SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
Amendment No. 2
CURRENT REPORT
Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
December 31, 2004
-----------------
Date of Report (Date of Earliest Event Reported)
AMERICAN LEISURE HOLDINGS, INC.
Nevada 333-48312 75-2877111
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(State of Incorporation) (Commission File (IRS Identification Number)
Number)
Park 80 Plaza East, Saddle Brook, NJ 07663
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(Address of Principal Executive Offices) (Zip Code)
(800) 546-9676 ext. 2076
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(Registrant's Telephone No.)
The name and address of the registrant has not changed since the date of the
last report.
Check the appropriate box below if the Form 8-K is intended to simultaneously
satisfy the filing obligation of the registrant under any of the following
provisions:
[ ] Written communications pursuant to Rule 425 under the Securities Act (17
CFR 230.425)
[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
[ ] Pre-commencement communications pursuant to rule 14d-2(b) under the
Exchange Act 17 CFR 240.14d-2(b))
[ ] Pre-commencement communications pursuant to Rule 13e.4 (c) under the
Exchange Act (17 CFR 240.13e-4(c))
This report on Form 8-K/A, Amendment No. 2 is being filed to include
audited financial statements for Around The World Travel, Inc. as of December
31, 2004 and December 31, 2003 and proforma financial information as required by
the Commission. The registrant acquired substantially all of the assets of
Around The World Travel, Inc. on December 31, 2004, as discussed herein. This
report includes management's discussion and analysis regarding the financial
statements of Around The World Travel, Inc. This report also includes disclosure
regarding the business, property and legal proceedings related to the acquired
assets, which the registrant has previously disclosed in its filings with the
Commission.
ITEM 1.01 ENTRY INTO A MATERIAL DEFINITIVE AGREEMENT
On December 30, 2004, American Leisure Holdings, Inc. (the "Company"),
American Leisure Equities Corporation (the "Purchaser") and Around The World
Travel, Inc. (the "Seller" or "AWT") entered into an Asset Purchase Agreement
(the "Purchase Agreement"), pursuant to which the Seller agreed to sell
substantially all of its assets to the Purchaser. The transaction was
consummated effective as of 11:59 p.m. on December 31, 2004. The Purchaser is a
wholly owned subsidiary of the Company. The Seller has been engaged in the
business of providing a variety of travel services to third parties under the
name TraveLeaders ("TraveLeaders" or the "Business"). Certain sections of the
Purchase Agreement were amended on March 31, 2005, as discussed in more detail
below.
Under the terms of the Purchase Agreement, as amended, the Seller conveyed
to the Purchaser all of the assets necessary to operate the Business, including
substantially all of the Seller's tangible and intangible assets.
The purchase price for the assets transferred under the Purchase Agreement,
as amended, is an amount equal to the fair value of the Business ($16 million,
established by an unaffiliated investment-banking firm, calculated on a going
concern basis) plus $1,500,000, for a total purchase price of $17.5 million. The
Company believes that it has purchased those assets of AWT which will be
profitable to the Company. The Company did not purchase assets of AWT which the
Company believed would not be profitable.
Under the original Purchase Agreement, the Purchaser was to pay the
purchase price on or before June 30, 2005 through a combination of 1) the
assumption of certain liabilities of the Seller 2) the forgiveness of certain
cash advances made by the Company to the Seller; and 3) the issuance of shares
by the Company of Series F preferred stock. The Purchase Agreement, as amended,
changed the form of the consideration for the purchase price to a combination of
1) an issuance to Seller of a note payable in the amount of $8,483,330, 2) a
reduction of certain amounts owed by the Seller to Purchaser in the amount of
$4,774,619 and 3) the assumption of certain liabilities of the Seller in the
amount of $4,242,051. The issuance of Series F preferred stock was retracted.
During the first quarter of 2005, the Purchaser transferred to Seller doubtful
receivables, pre-paids and security deposits that Purchaser had acquired
pursuant to the Purchase Agreement to reduce the amount of the note payable.
Purchaser also allowed Seller to retain an amount of accounts receivable that
Purchaser had acquired, which further offset the note payable. The final balance
due under the note payable as of June 30, 2005, after the offsets, was
$6,356,740.
The Purchase Agreement provides in Sections 9.1(e) that the Seller will
indemnify the Purchaser from and against losses that may be made
against the Purchaser arising out of or relating to:
- any material breach, non-performance or non-compliance by the Seller;
- any liabilities or obligations of the Seller;
- any claims asserted by any third party arising from the operation of
the business prior to closing of the Purchase Agreement, including
any claims asserted by the shareholders of Seller;
- any claims asserted by Seamless Technologies, Inc. arising from
the consummation of the transactions contemplated by the Purchase
Agreement, including, but not limited to, any claims based upon any
alleged breach of the agreement known as the Seamless Litigation
Funding Agreement; and
- any claims asserted by e-Traveleaders, Inc. arising from the
transactions contemplated by the Purchase Agreement, including, but not
limited to, any claims based upon any alleged breach by the Seller of
any agreement with e-Traveleaders, Inc.
The Seller and the Purchaser entered into a one-year Management Agreement
beginning on January 1, 2005, under which the Seller manages the Business on
behalf of the Purchaser in exchange for a monthly management fee equal to 10% of
the earnings before interest, depreciation and amortization ("EBITDA"), as
defined by the parties, of the Business. The Seller and the Purchaser also
entered into a License Agreement, under which the Purchaser granted the Seller a
non- exclusive license to use certain trade names and related intellectual
property in connection with the performance of its duties under the Management
Agreement. The License Agreement will expire on the earlier of the expiration of
the Management Agreement or upon 10 days prior written notice of termination
from the Purchaser to the Seller; provided that the Purchaser may suspend,
cancel and revoke the License Agreement upon 24 hours hand delivered notice if
the Purchaser discovers an inappropriate use of the license.
Prior to the Purchase Agreement, the Company had acquired the following: 1)
senior secured notes of AWT in the total amount of $22,600,000, subject to
$5,000,000 of liabilities (the "Galileo Loans"), in exchange for 340,000
restricted shares of the Company's common stock; 2) 907,877 shares of Series A
Preferred Stock of AWT (constituting approximately 51% of the issued and
outstanding shares of such preferred stock) and certain debt obligations of
Seller in exchange for 24,101 shares of newly designated Series E Convertible
preferred stock of the Company and a promissory note in the principal amount of
$1,698,340; 3) an option to purchase the membership interests of Around The
World Holdings, LLC, which owns approximately 62% of the issued and outstanding
common stock of AWT; 4) approximately 5% of the minority interests of the common
and preferred stock of AWT; and 5) options to purchase approximately 27% of the
common stock and an additional 42% of the preferred stock of AWT from minority
shareholders of AWT.
ITEM 2.01 COMPLETION OF ACQUISITION OR DISPOSITION OF ASSETS
On December 31, 2004, the Purchaser acquired substantially all of the
assets of AWT, as more fully described in Item 1.01. The Purchaser only assumed
certain liabilities of AWT in the amount of $4,242,051. AWT has indemnified the
Purchaser with respect to AWT's other liabilities, which other liabilities
should not affect the Purchaser's or the Company's business. The Commission
requires audited and proforma financial information regarding the Business,
which financial information is included in "Item 9.01. Financial Information,"
below. Investors should be aware that the historical information regarding the
Business as included in AWT's audited financial statements herein may not be
indicative of future operating results of the Business now that the AWT assets
have been acquired by the Purchaser. The purchase price of $17.5 million dollars
was based on a valuation of the Business by an independent investment banking
firm of $16 million plus $1.5 million. In addition to the assumption of
$4,242,051 of AWT's liabilities, $4,774,619 of debt that AWT owed to the Company
was forgiven and a promissory note in the amount of $8,483,330 was issued in
favor of AWT for the purchase price. The final balance due under the note
payable as of June 30, 2005, was $6,356,740. The Purchaser has the right to
set-off any liabilities that the Purchaser or the Company may incur as a result
of this acquisition.
DESCRIPTION OF BUSINESS
BUSINESS DEVELOPMENT
--------------------
AWT was incorporated in 1977. Historically, AWT served South Florida as the
Commercial Business Center for Carlson Wagonlit, a global travel management
company. In December 1999, Around the World Holdings LLC (the "Parent" or
"Holdings") acquired control of AWT from the former owners through a redemption
of common stock followed by a recapitalization of AWT. AWT then began a plan to
expand its operations through a series of acquisitions. AWT acquired two travel
agencies in 1999 and twelve in 2000.
On December 31, 2004, AWT sold a significant portion of its assets and
certain liabilities to the Purchaser. When the sale was completed, AWT had no
remaining operating assets although it does still possess the requisite
intangible assets to conduct a travel enterprise. AWT will continue to operate
the Business under the Management Agreement, but is also able to offer services
to others as a travel agency. Under the terms of the Management Agreement, AWT
will be paid a monthly management fee equal to 10% of the EBITDA of
TraveLeaders.
The disclosure provided in this Item 2.01, below, relates to TraveLeaders
unless stated otherwise.
DESCRIPTION OF PRINCIPAL PRODUCTS AND SERVICES
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TraveLeaders is a fully integrated travel services distribution business
that provides comprehensive travel management services to its corporate
customers, including making corporate travel reservations, organizing corporate
meetings, events and retreats, and providing profiled service levels, financial
and statistical reporting and supplier negotiations. TraveLeaders also provides
services to leisure customers through a combination of in-house and external
travel agents.
TraveLeaders provides integrated solutions for managing corporate travel on
a worldwide scale. It also offers corporate travel services on a local and
regional level. Its corporate travel services provide clients with a complete
suite of travel services that range from completely 'agent free' Internet
booking tools to specialized expert travel agent guidance. TraveLeaders also
provides private label websites that provide its corporate clients with an
exclusive portal for corporate and leisure travel planning and booking. The
corporate-clients range in size from companies with as few as two to three
travelers to companies with several hundred travelers or more. TraveLeaders
develops corporate travel policies, manages corporate travel programs and
designs and develops information systems tailored for its clients. The benefits
derived by the clients typically increase proportionately with the amount of
spending, in that TraveLeaders can obtain direct benefits for the clients by
negotiating favored terms with suppliers and provide the client with better
management information regarding their spending patterns through active,
involved account management and customized reporting capabilities.
TraveLeaders provides vacation travel services using destination
specialists who have first-hand knowledge of various destinations and the
capability to handle a client's specific vacation travel needs. TraveLeaders
helps its clients design and implement vacations suited to their particular
needs and tries to do this in the most cost-efficient manner. TraveLeaders
provides meeting, special event and incentive planning to corporate clients
ranging from Fortune 500 companies with thousands of travelers to smaller
companies with more modest meeting requirements. TraveLeaders plan events
ranging in size from 10 to over 3,000 people. TraveLeaders has the capability to
coordinate all aspects of a client's conference or event including servicing
general travel needs, booking group airline tickets as well as meeting
supervision and the production of all collateral needs. TraveLeaders' meeting,
special event and incentive planning services include program development,
promotion support, site selection, contract negotiations, registration and
on-site management for corporate events in addition to fulfillment of travel
service requirements. TraveLeaders also provides discount airline ticket and
hotel programs.
DISTRIBUTION OF TRAVEL SERVICES
-------------------------------
TraveLeaders has fourteen office locations including two large customer
service operations in Coral Gables, Florida and Irvine, California and twelve
branch offices.
The branch offices provide several corporate and vacation travel services
to clients. Most of the branch offices are primarily used by small companies as
well as vacation travelers seeking expertise in domestic and international
destinations.
TraveLeaders operates thirty on-site offices located at corporate client
premises, where it provides private label websites, customized trip planning,
reservation and ticketing services to the employees of such corporate clients.
TraveLeaders also maintains an online reservation and booking website at
www.traveleaders.com. This website permits both corporate and vacation clients
to book airline flights, hotel reservations, car rental reservations, cruises
and vacation specials.
TRAVEL SERVICES INDUSTRY OVERVIEW
---------------------------------
The travel services industry is made up of two broad categories, corporate
business travel and individual leisure travel. According to preliminary
estimates by the Travel Industry Association of America, Americans spent over
$500 billion on domestic travel in 2004. TraveLeaders does the majority of their
business in the corporate travel management category.
Corporate travel management became prevalent largely as a result of the
deregulation of the airline industry in 1978. Complex pricing strategies and
airline rules and the elimination of previously available commission
arrangements created an opportunity for travel management companies to assist
corporate clients in optimizing the value of their travel expenditures.
Travel is generally the second largest controllable expense, behind
personnel, for most companies. Corporate travel management companies like
TraveLeaders reduce travel expenses for their clients by creating and
documenting travel policies, negotiating favorable pricing directly with travel
suppliers, and streamlining the reservation process with customized profiles and
client-selected technologies including on-line booking tools.
The corporate travel management industry has changed significantly in the
last ten years. Elimination of airline commissions drove the industry to
fee-for-service arrangements, and rapid enhancements to technology allowed an
expansion of service offerings to clients. Successfully servicing those clients
requires significant technological, financial and operational resources, meaning
that larger corporate travel management companies like TraveLeaders may have a
competitive advantage. TraveLeaders' management believes the corporate travel
management industry is undergoing a period of consolidation as a result and that
a significant growth opportunity exists.
The industry's role and capacity as a distribution channel, and its
relationship with both clients and suppliers, is also undergoing significant
change as a result of the Internet and other technological innovations.
TraveLeaders' management believes these innovations offer opportunities for
corporate travel management companies to increase the efficiency of their
distribution capacities and enhance services provided to travelers and
management.
The industry has faced numerous challenges since the September 11, 2001
terrorist attacks, including the decline in travel, volatility in the U.S.
economy and continued geopolitical instability. These challenges, in part, led
to bankruptcy filings by several major airlines, and along with more recent
phenomena like rising fuel prices continue to cause other airlines to experience
adverse economic pressure. These ongoing financial pressures are driving almost
daily renovations in travel reservation economics and process, which in turn
affects the traditional supplier-intermediary-corporation-traveler
relationships.
COMPETITION IN THE TRAVEL INDUSTRY
----------------------------------
The travel services industry is highly competitive. TraveLeaders competes
with a large number of other providers of corporate and vacation travel
services. Some of its competitors include multi-national corporations that have
significantly greater resources than we have. These significantly larger
competitors continue to expand their size, which may give them access to new
products and more competitive pricing than TraveLeaders can offer. TraveLeaders
also competes with Internet travel service providers and directly with travel
suppliers including, airlines, cruise companies, hotels and car rental
companies. TraveLeaders is faced with increasing use of the Internet by both
business and vacation travelers to purchase products and services directly from
travel suppliers that could result in bypassing TraveLeaders and similarly
situated travel service providers similarly. To meet that competition,
TraveLeaders has developed and will continue to develop business models to
enable it to obtain a growing market share of the 'agent free' travel
business. TraveLeaders also competes by bundling our products in competitively
priced tour packages.
COPYRIGHTS, PATENTS, TRADEMARKS & LICENSES
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TraveLeaders does not own any patents, trademarks, copyrights or other
forms of intellectual property.
NEED FOR GOVERNMENTAL APPROVAL AND THE EFFECTS OF REGULATIONS
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Most states in which TraveLeaders operates require a business license or a
permit to sell travel services. TraveLeaders believes that it is current and in
good standing in all jurisdictions which require such a license or permit.
EMPLOYEES
---------
TraveLeaders does not have any employees. AWT has 274 employees and manages
TraveLeaders on behalf of the Purchaser.
DESCRIPTION OF PROPERTY
The Company's headquarters are located in Coral Gables, Florida. The
building is leased by Around The World Travel, Inc., which occupies almost all
of the 30,000 square feet of office space. TraveLeaders operates its customer
service operations at this office and at a large office in Irvine, California.
TraveLeaders also has twelve branch offices.
LEGAL PROCEEDINGS
AWT has indemnified the Purchaser and the Company against any losses that
it may incur in connection with the lawsuits discussed herein.
In early May 2004, AWT filed a lawsuit in the Miami-Dade Florida Circuit
Court against Seamless Technologies, Inc. and e-TraveLeaders, Inc. alleging
breach of contract and seeking relief that includes monetary damages and
termination of the contracts. They were granted leave to intervene as plaintiffs
in the original lawsuits against Seamless and e-TraveLeaders. On June 28, 2004,
the above named defendants brought suit against AWT and the Company in an action
styled Seamless Technologies, Inc. et al. v. Keith St. Clair et al. This suit
alleges that AWT has breached the contracts and also that the Company and AWT's
Chief Executive Officer were complicit with certain officers and directors AWT
in securing ownership of certain assets for the Company that were alleged to
have been a business opportunity for AWT. This lawsuit involves allegations of
fraud against Malcolm J. Wright. The lawsuit filed by Seamless has been abated
and consolidated with the original lawsuit filed by AWT. In a related matter,
Seamless' attorneys brought another action entitled Peter Hairston v. Keith St.
Clair et al. This suit mimics the misappropriation of business opportunity
claim, but it is framed within a shareholder derivative action. The relief
sought against the Company includes monetary damages and litigation costs.
On May 4, 2005, Simon Hassine, along with members of his family, filed a
lawsuit against the Company and AWT in the Circuit Court of Dade County,
Florida, Civil Division, Case Number 05-09137CA. The plaintiffs are the former
majority shareholders of AWT and former owners of the assets of TraveLeaders.
The plaintiffs allege that that they have not been paid for i) a subordinated
promissory note in the principal amount of $3,550,000 plus interest on such note
which they allege was issued to them by AWT in connection with their sale of 88%
of the common stock of AWT; and ii) subordinated undistributed retained earnings
and accrued bonuses in an aggregate amount of $1,108,806 which they allege were
due to them as part of the sale. The plaintiffs allege that the note was issued
to them net of $450,000 of preferred stock of AWT that they further allege they
never received. The plaintiffs also allege that in December 2004 they entered
into a settlement agreement with the Company regarding these matters. The
plaintiffs are pursuing a claim of breach of the alleged settlement agreement
with damages in excess of $1,000,000, interest and costs as well as performance
under the alleged settlement agreement or, in the alternative, a declaratory
judgment that the promissory note, undistributed retained earnings and accrued
bonuses are not subordinated to the Galileo Debt and full payment of the
promissory note, undistributed retained earnings and accrued bonuses plus
prejudgment interest, stated interest on the note, costs and reasonable
attorney's fees. The plaintiffs are also pursuing a claim for breach of contract
regarding the preferred stock of AWT and seeking $450,000 plus interest, costs
and reasonable attorney's fees. The plaintiffs are also pursuing claims of
fraudulent transfer regarding our acquisition of interests in the debt and
equity of AWT and seeking unspecified amounts. The Company intends to vigorously
defend the lawsuit. The Company has authorized its counsel to file various
motions including a motion to dismiss the complaint in its entirety as against
the Company and Malcolm J. Wright due to the failure by the plaintiffs to comply
with a provision in the underlying document that grants exclusive jurisdiction
to the courts located in Cook County, Illinois.
In the ordinary course of business, TraveLeaders may from time to time
become subject to routine litigation or administrative proceedings that are
incidental to its business.
MANAGEMENT'S DISCUSSION AND ANALYSIS
THIS REPORT CONTAINS FORWARD LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED AND SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. THE ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE SET FORTH IN THE FORWARD LOOKING STATEMENTS AS A RESULT
OF THE RISKS SET FORTH IN THE FILINGS WITH THE SECURITIES AND EXCHANGE
COMMISSION, GENERAL ECONOMIC CONDITIONS, AND CHANGES IN THE ASSUMPTIONS USED IN
MAKING SUCH FORWARD LOOKING STATEMENTS.
CRITICAL ACCOUNTING ESTIMATES
-------------------------------
This discussion and analysis of AWT's financial condition and results of
operations is based upon the its financial statements, which have been prepared
in accordance with accounting principals generally accepted in the United
States. The preparation of these financial statements requires AWT to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent 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 these estimates if our
assumptions do not materialize or conditions affecting those assumptions change.
For a detailed discussion of AWT's significant accounting policies, see Note 1,
Organization and Summary of Significant Accounting Policies, to the Notes to
AWT's audited financial statements included in "Item 9.01. Financial Statements
and Exhibits."
The Registrant believes the following critical accounting policies affect
more significant judgments and estimates relating to TraveLeaders on a going
forward basis:
Revenue Recognition
--------------------
TraveLeaders' revenues consist primarily of commissions and service fees
charged to customers. Commission revenue are recorded when earned, which for up
front airline commissions is at the time a reservation is ticketed. For cruise
and tour bookings, commission revenue is recognized when the customer is no
longer entitled to a full refund of the cost of the cruise or tour, which is
generally 45 to 90 days prior to the travel date. Hotel and auto reservation
commission income is recorded at the time the customer completes their stay or
use of the service provided. Airline override commissions are recorded on an
accrual basis in the month they are earned based upon TraveLeaders' ticket sales
in excess of required thresholds.
TraveLeaders also organizes corporate meetings and group events and
receives deposits from the customers in advance of the event. The deposits are
deferred and reduced as payments are made to hotels, tour operators and other
service providers. Any commission earned on this business is recognized at the
time the event occurs.
Revenues and expenses from TraveLeaders are not included in the Company's
results as the same are borne by AWT. The Company recognizes as revenue only the
net operating results of TraveLeaders after deducting the management fee paid to
AWT of 10% of TraveLeaders' EBITDA.
Concentration of Credit Risk
----------------------------
TraveLeaders operates in the travel industry and derives approximately 70%
of its revenue from business travel and 30% from leisure travelers. Any event
that adversely impacts the travel industry as a whole, would adversely impact
TraveLeaders. For example, the terrorist attacks of September 11, 2001 and the
subsequent SARS outbreak in 2002 - 2003 were significant events, which adversely
impacted TraveLeaders and the travel industry as a whole.
During the year ended December 31, 2004, no single customer represented
approximately more than 10% of net travel commissions and fees. Net travel
commissions and fees from TraveLeaders' largest customer were approximately
$767,000 or 3.8%.
Financial instruments that potentially subject TraveLeaders to
concentrations of credit risk consist principally of trade accounts receivable.
Trade accounts receivable are from travel vendors, hotels, corporate customers
and travel agents. These receivables are generally diversified due to the large
number of entities comprising TraveLeaders' customer base. Receivables from
airlines for override commissions are primarily due from two major airlines.
TraveLeaders performs ongoing evaluations of amounts due from customers where
appropriate and provides a reserve for managements' best estimate of amounts
that will not be realized.
RESULTS OF OPERATIONS OF AWT
----------------------------
Investors should be aware that the historical information regarding the
Business as discussed below may not be indicative of future operating results of
TraveLeaders now that a significant portion of the assets have been acquired by
the Purchaser. Since January 2005, the purchaser has been reviewing the trading
practices of TraveLeaders with a view to streamlining its operations and
increasing its profit margins as compared with prior years. Significant cost
savings have been implemented and new and innovative ways of distributing its
products to its client bases are currently being implemented.
Fiscal Year Ended December 31, 2004 compared to Fiscal Year Ended December
---------------------------------------------------------------------------
31, 2003
--------
Net travel commissions and fees decreased $207,475, or 1%, to $20,306,773
for the fiscal year ended December 31, 2004, as compared to net travel
commissions and fees of $20,514,248 for the fiscal year ended December 31, 2003.
The decrease in net travel commissions and fees was primarily attributable to
pricing changes to meet market competition.
Personnel expense increased $115,160, or just under 1%, to $14,989,862 for
the fiscal year ended December 31, 2004, as compared to personnel expense of
$14,874,702 for the fiscal year ended December 31, 2003. The increase in
personnel expense was primarily attributable to hiring additional personnel in
anticipation of increases in business volume.
Facilities expense decreased $271,666, or 11%, to $2,198,411 for the fiscal
year ended December 31, 2004, as compared to facilities expense of $14,874,702
for the fiscal year ended December 31, 2003. The decrease in facilities expense
was primarily attributable to closing two offices and subletting excess space.
Technology and communication expense increased $261,761, or 12%, to
$2,430,699 for the fiscal year ended December 31, 2004, as compared to
technology and communication expense of $2,168,938 for the fiscal year ended
December 31, 2003. The increase in technology and communication expense was
primarily attributable to investments into expanding TraveLeaders' commitment to
technology as well as incremental usage of other communication platforms.
Marketing and promotion expense increased $145,081, or 44%, to $475,263 for
the fiscal year ended December 31, 2004, as compared to marketing and promotion
expense of $330,182 for the fiscal year ended December 31, 2003. The increase in
marketing and promotion expense was primarily attributable to effort to increase
presence and exposure on web search engines.
Other general and administrative expense increased $547,723, or 23%, to
$2,950,851 for the fiscal year ended December 31, 2004, as compared to other
general and administrative expense of $2,403,128 for the fiscal year ended
December 31, 2003. The increase in other general and administrative expense was
primarily attributable to the increase in personnel, which had a direct
relationship to increases in overhead such as supplies.
Depreciation expense decreased $31,999, or 11%, to $249,266 for the fiscal
year ended December 31, 2004, as compared to other depreciation expense of
$281,265 for the fiscal year ended December 31, 2003. The decrease in
depreciation expenses was primarily attributable to assets becoming fully
depreciated and the retirement of assets.
Loss from operations increased $973,535, or 48%, to $2,987,579 for the
fiscal year ended December 31, 2004, as compared to a loss from operations of
$2,014,044 for the fiscal year ended December 31, 2003. The increase in loss
from operations was primarily due to the decrease in net travel commissions and
fees and the increases in personnel expense, technology and communication
expense, marketing and promotion expense and other general and administrative
expense.
AWT had total other income of $11,112,201 for the fiscal year ended
December 31, 2004, as compared to total other expense of $3,250,669 for the
fiscal year ended December 31, 2003. The change from total other expense to
total other income was primarily due to a gain on sale of assets of $12,929,493
and debt forgiveness income of $2,238,658 for the fiscal year ended December 31,
2004. AWT did not have these items of other income for the fiscal year ended
December 2003. Interest expense increased $766,597, or 25%, and net other
expense increased $38,684, or 26%, to $3,865,991 and $189,959, respectively, for
the fiscal year ended December 31, 2004, as compared to interest expense of
$3,099,394 and net other expense of $151,275 for the fiscal year ended December
31, 2005, which partially offset the items of other income.
AWT had net income of $8,124,622 for the fiscal year ended December 31,
2004, as compared to net loss of $5,264,713 for the fiscal year ended December
31, 2003. The change from net loss to net income is primarily attributable to
the gain on sale of assets and debt forgiveness income, discussed above.
AWT had an accumulated deficit of $51,291,529 as of December 31, 2004.
LIQUIDITY AND CAPITAL RESOURCES OF AWT
--------------------------------------
Investors should be aware that the historical information regarding the
Business as discussed below may not be indicative of future operating results of
TraveLeaders now that a significant portion of the assets have been acquired by
the Purchaser.
AWT had total current assets of $91,805 as of December 31, 2004, which
consisted solely of other current assets following the sale of substantially all
of its assets to the Purchaser.
AWT had total current liabilities of $40,628,310 as of December 31, 2004,
which consisted of notes and advances from the Company of $18,761,262, accrued
interest expense of $9,245,018, current portion of long-term debt of $6,065,316,
loans due to Parent and officers of $2,600,331, other accrued expenses of
$2,549,738, accounts payable of $782,664 and accrued payroll and benefits of
$623,981.
AWT had negative net working capital of $40,536,505 as of December 31,
2004. The ratio of total current assets to total current liabilities was less
than 1% as of December 31, 2004, following the sale of substantially all of the
assets to the Purchaser.
Net cash used in operating activities was $4,087,292 for the fiscal year
ended December 31, 2004, as compared to net cash used in operating activities of
$1,991,543 for the fiscal year ended December 31, 2003. Net cash used in
operating activities for 2004 was primarily attributable to an adjustment of
$12,929,493 for gain on sale of assets to the Company and $2,238,658 for non
cash debt forgiveness income, which offset net income of $8,124,622 and an
increase in accrued interest expense of $3,260,222.
Net cash used in investing activities was $889,380 for the fiscal year
ended December 31, 2004, as compared to net cash used in investing activities of
$79,333 for the fiscal year ended December 31, 2003. Net cash used in investing
activities for 2004 was attributable to cash given in sale of assets to the
Company of $767,292 and purchases of property and equipment of $122,088.
Net cash used in financing activities was $3,553,641 for the fiscal year
ended December 31, 2004, as compared to net cash used in financing activities of
$3,116,404 for the fiscal year ended December 31, 2003. Net cash used in
financing activities for 2004 primarily attributable to promissory note advances
from the Company of $4,515,067 and borrowings from Parent and officers of $6,010
which were offset by repayments of third party debt of $517,020, repayment of
borrowings from Parent and officer of $172,837, net change in other due to/from
the Company of $177,579 and repayments to the Company of $100,000.
RISK FACTORS
For purposes of these risk factors, and except as expressly indicated or
unless the context otherwise requires, "we," "our," or "us" means American
Leisure Holdings, Inc. and its subsidiaries.
Risks related to our acquisition of the assets of AWT
We have been, and in the future we could be, included in lawsuits or otherwise
--------------------------------------------------------------------------------
obligated to pay liabilities of AWT that we did not assume.
-----------------------------------------------------------
It is possible that we will be named or included in lawsuits related to
liabilities or obligations of AWT that we did not assume. AWT has agreed to
indemnify us pursuant to the Purchase Agreement. If we are named in these
lawsuits, even though AWT has agreed to indemnify us, it could have a material
adverse effect on our liquidity, results of operations or financial condition.
Risks related to the business operations of TraveLeaders
TraveLeaders' commissions and fees on contracts with suppliers of travel
--------------------------------------------------------------------------------
services may be reduced or these contracts may be cancelled at will by the
--------------------------------------------------------------------------------
suppliers based on the volume of business, which could have a material adverse
--------------------------------------------------------------------------------
effect on TraveLeaders' business, financial condition or results of operations.
-------------------------------------------------------------------------------
Suppliers of travel services including airline, hotel, cruise, tour and car
rental suppliers may reduce the commissions and fees that TraveLeaders earns
under contract with them based on the volume of business that TraveLeaders
generates for them. These contracts generally renew annually and in some cases
may be cancelled at will by the suppliers. If TraveLeaders cannot maintain its
volume of business, the suppliers could contract with TraveLeaders on terms less
favorable than the current terms of the contracts or the terms of their
contracts with competitors of TraveLeaders, exclude TraveLeaders from the
products and services that they provide to its competitors, refuse to renew
contracts with TraveLeaders, or, in some cases, cancel their contracts with
TraveLeaders at will. In addition, the suppliers may not continue to sell
services and products through global distribution systems on terms satisfactory
to TraveLeaders. If TraveLeaders is unable to maintain or expand its volume of
business, its ability to offer travel service or lower-priced travel inventory
could be significantly reduced. Any discontinuance or deterioration in the
services provided by third parties, such as global distribution systems
providers, could prevent customers from accessing or purchasing particular
travel services through TraveLeaders. If these suppliers were to cancel or
refuse to renew contracts with TraveLeaders or renew them on less favorable
terms, it could have a material adverse effect on the business, financial
condition or results of operations of TraveLeaders.
The suppliers of travel services could reduce or eliminate commission rates on
--------------------------------------------------------------------------------
bookings made through TraveLeaders by phone and over the Internet, which could
--------------------------------------------------------------------------------
reduce revenues.
----------------
TraveLeaders receives commissions paid to it by travel suppliers such as
hotel chains and cruise companies for bookings that its customers make through
TraveLeaders by phone and over the Internet. Consistent with industry practices,
the suppliers are not obligated by regulation to pay any specified commission
rates for bookings made through TraveLeaders or to pay commissions at all. Over
the last several years, travel suppliers have substantially reduced commission
rates. The travel suppliers have reduced TraveLeaders' commission rates in
certain instances. Future reductions, if any, in commission rates that are not
offset by lower operating costs could have a material adverse effect on the
business and results of operations of TraveLeaders.
Declines or disruptions in the travel industry could significantly reduce travel
--------------------------------------------------------------------------------
commissions and fees.
---------------------
Potential declines or disruptions in the travel industry may result from
any one or more of the following factors:
- price escalation in the airline industry or other travel related
industries;
- airline or other travel related strikes;
- political instability, war and hostilities;
- long term bad weather;
- fuel price escalation;
- increased occurrence of travel-related accidents; and
- economic downturns and recessions.
Travel revenues may fluctuate from quarter to quarter due to several factors
--------------------------------------------------------------------------------
including ones that are outside of the control of TraveLeaders, and if the
--------------------------------------------------------------------------------
revenues are below expectations it would likely have a material adverse effect
--------------------------------------------------------------------------------
on the results of operations of TraveLeaders.
---------------------------------------------
We may experience fluctuating revenues because of a variety of factors,
many of which are outside of our control. These factors may include, but are not
limited to, the timing of new contracts; reductions or other modifications in
our clients' marketing and sales strategies; the timing of new product or
service offerings; the expiration or termination of existing contracts or the
reduction in existing programs; the timing of increased expenses incurred to
obtain and support new business; changes in the revenue mix among our various
service offerings; labor strikes and slowdowns at airlines or other travel
businesses; and the seasonal pattern of TraveLeaders' business. In addition, we
make decisions regarding staffing levels, investments and other operating
expenditures based on our revenue forecasts. If our revenues are below
expectations in any given quarter, our operating results for that quarter would
likely be materially adversely affected.
Contracts with clients do not guarantee that TraveLeaders will receive a minimum
--------------------------------------------------------------------------------
level of revenue, are not exclusive, and may be terminated on relatively short
--------------------------------------------------------------------------------
notice.
-------
Contracts with clients do not ensure that TraveLeaders will generate a
minimum level of revenue, and the profitability of each client may fluctuate,
sometimes significantly, throughout the various stages of the sales cycles.
Although TraveLeaders will seek to enter into multi-year contracts with its
clients, its contracts generally enable the client to terminate the contract, or
terminate or reduce customer interaction volumes, on relatively short notice.
Although some contracts require the client to pay a contractually agreed amount
in the event of early termination, there can be no assurance that TraveLeaders
will be able to collect such amount or that such amount, if received, will
sufficiently compensate TraveLeaders for its investment in any canceled sales
campaign or for the revenues it may lose as a result of the early termination.
If TraveLeaders does not generate minimum levels of revenue from its contracts
or its clients terminate the multi-year contracts, it will have a material
adverse effect on the business, results of operation and financial condition of
TraveLeaders.
We receive contractually set service fees and have limited ability to increase
--------------------------------------------------------------------------------
our fees to meet increasing costs.
----------------------------------
Most of our travel contracts have set service fees that we may not increase
if, for instance, certain costs or price indices increase. For the minority of
our contracts that allow us to increase our service fees based upon increases in
cost or price indices, these increases may not fully compensate us for increases
in labor and other costs incurred in providing the services. If our costs
increase and we cannot, in turn, increase our service fees or we have to
decrease our service fees because we do not achieve defined performance
objectives, it will have a material adverse effect on our business, results of
operations and financial condition.
The travel industry is labor intensive and increases in the costs of our
--------------------------------------------------------------------------------
employees could have a material adverse effect on our business, liquidity or
--------------------------------------------------------------------------------
results of operations.
----------------------
The travel industry is labor intensive and has experienced high personnel
turnover. A significant increase in our personnel turnover rate could increase
our recruiting and training costs and decrease operating effectiveness and
productivity. If we obtain a significant number of new clients or implement a
significant number of new, large-scale campaigns, we may need to recruit, hire
and train qualified personnel at an accelerated rate, but we may be unable to do
so. Because significant portions of our operating costs relate to labor costs,
an increase in wages, costs of employee benefits, employment taxes or other
costs associated with our employees could have a material adverse effect on our
business, results of operations or financial condition.
Our industry is subject to intense competition and competitive pressures could
--------------------------------------------------------------------------------
adversely affect our business, results of operations and financial condition.
-----------------------------------------------------------------------------
We believe that the market in which we operate is fragmented and highly
competitive and that competition may intensify in the future. We compete with
small firms offering specific applications, divisions of large entities, large
independent firms and the in-house operations of clients or potential clients. A
number of competitors have or may develop greater capabilities and resources
than us. Additional competitors with greater resources than us may enter our
market. Competitive pressures from current or future competitors could cause our
services to lose market acceptance or result in significant price erosion, all
of which could have a material adverse effect upon our business, results of
operations or financial condition.
ITEM 3.03 MATERIAL MODIFICATION TO RIGHTS OF SECURITY HOLDERS
On December 30, 2004, the Company's Board of Directors authorized a new
class of preferred stock of the Company designated as Series F preferred stock.
A total of 150,000 shares were authorized in this new class. The Series F
preferred stock has a par value of $0.01 per share, a liquidation value of
$100.00 per share and can be converted at the option of the holder into a
maximum of two shares of the Company's common stock for each share of Series F
preferred stock. The Series F preferred stock will carry a cumulative preferred
dividend of one dollar ($1.00) per share per year.
On December 30, 2004, in conjunction with the Purchase Agreement, the
Company made a commitment to issue an amount of shares of Series F preferred
stock to Around The World Travel, Inc., as part of the consideration for the
assets acquired by the Purchaser pursuant to the Purchase Agreement. Pursuant to
the Amended Asset Purchase Agreement, the Company is not issuing any shares of
Series F preferred stock in consideration for the assets.
The Company has filed a Certificate of Designation of Series F preferred
stock with the Nevada Secretary of State. The Certificate of Designation was
attached as Exhibit 3.1 to our Form 8-K filed on January 6, 2005.
ITEM 9.01 FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements of AWT
------------------------------
AROUND THE WORLD TRAVEL, INC.
Financial Statements
December 31, 2004 and 2003
AROUND THE WORLD TRAVEL, INC.
CONTENTS:
---------
REPORT OF INDPENDENT CERTIFIED PUBLIC ACCOUNTANTS 1
FINANCIAL STATEMENTS:
Balance Sheets 2 - 3
Statements of Operations 4
Statements of Stockholders' Deficit 5
Statements of Cash Flows 6 - 7
Notes to Financial Statements 8 - 36
AROUND THE WORLD TRAVEL, INC.
-----------------------------
Balance Sheets
December 31,
ASSETS 2004 2003
--------------------------------------------------------------
CURRENT ASSETS
Cash $ - $1,423,031
Accounts receivable, net - 936,537
Prepaid expenses - 868,649
Other current assets 91,805 477,031
------- ----------
TOTAL CURRENT ASSETS 91,805 3,705,248
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, net - 528,255
DEPOSITS AND OTHER ASSETS - 274,175
------- ----------
TOTAL ASSETS $91,805 $4,507,678
======= ==========
The accompanying notes are an integral part of these financial statements.
-2-
AROUND THE WORLD TRAVEL, INC.
-----------------------------
Balance Sheets (Continued)
December 31,
LIABILITIES AND STOCKHOLDERS' DEFICIT 2004 2003
---------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Accounts payable $ 782,664 $ 1,391,111
Accrued payroll and benefits 623,981 640,910
Customer deposits - 3,340,941
Accrued interest expense 9,245,018 8,376,426
Other accrued expenses 2,549,738 5,564,476
Due to Parent and officers 2,600,331 2,862,158
Notes and advances from American Leisure Holdings, Inc. 18,761,262 -
Current portion of long-term debt 6,065,316 30,340,960
------------- -------------
TOTAL CURRENT LIABILITIES 40,628,310 52,516,982
------------- -------------
DEFERRED REVENUE AND RENT 1,189,203 1,441,026
COMMITMENTS AND CONTINGENCIES (Notes 9 and 10)
STOCKHOLDERS' DEFICIT:
Preferred stock, $.001 par value, 80,000,000 shares
authorized; none issued or outstanding - -
Series A Preferred stock, $.001 par value; 20,000,000 shares
authorized; 2,176,377 shares issued and outstanding;
liquidation preference of $10,881,885 2,176 2,176
Common stock, $.001 par value; 300,000,000 shares
authorized; 49,980,778 shares issued 49,981 49,981
Additional paid-in-capital 22,151,664 22,151,664
Accumulated deficit (51,291,529) (59,416,151)
Treasury stock - 17,920,000 and 17,600,000 shares
as of December 31, 2004 and 2003 (12,638,000) (12,238,000)
------------- -------------
TOTAL STOCKHOLDERS' DEFICIT (41,725,708) (49,450,330)
------------- -------------
TOTAL LIABILITIES AND
STOCKHOLDERS' DEFICIT $ 91,805 $ 4,507,678
============= =============
The accompanying notes are an integral part of these financial statements.
-3-
AROUND THE WORLD TRAVEL, INC.
-----------------------------
Statements of Operations
Years ended December 31,
2004 2003
---------------------------------------------------------------
TRAVEL COMMISSIONS AND FEES, Net $20,306,773 $20,514,248
------------ ------------
OPERATING EXPENSES
Personnel 14,989,862 14,874,702
Facilities 2,198,411 2,470,077
Technology and communication 2,430,699 2,168,938
Marketing and promotion 475,263 330,182
Other general and administrative 2,950,851 2,403,128
Depreciation 249,266 281,265
------------ ------------
23,294,352 22,528,292
------------ ------------
LOSS FROM OPERATIONS (2,987,579) (2,014,044)
------------ ------------
OTHER INCOME (EXPENSE):
Interest expense (3,865,991) (3,099,394)
Debt forgiveness income 2,238,658 -
Gain on sale of assets 12,929,493 -
Other expense, net (189,959) (151,275)
------------ ------------
TOTAL OTHER INCOME (EXPENSE) 11,112,201 (3,250,669)
------------ ------------
NET INCOME (LOSS) $ 8,124,622 $(5,264,713)
============ ============
The accompanying notes are an integral part of these financial statements.
-4-
AROUND THE WORLD TRAVEL, INC.
-----------------------------
Statements of Stockholders' Deficit
Years ended December 31, 2004 and 2003
Additional
Preferred Stock Common Stock Paid-in Accumulated Treasury
Shares Amount Shares Amount Capital Deficit Stock Total
--------- ------- ---------- ------- ----------- ------------- ------------- -------------
BALANCE - JANUARY 1, 2003 2,109,077 $ 2,109 46,174,637 $46,175 $21,502,661 $(54,151,438) $(12,238,000) $(44,838,493)
Shares issued for acquisition
holdbacks 67,300 67 68,675 69 393,364 - - 393,500
Shares issued for services - - 21,295 21 9,355 - - 9,376
Shares of common stock sold - - 3,716,171 3,716 246,284 - - 250,000
Net loss - - - - - (5,264,713) - (5,264,713)
--------- ------- ---------- ------- ----------- ------------- ------------- -------------
BALANCE - DECEMBER 31, 2003 2,176,377 2,176 49,980,778 49,981 22,151,664 (59,416,151) (12,238,000) (49,450,330)
Shares repurchased for note
payable - - - - - - (400,000) (400,000)
Net income - - - - - 8,124,622 - 8,124,622
--------- ------- ---------- ------- ----------- ------------- ------------- -------------
BALANCE - DECEMBER 31, 2004 2,176,377 $ 2,176 49,980,778 $49,981 $22,151,664 $(51,291,529) $(12,638,000) $(41,725,708)
========= ======= ========== ======= =========== ============= ============= =============
The accompanying notes are an integral part of these financial statements.
-5-
AROUND THE WORLD TRAVEL, INC.
-----------------------------
Statements of Cash Flows
Years ended December 31,
2004 2003
---------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 8,124,622 $(5,264,713)
Adjustments to reconcile net income (loss) to cash
used in operating activities:
Depreciation 249,266 281,265
Bad debt expense 221,262 19,071
Issuance of common stock for management services - 9,376
Non cash debt forgiveness income (2,238,658) -
Amortization of deferred financing cost with ALH 614,129 -
Gain on sale of assets to ALH (12,929,493) -
Changes in assets and liabilities:
Accounts receivable (315,717) 333,040
Prepaid expenses 59,800 (16,250)
Other current assets (52,242) (339,387)
Other assets - (109,244)
Accounts payable 70,745 (165,112)
Customer deposits (588,406) 1,478,819
Accrued interest expense 3,260,222 2,949,023
Accrued payroll and benefits 213,400 (248,099)
Deferred revenue and rent (251,823) (177,937)
Other accrued expenses (524,399) (741,395)
------------- ------------
NET CASH USED IN OPERATING ACTIVITIES (4,087,292) (1,991,543)
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash given in sale of assets to ALH (767,292) -
Purchases of property and equipment (122,088) (79,333)
------------- ------------
NET CASH USED IN INVESTING ACTIVITIES (889,380) (79,333)
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock - 250,000
Promissory note advances from ALH 4,515,067 -
Repayments to ALH (100,000) -
Net change in other due to / from ALH (177,579) -
Proceeds from third party debt - 1,545,797
Repayments of third party debt (517,020) (332,818)
Borrowings from Parent and officers 6,010 2,502,286
Repayment of borrowings from Parent and officer (172,837) (848,861)
------------- ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 3,553,641 3,116,404
------------- ------------
NET INCREASE (DECREASE) IN CASH (1,423,031) 1,045,528
CASH, BEGINNING OF PERIOD 1,423,031 377,503
------------- ------------
CASH, END OF PERIOD $ - $ 1,423,031
============= ============
The accompanying notes are an integral part of these financial statements.
-6-
AROUND THE WORLD TRAVEL, INC.
-----------------------------
Statements of Cash Flows (Continued)
Years ended December 31,
2004 2003
-----------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Income taxes paid $ - $ -
===== =======
Interest paid $ - $65,730
===== =======
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
In 2003, the Company issued 67,300 shares of preferred stock valued at $5.00 per
share and 68,675 shares of common stock valued at $0.83 per share to former
owners of an acquired business in satisfaction of acquisition holdbacks due.
In 2002, the Company received $2.82 million of financing from a third party
which was funded through the Parent and a company (Seaway) controlled by a
business associate of the Company's chairman and chief executive officer. As of
December 31, 2002, a total of $1,113,868 was due from the Parent and Seaway for
debt on which the Company was primarily liable. In 2003, the Company collected
$825,871 of this amount from Seaway. $4,388 remained due from Seaway at
December 31, 2003 and 2004. In 2003, the remaining amount due from Parent of
$283,610 was applied against advances due to Parent.
In 2004, the Company entered into a formal settlement of certain litigation
between the former owners of an acquired business, the Parent and the Company's
chairman and chief executive officer. In connection with the settlement,
$36,000 of deferred compensation due the former owners was reclassified to debt.
In 2004, the Company negotiated a settlement of amounts due to the former owners
of an acquired business. As part of the settlement, the Company issued a
$400,000 note to repurchase 320,000 shares of common stock from the former
owners. The Company also entered into a new combined promissory note totaling
$1,698,340 which replaced prior amounts due to the former owners. Upon
execution of the note, $235,069 of accrued interest due these former owners was
transferred to the principal balance of the new note.
During 2004, the Company received cash advances from ALH under two promissory
notes dated September 29, 2004. In connection with obtaining this financing,
ALH incurred certain costs and issued or modified warrants to purchase shares of
ALH common stock granted to a financial institution. ALH allocated these debt
related costs totaling $2,410,482 (including $2,023,660 representing the fair
value of ALH warrants) to the Company. These costs were capitalized in the
accompanying 2004 balance sheet as deferred financing costs and were being
amortized to interest expense over the one year term of the notes. During 2004,
$614,129 was amortized to interest expense. On December 31, 2004, following the
sale to ALH, the remaining unamortized balance of $1,796,306 was written off
(Note 1).
During 2004, ALH acquired certain indebtedness of the Company from a third
party. The outstanding principal amount of this debt was $18,761,262 and accrued
interest on the debt at December 31, 2004 was approximately $6,601,000. The
outstanding principal amount was reclassified to notes and advances from
American Leisure Holdings, Inc. in the accompanying 2004 balance sheet.
In February 2005, an outstanding legal matter in which the Company and certain
officers were defendants was settled for $100,000. The Company's chairman and
chief executive has agreed to indemnify the Company for $75,000 of the
settlement. ALH has agreed to indemnify the Company for the other $25,000. The
accompanying balance sheet as of December 31, 2004 includes $100,000 of accrued
legal expenses, a $25,000 due from ALH included in other assets and $75,000 due
from the chairman and chief executive officer which has been applied to the
balance of due to Parent.
On December 31, 2004, the Company sold substantially all of its operating assets
in exchange for assumption of liabilities by the purchaser and shares of a
series of preferred stock issued by the Purchaser. See Note 1.
The accompanying notes are an integral part of these financial statements.
-7-
AROUND THE WORLD TRAVEL, INC.
-----------------------------
Notes to Financial Statements
Years ended December 31, 2004 and 2003
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Around The World Travel, Inc. d/b/a Traveleaders ("Around the World Travel",
"ATW" or the "Company") was incorporated in 1977. Historically, the Company
served South Florida as the Commercial Business Center for Carlson Wagonlit, a
global travel management company. In December 1999, Around the World Holdings
LLC (the "Parent" or "Holdings") acquired control of the Company from the former
owners through a redemption of common stock followed by a recapitalization of
the Company. The Company then began a plan to expand its operations through a
series of acquisitions. The Company acquired two travel agencies in 1999 and
twelve in 2000.
The Company provides comprehensive travel management services to its Corporate
customers, including making corporate travel reservations and organizing
corporate meetings, events and retreats. The Company also provides services to
leisure customers through a combination of in-house and external travel agents.
The Company has branches in five states, and also provides services at various
on-site locations and at corporate clients' offices. The Company's headquarters
are located in Coral Gables, Florida.
BASIS OF PRESENTATION
Since the change in control in 1999, the Company has incurred recurring losses
and has an accumulated deficit of $51,291,529 as of December 31, 2004. The
Company has relied on third party financing, funding from the Parent and, in
2004, funding from American Leisure Holdings, Inc. ("ALH") (see "Sale of Assets
in 2004" below) to fund acquisitions and ongoing operations. The majority of
the Company's debt is in default. For the most part, the Company has been
unable to make principal or interest payments on outstanding debt obligations.
The accompanying financial statements have been prepared on a going concern
basis, which assumes the continuity of operations for a reasonable period of
time. The financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
As further described below, effective December 31, 2004, at 11:59 pm the Company
consummated an asset purchase agreement (the "Purchase Agreement") to sell
substantially all of its assets and certain liabilities to American Leisure
Equities Corporation (the "Purchaser"), a wholly-owned subsidiary of ALH. When
the sale was completed, the Company had no remaining operating assets. The
Company will continue to operate the business under a one-year management
agreement with the Purchaser. Under the terms of the management agreement, the
Company will be paid a monthly management fee equal to 10% of the earnings
before interest, depreciation and amortization ("EBITDA"), as defined by the
parties, of the business.
-8-
AROUND THE WORLD TRAVEL, INC.
-----------------------------
Notes to Financial Statements
Years ended December 31, 2004 and 2003
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
BASIS OF PRESENTATION (CONTINUED)
There can be no assurance that the Company will be able to generate positive
EBITDA and, therefore, earn a management fee or that management fees received,
if any, will be sufficient to enable the Company to meet its remaining
liabilities.
ALH's audited financial statements as of December 31, 2004 and for the year then
ended were filed with the Securities and Exchange Commission on March 31, 2005.
The independent auditor's report accompanying those financial statements
includes an explanatory paragraph which states that ALH's recurring losses from
operations and the need to raise additional financing in order to satisfy its
vendors and other creditors and execute its business plan raise substantial
doubt about its ability to continue as a going concern. This could also
adversely affect the Company's ability to realize any management fees earned or
the Purchaser's ability to satisfy the liabilities assumed as further described
below.
SALE OF ASSETS IN 2004
Under the terms of the Purchase Agreement, the Company conveyed to the Purchaser
all of the assets necessary to operate the Business, including substantially all
of the Seller's tangible and intangible assets and certain agreed liabilities.
The purchase price was determined by the parties as an amount equal to the fair
value of the business (calculated on a going concern basis), plus $1,500,000.
In accordance with the Purchase Agreement, the purchase price was paid through
assumption of liabilities, forgiveness of certain cash advances made by ALH to
the Company during 2004 and the issuance of ALH Series F Preferred Stock valued
by the parties at $193,648. There is no separate market for ALH Series F
preferred stock. Furthermore, as discussed above, ALH's auditor has issued a
going concern opinion on the 2004 financial statements of ALH. As a result, the
Company has reserved the value assigned to the stock in the transaction. The
purchase price is summarized as follows:
Assumption of liabilities:
Trade payables and accruals $ 6,266,032
Amounts due former owners and officer, including interest 4,242,051
Forgiveness of notes and advances from ALH 6,798,269
------------
17,306,352
ALH Series F preferred stock 193,648
------------
Gross consideration received 17,500,000
Reserve Value of Series F Preferred Stock (193,648)
------------
Net consideration received $17,306,352
============
-9-
AROUND THE WORLD TRAVEL, INC.
-----------------------------
Notes to Financial Statements
Years ended December 31, 2004 and 2003
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
SALE OF ASSETS IN 2004 (CONTINUED)
The following schedule summarizes the impact of the sale and certain asset
impairments on the accompanying financial statements as of December 31, 2004.
Immediately Assets Sold Balance
Prior to sale and Liabilities Impaired December 31,
December 31 Assumed Assets 2004
------------- ------------- ------------ -----------
Cash $ 767,292 $ (767,292) $ - $ -
Accounts receivable, net 1,030,992 (1,030,992) - -
Prepaid expenses and other
current assets 190,275 (51,825) (46,645) 91,805
------------- ------------- ------------ -----------
TOTAL CURRENT ASSETS 1,988,559 (1,850,109) (46,645) 91,805
Equipment and leasehold
improvements, net 407,318 (287,975) (119,343) -
ALH Deferred financing costs 1,796,306 - (1,796,306) -
Deposits and other assets 276,481 (276,481) - -
------------- ------------- ------------ -----------
TOTAL ASSETS 4,468,664 (2,414,565) (1,962,294) 91,805
------------- ------------- ------------ -----------
Accounts payable 1,461,856 (679,192) - 782,664
Accrued payroll and benefits 854,310 (230,329) - 623,981
Customer deposits 2,752,535 (2,752,535) - -
Accrued interest expense 10,928,897 (1,683,879) - 9,245,018
Other accrued expenses 5,153,714 (2,603,976) - 2,549,738
Due to Parent and officers 2,620,331 (20,000) - 2,600,331
Notes and advances from ALH 25,406,764 (6,645,502) - 18,761,262
Current portion of long-term debt 8,756,255 (2,690,939) - 6,065,316
------------- ------------ -----------
TOTAL CURRENT
LIABILITIES 57,934,662 (17,306,352) - 40,628,310
Deferred Revenue and Rent 1,189,203 - - 1,189,203
------------- ------------- ------------ -----------
TOTAL LIABILITIES 59,123,865 (17,306,352) - 41,817,513
STOCKHOLDERS' DEFICIT (54,655,201) (41,725,708)
TOTAL LIABILITIES AND
STOCKHOLDERS' DEFICIT $ 4,468,664 $ 91,805
------------- -----------
GAIN ON SALE TO ALH $ 14,891,787 $ (1,962,294) $12,929,493
------------- ------------ -----------
-10-
AROUND THE WORLD TRAVEL, INC.
-----------------------------
Notes to Financial Statements
Years ended December 31, 2004 and 2003
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
SALE OF ASSETS IN 2004 (CONTINUED)
Assets not acquired by the Purchaser included a $25,000 indemnification payment
due from ALH which was received in March 2005 and $66,805 of travel advances and
fee advances to a consultant engaged by ALH who performed services for the
Company.
ALH did not acquire the following liabilities:
- Certain trade payables and expense accruals specifically
identified by the parties, including property lease obligations,
accrued legal and professional fees, the net amount due to Global
Distribution Systems (Note 10) and the liability to airlines for
contract booking errors (Note 10). ALH also did not acquire the
leasehold improvements related to such properties for which leases
were not assumed.
- The acquisition note and post closing payment due to the former
shareholders of ATW (Note 6) totaling $4,720,000 and accrued interest
thereon of approximately $2,355,000 as of December 31, 2004.
- Amounts due to the Parent as of December 31, 2004, including
accrued interest payable totaling approximately $188,000 and a bonus
due the Company's chairman and chief executive officer of
approximately $1,248,000.
- Debt due to other third parties of $1,345,316 and accrued
interest on such debt of approximately $101,000.
- The majority of employee-related liabilities. Following the sale,
the Company will continue to operate the business on the Purchaser's
behalf pursuant to a management agreement as further described below.
Consequently, employees of the Company will remain employed by the
Company.
- Certain indebtedness of the company with an outstanding principal
amount of $18,761,262 and the accrued interest thereon of
approximately $6,601,000 as of December 31, 2004. As further discussed
in Note 6, in 2004, ALH acquired this indebtedness from a third party
in exchange for a $5 million note payable. The debt is secured by a
first priority lien on all of the assets of the Company. ALH has not
legally released the Company from its obligations under this debt.
Because the debt has not been forgiven or otherwise discharged, the
entire outstanding amount of principal and accrued interest is
included in the accompanying financial statements.
Following the forgiveness of amounts due to ALH, the Company wrote off the
remaining unamortized balance of deferred financing costs of $1,796,306 (Note
9). The Company also wrote off the remaining balance of leasehold improvements
and certain other assets not acquired by the Purchaser.
-11-
AROUND THE WORLD TRAVEL, INC.
-----------------------------
Notes to Financial Statements
Years ended December 31, 2004 and 2003
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
SALE OF ASSETS IN 2004 (CONTINUED)
Pursuant to the terms of the Purchase Agreement, the Company and the Purchaser
entered into a Management Agreement under which the Company will manage the
business on behalf of the Purchaser. The term of the management agreement is
from January 1, 2005 through December 31, 2005. As compensation for services
under the Agreement, the Company will be paid a monthly management fee equal to
10% of the earnings before interest, depreciation and amortization of the
business.
The Company and the Purchaser also entered into a License Agreement, under which
the Purchaser granted the Company a non-exclusive license to use certain trade
names and related intellectual property in connection with the performance with
its duties under the Management Agreement. The License Agreement will expire
simultaneously with the Management Agreement. The Company will pay the Purchaser
a royalty equal to all the earnings of the business less the amount due the
Company under the management agreement.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid instruments purchased with maturities of
three months or less to be cash equivalents.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are recorded at cost. Additions and
improvements are capitalized. Maintenance and repairs are expensed as incurred.
Depreciation and amortization are computed using both the straight-line method
over the estimated useful lives of the assets or life of the lease (if shorter),
which range from 3 to 10 years.
LONG-LIVED ASSETS
Management evaluates the recoverability of the carrying value of its long-lived
assets whenever events or changes in circumstances indicate the carrying amounts
of such assets may not be recoverable. Recoverability of these assets is
assessed by comparing the forecasted undiscounted future cash flows from the
operation and eventual disposition of the assets to their carrying values. If
the operation is determined to be unable to recover the carrying amount of its
assets, then an impairment charge would be recognized for the difference between
the fair value and carrying value of the assets. Fair value is determined based
on discounted cash flows or appraised values, whichever is more readily
determinable, depending upon the nature of the assets.
-12-
AROUND THE WORLD TRAVEL, INC.
-----------------------------
Notes to Financial Statements
Years ended December 31, 2004 and 2003
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
REVENUE RECOGNITION
Revenues consist primarily of commissions and service fees charged to customers.
The Company records commission revenues when earned, which for up front airline
commissions is at the time a reservation is ticketed. For cruise and tour
bookings, commission revenue is recognized when the customer is no longer
entitled to a full refund of the cost of the cruise or tour, which is generally
45 to 90 days prior to the travel date. Hotel and auto reservation commission
income is recorded at the time the customer completes their stay or use of the
service provided. Airline override commissions are recorded on an accrual basis
in the month they are earned based upon the Company's ticket sales in excess of
required thresholds.
The Company also organizes corporate meetings and group events. The Company
receives deposits from the customers in advance of the event. The deposits are
deferred and reduced as payments are made to hotels, tour operators and other
service providers. Any commission earned on this business is recognized at the
time the event occurs.
ACCOUNTS RECEIVABLE
Accounts receivable are primarily comprised of commissions due from airlines and
travel vendors and amounts due from corporate customers and travel agents.
Amounts due to or from the airlines are reported through Airline Reporting
Corporation (ARC), an industry clearing house. Up front airline commissions
(primarily for international travel) and customer service fees processed through
ARC are collected 10 days after the close of each weekly ARC reporting period.
Airline override commissions are collected quarterly in arrears directly from
the airlines.
Management provides an allowance for its best estimate of amounts that will not
be collected. In determining its allowance, management considers the length of
time that amounts have been outstanding and the financial condition of
customers. The Company writes off accounts receivable in the period when they
are determined to be uncollectible, and payments subsequently received on such
receivables are credited to the allowance for doubtful accounts.
CUSTOMER DEPOSITS
Customer deposits represent advance deposits received from customers for travel
reservations, corporate meetings and events and, to a lesser extent, advance
payments on account from travel agents and corporate customers. Advance deposits
on travel reservations are remitted to the service provider such as a cruise
line or tour operator net of the Company's commission. The Company recognizes
its commission when the customer is no longer entitled to a refund of the cost.
Advance payments from corporate customers for meetings and events are reduced as
payments are made to the various vendors such as hotels who provide facilities
and services. Any profit earned by the Company is recognized in revenue when
earned which is the date when the event occurs. Advance deposits from travel
agents and corporate customers are reduced by future travel bookings from those
customers.
-13-
AROUND THE WORLD TRAVEL, INC.
-----------------------------
Notes to Financial Statements
Years ended December 31, 2004 and 2003
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
INCOME TAXES
The Company uses the asset and liability method of accounting for income taxes.
Under this method, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to (i) differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases, and (ii) operating losses and tax credit carryforwards. If
it is more likely than not that some portion or all of a deferred asset will not
be realized, a valuation allowance is recognized.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect (i) the reported amounts of assets and liabilities, (ii) disclosure of
contingent assets and liabilities at the date of the financial statements, and
(iii) the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation arrangements in accordance
with the provisions of Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees", and complies with the disclosure
provisions of Statement of Financial Accounting Standards SFAS No. 123,
"Accounting for Stock-Based Compensation", issued by the Financial Accounting
Standards Board ("FASB"). Under APB No. 25, compensation cost is recognized
over the vesting period based on the difference, if any, on the date of grant
between the fair value of the Company's stock and the amount an employee must
pay to acquire the stock.
TREASURY STOCK
On December 23, 1999, the Company redeemed 88 shares, representing 88% of the
outstanding common stock of ATW from the original shareholder group and added
these shares to the Company's Treasury. The redemption of these shares was
effected as follows:
AMOUNT
------------
Cash payment $ 7,758,000
Promissory note (Note 6) 3,550,000
Less unamortized discount on promissory note (240,000)
Acquisition holdback due Seller 1,170,000
-------------
Total cost of shares $ 12,238,000
=============
-14-
AROUND THE WORLD TRAVEL, INC.
-----------------------------
Notes to Financial Statements
Years ended December 31, 2004 and 2003
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
TREASURY STOCK (CONTINUED)
Immediately following the acquisition, the Company effected a 200,000:1 stock
split to increase the number of outstanding common shares to 20,000,000. As a
result, the 88 shares placed in treasury were adjusted to 17,600,000 shares. The
Company then amended its articles of incorporation to increase the number of
authorized shares to 400,000,000. The Company issued 17,600,000 shares to
Holdings in exchange for agreements to purchase eight Travel companies. Refer to
Note 2 for further discussion of the Company's capitalization.
In 2004, the Company negotiated a settlement of amounts due to the former owners
of an acquired business. In connection with the settlement, the Company issued
a $400,000 note to repurchase 320,000 common shares from the former owner.
CONCENTRATIONS OF CREDIT RISK
Credit risk represents the maximum accounting loss that would be recognized at
the reporting date if counterparties failed completely to perform as contracted
and any collateral or security proved to be of no value. Concentration of credit
risk (whether on or off balance sheet) arises when a number of counterparties
have similar economic characteristics that would cause their ability to meet
contractual obligations to be similarly affected by changes in economic or other
conditions.
The Company operates in the travel industry and derives approximately 70% of its
revenue from business travel and 30% from leisure travelers. Any event that
adversely impacts the travel industry as a whole, would adversely impact the
Company. For example, the terrorist attacks of September 11, 2001 and the
subsequent SARS outbreak in 2002 - 2003 were significant events, which adversely
impacted the Company and the travel industry as a whole.
During the year ended December 31, 2004, no single customer represented
approximately more than 10% of net travel commissions and fees. Net travel
commissions and fees from the Company's largest customer were approximately
$767,000 or 3.8%.
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of trade accounts receivable. Trade accounts
receivable are from travel vendors, hotels, corporate customers and travel
agents. These receivables are generally diversified due to the large number of
entities comprising the Company's customer base. Receivables from airlines for
override commissions are primarily due from two major airlines. The Company
performs ongoing evaluations of amounts due from customers where appropriate and
provides a reserve for managements' best estimate of amounts that will not be
realized.
-15-
AROUND THE WORLD TRAVEL, INC.
-----------------------------
Notes to Financial Statements
Years ended December 31, 2004 and 2003
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
CONCENTRATIONS OF CREDIT RISK (CONTINUED)
The Company may from time to time, maintain cash balances at financial
institutions that exceed federally insured limits.
RECENT ACCOUNTING PRONOUNCEMENTS
Consolidation of Variable Interest Entities
-----------------------------------------------
The Company adopted FASB Interpretation No. 46 and 46R, "Consolidation of
Variable Interest Entities," effective December 31, 2002. Interpretation 46, as
revised in December 2003, changes the accounting model for consolidation from
one based on control through voting interests to one based on control through
economic interests. Whether to consolidate an entity now considers whether that
entity has sufficient equity at risk to enable it to operate without additional
subordinated financial support, whether the equity owners in that entity lack
the obligation to absorb expected losses or the right to receive residual
returns of the entity, or whether voting rights in the entity are not
proportional to the equity interest and substantially all the entity's
activities are conducted for an investor with few voting rights. This
interpretation requires a Company to consolidate variable interest entities
("VIE's") if the enterprise is a primary beneficiary of the VIE and the VIE
possesses specific characteristics. It also requires additional disclosures for
parties involved with VIE's. The adoption of this statement did not have a
material impact on the Company's consolidated results of operations or financial
position because the Company does not invest or participate in any entities,
which would be considered VIE's under Interpretation 46.
Share-Based Payment
--------------------
The FASB has issued Statement of Financial Accounting Standards ("SFAS") No. 123
(Revised 2004), Share-Based Payment. The new FASB rule requires that the
compensation cost relating to share-based payment transactions be recognized in
financial statements. That cost will be measured based on the fair value of the
equity or liability instruments issued. SFAS No. 123R represents the culmination
of a two-year effort to respond to requests from investors and many others that
the FASB improve the accounting for share-based payment arrangements with
employees. For nonpublic entities, SFAS No. 123R must be applied as of the
beginning of the first annual reporting period beginning after December 15,
2005.
Management is in the process of determining the effect of adopting SFAS No. 123R
on the Company's financial statements.
-16-
AROUND THE WORLD TRAVEL, INC.
-----------------------------
Notes to Financial Statements
Years ended December 31, 2004 and 2003
NOTE 2. COMMON AND PREFERRED STOCK
AUTHORIZED SHARES
Subsequent to the purchase of the 88 shares of stock of ATW, the Company
effected a 200,000:1 stock split to increase the number of outstanding common
shares to 20,000,000. In December 1999, immediately following the acquisition,
the Company amended its Articles of Incorporation to increase the number of
authorized shares to 400,000,000 shares, consisting of 300,000,000 shares of
common stock, par value $.001 per share and 100,000,000 shares of preferred
stock at a par value of $.001 per share. 20,000,000 of the authorized preferred
shares were designated as $0.001 par, Series A Preferred Stock.
In the event of any liquidation, dissolution or other winding up of the affairs
of the Company, after provision for the payment of the debts and other
liabilities of the Company and before any distribution to any holder of common
stock, the holders of the Series A Preferred stock are entitled to be paid $5.00
per share plus an amount equal to accrued or declared but unpaid dividends on
each share. The aggregate liquidation preference on Series A Preferred stock
was $10,881,885 as of December 31, 2004 and 2003.
In addition holders of the Series A Preferred Stock are entitled to receive
cumulative annual dividends at a rate of five percent per share per year.
Dividends accrue monthly at the end of each month after the date of original
issuance so long as shares of Series A Preferred Stock remain outstanding.
Declaration and payment of such dividends is not mandatory, and any dividends
not declared and paid are accumulated to future months until paid or until such
shares of Series A Preferred Stock are liquidated upon a liquidation or
dissolution of the Company or on conversion upon the occurrence of specified
events, including an initial public offering or a change in control as defined
in the Articles of Incorporation. The Series A Preferred Stock is not
redeemable by the Company and Series A Preferred shareholders have no voting
rights.
The cumulative amount of undeclared and unpaid dividends at December 31, 2004 is
approximately $2,037,000. No dividends have been declared on Series A Preferred
stock, thus the accompanying financial statements do not include an accrual for
unpaid dividends.
STOCK OPTION AGREEMENTS
Effective December 23, 1999, the Company established the 1999 Management and
Director Equity Incentive and Compensation Plan (the "Plan"). Under the Plan,
the Company may provide key employees, directors and consultants with incentives
and compensation in the form of:
- Incentive Stock Options ("ISO"),
- Performance Shares - shares of Company common stock subject to a
vesting schedule based on certain performance objectives,
- Stock options which are not intended to qualify as ISOs,
(non-qualified stock options or NQSO's) and
- Restricted Shares - shares of Company common stock that are
subject to a vesting schedule based on the recipients continued
employment.
-17-
AROUND THE WORLD TRAVEL, INC.
-----------------------------
Notes to Financial Statements
Years ended December 31, 2004 and 2003
NOTE 2. COMMON AND PREFERRED STOCK (CONTINUED)
STOCK OPTION AGREEMENTS (CONTINUED)
An aggregate maximum of 5,000,000 shares may be issued under the plan.
The term of the ISOs and NQSOs is for a period of ten years from the date of
grant. With respect to ISOs, if the participant owns Company stock amounting to
more than 10% of the total combined voting power of all classes of Company
stock, the ISO shall not be exercisable after seven years from the date on which
the ISO is granted. The exercise price shall be no less than fair market value
per share, determined in good faith by the Plan committee. If the participant
owns more than 10% of the total combined voting power of all classes of stock of
the Company, the exercise price per share shall be at least 110% of the fair
market value of the shares subject to the ISO on the date of grant.
NOTE 3. ACCOUNTS RECEIVABLE
Accounts receivable at December 31, 2004 and 2003 consist of the following:
2004 2003
----- ----------
Airline override commissions $ - $ 377,082
Other commissions - 674,716
----- ----------
Less: Reserve - (115,261)
----- ----------
Total $ - $ 936,537
===== ==========
Other commissions include commissions due from hotels, car rental companies,
cruise lines and other travel vendors. As discussed in Note 1, on December 31,
2004, the Purchaser acquired all of the Company's receivables.
NOTE 4. OTHER ACCRUED EXPENSES
Other accrued expenses at December 31, 2004 and 2003 consisted of the following:
2004 2003
---------- ----------
Due to Global Distribution Systems (Note 10) $ 885,407 $1,144,351
Payroll taxes (Note 10) - 2,367,682
Commissions 146,418 252,221
Deferred compensation (Note 9) - 448,724
Liability to airlines for contract booking
errors (Note 10) 500,000 -
Legal and professional 793,361 590,217
Other 224,552 761,281
---------- ----------
Total $2,549,738 $5,564,476
========== ==========
Refer to Note 1 for discussion of accrued liabilities not assumed by the
Purchaser.
-18-
AROUND THE WORLD TRAVEL, INC.
-----------------------------
Notes to Financial Statements
Years ended December 31, 2004 and 2003
NOTE 5. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements at December 31, 2004 and 2003 consisted of
the following:
2004 2003
----- ------------
Leasehold improvements $ - $ 457,790
Furniture and fixtures - 671,721
Computers and equipment - 548,633
----- ------------
Less accumulated depreciation - (1,149,889)
----- ------------
Total $ - $ 528,255
===== ============
Depreciation expense for the years ended December 31, 2004 and 2003 was $
249,266 and $281,265, respectively. As discussed in Note 1, on December 31,
2004, the Purchaser purchased the furniture and fixtures and computers and
equipment of the Company. Leasehold improvements with a net carrying value of
$119,343 not acquired by the Purchaser were written off.
NOTE 6. DEBT
As discussed in Note 1, the majority of the Company's outstanding debt to third
parties is in default. As a result, all debt has been included in current
liabilities in the accompanying balance sheets. Debt of the Company as of
December 31, 2004 and 2003 consists of the following:
2004 2003
---------- -----------
Loans from Global Distribution System ("GDS"):
Initial and acquisition notes $ - $12,951,118
Bridge loan - 5,810,144
---------- -----------
- 18,761,262
---------- -----------
Due to former shareholders of ATW
Acquisition note 3,550,000 3,550,000
Post closing payment 1,170,000 1,170,000
---------- -----------
4,720,000 4,720,000
---------- -----------
Due to former owner
Stock put liability - 1,100,000
Working capital loan - 13,544
Acquisition holdback - 425,072
---------- -----------
- 1,538,616
---------- -----------
Due to other former owners - 1,012,488
Seaway/CNG loans - 2,820,000
CNG working capital advances - 945,741
Due to other third parties 1,151,548 300,000
Bank lines of credit 193,768 242,853
---------- -----------
Total long-term debt $6,065,316 $30,340,960
========== ===========
-19-
AROUND THE WORLD TRAVEL, INC.
-----------------------------
Notes to Financial Statements
Years ended December 31, 2004 and 2003
NOTE 6. DEBT (CONTINUED)
LOANS FROM GDS
Initial and Acquisition Notes
--------------------------------
In December 1999, the Company entered into a credit facility with Galileo
International LLC (Galileo) to finance the acquisitions of travel companies.
Galileo is a Global Distribution System (GDS) through which travel reservations
are made. The credit facility was structured as an Initial Note in the amount
of $7.2 million and subsequent Acquisition Notes of up to $6 million.
Collectively the Initial and Acquisition Notes are referred to herein as the
"Acquisition Notes." From 1999 through 2000, the Company drew a total of
$12,951,118 on these facilities to finance acquisitions. The Acquisition Notes
bear interest at a rate of LIBOR plus 1%, except that upon failure to process a
minimum number of travel bookings through Galileo, the rate increased to LIBOR
plus 3%. Further, upon the occurrence of an event of default, the interest rate
increased to 2% above the otherwise applicable rate. Principal and interest
payments on the Acquisition Notes were due in scheduled quarterly installments
beginning in September 2000. The Company made one scheduled payment in October
2000 and defaulted on the December 2000 payment. Consequently, since that date,
the Company has accrued interest on the Notes at LIBOR plus 5% (7.6% and 6.2% at
December 31, 2004 and 2003, respectively)
Bridge Note
------------
In November of 2000, Galileo provided additional financing to the Company in the
form of a Bridge Note for up to $6 million. The Company received $5,810,144
under the Bridge Note. The Bridge Note bears interest at Prime plus 1% and
matured on December 29, 2000. The Company defaulted on the Bridge Note in
December 2000, at which time the interest increased to Prime plus 3% (8.25% and
7.0% at December 31, 2004 and 2003, respectively).
The Initial and Acquisition Notes and the Bridge Note are each secured by
substantially of the Company's assets.
Purchase of Acquisition and Bridge Notes by ALH
------------------------------------------------------
In March 2004, the Acquisition and Bridge Notes were acquired by ALH. This
transaction is explained further below under the caption Seaway/CNG Debt.
-20-
AROUND THE WORLD TRAVEL, INC.
-----------------------------
Notes to Financial Statements
Years ended December 31, 2004 and 2003
NOTE 6. DEBT (CONTINUED)
SALE OF GALILEO INDEBTEDNESS TO SEAWAY/CNG
On October 31, 2002, Galileo closed on a Loan Purchase and Sale Agreement to
sell the above described Acquisition Notes and Bridge Note to Seaway Two Corp.
(Seaway), a Company controlled by a business associate of the Company's chairman
and chief executive officer. Seaway issued a $6 million note payable to a
subsidiary of CNG Hotels Ltd. (CNG) and used the proceeds to purchase the
indebtedness from Galileo. This transaction did not impact the carrying value
of the debt on the Company's financial statements, which was approximately
$25,362,000 (including accrued interest of $6,601,000) at December 31, 2004.
SEAWAY/CNG DEBT
In the fourth quarter of 2002, the Company and CNG were engaged in discussions
about a potential joint acquisition of a travel company with which the Company
held a letter of intent to acquire. In 2002, the Company received working
capital advances totaling $2.82 million which were funded by CNG through Seaway.
These advances were scheduled to mature on the earlier of October 31, 2003 or
upon the occurrence of other conditions specified in the loan agreement. The
advances bore interest at 3-month LIBOR plus 1%. The Company defaulted on the
debt at October 31, 2003.
In addition, in 2002 and 2003, CNG also made direct advances to the Company
totaling $945,471 for working capital advances and to fund $787,500 of deposits
for the contemplated acquisition. These advances were made via two loans, one
for $650,000 bearing interest at 3-month LIBOR plus 1% and the other for
$295,471 bearing interest at 5%. The deposits are included in prepaid expenses
in the accompanying December 31, 2003 balance sheet and were written off in 2004
in connection with the settlement described below. The proceeds from the $2.82
million and the $650,000 were initially funded into Holdings and/or Seaway. The
majority of the proceeds were provided to the Company or used to pay expenses on
behalf of the Company in 2002 and 2003. As of December 31, 2002, $219,543 of
the CNG proceeds remained due from Holdings. In May 2003, this amount was
applied against the debt balance due to Holdings. As of 2003, $4,388 remained
due from Seaway and is included in other current assets in the accompanying 2003
balance sheet.
In connection with, and in anticipation of the proposed acquisition of the
travel company, the Company, CNG, Seaway and the target company formed a new
venture in which each received an equity interest ranging from 20% - 30%.
During 2003, the Company incurred costs totaling approximately $321,000 on
behalf of the venture which are included in other current assets in the
accompanying December 31, 2003 balance sheet. These amounts were written off in
connection with the settlement described below.
-21-
AROUND THE WORLD TRAVEL, INC.
-----------------------------
Notes to Financial Statements
Years ended December 31, 2004 and 2003
NOTE 6. DEBT (CONTINUED)
SEAWAY/CNG DEBT (CONTINUED)
In April 2003, CNG consummated the acquisition of the target travel company for
its own account, and in September 2003 made demand upon Seaway and the Company
to collect the amounts due from them. The companies became involved in
litigation which was settled in February 2004. In connection with the settlement
the parties agreed to the following:
- CNG purchased the Galileo indebtedness from Seaway and released
Seaway from the $6 million and $2.82 million notes. Seaway
simultaneously released the Company from its obligation under the
$2.82 million loan due Seaway. This amount was recorded as debt
forgiveness income as discussed below.
- Immediately following the sale of the Galileo indebtedness to
CNG, GCD Acquisition Corp. ("GCD"), a wholly owned subsidiary of
Seaway, purchased the indebtedness back from CNG in exchange for a
5-year, $5 million unsecured, non-recourse promissory note. However,
principal and interest on the note are payable only to the extent that
GCD receives such amounts from the Company pursuant to the Company's
obligations under the debt.
In connection with the settlement, the Company reversed its liability for all
amounts due CNG and wrote off any assets related to the failed venture which
were no longer deemed realizable. As part of the settlement, CNG agreed, upon
request of the Company, to cancel the note from GCD and accept a promissory note
from the Company in substitution for the GCD note. Upon cancellation and
substitution, GCD agreed that the outstanding balance on the debt of $18.761
million plus accrued interest would be reduced by an amount equal to the
principal amount of the substitution note. However, such cancellation and
substitution has not occurred, consequently the carrying value of the debt has
not been reduced in the accompanying financial statements.
In March 2004, ALH entered into an agreement to acquire the Galileo indebtedness
from GCD in exchange for assuming all of GCD's obligations under the note and
agreeing to hold harmless and indemnify GCD and Seaway for any and all damages,
costs, liabilities, responsibilities and duties which may be incurred by GCD
arising from or as a result of the settlement agreement with CNG. ALH also paid
GCD 340,000 shares of ALH stock. As described in Note 1, ALH did not forgive
this debt as part of the sale transaction. Because the debt has not been
forgiven or otherwise legally discharged, the outstanding principal balance is
reflected in notes and advances from ALH in the accompanying December 31, 2004
balance sheet. In addition, accrued interest in the accompanying 2004 balance
sheet includes approximately $6,601,000 of accrued interest on the debt which is
also due to ALH.
-22-
AROUND THE WORLD TRAVEL, INC.
-----------------------------
Notes to Financial Statements
Years ended December 31, 2004 and 2003
NOTE 6. DEBT (CONTINUED)
DUE TO FORMER SHAREHOLDERS OF AROUND THE WORLD TRAVEL, INC.
As described in Note 1 under the caption "Treasury Stock Purchase", in
connection with the acquisition of 88% of the outstanding shares of the Company
in 1999, the Company issued the former shareholders a $3.55 million, 5% Junior
Subordinated Unsecured Note. The note is secured by a second priority lien on
substantially all the assets of the Company. By its terms, the note was due on
the earlier of January 1, 2002 or the occurrence of other specified events,
which did not occur. The Company did not make payment on the maturity date, at
which time the note went into default. The note bears interest at 5% on the
outstanding principal balance; however, upon default, the interest rate
increased to 18% per year on the outstanding principal balance. The note is
secured by a second priority interest in the assets of the Company.
The former owners were also entitled to a post-closing payment determined as
defined in the purchase agreement. Subsequent to closing, the parties agreed on
a post closing payment due to the sellers of $1,170,000. Under the terms of the
agreement, any portion of the post-closing payment remaining at March 31, 2000,
bears interest at LIBOR plus 1% (3.6% and 2.2% at December 31, 2004 and 2003,
respectively). No payments have been made toward the post-closing payment.
These obligations were not assumed by the Purchaser in the sale. Accrued
interest on the obligations totaling approximately $2,355,000 was also not
assumed by ALH and, accordingly, is included in accrued interest in the
accompanying 2004 balance sheet.
On May 4, 2004, the former shareholders of Around the World Travel, Inc. filed
an action against the Company, Holdings and ALH. See Note 11.
DUE TO FORMER OWNER
In connection with an acquisition in November 2000, the Company owes the former
owner a holdback payment of $425,072. Under the terms of the agreement, the
holdback was due to the seller 45 days after the closing. The Company did not
make the required holdback payment when due, but has been accruing 8% annual
interest on the outstanding principal balance as agreed with the former owner.
-23-
AROUND THE WORLD TRAVEL, INC.
-----------------------------
Notes to Financial Statements
Years ended December 31, 2004 and 2003
NOTE 6. DEBT (CONTINUED)
DUE TO FORMER OWNER (CONTINUED)
In addition, this former owner has from time-to-time advanced funds to the
Company for working capital purposes. In February 2001, the former owner
advanced the Company $1 million pursuant to a stock put agreement. Under the
agreement, the former owner agreed to purchase 1,000,000 shares of Company
common stock from Holdings for $1.25 million, of which $1 million was paid upon
execution of the transaction and $250,000 was due in 180 days if the former
owner elected to keep the shares. Holdings then entered into a mirror put option
with the Company. If the former owner exercised its option to put back the
shares after 180 days, Holdings was obligated to repurchase the shares for $1.1
million and the Company was obligated to repurchase the shares from Holdings. In
June 2001, the former owner exercised its option, but neither the Company nor
Holdings had the funds to satisfy the obligation. Following the default, the
parties agreed to assign all the rights under Holdings' put option with the
Company to the former owner in exchange for release of Holdings' obligations. In
addition, the parties agreed to extend the option on several occasions,
ultimately through February 2005. They also agreed that the Company would pay
the former owner a fee of $241 per day (which equates to approximately 8% annual
interest on the outstanding principal balance) from September 1, 2001 through
the date at which the Company discharges its obligation. The fee is included in
interest expense in the accompanying statements of operations.
This former owner also made cash advances to the Company totaling approximately
$180,000 at various dates in 2001 bearing annual interest of 8%. As of December
31, 2003, $13,544 remained due under these advances and as of December 31, 2004
the balance had been paid.
In April 2004, the Company agreed to repurchase 320,000 shares of common stock
held by the former owner for $400,000. ALH also made an offer to acquire shares
of common and preferred stock held by the former owner in exchange for 24,101
shares of Series E convertible preferred stock of ALH. In addition, on April 1,
2004, the former owner entered into an agreement with the Company, Holdings and
ALH pursuant to which the parties agreed that the total amount due to the former
owner at that date for the share repurchase, the stock put obligation and the
balance of cash advances (including accrued interest) was replaced by a
replacement note in the amount of $1,698,340. This note bears simple interest at
4% per annum and is payable in weekly installments of $5,000. In addition, until
such amounts are paid in full, the company and ALH agreed that the former owner
would receive an amount of money equal to 9.5% of the annual earnings before
income tax, depreciation and amortization (EBITDA), as defined, of the Company's
Western Unit located in Irvin, California until the replacement note is paid in
full.
-24-
AROUND THE WORLD TRAVEL, INC.
-----------------------------
Notes to Financial Statements
Years ended December 31, 2004 and 2003
NOTE 6. DEBT (CONTINUED)
DUE TO FORMER OWNER (CONTINUED)
The stock repurchase has been reflected as an increase in treasury stock in the
accompanying statement of changes in stockholders' deficit.
The amounts due this former owner for the acquisition holdback and replacement
note totaling $1,928,412 and accrued interest payable totaling $178,787 were
assumed by the Purchaser on December 31, 2004.
OTHER AMOUNTS DUE TO FORMER OWNERS
Other amounts due to former owners consist of holdback payments due to the
former owners of seven businesses which were acquired prior to 2001. All such
amounts are currently in default. The outstanding balances bear interest at
rates ranging from 4% to 18%.
In 2004, the Company and ALH negotiated settlements with other former owners of
amounts due them. In most instances, the parties agreed that the Company would
pay the outstanding principal balance as of the settlement date in specified
monthly installments until the balance is paid in full. 4% annual interest will
accrue on the balance from the settlement date until the liability is
extinguished. In most instances, ALH guaranteed the Company's payment of the
debt. As a result of these settlements, the Company reversed approximately
$251,000 of previously accrued interest which was no longer due.
In connection with the sale, the Purchaser assumed the balance due to these
former owners as of December 31, 2004. Accrued interest and principal due to the
former owners at that date consisted was $2,107,608.
DUE TO OTHER THIRD PARTIES
In September 2003, the Company received a $250,000 loan from Seamless
Technologies, Inc. ("Seamless"). The loan accrues interest at 5% compounded
monthly and required monthly payments of interest only payments beginning in
October 2003. All outstanding principal and accrued interest was due on
September 30, 2004, the maturity date. The loan provides that upon default in
any payment, the loan will bear interest at the maximum rate allowed by Florida
law. The Company defaulted on its October 2003 interest payment and has not made
any payments on the loan. The Company has recorded interest on the loan at 18%
since the date of default.
-25-
AROUND THE WORLD TRAVEL, INC.
-----------------------------
Notes to Financial Statements
Years ended December 31, 2004 and 2003
NOTE 6. DEBT (CONTINUED)
DUE TO OTHER THIRD PARTIES (CONTINUED)
In connection with certain agreements entered into with Seamless (more fully
described in Note 10), in exchange for funding the litigation with CNG
(described above) Seamless was entitled to 30% of any and all proceeds from the
lawsuit. In the event that a settlement resulted in debt forgiveness or other
non-cash settlement, Seamless is entitled to 30% of the amount of such non-cash
settlement amount payable in the form of a 3-year senior first-priority
promissory note payable monthly bearing interest at 5% compounded monthly. In
2003, the Company recorded an accrued liability for management's estimate of the
amount which will be due to Seamless under the agreement.
Due to other third parties also includes a $50,000 negotiated fee settlement due
to a third party for professional services.
These obligations were not assumed by the Purchaser.
LINE OF CREDIT WITH BANK
The Company has a $250,000 unsecured line of credit with a bank. The line bears
interest at prime plus 1% (5.25% and 5.0% at December 31, 2004 and 2003,
respectively). The Company's obligation under the line was not assumed by the
Purchaser.
2004 FORGIVENESS OF DEBT INCOME
Debt forgiveness income reported in the accompanying 2004 statement of
operations is comprised of the following items which have been reversed or
written off pursuant to settlement agreements with CNG and certain former owners
of acquired businesses as described above:
CNG settlement
Reverse principal balance due Seaway $ 2,820,000
Reverse principal due CNG on advances 945,471
Reverse accrued interest 182,979
Write off amounts due from CNG (321,487)
Write off deposits toward proposed acquisition (787,500)
----------------
2,839,463
30% due Seamless (851,839)
----------------
1,987,624
Reverse accrued interest on settlements with
former owners of acquired businesses 251,034
----------------
$ 2,238,658
================
-26-
AROUND THE WORLD TRAVEL, INC.
-----------------------------
Notes to Financial Statements
Years ended December 31, 2004 and 2003
NOTE 7. INCOME TAXES
Due to its history of net losses, the Company cannot conclude that it will more
likely than not be able to realize the tax benefit of accumulated net operating
loss carryforwards. Consequently, the deferred tax benefit for 2004 and 2003
has been off set by an increase in the valuation allowance for deferred tax
assets.
The tax effect of temporary differences that give rise to deferred tax assets
and deferred tax liabilities at December 31, 2004 and 2003 are presented below:
DEFERRED TAX ASSETS 2004 2003
------------ ------------
Current:
Allowance for doubtful accounts $ - $ 44,952
Noncurrent:
Net operating loss carryforwards 3,685,488 6,850,666
------------ ------------
Total deferred tax assets 3,685,488 6,895,518
------------ ------------
Valuation allowance (3,685,488) (6,895,618)
------------ ------------
Deferred tax assets, net $ - $ -
============ ============
As of December 31, 2004, the Company had net operating losses totaling
approximately $9.6 million to offset future taxable income. Approximately
$793,000, $3,782,000, and $4,992,000 of NOL's expire in 2021, 2022 and 2023,
respectively.
NOTE 8. STOCK OPTIONS AND COMMON STOCK-BASED COMPENSATION
The Company has a stock-based compensation plan, as more fully described in Note
2. The Company applied APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations in accounting for the plan.
Consequently, for fixed grants of stock options where the exercise price equals
or exceeds the fair value on the date of grant, no compensation cost is
recognized in the accompanying financial statements.
No stock options were granted during 2004 and 2003. All stock options
outstanding were exercisable. The following table summarizes 2004 and 2003
activity related to outstanding stock options.
-27-
AROUND THE WORLD TRAVEL, INC.
-----------------------------
Notes to Financial Statements
Years ended December 31, 2004 and 2003
NOTE 8. STOCK OPTIONS AND COMMON STOCK-BASED COMPENSATION (CONTINUED)
2004 2003
------------------- --------------------
Weighted Weighted
Average Average
Number of Exercise Number of Exercise
Options Price Options Price
----------- ------ --------- --------
Outstanding, January 1 5,839,226 $ 0.95 6,004,226 $ 0.93
Options granted - - - -
Options cancelled/forfeited (1,321,226) 0.84 (165,000) 0.30
Options exercised - - - -
----------- ------ --------- --------
Outstanding, December 31 4,518,000 $ 0.98 5,839,226 $ 0.95
=========== =========
The number of options outstanding, weighted average remaining contractual life
and weighted average exercise price summarized by range of exercise prices is
presented in the table below.
Weighted Average
Remaining Weighted
Number Contractual Life Average
Range of Prices Outstanding (years) Exercise Price
------------------------ ----------------- ----------------- ---------------
75% - full IPO price 125,000 4.93 $ -
$ 0.25 - $1.00 1,963,000 4.94 0.70
$ 1.25 2,430,000 3.71 1.25
-----------------
Outstanding, December 31 4,518,000 4.28 $ 0.98
=================
All options with vesting provisions were fully vested in 2003 and 2004.
Accordingly, there was no pro forma compensation expense to report for 2004 or
2003. On December 30, 2004, the Company's chairman and chief executive officer
elected to receive a bonus payment of $1,247,620 due under his employment
contract in cash rather than stock options. In connection with the election,
the chairman and chief executive forfeited 1,289,728 stock options previously
granted to him. Because the bonus was payable in cash at the officer's
election, a liability for this amount was recorded at the time the bonus was
earned. The liability is included in Due to Parent and Officers in the
accompanying balance sheets.
NOTE 9. RELATED PARTY TRANSACTIONS
Due to Parent and Officers and Due to ALH as of December 31, 2004 and 2003 were
as follows:
2004 2003
---------- ----------
Due to Parent and Officer
IRS advance $ 526,210 $ 526,210
Revolving working capital advances 806,501 1,068,328
Bonus due chairman and chief executive 1,247,620 1,247,620
Other due to officer 20,000 20,000
---------- ----------
$2,600,331 $2,862,158
========== ==========
-28-
AROUND THE WORLD TRAVEL, INC.
-----------------------------
Notes to Financial Statements
Years ended December 31, 2004 and 2003
NOTE 9. RELATED PARTY TRANSACTIONS (CONTINUED)
2004 2003
---------- -----
Due to ALH - Due to GDS debt acquired
by ALH
Initial and requisition notes $12,951,118 $ -
Bridge loan 5,810,144 -
----------- -----
$18,761,262 $ -
=========== =====
DUE TO PARENT AND OFFICERS
The Company periodically receives advances on a revolving basis from Holdings.
During 2003, the Company received advances from Holdings totaling $2,502,286, of
which $811,000 was advanced to make required payments to the Internal Revenue
Service (IRS) (see Note 10). In 2003, the Company made cash repayments to the
Parent totaling $848,861. In addition, the balance of advances due was reduced
by offset of $219,543 due from Parent from proceeds of CNG financing (See Note
6) which were funded into Holdings. In 2004, repayments to the Parent were
$172,837. Interest is accrued at 8% on amounts due Holdings for working capital
advances and 5% for IRS advances.
The Company also has a liability of $20,000 for advances due to an officer of
the Company as of December 31, 2004 and 2003. As part of the sale transaction,
the Purchaser assumed $27,244 of principal and interest due to this officer as
of December 31, 2004. The Purchaser did not assume the amounts due to Parent.
The Purchaser also did not assume the bonus liability due to the Company's
chairman and chief executive officer discussed further below under "Employment
Agreements".
Accrued interest payable in the accompanying 2003 balance sheet includes
approximately $85,000 of accrued interest due to Parent and officers. Interest
expense in the accompanying statement of operations includes approximately
$110,000 and $66,000 of Parent and officer interest expense for 2004 and 2003,
respectively.
DUE TO AMERICAN LEISURE HOLDINGS, INC. (ALH)
During 2004, ALH advanced funds to or on behalf of the Company totaling
$4,515,067. The Company repaid $100,000 of such advances. The advances were
made pursuant to two promissory notes dated September 29, 2004 which allowed for
aggregate advances totaling $4,500,000. The notes bear interest at 8% per annum
and are due on the earlier of (a) the funding of a like amount by a specified
financial institution in conjunction with the credit facility granted to ALH to
acquire the assets of the Company or (b) one year from the date of the note.
-29-
AROUND THE WORLD TRAVEL, INC.
-----------------------------
Notes to Financial Statements
Years ended December 31, 2004 and 2003
NOTE 9. RELATED PARTY TRANSACTIONS (CONTINUED)
DUE TO AMERICAN LEISURE HOLDINGS, INC. (ALH) (CONTINUED)
In addition to the amounts advanced under the notes, the Company also has a
non-interest bearing balance due to ALH for transactions between the companies.
In connection with obtaining financing to make advances to the Company, ALH
agreed to issue warrants to purchase its common stock to the investor and to
modify the exercise terms of certain warrants previously issued to investor. ALH
determined that the fair value of the warrants (and modifications) was
$2,023,650. This cost plus $386,833 of legal and other debt costs associated
with the financing were allocated to the Company by ALH. The Company has
capitalized these costs and is amortizing them to interest expense over the 12
month term of the notes. $614,196 of ALH deferred financing costs were amortized
to interest expense in the accompanying 2004 statement of operations.
$1,796,306 of such costs reflected as ALH deferred financing costs on the
accompanying December 31, 2004 balance sheet were written off in connection with
the sale to the Purchaser (See Note 1).
The amounts due to ALH under other non-interest bearing advances consist of the
following:
Deferred financing costs:
Fair value of warrants $ 2,023,650
Legal and other debt costs 386,832
-----------------
2,410,482
Expenses incurred by ATW on behalf of ALH (333,136)
Expenses incurred by ALH on behalf of ATW 153,089
-----------------
$ 2,230,435
=================
All amounts due ALH as of December 31, 2004 totaling $6,798,269 (including
accrued interest of $152,767) were forgiven by ALH as part of the sale
transaction.
As described in Note 6, in March 2004, ALH acquired the Galileo indebtedness
from GCD Corporation. Because the debt has not been forgiven by ALH or
otherwise legally discharged, the outstanding principal balance is reflected in
Notes and advances from ALH in the accompanying December 31, 2004 balance sheet.
In addition, accrued interest in the accompanying 2004 balance sheet includes
approximately $6,601,000 of accrued interest on the debt which is also due to
ALH.
Interest expense in the accompanying 2004 statement of operations includes
approximately $2,178,000 of interest expense for ALH.
-30-
AROUND THE WORLD TRAVEL, INC.
-----------------------------
Notes to Financial Statements
Years ended December 31, 2004 and 2003
NOTE 9. RELATED PARTY TRANSACTIONS (CONTINUED)
EMPLOYMENT AGREEMENTS
The Company's Chairman and Chief Executive Officer, is employed under an
employment contract with the Company. The contract commenced on December 23,
1999 for a three year term and provides that the employment period shall be
renewed annually for additional one year periods on an "evergreen" basis. The
agreement provides for future minimum annual compensation to this officer at a
rate of $200,000 per year. The executive is also eligible to receive annual
incentive-based bonuses at Board discretion and is entitled to participate in
the benefits offered to Company employees. Upon entering the employment
agreement, the executive was also granted stock options under the Company's 1999
plan to purchase 200,000 shares of common stock at $0.25 per share and 1,250,000
shares of common stock at $0.83 per share. If terminated for any reason other
than for cause, the executive is entitled to receive his salary for the
remainder of the employment period, payment of any incentive compensation that
otherwise would have been payable to the employee though the date of his
employment termination, and benefits and perquisites for the remainder of his
employment agreement.
Under his employment agreement, the Company's Chairman and Chief Executive
Officer was also entitled to a "mandatory bonus" in the form of stock options
based on his performance in building the Company through acquisitions. The
bonus was based on the total consideration paid to acquire companies where the
Company was the surviving entity. Based on acquisitions completed by the
Company during 1999 and 2000, the officer was due a bonus of $1,247,620. The
bonus was initially paid by issuing the officer 1,289,728 options to acquire
Company stock with exercise prices ranging from $0.83 to $1.25. The employment
agreement permitted the officer to elect to have such bonus paid in cash upon
forfeiting the stock options. On December 30, 2004, the officer exercised his
election to have the bonus paid in cash. Because this election was available at
the officer's discretion, a liability for the amount of the bonus was
established at the time the bonus was earned. The liability is included in Due
to Parent and Officers in the accompanying consolidated balance sheets. This
liability has not been assumed by the Purchaser.
During 2004, the Company and ALH initiated negotiations for the continued
employment of two executives who are considered critical to the success of a
business previously acquired from the executives. Although the agreement has not
been finalized, the Company and ALH have agreed to enter into identical
employment contracts with the executives. Such contracts would provide for
aggregate annual compensation of $350,000, $400,000 and $450,000 for each of the
first three years of employment and increasing 5% annually thereafter. In
addition, the executives would be entitled to an annual bonus based on the
financial results of the business. Although the agreements have not been
finalized, the Company, ALH and the executives have agreed that a bonus of
$230,239 is due to the executives for 2004. This amount is included in other
accrued expenses in the accompanying 2004 balance sheet.
-31-
AROUND THE WORLD TRAVEL, INC.
-----------------------------
Notes to Financial Statements
Years ended December 31, 2004 and 2003
NOTE 9. RELATED PARTY TRANSACTIONS (CONTINUED)
LEASE COMMITMENTS
The Company leases four of its office locations from entities owned by various
stockholders of the Company and other office locations from unrelated parties.
Some of the operating leases contain scheduled rent increases, and the effect of
those rent increases is being recognized on a straight-line basis over the lease
terms.
Future minimum payments under lease agreements as of December 31, 2004 are
presented in the table below. Lease commitments to unrelated parties and related
parties are presented separately and on a combined basis to present the
Company's aggregate future cash commitments.
Related
Non-Related Party
Year Ending December 31, Parties Leases Total
------------------------- ---------- ---------- ----------
2005 $ 499,000 $1,531,000 $2,030,000
2006 316,000 1,453,000 1,769,000
2007 198,000 702,000 900,000
2008 156,000 730,000 886,000
2009 78,000 628,000 706,000
Thereafter 86,000 - 86,000
---------- ---------- ----------
1,333,000 $5,044,000 $6,377,000
========== ========== ==========
Lease expense was $ 1,893,000 and $ 2,174,000 for the years ended December 31,
2004 and 2003, respectively, of which approximately $1,281,000 and $1,117,000,
respectively, is attributable to the related parties.
The company analyzes the rentals which will be due over the life of each
operating lease. The effects of scheduled and specified rent increases are
recognized on a straight line basis over the life of the lease. Deferred
revenue and rent in the accompanying balance sheets includes deferred rent of
$469,382 and $495,498 at December 31, 2004 and 2003, respectively.
As discussed in Note 1, the Purchaser did not assume the Company's lease
obligations.
DEFERRED COMPENSATION DUE TO CERTAIN EMPLOYEES
In October 2001, the Company implemented cost cutting measures which required
executives and certain senior managers to accept a deferment of 20% of their
salaries. In May 2002, an additional deferment of 10% was implemented with the
same executives and managers. Accrued deferred compensation due these employees
was approximately $391,665 and $448,724 as of December 31, 2004 and 2003,
respectively. The Purchaser has assumed this obligation.
-32-
AROUND THE WORLD TRAVEL, INC.
-----------------------------
Notes to Financial Statements
Years ended December 31, 2004 and 2003
NOTE 10. COMMITMENTS AND CONTINGENCIES
GLOBAL DISTRIBUTION SYSTEMS (GDS) AGREEMENTS
The Company has agreements with three Global Distribution Systems of which two
account for the substantial majority of the Company's travel bookings. The
Company is obligated under reservation system equipment lease agreements with
each of the GDS's which expire at various dates through July 2008. The Company's
future minimum lease commitments under these leases are approximately $447,000,
$447,000, $406,000 and $117,000 in 2005, 2006, 2007, and 2008, respectively.
The Company earns a specified fee per travel segment booked on each GDS (Segment
fee income). Segment fee income included in travel commissions and fees, net in
the accompanying statements of operations was $1,466,321 and $1,389,655 in 2004
and 2003, respectively.
The Company records GDS expense for monthly fees paid to the GDS's for equipment
leases and contract management fees. In addition, the Company's agreements with
its largest GDS's require the Company to pay a "shortfall fee" per segment for
the number of segments booked below minimum contractual targets. The Company
recorded GDS expense and shortfall fees of approximately $1,010,637 and
$1,051,568 in 2004 and 2003, respectively, which is included in technology and
communication expense in the accompanying statements of operations.
In 2000 and 2001 the Company had received approximately $1.35 million of
promotional advances under the terms of agreements with two GDS's. These
advances were recorded as deferred revenue and are being amortized to revenue on
a straight line basis over the terms of the agreements. In July 2003, the
Company amended its agreement with one of these GDS's, which agreed to extend
the term of the remaining unamortized advance of approximately $1,017,000 for an
additional five years. If the Company terminates the agreement prior to the end
of its term, the Company will be obligated to repay a pro-rata portion of the
advance. The remaining unamortized balance of promotional advances as of
December 31, 2004 of $712,000 is included in deferred revenue and rent in the
accompanying balance sheet.
In connection with the July 2003 amendment, the GDS also agreed to defer
collection of the net amount due to the GDS on the date of the modification
totaling approximately $909,000. The GDS agreed to forgive these fees at the end
of the amended term provided the Company meets all its obligations under the
agreement.
The net amount due to the GDS's for segment fee income, accrued shortfall fees
and deferred prior shortfalls under the July 2003 amendment was $885,407 and
$1,144,351. As a practical matter, except for the $1.35 million of up front
promotional advances described above, the Company has historically not collected
cash from the GDS's for segment fee income or paid cash to them for GDS expense
and shortfalls. These amounts have historically been netted in the due to/from
account and deferred or renegotiated in connection with modifications of
agreements. The Purchaser did not assume the net liability to the GDS's as part
of the sale.
-33-
AROUND THE WORLD TRAVEL, INC.
-----------------------------
Notes to Financial Statements
Years ended December 31, 2004 and 2003
NOTE 10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
UNPAID PAYROLL TAXES DUE TO INTERNAL REVENUE SERVICE
In 2001 and 2002 the Company experienced financial difficulties and was unable
to pay its federal payroll tax obligations timely for the third and fourth
quarters of 2001 and the first quarter of 2002. The Company paid the third
quarter 2001 liability plus interest and penalties in 2002. The Company has
made installment payments against the fourth quarter 2001 and first quarter 2002
balances throughout 2002, 2003, and 2004. As of December 31, 2003 other accrued
expenses includes $2,367,682 of accrued payroll tax liabilities, of which
approximately $1,895,000 represents taxes, penalties and interest related to
2001 and 2002. As of December 31, 2004, other accrued expenses include
$1,989,498 of accrued payroll taxes, of which approximately $1,660,000
represents taxes, penalties and interest related to 2001 and 2002.
The Company has continued to experience difficulty in making payroll tax
payments to the IRS in the fourth quarter of 2004 and first quarter of 2005. As
of March 31, 2005, the total amount of payroll taxes due the IRS was
approximately $2,600,000 of which approximately $600,000 was added in the first
quarter of 2005.
In connection with the sale, the Purchaser assumed the Company's IRS liability
as of December 31, 2004.
LEGAL MATTERS
During 2004, the Company became involved in a series of legal actions arising
from the transactions in which the Galileo indebtedness (See Note 6) was
purchased and sold between third parties.
In early May, 2004, the Company filed a suit against Seamless Technologies, Inc.
and e-Traveleaders, Inc. alleging breach of contract seeking relief including
monetary damages and termination of the contracts. At the time of the filing,
ALH was pursuing an acquisition of the Company and was granted leave to
intervene as a plaintiff in the original lawsuit filed against Seamless. On
June 28, 2004, the above named defendants brought suit against the Company, the
Parent, the Company's Chairman and ALH alleging that the Company breached the
contracts and also that ALH and its chief executive officer were complicit with
certain officers and directors of the Company in securing ownership of certain
assets for the Company that are alleged to have been a business opportunity for
the Company. The lawsuit filed by Seamless has been abated and consolidated with
the original lawsuit filed by the Company.
-34-
AROUND THE WORLD TRAVEL, INC.
-----------------------------
Notes to Financial Statements
Years ended December 31, 2004 and 2003
NOTE 10. COMMITMENTS AND CONTINGENCIES (CONTINUED)
LEGAL MATTERS (CONTINUED)
In a related matter, the attorneys for Seamless brought another action which
mirrors the misappropriation of business opportunity claim, but is framed within
a shareholder derivative action. The suit alleges that the named director
defendants usurped an opportunity that was available to the Company and profited
thereby. The alleged corporate opportunity involved the transaction wherein the
senior secured debt owed by the Company was sold at a deep discount to an entity
unrelated to the Company and the named director defendants. The suit alleges
that the named director defendants conspired with the purchaser of the debt so
as to maintain the debt against the Company while deriving a personal benefit
from obtaining the debt at a discount.
No specific monetary damages have been claimed to date in the litigation.
Discovery has not commenced in the case. Management is currently unable to
estimate a range of loss, if any, from this matter.
The Company, the Parent and certain officers and former owners of acquired
businesses were involved in litigation initiated in 2001 by an individual on
behalf of himself and derivatively on behalf of International Travel Group, Inc.
(ITG). The parties reached a settlement in February 2005. Pursuant to the
settlement, the Company agreed to pay the claimant $100,000. This amount is
included in accrued expenses in the accompanying balance sheet as of December
31, 2004. Separately, the Company's Chairman and Chief Executive Officer has
agreed to indemnify the Company for $75,000 of the settlement amount and ALH has
agreed to indemnify the Company for $25,000.
LIABILITY TO AIRLINES FOR CONTRACT BOOKING ERRORS
In December 2004, the Company became aware of airline tickets that were issued
at incorrect fares primarily during 2004 which were less than the amounts which
should have been charged to the travelers. The Company brought these errors to
the attention of the affected airlines. Management and the airlines have agreed
that the probable amount due to the airlines as a result of these errors is
approximately $500,000. The Company has recorded a $500,000 expense and accrued
liability for the loss. The accrued liability is included in other accrued
expenses and the expense is included in other general and administrative
expenses in the accompanying financial statements. Management intends to pursue
recovery for these errors to the extent that booking errors were made by
independent agents. However, the amount of the potential recovery has not been
determined at this time and it is not certain that the Company will be able to
recover. Recoveries from independent agents, if any, will be recognized as they
are realized. The Purchaser has not assumed this liability.
-35-
AROUND THE WORLD TRAVEL, INC.
-----------------------------
Notes to Financial Statements
Years ended December 31, 2004 and 2003
NOTE 11. SUBSEQUENT EVENT - LAWSUIT FILED BY FORMER SHAREHOLDERS OF AROUND
THE WORLD TRAVEL, INC.
On May 4, 2005, certain former shareholders of Around the World Travel, Inc. who
are also creditors under certain debt agreements described in Note 6 and whose
obligations were not assumed by the Purchaser filed an action against the
Company, Holdings and ALH. The complaint sets forth the terms of the
obligations due these shareholders and the Company's default on the payment of
such obligations. The complaint makes reference to certain settlement
negotiations between the plaintiffs and defendants which were never formalized
or finalized, but which plaintiffs allege should be enforced. In addition, the
complaint alleges that the subordination of amounts due the shareholders to the
Galileo indebtedness is invalid for various reasons, including the manner in
which the indebtedness was acquired by ALH at a considerable discount from face
value while not relieving the Company of the entire amount due. The plaintiffs
seek one of several alternative forms of relief, including enforcement of the
alleged settlement agreement or, if the court determines that a settlement
agreement did not exist, specified monetary relief consisting primarily of the
amounts claimed to be due under the debt agreements plus attorney's fees.
Management is in the process of reviewing the allegations to respond to the
complaint. However, the amounts due these former owners are reflected as a
liability in the accompanying financial statements. Consequently, management
believes the ultimate resolution of this matter will not adversely impact the
Company's financial position or results of operations.
-36-
(b) Pro Forma Financial Information
----------------------------------
The following summarizes the estimated Statement of Operations as
if the acquisition of a significant portion of the assets of AWT had occurred
as of January 1, 2004.
Proforma Combined Condensed Statement of Operations
For the Period of January 1, 2004 through December 31, 2004
Revenues $26,629,000
Depreciation & Amortization Expense $ 1,411,000
General & Administrative Expenses $31,788,000
-----------
Net Loss from Operations $ 6,570,000
(c) Exhibits:
--------
3.1(1) Certificate of Designation of Series F preferred stock
10.1(1) Asset Purchase Agreement
10.2(2) Management Agreement with Around The World Travel, Inc. dated
January 1, 2005
10.3(2) License Agreement with Around The World Travel, Inc. dated
January 1, 2005
10.4(3) First Amendment to Asset Purchase Agreement dated
March 31, 2005
10.5* Re-Stated Promissory Note for $6,356,740 issued in favor of
Around The World Travel, Inc. dated June 30, 2005.
* Filed herein.
(1) Filed as Exhibits 3.1 and 10.1, respectively, to the Form 8-K filed with the
Commission on January 6, 2005 and incorporated herein by reference.
(2) Filed as Exhibits 10.45 and 10.46, respectively, to the Form SB-2 filed with
the Commission on June 30, 2005 and incorporated herein by reference.
(3) Files as Exhibit 10.44 to the Form 10-QSB filed with the Commission on May
23, 2005 and incorporated herein by reference.
SIGNATURES
Pursuant to the requirements of Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned
hereunto duly authorized.
American Leisure Holdings, Inc.
By: /s/ Malcolm J. Wright
------------------------
Malcolm J. Wright
Chief Executive Officer
Dated: August 19, 2005