------------------------------------------------------------------------------
4.11 Warrant Subscription Agreement between Affinity and Schoemann Venture Capital, LLC dated June
10, 1999*
----------------------------------------------------------------------------------------------------------------------------
4.12 Subscription Agreement between Affinity and Schoemann Venture Capital, LLC dated December 20,
1999*
----------------------------------------------------------------------------------------------------------------------------
4.13 Letter Agreement between Affinity and Schoemann Venture Capital, LLC effective date as of
September 1, 1999*
----------------------------------------------------------------------------------------------------------------------------
4.14 First Amended and Restated Consulting Agreement between Schoemann Venture Capital, LLC dated
June 1, 1999*
----------------------------------------------------------------------------------------------------------------------------
4.15 Termination of Agreements by and between Affinity and Schoemann Venture Capital, LLC dated
January 26, 2000*
----------------------------------------------------------------------------------------------------------------------------
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*
----------------------------------------------------------------------------------------------------------------------------
4.17 Warrant Subscription Agreement dated January 26, 2000 which amends and restates the Warrant
Subscription Agreement dated April 23, 1999*
----------------------------------------------------------------------------------------------------------------------------
</TABLE>
II-6
<PAGE>
<TABLE>
<S> <C>
4.18 Warrant Subscription Agreement dated January 26, 2000 which amends and restates the Warrant
Subscription Agreement dated June 1, 1999*
----------------------------------------------------------------------------------------------------------------------------
4.19 Warrant Subscription Agreement dated January 26, 2000 which amends and restates the Warrant
Subscription Agreement dated June 10, 1999*
----------------------------------------------------------------------------------------------------------------------------
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*
----------------------------------------------------------------------------------------------------------------------------
4.21 Subscription Agreement between Affinity and GCD Investments, LLC dated December 20, 1999*
----------------------------------------------------------------------------------------------------------------------------
4.22 Termination of Agreements between Affinity and GCD Investments, LLC dated January 26, 1999*
----------------------------------------------------------------------------------------------------------------------------
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*
----------------------------------------------------------------------------------------------------------------------------
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*
----------------------------------------------------------------------------------------------------------------------------
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*
----------------------------------------------------------------------------------------------------------------------------
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*
----------------------------------------------------------------------------------------------------------------------------
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*
----------------------------------------------------------------------------------------------------------------------------
4.28 Stock Purchase Warrant issued to Schoemann Venture Capital, LLC dated December 20, 1999*
----------------------------------------------------------------------------------------------------------------------------
4.29 Stock Purchase Warrant issued to GCD Investments, LLC dated December 20, 1999*
----------------------------------------------------------------------------------------------------------------------------
4.30 Form of Subscription Agreement used in connection with Affinity's Private Placement in January
2000*
----------------------------------------------------------------------------------------------------------------------------
4.31 Form of Warrant used in connection with Affinity's Private Placement in January 2000*
----------------------------------------------------------------------------------------------------------------------------
4.32 Incentive Stock Option Agreement between Affinity and Daniel G. Brandano dated July 1, 1999*
----------------------------------------------------------------------------------------------------------------------------
5.1 Opinion of Brown, Rudnick, Freed & Gesmer**
----------------------------------------------------------------------------------------------------------------------------
10.1 Lease Agreement Between Affinity and City Center Associates, Ltd. dated May 27, 1999*
----------------------------------------------------------------------------------------------------------------------------
10.2 Employment Agreement dated July 1, 1999 between Affinity and Daniel Brandano*
----------------------------------------------------------------------------------------------------------------------------
10.3 Employment Agreement dated July 1, 1999 between SunStyle International Holidays, Inc. and Mark
S. Mandula, as amended*
----------------------------------------------------------------------------------------------------------------------------
10.4 1999 Combination Stock Option Plan*
----------------------------------------------------------------------------------------------------------------------------
10.5 Management Agreement and Option to Purchase effective as of April 5, 1999*
----------------------------------------------------------------------------------------------------------------------------
10.6 Termination and Settlement Agreement between Affinity, Prestige Travel Services II and Kenneth
Wiggins effective as of April 5, 1999*
----------------------------------------------------------------------------------------------------------------------------
10.7 Software License Agreement between SunStyle International Holidays City and The SABRE Group,
Inc. dated April 26, 1997*
----------------------------------------------------------------------------------------------------------------------------
10.8 Amendment No. 1 effective June 1, 1999 of Software License Agreement dated April 26, 1997*
----------------------------------------------------------------------------------------------------------------------------
10.9 Consulting Agreement between Affinity and James E. Hicks dated December 20, 1999*
----------------------------------------------------------------------------------------------------------------------------
10.10 Sabre Tourguide Agreement between the Sabre Group, Inc. and SunStyle International Holidays,
Inc.*
----------------------------------------------------------------------------------------------------------------------------
21.1 Subsidiaries of Affinity International Travel Systems, Inc.*
----------------------------------------------------------------------------------------------------------------------------
</TABLE>
II-7
<PAGE>
<TABLE>
<S> <C>
23.1 Consent of BDO Seidman LLP, independent auditors**
----------------------------------------------------------------------------------------------------------------------------
24.1 Power of Attorney (contained on signature page of registration statement)*
----------------------------------------------------------------------------------------------------------------------------
27.1 Financial Data Schedule*
----------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Previously filed.
** Filed herewith.
ITEM 17. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement (or the most
recent ost-effective amendment thereof) which, individually or in
the aggregate, represent a fundamental change in the information set
forth in the Registration Statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the Registration
Statement or any material change to such information in this
Registration Statement;
PROVIDED, HOWEVER, that paragraphs (a)(1)(i) and (a)(1)(ii) do
not apply if the information required to be included in a post-
effective amendment by those paragraphs is contained in periodic
reports filed by the Registrant pursuant to Section 13 or Section
15(d) of the Securities Exchange Act that are incorporated by
reference in this Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered
therein, and the offering of such securities at the time shall be
deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the Registrant's By-Laws, the Underwriting
Agreement relating to this offering, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-8
<PAGE>
(c) The undersigned Registrant hereby further undertakes that:
(1) For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of
prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of prospectus
filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of
this registration statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering of such securities at that time
shall be deemed to be the initial BONA FIDE offering thereof.
II-9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 3 to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of St.
Petersburg, State of Florida, on June 14, 2000.
AFFINITY INTERNATIONAL TRAVEL SYSTEMS, INC.
By:/s/ Daniel G. Brandano, Jr.
-------------------------------------------
Daniel G. Brandano, Jr., Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to this Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ Daniel G. Brandano, Jr. President, Chief Executive Officer and Director June 14, 2000
-------------------------------
Daniel G. Brandano, Jr.
/s/ Gerard Lamontagne Vice President - Finance and Controller, June 14, 2000
------------------------------- (Principal Financial and Accounting Officer)
Gerard LaMontagne
/s/ Joan Brandano Secretary and Director June 14, 2000
-------------------------------
Joan Brandano
/s/ John Vahl Director June 14, 2000
-------------------------------
John Vahl
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
EXHIBIT NO. 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.*
----------------------------------------------------------------------------------------------------------------------------
2.2 Affinity/Prestige Acquisition Agreement dated January 1, 1999*
----------------------------------------------------------------------------------------------------------------------------
2.3 Asset Purchase Agreement between Affinity Design-A-Tour, Inc. dated February 3, 1999*
----------------------------------------------------------------------------------------------------------------------------
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*
----------------------------------------------------------------------------------------------------------------------------
2.5 Agreement dated December 29, 1999 between Affinity, Prestige Travel Services II, Anita LaScala,
Ron LaScala, Kimberly LaScala and Prestige Travel Systems*
----------------------------------------------------------------------------------------------------------------------------
3.1 Articles of Incorporation, as amended*
----------------------------------------------------------------------------------------------------------------------------
3.2 Bylaws of Affinity International Travel Systems, Inc.*
----------------------------------------------------------------------------------------------------------------------------
4.1 Specimen Certificate of Common Stock*
----------------------------------------------------------------------------------------------------------------------------
4.2 Subscription Agreement between Affinity and Schoemann Venture Capital, LLC dated December 2,
1998*
----------------------------------------------------------------------------------------------------------------------------
4.3 Warrant Subscription Agreement between Affinity and Schoemann Venture Capital, LLC dated
December 2, 1998*
----------------------------------------------------------------------------------------------------------------------------
4.4 Amendment to Subscription Agreement between Affinity and Schoemann Venture Capital, LLC dated
January 21, 1999*
----------------------------------------------------------------------------------------------------------------------------
4.5 Warrant Subscription Agreement between Affinity and Schoemann Venture Capital, LLC dated January
15, 1999*
----------------------------------------------------------------------------------------------------------------------------
4.6 Restatement of Subscription Agreement between Affinity and Schoemann Venture Capital, LLC dated
January 31, 1999*
----------------------------------------------------------------------------------------------------------------------------
4.7 Subscription Agreement between Affinity and Schoemann Venture Capital, LLC dated April 23, 1999*
----------------------------------------------------------------------------------------------------------------------------
4.8 Warrant Subscription Agreement between Affinity and Schoemann Venture Capital, LLC dated April
23, 1999*
----------------------------------------------------------------------------------------------------------------------------
4.9 Consulting Agreement between Affinity and Schoemann Venture Capital, LLC dated April 23, 1999*
----------------------------------------------------------------------------------------------------------------------------
4.10 Subscription Agreement between Affinity and Schoemann Venture Capital, LLC dated June 10, 1999*
----------------------------------------------------------------------------------------------------------------------------
4.11 Warrant Subscription Agreement between Affinity and Schoemann Venture Capital, LLC dated June
10, 1999*
----------------------------------------------------------------------------------------------------------------------------
4.12 Subscription Agreement between Affinity and Schoemann Venture Capital, LLC dated December 20,
1999*
----------------------------------------------------------------------------------------------------------------------------
4.13 Letter Agreement between Affinity and Schoemann Venture Capital, LLC effective date as of
September 1, 1999*
----------------------------------------------------------------------------------------------------------------------------
4.14 First Amended and Restated Consulting Agreement between Schoemann Venture Capital, LLC dated
June 1, 1999*
----------------------------------------------------------------------------------------------------------------------------
4.15 Termination of Agreements by and between Affinity and Schoemann Venture Capital, LLC dated
January 26, 2000*
----------------------------------------------------------------------------------------------------------------------------
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*
----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
EXHIBIT NO. DESCRIPTION
----------------------------------------------------------------------------------------------------------------------------
<S> <C>
4.17 Warrant Subscription Agreement dated January 26, 2000 which amends and restates the Warrant
Subscription Agreement dated April 23, 1999*
----------------------------------------------------------------------------------------------------------------------------
4.18 Warrant Subscription Agreement dated January 26, 2000 which amends and restates the Warrant
Subscription Agreement dated June 1, 1999*
----------------------------------------------------------------------------------------------------------------------------
4.19 Warrant Subscription Agreement dated January 26, 2000 which amends and restates the Warrant
Subscription Agreement dated June 10, 1999*
----------------------------------------------------------------------------------------------------------------------------
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*
----------------------------------------------------------------------------------------------------------------------------
4.21 Subscription Agreement between Affinity and GCD Investments, LLC dated December 20, 1999*
----------------------------------------------------------------------------------------------------------------------------
4.22 Termination of Agreements between Affinity and GCD Investments, LLC dated January 26, 1999*
----------------------------------------------------------------------------------------------------------------------------
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*
----------------------------------------------------------------------------------------------------------------------------
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*
----------------------------------------------------------------------------------------------------------------------------
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*
----------------------------------------------------------------------------------------------------------------------------
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*
----------------------------------------------------------------------------------------------------------------------------
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*
----------------------------------------------------------------------------------------------------------------------------
4.28 Stock Purchase Warrant issued to Schoemann Venture Capital, LLC dated December 20, 1999*
----------------------------------------------------------------------------------------------------------------------------
4.29 Stock Purchase Warrant issued to GCD Investments, LLC dated December 20, 1999*
----------------------------------------------------------------------------------------------------------------------------
4.30 Form of Subscription Agreement used in connection with Affinity's Private Placement in January
2000*
----------------------------------------------------------------------------------------------------------------------------
4.31 Form of Warrant used in connection with Affinity's Private Placement in January 2000*
----------------------------------------------------------------------------------------------------------------------------
4.32 Incentive Stock Option Agreement between Affinity and Daniel G. Brandano dated July 1, 1999*
----------------------------------------------------------------------------------------------------------------------------
5.1 Opinion of Brown, Rudnick, Freed & Gesmer**
----------------------------------------------------------------------------------------------------------------------------
10.1 Lease Agreement Between Affinity and City Center Associates, Ltd. dated May 27, 1999*
----------------------------------------------------------------------------------------------------------------------------
10.2 Employment Agreement dated July 1, 1999 between Affinity and Daniel Brandano*
----------------------------------------------------------------------------------------------------------------------------
10.3 Employment Agreement dated July 1, 1999 between SunStyle International Holidays, Inc. and Mark
S. Mandula, as amended*
----------------------------------------------------------------------------------------------------------------------------
10.4 1999 Combination Stock Option Plan*
----------------------------------------------------------------------------------------------------------------------------
10.5 Management Agreement and Option to Purchase effective as of April 5, 1999*
----------------------------------------------------------------------------------------------------------------------------
10.6 Termination and Settlement Agreement between Affinity, Prestige Travel Services II and Kenneth
Wiggins effective as of April 5, 1999*
----------------------------------------------------------------------------------------------------------------------------
10.7 Software License Agreement between SunStyle International Holidays City and The SABRE Group,
Inc. dated April 26, 1997*
----------------------------------------------------------------------------------------------------------------------------
10.8 Amendment No. 1 effective June 1, 1999 of Software License Agreement dated April 26, 1997*
----------------------------------------------------------------------------------------------------------------------------
10.9 Consulting Agreement between Affinity and James E. Hicks dated December 20, 1999*
----------------------------------------------------------------------------------------------------------------------------
10.10 Sabre Tourguide Agreement between the Sabre Group, Inc. and SunStyle International Holidays,
Inc.*
----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
EXHIBIT NO. DESCRIPTION
----------------------------------------------------------------------------------------------------------------------------
<S> <C>
21.1 Subsidiaries of Affinity International Travel Systems, Inc.*
----------------------------------------------------------------------------------------------------------------------------
23.1 Consent of BDO Seidman LLP, independent auditors**
----------------------------------------------------------------------------------------------------------------------------
24.1 Power of Attorney (contained on signature page of registration statement)*
----------------------------------------------------------------------------------------------------------------------------
27.1 Financial Data Schedule*
----------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Previously filed.
** Filed herewith.
