UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
AMENDMENT NO. 1
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2006
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT
For the transition period from to
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Commission file number 333-48312
AMERICAN LEISURE HOLDINGS, INC.
-------------------------------
(Exact name of small business issuer as specified in its charter)
Nevada 75-2877111
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
2460 Sand Lake Road, Orlando, FL 32809
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(Address of principal executive offices)
(407)-251-2240
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(Registrant's telephone number)
1
Check whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes
[X] No [ ].
As of May 16, 2005, 10,642,974 shares of Common Stock of the issuer were
outstanding ("Common Stock"), which amount does not include 850,000 shares of
common stock held by our Director, William Chiles, which original 850,000 shares
held by Mr. Chiles were reissued to Mr. Chiles into a greater number of share
certificates in smaller amounts, but which original shares have not been
cancelled by our Transfer Agent. We are currently in the process of cancelling
the original 850,000 shares issued to Mr. Chiles, at which time Mr. Chiles will
beneficially own a total of 850,000 shares of our common stock.
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X].
The registrant has restated the financial statements for the three months ended
March 31, 2006 to include the gross revenues and expenses for the business
that was acquired from Around the World Travel on December 31, 2004. The
revenues and expenses were previously reported on a net basis. This amended Form
10-QSB includes these restated financial statements and certain revisions to the
Related disclosure in "Item 2. Management's Discussion and Analysis or Plan of
Operation" including the disclosure under the heading "Risk Factors." The
financial information and related disclosure is current through March 31, 2006,
unless otherwise stated. None of the other sections of this amended report
on Form 10-QSB have been amended or updated since the Registrant's Form 10-QSB
filed in July 2005, and investors are therefore cautioned to review the
Registrant's most recent periodic and current report filings for updated and
current information regarding the Registrant's operations and results of
operations.
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERICAN LEISURE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2006 AND YEAR ENDED DECEMBER 31, 2005
MARCH 31, 2006 DECEMBER 31, 2005
---------------- -------------------
UNAUDITED
ASSETS
CURRENT ASSETS:
Cash $ 335,416 $ 225,055
Cash - Restricted 21,249,358 13,175,354
Accounts receivable, net 1,080,412 2,043,141
Other receivable 5,788,553 6,587,357
Prepaid expenses and other 90,894 99,418
---------------- -------------------
Total Current Assets 28,544,633 22,130,325
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PROPERTY AND EQUIPMENT, NET 4,198,657 4,583,853
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LAND HELD FOR DEVELOPMENT 49,312,308 34,695,281
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OTHER ASSETS
Prepaid Sales Commissions 8,742,733 7,770,949
Prepaid Sales Commissions - affiliated entity 3,469,838 3,516,209
Investment-Senior Notes 5,170,000 5,170,000
Goodwill 5,925,437 5,925,437
Trademark 968,750 975,000
Other 3,747,452 5,156,193
---------------- -------------------
Total Other Assets 28,024,210 28,513,788
---------------- -------------------
TOTAL ASSETS $ 110,079,808 $ 89,923,247
================ ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt and notes payable $ 18,117,620 $ 1,790,808
Current maturities of notes payable-related parties 1,095,541 1,268,101
Accounts payable and accrued expenses 3,800,767 3,782,822
Accrued expenses - officers 3,705,500 3,393,500
Other 109,338 285,443
---------------- -------------------
Total Current Liabilities 26,828,766 10,520,674
Long-term debt and notes payable 36,360,032 34,532,851
Put liability 985,000 985,000
Deposits on unit pre-sales 38,068,034 37,666,368
---------------- -------------------
Total liabilities 102,241,832 83,704,893
Commitments and contingencies ---------------- -------------------
STOCKHOLDERS' EQUITY:
Preferred stock; 1,000,000 shares authorized; $.001 par value;
1,000,000 Series "A" shares issued and outstanding at
March 31, 2006 and December 31, 2005 10,000 10,000
Preferred stock; 100,000 shares authorized; $.01 par value;
2,825 Series "B" shares issued and outstanding at
March 31, 2006 and December 31, 2005 28 28
Preferred stock, 28,000 shares authorized; $.01 par value
27,189 Series "C" shares issued and outstanding at
March 31, 2006 and December 31, 2005 272 272
Preferred stock; 50,000 shares authorized; $.001 par value;
24,101 Series "E" shares issued and outstanding at
March 31, 2006 and December 31, 2005 24 24
Preferred stock; 150,000 shares authorized; $.01 par value;
0 and 0 Series "F" shares issued and outstanding at
March 31, 2005 and December 31, 2005 - -
Common stock, 6.001 par value; 100,000,000 shares authorized;
10,642,974 shares issued and outstanding at March 31, 2006 and
10,334,974 shares issued and outstanding at December 31, 2005 10,643 10,335
Additional paid-in capital 20,173,901 19,697,115
Accumulated deficit (12,356,892) (13,499,420)
---------------- -------------------
Total Stockholders' Equity 7,837,976 6,218,354
---------------- -------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 110,079,808 $ 89,923,247
================ ===================
See accompanying notes to financial statements.
3
AMERICAN LEISURE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2006 AND 2005
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2006 MARCH 31, 2005
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UNAUDITED UNAUDITED
(RESTATED) (RESTATED)
Revenue
Operating Revenues $ 6,379,373 $ 6,739,460
Undeveloped Land Sales 13,129,246 4,132,911
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Total Revenue 19,508,619 10,872,371
Cost of Service Revenues (6,194,226) (6,827,622)
Cost of Undeveloped Land Sales (9,796,634) (3,062,990)
----------- ----------
Gross Margin 3,517,759 981,759
Operating Expenses:
Depreciation and amortization (342,358) (343,496)
General and administrative expenses (855,811) (799,127)
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Income (Loss) from Operations 2,319,590 (160,864)
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Interest Expense (1,240,148) (393,319)
Equity in operations of unconsolidated affiliate 64,484 -
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Total Other Income (Expense) (1,175,664) (393,319)
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Income (Loss) before Income Taxes 1,143,926 (554,183)
PROVISIONS FOR INCOME TAXES (1,399) -
----------- ----------
NET INCOME (LOSS) $ 1,142,527 $ (554,183)
=========== ==========
NET INCOME (LOSS) PER SHARE:
BASIC AND DILUTED $ 0.07 $ (0.09)
=========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING
BASIC AND DILUTED 10,620,530 9,977,974
=========== ==========
See accompanying notes to financial statements.
4
AMERICAN LEISURE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2006 AND 2005
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2006 MARCH 31, 2005
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UNAUDITED UNAUDITED
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,142,527 $ (554,183)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 415,372 431,382
Interest Expense 1,240,148 393,319
Non-cash warrant compensation 110,253 -
Changes in assets and liabilities:
Increase in restricted cash (8,074,004) -
Decrease in receivables 962,729 2,460,079
Decrease (Increase) in prepaid and other assets 1,348,704 (1,388,560)
Increase in prepaid commissions (925,413) (1,157,752)
Increase (Decrease) in shareholder advances & notes payable (172,560) -
Increase (Decrease) in deposits on unit pre-sales 401,666 2,867,598
Decrease (Increase) in customer deposits - (2,712,035)
Decrease (Increase) in accounts payable and accrued expenses 153,841 (4,231,662)
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Net cash used in operating activities (3,396,737) (3,891,814)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of fixed assets (30,176) -
Property sold 9,130,972 -
Capitalization of real estate carrying costs (10,361,734) (49,757)
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Net cash used in investing activities (1,260,938) (49,757)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Debt - 6,391,615
Payment of debt (129,181) (1,300,000)
Proceeds from notes payable 4,896,909 -
Proceeds from exercise of warrants 308 -
Payments of notes payable - related parties - (1,648,317)
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Net cash provided by financing activities 4,768,036 3,443,298
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Net decrease in cash 8,184,365 (498,273)
CASH AT BEGINNING PERIOD 225,055 2,266,042
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CASH AT END OF PERIOD $ 335,416 $ 1,767,769
============= ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 5,829 $ 636,065
============= ============
Cash paid for income taxes $ - $ -
============= ============
SUPPLEMENTAL DISCLOSURE OF NON CASH TRANSACTION:
Purchase of land held for development for notes payable $ 13,386,265 $ -
============= ============
See accompanying notes to financial statements.
5
NOTES TO FINANCIAL STATEMENTS
March 31, 2006
(Unaudited)
NOTE A - PRESENTATION
The balance sheets of the Company as of March 31, 2006 and December 31, 2005,
the related consolidated statements of operations for the three months ended
March 31, 2006 and 2005, and the consolidated statements of cash flows for the
three months ended March 31, 2006 and 2005, (the financial statements) include
all adjustments (consisting of normal, recurring adjustments) necessary to
summarize fairly the Company's financial position and results of operations. The
results of operations for the three months ended March 31, 2006 are not
necessarily indicative of the results of operations for the full year or any
other interim period. The information included in this Form 10-QSB should be
read in conjunction with Management's Discussion and Analysis and restated
Financial Statements and notes thereto included in the Company's December 31,
2005, Form 10-KSB and the Company's Forms 8-K & 8-K/A filings.
NOTE B - REVENUE RECOGNITION
American Leisure recognizes revenues on the accrual method of accounting. For
the sales of units on the Orlando property and other property sales, revenues
will be recognized upon the Orlando property and other property sales, upon the
close of escrow for the sales of its real estate.
Revenues from travel, call center and other segments are recognized as earned,
which is primarily at the time of delivery of the related service, publication
or promotional material. Costs associated with the current period are expensed
as incurred; those costs associated with future periods are deferred.
Costs associated with the acquisition and development, architectural and
engineering costs of vacation resorts, including carrying costs such as interest
and taxes, are capitalized as land held for development and will be allocated to
cost of real estate sold as the respective revenues are recognized.
Revenues from our wholly owned subsidiary ALEC are recognized as earned, which
is primarily at the time of delivery of the related service. Specifically,
commission revenues for cruises, hotel and car rentals are recognized upon
completion of travel, hotel stay or car rental. Commission fees for ticketing
are recognized at the time of departure.
6
NOTE C - PROPERTY AND EQUIPMENT, NET
As of March 31, 2006, property and equipment consisted of the following:
Useful
Lives Amount
---------- ----------
Equipment 3-5 $7,642,255
Furniture & fixtures 5-7 1,559,375
----------
Subtotal 9,201,630
Less: accumulated depreciation and amortization 5,002,973
----------
Property and equipment, net $4,198,657
==========
Depreciation expense for the three-month period ended March 31, 2006 amounts to
$415,372.
NOTE D - NOTES PAYABLE - RELATED PARTIES
The Current maturities of notes payable - related parties is as follows:
Xpress Ltd $ 174,433
Officers of Hickory Travel Services 429,445
Malcolm Wright 167,401
Peter Webb 124,262
Shareholders of Hickory Travel Services 180,000
Others 20,000
-------------
Notes payable - related parties $1,095,541
=============
The current portion of notes payable includes amounts owed to the officers of
Hickory Travel Systems, Inc., a subsidiary of the Company in the amount of
$429,445. $131,945 of such amount is owed to L. William Chiles, a Director of
the Company.
Included in Long-term debt and notes payable are debts and notes payable to the
following related parties:
Officers of Hickory Travel Services $378,670
--------------
Related party debt and notes $378,670
==============
The long-term portion of notes payable includes amounts owed to the officers of
Hickory Travel Systems, Inc., a subsidiary of the Company in the amount of
$378,670. $93,670 of such amount is owed to L. William Chiles, a Director of the
Company.
NOTE E - RELATED PARTY TRANSACTIONS
The Company accrues salaries payable to Malcolm Wright in the amount of $500,000
per year (and $250,000 per year in 2002 and 2003) with interest at 12%. As of
March 31, 2006, the amount of salaries payable accrued to Mr. Wright amounts to
$2,900,000 plus accrued interest on those salaries of $558,000.
7
The Company accrued director fees to each of its four (4) directors in an amount
of $18,000 per year for their services as directors of the Company. No payments
of director fees were paid during the current quarter and the balance of accrued
director fees as of the end of the quarter covered by this report amounts to
$195,000.
Malcolm Wright is the majority shareholder of American Leisure Real Estate
Group, Inc. (ALRG). On November 3, 2003 TDSR entered into an exclusive
Development Agreement with ALRG to provide development services for the
development of the Tierra Del Sol Resort. Pursuant to the Development Agreement
ALRG is responsible for all development logistics and TDSR is obligated to
reimburse ALRG for all of ALRG's costs and to pay ALRG a development fee in the
amount of 4% of the total costs of the project paid by ALRG. During the period
from inception through March 31, 2006 the total costs plus fees amounted to
$19,829,898.
A trust for the natural heirs of Malcolm Wright is the majority shareholders of
Xpress Ltd. ("Xpress"). On November 3, 2003, TDSR entered into an exclusive
sales and marketing agreement with Xpress to sell the units being developed by
TDSR. This agreement provides for a sales fee in the amount of 3% of the total
sales prices received by TDSR payable in two installments: one-half of the fee
is paid when the rescission period has elapsed in a unit sales agreement and
one-half is paid upon the conveyance of the unit. The agreement also provides
for a marketing fee of 1.5% of the total sales prices received by TDSR. The
marketing fee is paid when the first segment of the sales fee is paid. During
the period since the contract was entered into and ended March 31, 2006 the
total sales amounted to approximately $231,322,549. As a result of the sales,
TDSR was obligated to pay Xpress a fee of $6,939,677, consisting of one-half of
the sales fee and the full amount of the marketing fee. As of March 31, 2006,
$6,765,244 has been paid to Xpress and $174,433 remains unpaid and is included
in current maturities of notes payable - related parties (see Note D regarding
Notes payable - Related parties). Based on the sales contracts as of March 31,
2006, TDSR will be obligated to pay Xpress $3,469,838, the other half of the
sales fee, upon the conveyance of the units.
NOTE F - NET INCOME (LOSS) PER SHARE
Dividends have not been declared on the Company's cumulative preferred stock.
The accumulated dividends are deducted from Net Loss to arrive at Net income
(loss) per share as follows:
Description Three months Three months
ended ended
3/31/2006 3/31/2005
---------- ----------
NET INCOME (LOSS) $ 1,142,527 $ (554,183)
UNDECLARED PREFERRED
STOCK DIVIDEND (355,005) (350,890)
---------- ----------
NET LOSS AFTER PREFERRED
STOCK DIVIDEND $ 787,522 $ (905,073)
========== ==========
NET INCOME (LOSS) PER SHARE
BASIC AND DILUTED 0.07 (0.09)
8
NOTE G - SHARES FOR SERVICES
In December 2004, FASB issued a revision to SFAS 123 (also known as SFAS 123R)
that amends existing accounting pronouncements for share-based payment
transactions in which an enterprise receives employee and certain non-employee
services in exchange for (a) equity instruments of the enterprise or (b)
liabilities that are based on the fair value of the enterprise's equity
instruments or that may be settled by the issuance of such equity instruments.
SFAS 123R eliminates the ability to account for share-based compensation
transactions using APB 25 and generally requires such transactions be accounted
for using a fair-value-based method. SFAS 123R's effective date would be
applicable for awards that are granted, modified, become vested, or settled in
cash in interim or annual periods beginning December 15, 2005. SFAS 123R
includes three transition methods: a prospective method, a modified prospective
method and a retroactive method. The Company adopted SFAS 123R in the first
quarter of the fiscal year ending December 31, 2006.
In accordance with SFAS No. 123R we have recorded approximately $110,000 as
stock based compensation under the fair value method for the three months ended
March 31, 2006. There was no proforma stock based compensation under the fair
value method for the three months ended March 31, 2005.
The fair value of each option grant was estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions: risk free
rate of 3.5%; volatility of 131% for 2006 and 196% for 2005 with no assumed
dividend yield; and expected lives of five years.
During the three months ended March 31, 2006, the Company issued 200,000
warrants to two executives of the Company (100,000 to Michael Crosbie as
Corporate General Counsel, Executive Vice President and Secretary of the Company
and 100,000 to Jeff Scott as President of Hickory Travel Services); for each
executive, 50,000 were immediately vested and the other 50,000 will vest in
equal amounts in the next two years. In addition, 450,000 warrants were issued
to Malcolm Wright for debt guarantees relating to the acquisition of land held
for development during the three months ended March 31, 2006. As of March 31,
2006, there were 4,933,096 warrants outstanding to officers and directors and
2,191,000 warrants outstanding to third parties for a total outstanding of
7,124,096. In January 2006, 308,000 warrants were exercised of the Company's
common stock at $.001 per share which increased the common stock outstanding to
10,642,974 shares and resulted in the Company receiving $10,643.
NOTE H - OPERATING SEGMENTS
The Company has adopted the provisions of SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information". At March 31, 2006, the
Company's three business units have separate management teams and
infrastructures that offer different products and services. The business units
have been aggregated into three reportable segments.
Tierra Del Sol, Inc. is planning to construct a 972-unit resort in Orlando,
Florida on 122 acres of undeveloped land. Development is scheduled to commence
in the summer of 2006. Presales commenced in February 2004.
American Leisure operates a call center and revenues are recognized upon the
completion of the earning process from the completion of the travel of the
customer, the trip to the properties for the potential purchase, or the
appropriate event based on the agreement with American Leisure's client as to
the ability to be paid for the service.
9
Travel Unit ("Travel") provides travel related services.
For the three months ending March 31, 2006:
In (000's) Real Estate Call Center Travel Elim. Consol.
------------- ------------- ------------- ------------- -------------
Revenue $ 13,493 $ 64 $ 6,002 $ (50) $ 19,509
Segment
income
(loss) $ 2,304 $ (125) $ (369) $ (667) $ 1,143
Total Assets $ 96,142 $ 2,755 $ 11,505 $ (322) $ 110,080
Capital
Expenditures $ - $ - $ - $ - $ -
Depreciation $ 186 $ 162 $ 67 $ - $ 415
For the three months ending March 31, 2005:
In (000's) Real Estate Call Center Travel Elim. Consol.
------------- ------------- ------------- ------------- -------------
Revenue $ 4,279 $ - $ 6,593 $ - $ 10,872
Segment
income
(loss) $ 26 $ (240) $ (340) $ - $ (554)
Total Assets $ 65,521 $ 3,380 $ 16,000 $ (18,293) $ 66,608
Capital
Expenditures $ - $ 1 $ 3 $ - $ 4
Depreciation $ 181 $ 162 $ 88 $ - $ 431
The Company evaluates the performance of its operating segments based on income
before net interest expense, income taxes, depreciation and amortization
expense, accounting changes and non-recurring items.
NOTE I - RECLASSIFICATIONS
Certain amounts in the 2005 financial statements have been reclassified to
conform with the 2006 financial statement presentation.
10
NOTE J - RESTATEMENT
American Leisure has restated its financial statements to include the gross
revenues and expenses for the business that was acquired from Around the
World Travel on December 31, 2004. The revenues and expenses were
previously reported on a net basis.
The inclusion of gross revenue and expenses from Around the World did not affect
net income.
A summary of the restatement is as follows:
As previously reported As Restated
THREE MONTHS ENDED 03/31/06 THREE MONTHS ENDED Increase THREE MONTHS ENDED
03/31/06 (Decrease) 03/31/06
Operating Revenues $ 1,662,295 $ 4,717,078 $ 6,379,373
Undeveloped land sales $ 13,129,246 $ - $ 13,129,246
Total Revenue $ 14,791,541 $ 4,717,078 $ 19,508,619
Cost of Service Revenues $ - $(6,194,226) $ (6,194,226)
Cost of Undeveloped Land Sales $ (9,796,634) $ - $ (9,796,634)
Gross Margin $ 4,994,907 $(1,477,148) $ 3,517,759
Depreciation and amortization $ (415,372) $ 73,014 $ (342,358)
General and administrative expenses $ (2,259,945) $ 1,404,134 $ (855,811)
Income (Loss) from Operations $ 2,319,590 $ - $ 2,319,590
As previously reported As Restated
THREE MONTHS ENDED 03/31/05 THREE MONTHS ENDED Increase THREE MONTHS ENDED
03/31/05 (Decrease) 03/31/05
Operating Revenues $ 1,605,754 $ 5,133,706 $ 6,739,460
Undeveloped Land Sales $ 4,132,911 $ - $ 4,132,911
Total Revenue $ 5,738,665 $ 5,133,706 $ 10,872,371
Cost of Service Revenues $ - $(6,827,622) $ (6,827,622)
Cost of Undeveloped Land Sales $ (3,062,991) $ 1 $ (3,062,990)
Gross Margin $ 2,675,674 $(1,693,915) $ 981,759
Depreciation and amortization $ (431,382) $ 87,886 $ (343,496)
General and administrative expenses $ (2,405,156) $ 1,606,029 $ (799,127)
Income (Loss) from Operations $ (160,864) $ - $ (160,864)
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
CERTAIN STATEMENTS IN THIS QUARTERLY REPORT ON FORM 10-QSB (THIS "FORM 10-QSB"),
CONSTITUTE "FORWARD LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE
SECURITIES ACT OF 1934, AS AMENDED, AND THE PRIVATE SECURITIES LITIGATION REFORM
ACT OF 1995 (COLLECTIVELY, THE "REFORM ACT"). CERTAIN, BUT NOT NECESSARILY ALL,
OF SUCH FORWARD-LOOKING STATEMENTS CAN BE IDENTIFIED BY THE USE OF
FORWARD-LOOKING TERMINOLOGY SUCH AS "BELIEVES", "EXPECTS", "MAY", "SHOULD", OR
"ANTICIPATES", OR THE NEGATIVE THEREOF OR OTHER VARIATIONS THEREON OR COMPARABLE
TERMINOLOGY, OR BY DISCUSSIONS OF STRATEGY THAT INVOLVE RISKS AND UNCERTAINTIES.
SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES
AND OTHER FACTORS WHICH MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE OR
ACHIEVEMENTS OF AMERICAN LEISURE HOLDINGS, INC. ("AMLH", "AMERICAN LEISURE,"
"THE COMPANY", "WE", "US" OR "OUR") TO BE MATERIALLY DIFFERENT FROM ANY FUTURE
RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH
FORWARD-LOOKING STATEMENTS. REFERENCES IN THIS FORM 10-QSB, UNLESS ANOTHER DATE
IS STATED, ARE TO MARCH 31, 2006.
BUSINESS HISTORY
We were incorporated in Nevada in June 2000 as "Freewillpc.com, Inc.," and until
June 2002, operated as a web-based retailer of built-to-order personal computers
and brand name related peripherals, software, accessories and networking
products. In June 2002, we acquired American Leisure Corporation, Inc.
("American Leisure Corporation"), in a reverse merger (discussed below). We
re-designed and structured our business to own, control and direct a series of
companies in the travel and tourism industries so that we can achieve vertical
and horizontal integration in the sourcing and delivery of corporate and
vacation travel services.
On June 14, 2002, we entered into a stock purchase agreement with the former
stockholders of American Leisure Corporation, in connection with the acquisition
of American Leisure Corporation, pursuant to which we issued the former
stockholders of American Leisure Corporation 4,893,974 shares of our common
stock and 880,000 shares of our Series A preferred stock having 10 votes per
share. As part of this transaction, Vyrtex Limited, a UK company, which owned
3,830,000 shares of our common stock, surrendered 3,791,700 of the 3,830,000
shares owned by them. The transaction was treated as a reverse merger and a
re-capitalization of American Leisure Corporation, which was considered the
accounting acquirer. The operations of Freewillpc.com prior to the transaction
were not carried over and were adjusted to $0. Effective July 24, 2002, we
changed our name to American Leisure Holdings, Inc.
We are in the process of developing a large, multi-national travel services,
travel management and travel distribution organization. We have established a
Travel Division, a Resort Development Division and a Communications Division.
Through our various subsidiaries, we manage and distribute travel services, and
develop, construct and will manage vacation home ownership and travel
destination resorts and properties, develop and operate affinity-based travel
clubs and own a call center in Antigua-Barbuda. Our businesses are intended to
complement each other and create cross-marketing opportunities within our
business. We intend to take advantage of the synergies between the distribution
of travel services and the development, marketing, sale and management of
vacation home ownership and travel destination properties.
On October 1, 2003, we acquired a 50.83% majority interest in Hickory Travel
Systems, Inc. ("Hickory" or HTS") as the first building block of our Travel
Division. Hickory is a travel management service organization that serves its
network/consortium of approximately 160 well-established travel agency members,
comprised of over 3,000 travel agents worldwide that focus primarily on
12
corporate travel. We intend to complement our other businesses through the use
of Hickory's 24-hour reservation services, international rate desk services,
discount hotel programs, preferred supplier discounts, commission enhancement
programs, marketing services, professional services, automation and information
exchange. We view the members of Hickory as a resource for future acquisitions
of viable travel agencies as we intend to continue to add well-positioned travel
agencies to our Travel Division.
In December 2004, Caribbean Leisure Marketing, Ltd. ("Caribbean Leisure
Marketing"), a wholly owned subsidiary of our company that is focused on
telecommunications, entered into a joint venture with IMA Antigua, Ltd. to
operate a call center in Antigua that Caribbean Leisure Marketing owns. The
joint venture is operated through Caribbean Media Group, Ltd., an international
business corporation formed under the laws of Barbados. We own 49% of Caribbean
Media Group, Ltd., which is currently operating the call center. Our
co-venturer, IMA, Ltd. owns the remaining 51%.
On December 31, 2004, American Leisure Equities Corporation ("ALEC"), one of our
wholly owned subsidiaries, acquired substantially all of the assets of Around
The World Travel, Inc. ("Around The World Travel" or "AWT") which included all
of the tangible and intangible assets necessary to operate the business
including the business name "TraveLeaders". We engaged Around The World Travel
to manage the assets and granted Around The World Travel a license to use the
name "TraveLeaders". TraveLeaders is a fully-integrated travel services
distribution business that provides its clients with a comprehensive range of
business and vacation travel services in both traditional and e-commerce
platforms including corporate travel management, leisure sales, and meeting,
special event and incentive planning. TraveLeaders is based in Coral Gables,
Florida.
Except as expressly indicated or unless the context otherwise requires, "we,"
"our," or "us" means American Leisure Holdings, Inc. and its subsidiaries.
BUSINESS INTEGRATION
Our mission is to Develop Resort Properties in areas which we believe have good
year round occupancy levels and then to manage the completed Resort Property and
distribute its room nights through our multi-national travel services, travel
management and travel distribution organization. We are focused on the
development, construction and management of vacation homes and vacation
condominiums in Vacation Travel Destination Resorts and as such have completed
the planning stage for "The Sonesta Orlando Resort at Tierra Del Sol" (the
"Sonesta Resort"), a planned 972-unit vacation home resort located just 10 miles
from Walt Disney World, in Orlando, Florida. Additionally, we are in the
planning stages of developing our Reedy Creek Property, which is situated in the
northwest section of Osceola County, Florida about one mile from the "Maingate"
entrance to Walt Disney World, Orlando and 0.75 miles from the entrance to
"Disney's Animal Kingdom" theme park. The Reedy Creek Property consists of three
parcels totaling over 40 gross acres with approximately 29 acres of buildable
land. The Ready Creek Property is currently planned to consist of approximately
522 residential units consisting of mid-rise condominium buildings.
13
We are also in the process of integrating the administrative operations of
Hickory and TraveLeaders to distribute, fulfill and manage our travel services
and our Resort Properties which integration, we anticipate completing during
fiscal year 2006.
Our business model for support between our divisions is to use the travel
distribution, fulfillment and management services of the combined resources of
Hickory and TraveLeaders to provide consumer bookings at our planned resorts, to
rent vacation homes that we plan to manage at these resorts, and to fulfill the
travel service needs of our affinity-based travel clubs. We intend to complement
our other businesses through the use of Hickory's 24-hour reservation services,
international rate desk services, discount hotel programs, preferred supplier
discounts, commission enhancement programs, marketing services, professional
services, automation and information exchange. TraveLeaders is a fully
integrated travel services distribution business that provides its clients with
a comprehensive range of business and vacation travel services in both
traditional and e-commerce platforms including corporate travel management,
leisure sales, and meeting, special event and incentive planning. TraveLeaders
currently fulfills travel orders produced by our affinity travel clubs.
During the quarter ended March 31, 2006, we received the majority of our
operating revenues through the operations of Hickory which manages and
distributes travel services, which accounted for approximately 70% of our
operating revenues for the quarter ended March 31, 2006. Additionally, we had
undeveloped land sales of $13,129,246, which were generated by Tierra del Sol in
connection with the sale of forty-two acres of land in the Sonesta Resort for
$9,090,130 to the Westridge Community Development District ("District") and an
additional $4,039,116, which was received from the District in connection with
reimbursements for site improvements on the land purchased by the District.
RECENT EVENTS
-------------
On January 9, 2006, with an effective date of June 14, 2002, the Company entered
into an Amended Debt Guarantor Agreement ("Amended Debt Agreement") with Malcolm
J. Wright, its Chief Executive Officer and Chairman and L. William Chiles, a
Director of the Company (collectively, Mr. Wright and Mr. Chiles are referred to
herein as the "Guarantors"). Pursuant to the Amended Debt Agreement, the Company
and the Guarantors agreed to amend the terms of the prior Debt Guarantor
Agreement entered into between the parties. The original Debt Guarantor
Agreement provided for the Guarantors to receive warrants to purchase shares of
the Company's common stock at $2.96 per share in an amount equal to 3% of any
Company indebtedness that they personally guarantee. The Amended Debt Agreement
decreased the exercise price of the warrants to be issued in connection with any
of the Guarantor's guarantees to $1.02 per share (the "Guarantor Warrants").
Under the Amended Debt Agreement, the warrants issued to the Guarantors are
exercisable until five years after the date the Guarantor is no longer obligated
to personally guarantee such Company indebtedness.
14
Additionally, under the Amended Debt Agreement, the fee which the Guarantors
receive for a pledge of personally owned collateral to secure Company
indebtedness was increased from 1% of such total indebtedness guaranteed (as was
provided under the original Debt Guarantor Agreement), to 2% of the total amount
of indebtedness guaranteed. The 2% fee is paid to the Guarantors in Guarantor
Warrants with the same terms and conditions as provided above.
We also entered into a Third Party Debt Guarantor Agreement (the "3rd Party
Guarantor Agreement") on March 20, 2006, with an effective date of June 14,
2002, which provided for fees identical to those which are provided to Mr.
Wright and Mr. Chiles pursuant to the Amended Debt Agreement, described above,
to be issued to certain third parties who guarantee the indebtedness of the
Company.
SETTLEMENT AGREEMENT WITH AROUND THE WORLD TRAVEL
On or about November 14, 2005, the Company and ALEC asserted certain claims
against AWT with respect to the alleged breach of the Asset Purchase Agreement
and a Management Agreement (the "Management Agreement"). The claimed breach of
the Management Agreement was the failure of AWT to pay withholding taxes for its
employees to the Internal Revenue Service. After negotiations among the parties,
the parties agreed to settle the claims made by the Company and ALEC regarding
the Asset Purchase Agreement pursuant to the terms of a Settlement Agreement
entered into on February 24, 2006, and effective as of December 31, 2005 (the
"Settlement Agreement"). The claimed breach of the Management Agreement remains
unsettled pending the good faith efforts of AWT to completely fund its tax
deposit obligations.
The Settlement Agreement provides that the purchase price under the Amended
Purchase Agreement will be reduced from $17,500,000 to $9,000,000. The parties
agreed to implement the reduction of the purchase price by eliminating the
remaining balance of the Purchaser Note approximately $5,297,788 and by
establishing an obligation of AWT to pay to ALEC the amount of $3,185,548, which
is payable on demand.
Under the terms of the Settlement Agreement, the Company, ALEC and AWT agreed to
release each other (and their respective officers and directors) from all claims
based upon the Asset Purchase Agreement. Additionally, the parties agree to
waive any right to indemnity or contribution which they may have against each
other (and their respective officers and directors) for any liability which they
might incur to certain plaintiff's in certain pending litigation including Simon
Hassine and Seamless Technologies, provided that the waiver does not cover any
liability incurred by the releasing party that is attributable to any act or
omission of the released party that constitutes bad faith or is not known to the
releasing party.
SONESTA RESORT FINANCING
On December 29, 2005, certain affiliates of the Company closed two (2) credit
facilities with Key Bank, National Association ("KeyBank") related to the
Sonesta Resort. The credit facilities consisted of a $40,000,000 revolving
construction loan to be used to construct Phase 1 of the Sonesta Resort (the
"Construction Loan") and a $14,850,000 term loan on the Phase 2 land the
15
proceeds of which were contributed to the Phase 1 partnership as equity and used
to repay existing debt on the property and finance part of the site work of the
property for the Resort and to pay certain related costs (the "Land Loan"). To
facilitate the financing for the Sonesta Resort, the Company has formed two
limited partnerships, each of which will develop Phase 1 and Phase 2 of the
Resort (the "Development Partnerships"). Each Development Partnership has
several subsidiaries, which have been formed to develop different portions of
the Sonesta Resort.
Phase 1 will also include construction of related amenities, including a
swimming pool complex and sun decks, a lazy river, a poolside restaurant and
other amenities typical of a resort of this kind. Phase 2 will include
construction of 252 additional residential condominium units and 426 additional
town home units, as well as a 126,000 square foot clubhouse (84,000 square feet
under air). Construction of Phase 2 is expected to overlap with the construction
of Phase 1.
The general partner of each Development Partnership is TDS Management LLC, a
newly organized limited liability company controlled by Malcolm J. Wright, the
Company's Chairman, Chief Executive Officer, Chief Financial Officer and a
Director. The principal limited partner of each Development Partnership is
Tierra Del Sol, which owns a 99.9% interest in each Development Partnership. The
Company owns 100% of Tierra Del Sol Resort, Inc., as a result of the
transactions described below under "Recent Events."
Each Development Partnership has granted Stanford Venture Capital Holdings, Inc.
("Stanford") the right to acquire a 2% interest in each partnership in
connection with the release of a mortgage lien formerly held by Stanford.
THE CONSTRUCTION LOAN
The borrowers under the Construction Loan are Tierra Del Sol Resort (Phase 1),
Ltd. (the "Phase 1 Partnership") and three other special purpose entities that
are owned by the Phase 1 Partnership. The Construction Loan is structured as a
$40,000,000 revolving credit facility, with maximum borrowings of up to
$72,550,000.
The interest rate on the outstanding balance of the Construction Loan is the
daily London Interbank Offered Rate ("LIBOR") plus 2.75%, currently 8.16% as of
May 17, 2006, with the LIBOR rate as of that date of approximately 5.41%. The
term of the Construction Loan is 24 months, with a maturity date of December 28,
2007. Interest on the Construction Loan is due and payable monthly beginning on
the fifth day of the first month following the closing. If an event of default
occurs under the Construction Loan (as described and defined below), the
interest rate then in effect will become the greater of (a) the interest rate
otherwise applicable plus 3%; or (b) 18%.
The Construction Loan is secured by a first lien on the land within Phase 1 of
the Sonesta Resort, including any improvements, easements, and rights of way; a
first lien and security interest in all fixtures and personal property, an
16
assignment of all leases, subleases and other agreements relating to the
property; an assignment of construction documents; a collateral assignment of
all contracts and agreements related to the sale of each condominium unit; a
collateral assignment of all purchase deposits and any management and/or
operating agreement.
The borrowers will be able to draw amounts under the Construction Loan upon the
fulfillment of various conditions. One of these conditions is, in the case of
borrowings to construct a condominium building, the sale of at least 33 of the
36 units of each such building. As of the closing, the Company had delivered
approximately 100% of the contracts required for construction of the town homes
and 84% of the contracts required to commence construction of the condominium
buildings. The Company's management believes that vertical construction of the
Phase 1 units will begin as early as the second or third quarter of 2006.
The obligations of the borrowers under the Construction Loan are guaranteed by
the Company, its Chief Executive Officer and Chairman, Malcolm J. Wright, and
TDS Development, LLC, , a subsidiary of Tierra Del Sol Resort, Inc., pursuant
to a Payment Guaranty and a Performance and Completion Guarantee. In connection
with Mr. Wright's guarantee of the Construction Loan, he earned 1,200,000
warrants of the Company's common stock for such guarantee equal to three percent
(3%) of the total indebtedness of the Construction Loan at an exercise price of
$1.02 per share.
In consideration of Mr. Wright's guarantee of the Construction Loan, the Phase 1
Partnership has agreed to pay Mr. Wright an annual guaranty fee equal to 2.5% of
the amount of such guarantee. The payment of this fee is subordinated to the
Partnership's obligations under the Construction Loan and the Partnership will
accrue Mr. Wright's annual guaranty fee until such time as the Construction Loan
is satisfied.
The borrowers paid 1% of the maximum borrowings under Construction Loan as a
commitment fee, which totaled approximately $725,500. The Company was obligated
to pay all costs and expenses of KeyBank in connection with the commitment and
the closing of the loan.
On December 29, 2005, KeyBank and the borrowers entered into the "Addendum to
Construction Loan Agreement Condominium and Townhouse Project Development,"
which changed and amended some of the terms of the Construction Loan (the
"Construction Addendum"). The Construction Addendum sets forth certain terms
whereby condominium and/or townhouse units to be constructed pursuant to the
Construction Loan may be released from the first priority lien on the units held
by KeyBank so that the units may be sold. Unless stated otherwise, all
discussions of the Construction Loan herein include the changes and additions to
the Construction Loan affected by the Construction Addendum.
The occurrence of any one or more "events of default" under the Construction
Loan allow KeyBank to pursue certain remedies including taking possession of the
Sonesta Resort project; withholding further disbursement of the proceeds of the
loan and/or terminate KeyBank's obligations to make further disbursements
thereunder; and/or declaring the note evidencing the loans to be immediately due
and payable.
17
PCL CONSTRUCTION GUARANTEE AND LOAN.
The Orlando based contractor, PCL Construction Services, Inc., a subsidiary of
PCL Construction Enterprises, Inc. of Denver, Colorado ("PCL"), is the General
Contractor for Phase 1 of the project. In conjunction with its designation as
the General Contractor, PCL has committed to a guaranteed maximum price for the
construction of Phase 1.
PCL also provided a $4,000,000 loan to TDS Development, LLC, a subsidiary of
Tierra Del Sol Resort, Inc. (the "PCL Loan"). The proceeds of the PCL Loan were
used to establish a $4,000,000 account with KeyBank, which was pledged as
security for the Construction Loan. The loan bears interest at the rate of 14%
per annum. The term of the loan is two years.
The PCL Loan is guaranteed by the Company, the Company's Chief Executive Officer
and Chairman, Malcolm J. Wright, individually, and Tierra Del Sol Resort, Inc.
In consideration of Mr. Wright's guarantee, and pursuant to an existing
agreement between Mr. Wright and the Company, Mr. Wright will earn a fee equal
to three percent (3%) of the loan. The Company paid this fee through the grant
of 120,000 warrants to purchase the Company's common stock at an exercise price
of $1.02 per share. These warrants will expire 5 years from the expiration of
the guaranty.
We may choose to repay the PCL Loan in the future, with separately sourced
capital in order to facilitate a more favorable financial arrangement in
relation to the proposed construction and related costs, of which there can be
no assurance.
THE LAND LOAN
The borrowers under the Land Loan are Tierra Del Sol Resort (Phase 2), Ltd. (the
"Phase 2 Partnership") and four other special purpose entities that are owned by
the Phase 2 Partnership.
The Land Loan is a $14,850,000 term loan with a maturity date of June 28, 2007.
The proceeds of the Land Loan were primarily used to repay existing debt of the
property for the Sonesta Resort. The Land Loan bears interest at LIBOR plus
3.10% per annum, equal to 8.51% as of May 17, 2006, with the LIBOR equal to
5.41% as of that date.
The Land Loan is secured by a first lien on the land within Phase 2 of the
Sonesta Resort, including any improvements, easements, and rights of way; a
first lien and security interest in all fixtures and personal property, an
assignment of all leases, subleases and other agreements relating to the
property; an assignment of construction documents; a collateral assignment of
all contracts and agreements related to the sale of each condominium unit; a
collateral assignment of all purchase deposits and any management and/or
operating agreement.
The borrowers paid 1% of the Land Loan Agreement as a commitment fee, which
totaled $148,500. The Borrowers were obligated to pay all costs and expenses of
KeyBank in connection with the commitment and closing of the loan. Additionally,
18
the Company will pay an exit fee equal to 4% of the maximum loan amount unless
the loan is repaid with a construction loan from KeyBank or KeyBank declines to
grant a construction loan to the Company for Phase 2. The Company was obligated
to pay all costs and expenses of KeyBank in connection with the commitment and
the closing of the loan.
The Company and Mr. Wright have issued guarantees to KeyBank on the Land Loan.
Pursuant to an existing agreement between Mr. Wright and the Company, Mr. Wright
will earn a fee for such guarantee equal to three percent (3%) of the total
original indebtedness of the Land Loan. This fee was paid by granting 445,500
warrants to purchase the Company's common stock to Mr. Wright at an exercise
price of $1.02 per share which warrants will expire 5 years from the expiration
of the guarantee.
The occurrence of any one or more "events of default" under the Land Loan allow
KeyBank to pursue certain remedies including taking possession of the Sonesta
Resort project; withholding further disbursement of the proceeds of the loan
and/or terminate KeyBank's obligations to make further disbursements thereunder;
and/or declaring the note evidencing the loans to be immediately due and
payable.
WESTRIDGE COMMUNITY DEVELOPMENT DISTRICT BONDS
The closing of the new credit facilities with KeyBank triggered the closing of
the sale of $25,825,000 in community development bonds issued by the Westridge
Community Development District (the "District"). The proceeds of the bonds will
be used, in part, to fund infrastructure at the Sonesta Resort and to acquire
land for public purposes from Tierra Del Sol Resort (Phase1), Ltd., The debt
service and retirement of these bonds will be funded by a special district tax
upon the property owners in the District at an interest rate of 5.8% over a
30-year amortization period.
Additionally, on January 11, 2006, the Company sold forty-two acres of land in
the Sonesta Resort for $9,090,130 to the District and received an additional
$4,039,116 from the District in connection with reimbursements for site
improvements on the land purchased by the District. The land sold to the
District will be used for public infrastructure for the Sonesta Resort,
including the creation of roads and for water collection among other purposes.
RELEASE OF LIEN BY STANFORD
In connection with the closing of the new credit facilities with KeyBank,
Stanford Venture Capital Holdings Inc. ("Stanford") released its existing
mortgage lien on the Sonesta Resort property. In consideration of this release,
the Development Partnerships granted Stanford warrants to acquire a 2% interest
in each Partnership at a nominal exercise price. The Company also granted
Stanford the right to exchange any distributions that it might receive on
account of these interests into shares of the Company's Series E preferred stock
at a strike price of $15.00 per common share.
19
SIBL CREDIT FACILITY
On December 29, 2005, Stanford International Bank, Ltd. ("SIBL") provided Tierra
Del Sol with financial assistance to facilitate the closings of the Land Loan
and the Construction Loan. The financial assistance consisted of a loan to
Tierra Del Sol of $2,100,000 (the "SIBL Tierra Del Sol Loan"), and the
establishment of letters of credit in favor of KeyBank in the amount of
$4,000,000 and $2,000,000, respectively (the "Letters of Credit"). The financial
assistance provided by SIBL was evidenced by a Credit Agreement dated as of
December 29, 2005 between SIBL, Tierra Del Sol Resort, Inc. and the Company (the
"SIBL Credit Agreement").
Tierra Del Sol utilized the proceeds of the SIBL Tierra Del Sol Loan to make a
capital contribution to the Phase 1 Development Partnership, which in turn
pledged this amount to KeyBank as additional collateral for the Construction
Loan. SIBL is an affiliate of Stanford Venture Capital Holdings Inc. Tierra Del
Sol used the Letters of Credit in lieu of cash to complete its equity
requirements under the Construction Loan.
The SIBL Tierra Del Sol Loan has a 2-year term, with an initial interest rate of
12% per annum. The Letters of Credit are in the amounts of $4,000,000 and
$2,000,000, with terms of 24 months and 12 months, respectively. Tierra Del Sol
is obligated to pay a monthly fee for each letter of credit equal to 1% of the
face amount of such letter of credit. Upon release of the letters of credit and
upon either the payment of the note in full or the maturity of the loan from
KeyBank, Tierra Del Sol is also required to pay a minimum fee equal to 3%. After
six months, this fee increases by 1% each month until the letters of credit are
released. Any unpaid amounts on the SIBL Tierra Del Sol Loan or Letters of
Credit bear interest at the rate of 12% per year.
The obligations of Tierra Del Sol under the SIBL credit facility (the "Stanford
Credit Facility") were guaranteed by the Company and Malcolm J. Wright, the
Company's Chief Executive Officer and Chairman, along with other third party
entities, which third party entities are beneficially owned, in part, by Roger
Maddock, a significant shareholder of the Company, pursuant to an Irrevocable
and Unconditional Guaranty. These obligations were also secured by a first
mortgage lien on a parcel of real property owned by the third party entities.
The consideration paid for the third party entities' guarantees was consistent
with the existing debt guarantor agreement issued by the Company for its
executives. The third party entities will receive and share in a guarantee fee
equal to 3% of the amount guaranteed. The third party entities, by virtue of
pledging collateral for a debt that benefits the Company, will also receive a
collateral pledge fee equal to 2% of the amount guaranteed. The Company paid
this fee through the grant of 405,000 warrants to the third party entities to
purchase shares of the Company's common stock at an exercise price of $1.02 per
share. These warrants will expire 5 years from the expiration date of the
guarantees.
In consideration of Mr. Wright's guarantee, and pursuant to an existing
agreement between Mr. Wright and the Company, Mr. Wright earned a fee for such
guarantee equal to three percent (3%) of the amount guaranteed. The Company will
pay this fee through the grant of 243,000 warrants to Mr. Wright to purchase
shares of the Company's common stock at an exercise price of $1.02 per share.
These warrants will expire 5 years from the expiration date of the guarantee.
20
Tierra Del Sol has pledged its partnership interests in the Development
Partnerships to Stanford as additional collateral for this facility. Following
an event of default as defined under the Credit Agreement, Stanford has the
right for thirty (30) days following such event of default, directly or through
its affiliates, to purchase any unsold units in the Sonesta Resort at a price
equal to the developer's cost, but only to the extent permitted by KeyBank.
The Company's relationship with Stanford includes the requirement that the
Company utilize services provided by US Funding Corporation, an investment
banking firm. US Funding Corporation earned an administration fee of
approximately one half of one percent of the financing provided by Stanford.
As additional consideration for the loan, the Company granted SIBL warrants to
purchase 308,000 shares at an exercise price of $5.00 per share of common stock
and warrants to purchase 154,000 shares at an exercise price of $0.001 per
share. The warrants expire 5 years from issuance. The warrants contain
anti-dilution provisions, including a provision which requires the Company to
issue additional shares under the warrants if the Company issues or sells any
common stock at less than $1.02 per share, or grants, issues or sells any
options or warrants for shares of the Company's common stock to convert into
shares of the Company's common stock at less than $1.02 per share.
In connection with the warrants, the Company and Stanford entered into a
Registration Rights Agreement (the "Registration Rights Agreement"). Under the
Registration Rights Agreement, the Company agreed to prepare and file a
Registration Statement with the SEC covering the shares underlying the warrants
within 180 days of notice from SIBL of their demand that we file such
Registration Statement and to use the Company's best efforts to obtain
effectiveness of such Registration Statement as soon as practicable thereafter.
In the event the Company does not file a Registration Statement in connection
with the shares issuable in connection with the exercise of the warrants after
180 days notice from the warrant holders, the Company agreed to issue the
warrant holders as liquidated damages, warrants to purchase 10% of the shares
issuable in connection with the warrants, under the same terms and conditions as
the warrants, upon such default and for every consecutive quarter in which such
default is occurring.
We estimate that the cost to complete the construction of Phase I of the Sonesta
Resort will be $135,500,000 of which $8,000,000 will be for resort amenities,
$64,000,000 will be for vertical construction on 294 units and $ 49,500,000 will
be for other costs such as contingencies, closing costs and soft costs such as
architectural, engineering, and legal costs. An additional approximate amount of
$14,000,000 will be expended for horizontal construction costs which include all
of Phase I requirements plus most of the infrastructure requirements for the
entire Project. The $14,000,000 will be funded by the bonds proceeds held by the
Westridge Development District and from equity reserves held by Key Bank.
Disbursement of the Construction Loan proceeds is structured as a $40,000,000
revolving construction loan credit facility. A Land Loan was also funded by Key
Bank which was described above in the amount of $14,850,000 in connection with
our planned Phase 2 development. As a result, we currently believe that we have
21
sufficient funds to provide for the completion of Phase 1, assuming there are no
material cost overruns, delays or increases in material costs. Phase 2 will be
financed separately.
In November 2003, we entered into an exclusive sales and marketing agreement
with Xpress Ltd. ("Xpress") to sell the vacation homes in the Sonesta Resort.
Malcolm J. Wright, one of our founders and our Chief Executive Officer and
Chairman, and members of his family are the majority shareholders of Xpress. As
of March 31, 2006, Xpress has pre-sold approximately 653 vacation homes in a
combination of contracts on town homes and reservations on condominiums for
total sales volume of over $230 million.
REEDY CREEK ACQUISITION COMPANY, LLC TRANSACTIONS
Background
---------------
In July 2005, the Company and Stanford Financial Group Company ("SFG") formed a
new limited liability company named Reedy Creek Acquisition Company LLC ("Reedy
Creek Acquisition Company") for the purpose of acquiring a parcel of
approximately 40 acres of land located adjacent to the Animal Kingdom Theme Park
at Walt Disney World, in Orlando, Florida (the "Reedy Creek Property"). The
Reedy Creek Property is described in greater detail below under "Development
Plans for Reedy Creek Property."
Reedy Creek Acquisition Company acquired the Reedy Creek Property in July 2005
for a purchase price of $12,400,000. Reedy Creek Acquisition Company paid
$8,000,000 of the purchase price in cash and paid the $4,400,000 balance
pursuant to the terms of a promissory note issued to the sellers secured by a
first mortgage lien on the Reedy Creek Property. At the time of the purchase,
Reedy Creek Acquisition Company obtained a $7,150,000 loan from SIBL (the "SIBL
Reedy Creek Loan"), secured by a second mortgage lien on the property. The
proceeds of this loan were used to pay part of the cash portion of the purchase
price and for closing costs associated with the closing. The Company contributed
the remainder of the purchase price.
SFG and SIBL are affiliates of Stanford Venture Capital Holdings Inc., a
significant shareholder of the Company.
At the time of the acquisition of the Reedy Creek Property, Reedy Creek
Acquisition Company was owned 99% by SFG and 1% by one of the Company's wholly
owned subsidiaries, American Leisure Reedy Creek Inc. ("ALRC"). In connection
with the acquisition of the Reedy Creek Property, the Company, ALRC and SFG
entered into an Option Agreement (the "Option Agreement"), pursuant to which SFG
granted ALRC the right to acquire SFC's 99% interest in Reedy Creek Acquisition
Company (the "Reedy Creek Option").
22
Option Exercise
----------------
On December 27, 2005, the Company and ALRC entered in to an Option Exercise
Agreement with SFG, pursuant to which ALRC acquired the 99% interest in Reedy
Creek Acquisition Company held by SFG for the exercise price of $600,000 (the
"Exercise Price"), which was less than the exercise price originally stated in
the Option Agreement.
Pursuant to the terms of the Option Exercise Agreement, the parties took the
following actions:
- SFG transferred its 99% interest in Reedy Creek Acquisition
Company to ALRC.
- SIBL loaned an additional $850,000 to Reedy Creek Acquisition
Company. This amount was used by Reedy Creek Acquisition Company to
pay the Exercise Price and to pay an additional placement fee of
$250,000 to certain affiliates of SIBL.
- The Company issued warrants to SIBL. The warrants entitle SIBL to
purchase 154,000 shares of the Company's common stock at an exercise
price of $5.00 per share and 77,000 shares of the Company's common
stock at $.001 per share. Additionally, the Company granted warrants
to four affiliates of SIBL, entitling them to purchase an aggregate of
154,000 shares of the Company's common stock at an exercise price of
$5.00 per share and 77,000 shares at an exercise price of $.001 per
share. The warrants have a term of five years and are immediately
exercisable. The warrants contain anti-dilution provisions, including
a provision which requires the Company to issue additional shares
under the warrants if the Company issues or sells any common stock at
less than $1.02 per share, or grants, issues or sells any options or
warrants for shares of the Company's common stock to convert into
shares of the Company's common stock at less than $1.02 per share.
- The Company entered into a Registration Rights Agreement (the
"Ready Creek Registration Rights Agreement") with Stanford, pursuant
to which, the Company agreed to prepare and file a Registration
Statement with the SEC covering the shares underlying the Warrants
within 180 days of notice from Stanford of their demand and to use its
best efforts to obtain effectiveness of such Registration Statement as
soon as practicable thereafter. In the event that the Company does not
file a Registration Statement in connection with the shares issuable
in connection with the exercise of the warrants after 180 days notice
from the warrant holders, the Company must issue the warrant holders
as liquidated damages, warrants to purchase 10% of the shares issuable
in connection with the warrants, under the same terms and conditions
as the warrants, upon such default and for every consecutive quarter
in which such default is occurring.
- Reedy Creek Acquisition Company agreed to modify the existing
SIBL mortgage on the Reedy Creek Property to secure the additional
$850,000 loan made by SIBL. As a result, the principal amount secured
by the SIBL mortgage was increased to $8,000,000.
23
- SIBL agreed to subordinate its mortgage on the Reedy Creek
Property to a new $7,000,000 loan to be made to Reedy Creek
Acquisition Company by Bankers Credit Corporation. This loan is
described below.
SIBL Reedy Creek Loan Terms
-------------------------------
In connection with the exercise of the Reedy Creek Option, Reedy Creek
Acquisition Company and SIBL agreed to modify the terms of the SIBL Reedy Creek
Loan made by SIBL to Reedy Creek Acquisition Company. The modified loan terms
are evidenced by a Renewed, Amended and Increased Promissory Note (the "Amended
Note") made by Reedy Creek Acquisition Company in favor of SIBL. The Amended
Note has a maturity date of December 31, 2006, a principal balance of $8,000,000
and bears interest at the rate of 8% per year. Interest on the Amended Note is
payable quarterly on June 30, 2006, September 30, 2006 and on the maturity date
of the Amended Note. Upon an event of default as described in the Amended Note,
SIBL has several rights and remedies, including causing the Amended Note to be
immediately due and payable.
The Amended Note is secured by a second lien on the Reedy Creek Property. It is
guaranteed by the Company and Malcolm J. Wright, the Company's Chief Executive
Officer and Chairman pursuant to a Modification and Reaffirmation of Guaranty
and Environmental Indemnity Agreement. In consideration for Mr. Wright's
guarantee, and pursuant to an existing agreement between Mr. Wright and the
Company, Mr. Wright earned a fee equal to three percent (3%) of principal amount
of the Amended Note. The Company will pay this fee through the grant of 240,000
warrants to Mr. Wright to purchase shares of the Company's common stock at an
exercise price of $1.02 per share. These warrants will expire 5 years from the
expiration of the guaranty.
Bankers Credit Corporation Loan
----------------------------------
In connection with the exercise of the Reedy Creek Option, the Company and Reedy
Creek Acquisition Company arranged to receive a $7,000,000 loan from Bankers
Credit Corporation ("Bankers Credit").
Under the terms of the Bankers Credit loan, Bankers Credit advanced Reedy Creek
Acquisition Company $3,000,000 at closing and an additional $4,000,000
subsequent to the date of closing.
The Bankers Credit loan is evidenced by a Promissory Note (the "Bankers Credit
Note") and bears interest at the greater of the Wall Street Journal published
prime rate plus 7.75%, not to exceed the highest rate allowable under Florida
law or 15% per year. The interest rate of the Bankers Credit Note as of May 17,
2006 was 15% (with a prime rate, as reported by the Wall Street Journal of 8%).
Interest on the Bankers Credit Note is payable monthly. The maturity date of the
Bankers Credit Note is January 3, 2007, when all principal and unpaid interest
is due and payable. Pursuant to the Bankers Credit Note, Reedy Creek Acquisition
Company agreed to pay a 10% late charge on any amount of unpaid principal or
interest under the Bankers Credit Note. The Bankers Credit Note is subject to a
1% exit fee. Additionally, if repaid by Reedy Creek Acquisition Company prior to
July 3, 2006, the Bankers Credit Note is subject to an additional 1% repayment
fee; however, if repaid after July 3, 2006, the Bankers Credit Note is not
24
subject to the repayment fee. Upon an event of default as described in the
Bankers Credit Note, Bankers Credit has several rights and remedies, including
causing the Bankers Credit Note to be immediately due and payable.
The Bankers Credit Note is secured by a first lien on the Reedy Creek Property.
Additionally, the Bankers Credit Note is guaranteed by the Company and Malcolm
J. Wright, the Company's Chief Executive Officer and Chairman pursuant to a
Guaranty Agreement. In consideration for Mr. Wright's guarantee, and pursuant to
an existing agreement between Mr. Wright and the Company, Mr. Wright earned a
fee equal to three percent (3%) of the Bankers Credit Note. The Company will pay
this fee through the grant of 210,000 warrants to Mr. Wright to purchase shares
of the Company's common stock at an exercise price of $1.02 per share. These
warrants will expire 5 years from the expiration of the guaranty.
Reedy Creek Acquisition Company utilized the initial proceeds from the Bankers
Credit loan to pay a portion of the amount owed on the existing first mortgage
note issued to the sellers of the Reedy Creek Property. The holder of this
mortgage agreed to release the mortgage in exchange for this payment. Reedy
Creek Acquisition Company has now paid the balance of this mortgage note upon
the receipt of the balance of the Bankers Credit loan.
Development Plans for Reedy Creek Property
-----------------------------------------------
The Reedy Creek Property is situated in the northern section of Osceola County,
Florida and lies on three contiguous development parcels located to the
immediate north of U.S. Highway 192 West, about one mile from the "Maingate"
entrance to Walt Disney World, Orlando and 0.75 miles from the entrance to
"Disney's Animal Kingdom" theme park. The property is one of only a small number
of privately owned parcels abutting Walt Disney World (north and east
boundaries).
The Reedy Creek Property consists of three parcels totaling over 40 gross acres
with approximately 29 acres of buildable land. The Osceola County Comprehensive
Land Plan for the site allows vacation homes at a density of 18 units per acre,
which results in a maximum allowable project density of 522 residential units.
To achieve the maximum density, it is anticipated that the project will consist
of mid-rise condominium buildings. Amenities proposed on-site include a water
park with swimming pools, guest services clubhouse, and other related on-site
resort amenities.
It is anticipated that Walt Disney World's Reedy Creek Improvement District (the
"District"), a quasi-government body whose constituents are all affiliated with
Walt Disney World Company, will agree to construct and pave the widening and
extension of Reedy Creek Boulevard north and westward at its expense. The
25
District will have a public hearing during which it is anticipated that the
District will be given the authority to acquire the land from Reedy Creek
Acquisition Company and make the improvements to Reedy Creek Boulevard. If the
District acquires the requisite authority from its constituents, Reedy Creek
Acquisition Company has agreed to convey relatively small portions of the three
combined properties to constitute this roadway. Reedy Creek Acquisition Company
will benefit from the conveyance by saving the cost of the road it would have to
build anyway and it will enhance the required road frontage for the project.
The Company's development of the Reedy Creek Property is currently planned to
begin in the fourth quarter of 2007 and is currently planned to be completed
sometime in 2009, funding and scheduling permitting. The Company will not know
the total estimated cost of the development of the Reedy Creek Property until it
has determined the market and completed designs for the properties. The Company
does not currently have any funding in place for any of the capital which will
be required to complete the development of the Reedy Creek Property and there is
no assurance that funding will be available on favorable terms, if at all. The
Company is currently seeking a joint venture partner for this property.
Note Modification Agreement
-----------------------------
In February 2006, we entered into a Note Modification Agreement with SIBL,
whereby we agreed to modify certain provisions of our outstanding promissory
notes with SIBL to grant extensions of payments due. Pursuant to the Note
Modification Agreement, we and SIBL agreed that all interest due on our
$6,000,000 note, from January 1, 2005, through September 30, 2006, shall be due
and payable on September 30, 2006, with all interest thereafter payable with the
original terms of that note; that all interest accrued on the $3,000,000 note we
have with SIBL, from the date of the note until September 30, 2006, shall be due
and payable on September 30, 2006, with all interest thereafter payable with the
original terms of that note; that the maturity date of our $1,250,000 note with
SIBL be extended until September 30, 2006, and that no payments of principal or
interest on that note shall be payable until the extended due date of that note;
that the maturity date of our $1,355,000 note with SIBL be extended until June
30, 2007, and that no payments of principal or interest on that note shall be
payable until the extended due date of that note; that the maturity date of our
$305,000 note with SIBL be extended until June 30, 2007, and that no payments of
principal or interest on that note shall be payable until the extended due date
of that note; and that interest on our $2,100,000 note with SIBL be payable in
arrears, on a quarterly basis, with the first payment due on March 28, 2006, and
subsequent payments due on each June 28, September 28, December 28 and March 28,
until the maturity date of December 27, 2007, with the outstanding principal and
interest shall be due (collectively, all the notes described above shall be
referred to as the "Notes").
Furthermore, SIBL agreed, pursuant to the Note Modification Agreement, to waive
any defaults arising under the Notes prior to the date of the Note Modification
Agreement, attributable to our failure to make any payments of interest due
under the Notes prior to the date of the Note Modification Agreement; and any
default of us and/or Around The World Travel, Inc. ("AWT") under the $1,250,000
26
note to fulfill the financial reporting requirements under the loan documents
related to the $1,250,000 note. SIBL also waived our obligation and AWT's under
the $1,250,000 note to fulfill the financial reporting requirements described in
the note in the future, provided that SIBL may reinstate such requirements at
any time upon written demand to us of such note.
PURCHASE OF MINORITY INTEREST IN TIERRA DEL SOL
-----------------------------------------------------
In March 2006, and effective as of December 31, 2005, we purchased the minority
interest of our now wholly owned subsidiary, Tierra Del Sol, Inc. (the "Minority
Interest") from Harborage Leasing Corporation ("Harborage"). The purchase price
of the Minority Interest from Harborage was a promissory note for $1,411,705
("Harborage Note"); the right to receive, without payment, two (2) three-bedroom
condominium units to be constructed in Phase 2 of the Sonesta Resort, or in the
event title to both such units is not delivered by December 31, 2007, then, in
lieu thereof, payment of $500,000 for each such unit that is not transferred by
such date; 197,000 shares of the Company's common stock; and warrants to acquire
300,000 additional shares of the Company's common stock at an exercise price of
$5.00 per share. The warrants expire if unexercised five (5) years from their
date of grant. Pursuant to the Stock Purchase Agreement, Harborage has the right
to require the Company to purchase all or a portion of the Harborage 197,000
shares at $5.00 per share, for sixty (60) days, beginning January 1, 2007 (the
"Put Option"). The Put Option will no longer be in effect provided that both of
the following events occur: (i) Harborage is able to sell the Harborage Shares
pursuant to an effective Registration Statement under the Securities Act of 1933
(the "Act"), or pursuant to Rule 144 of the Act; and after the fulfillment of
(i) above, the average closing price of the Company on the Over-The-Counter
Bulletin Board or principal exchange on which the Company's common stock then
trades, exceeds $5.00 per share for a period of thirty (30) consecutive days.
The Harborage Note and shares are guaranteed by Malcolm J. Wright, the Company's
Chief Executive Officer and Director, for which he received a guaranty fee equal
to three percent (3%)_of the amount guaranteed. The Company paid this fee
through the grant of 102,351 warrants to purchase shares of the Company's common
stock at an exercise price of $1.02 per share. These warrants will expire 5
years from the expiration date of the guaranty.
SUBSEQUENT EVENTS
-----------------
On or about May 1, 2006, with an effective date of March 15, 2006, we entered
into an Employment Agreement with our Executive Vice President, General Counsel
and Secretary, Michael D. Crosbie (the "Executive" and the "Employment
Agreement"). The term of the Employment Agreement is from March 15, 2006, until
March 15, 2009, unless he is terminated by us sooner as set forth in the
Employment Agreement, during which time Mr. Crosbie will serve as our Executive
Vice President, General Counsel and Secretary. Pursuant to the Employment
Agreement, Mr. Crosbie agreed to work for us on a full-time basis and have no
other outside business activities which require the devotion of a substantial
amount of his time, without the consent of our Chief Executive Officer. In
consideration for Mr. Crosbie's employment with us, we agreed to pay him a base
salary of $170,000 per year, during the first year of his employment (pro rated
from the effective date of the Employment Agreement), which salary shall
27
increase no less than 10% annually. Additionally, Mr. Crosbie shall be eligible
for a yearly bonus, which may be equal to or greater than his then base salary,
based on the satisfactory performance of his duties under the Employment
Agreement, however we have not committed to grant Mr. Crosbie any yearly bonus.
Additionally, we agreed to provide Mr. Crosbie a vehicle allowance equal to 5%
of his then annual salary.
In connection with Mr. Crosbie's Employment Agreement, we agreed to issue him
50,000 warrants which vested as of the effective date of the Employment
Agreement; and 25,000 warrants vesting each year, on the anniversary of the
effective date of his employment, that Mr. Crosbie is employed by the Company
pursuant to the Employment Agreement, which warrants have an exercise price of
$1.02 per share.
We may terminate Mr. Crosbie's Employment Agreement for cause as provided in the
Employment Agreement and Mr. Crosbie may terminate his employment with us if we
materially breach any term of the Employment Agreement. If we materially breach
a term of the Employment Agreement and Mr. Crosbie terminates the agreement, he
shall be entitled to receive his base salary for a period of one and a half
years from the effective date of such termination as long as he does not accept
any other full-time employment (the "Termination Payments"). If he accepts
other full-time employment after the date of such termination or otherwise
notifies us of his intent to terminate such payments, he will be entitled to
receive, at our option, a one-time lump sum payment, discounted for the present
value of such payment, equal to the balance of the payments he would have
received during the remaining time of the one and one half year period pursuant
to the Employment Agreement.
If the Employment Agreement has not been terminated pursuant to the terms of the
Employment Agreement prior to the expiration of the term of the Employment
Agreement, such employment shall automatically continue for additional six month
periods, subject to either party providing 60 days written notice to the other
party. However, if we terminate Mr. Crosbie after the initial term of the
Employment Agreement for any reason other than for cause, he shall be entitled
to Termination Payments as described above.
Additionally, pursuant to the Employment Agreement, Mr. Crosbie is able to
terminate the Employment Agreement with us at any time, for any reason, provided
that if his termination is not for breach of the Employment Agreement by us, he
is only entitled to receive his compensation earned through the termination
date.
PLAN OF OPERATIONS
We are currently in the process of integrating the administrative operations of
Hickory and TraveLeaders. The integration process has been slower than we
anticipated because it has taken us longer than expected to identify those
operations that could be consolidated and determine the allocation and
re-assignment of the personnel best suited for the consolidated enterprise;
however, we expect such integration process to be completed in fiscal 2006. In
addition, time has been required to analyze and determine the impact, if any, of
28
certain litigation commenced by Around The World Travel regarding its contracts
with Seamless Technologies, Inc. and others, as discussed in "Legal
Proceedings," herein.
Under our arrangement with Around The World Travel, which operates the
TraveLeaders assets on our behalf and from whom we acquired the assets, we
Incur a fee of 10% of the net earnings of the TraveLeaders
assets before interest, taxes, depreciation and amortization.
We are currently generating modest revenues from our call center joint venture
in Antigua. We expect revenues from our call center operations to increase
throughout the year based on existing contracts with major clients that will
require an increase in the number of seats in the second quarter of 2006.
We believe that the capital requirement for the first phase of the resort will
be approximately $135,500,000, of which $8,000,000 will be for the resort
amenities, $64,000,000 will be for vertical construction on 294 units and
$49,500,000 will be for other costs such as contingencies, closing costs and
soft costs such as architectural, engineering, and legal costs. An additional
approximate amount of $14,000,000 will be expended for horizontal construction
costs which include all of Phase I requirements plus most of the infrastructure
requirements for the entire Project. On or about December 29, 2005 we closed on
$54.85 million of senior debt to be used in the development of The Sonesta
Orlando Resort at Tierra Del Sol (the "Project"), described in greater detail
above. KeyBank, N.A. is the lender of two credit facilities for the benefit of
AMLH. The first is a land loan in the amount of $14,850,000, which is secured by
Project land that is dedicated to specific phases of the development. The second
is a $40,000,000 revolving construction loan, for up to $72,550,000 in funding
that will fund the development and construction for Phase 1 of the Resort. Both
loans are part of a comprehensive finance plan from KeyBank, N.A. who had the
underwriting role in the sale of the Community Development District Bonds.
Financing for the balance of the development budget, which includes
infrastructure, retention, roads and green space of approximately $26,000,000,
was through the sale of Westridge Community Development District bonds which was
completed on December 29, 2005 as described above. In June 2005, we began the
earth moving and clearing process on the land for the resort and we expect to
begin the vertical construction in the third quarter of 2006.
As of the date of this filing, the Company anticipates using "Resorts
Construction LLC," to construct and develop part of the Sonesta Resort and
properties ("Resorts Construction"). It is anticipated that Resorts Construction
will be 40.5% owned by Malcolm J. Wright, the Company's Chief Executive Officer
and Chairman. It is also anticipated that the yet to be signed construction
contract with Resorts Construction will provide significant construction savings
over the PCL contract described in detail above.
29
KNOWN TRENDS, EVENTS, AND UNCERTAINTIES
We expect to experience seasonal fluctuations in our gross revenues and net
earnings due to higher sales volume during peak periods. Advertising revenue
from the publication of books by Hickory that list hotel availability is
recognized either when the books are published (December) or on a performance
basis throughout the year, depending on the contractual terms. This seasonality
may cause significant fluctuations in our quarterly operating results and our
cash flows. In addition, other material fluctuations in operating results may
occur due to the timing of development of resort projects and our use of the
completed contracts method of accounting with respect thereto. Furthermore,
costs associated with the acquisition and development of vacation resorts,
including carrying costs such as interest and taxes, are capitalized as
inventory and will be allocated to cost of real estate sold as the respective
revenues are recognized. We intend to continue to invest in projects that will
require substantial development and significant amounts of capital funding
during 2006 and in the years ahead.
CRITICAL ACCOUNTING ESTIMATES
Our discussion and analysis of our financial condition and results of operations
is based upon our financial statements, which have been prepared in accordance
with accounting principals generally accepted in the United States. The
preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of any contingent assets and liabilities. We
base our estimates on various assumptions that we believe to be reasonable under
the circumstances, the results of which form the basis for making judgments
about carrying values of assets and liabilities that are not readily apparent
from other sources. On an on-going basis, we evaluate our estimates. Actual
results may differ from these estimates if our assumptions do not materialize or
conditions affecting those assumptions change. For a detailed discussion of our
significant accounting policies, see Note 2, Summary of Significant Accounting
Policies to the Notes to our audited consolidated financial statements included
in "Item 7. Financial Statements."
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our financial
statements:
GOING CONCERN CONSIDERATIONS
----------------------------
We have incurred losses during the development stage during our existence, and
we have negative retained earnings. We had an accumulated deficit of $13,499,420
at December 31, 2005 and $12,356,892 as of March 31, 2006. We expect our travel
operations through the end of the current fiscal year to require additional
working capital of approximately $2,000,000 and Hickory to require approximately
$500,000 in working capital during the next twelve months. If we are unable to
obtain these funds, we may have to curtail or delay our travel business plan. In
addition to our ability to raise additional capital, our continuation as a going
concern also depends upon our ability to generate sufficient cash flow to
conduct our operations. If we are unable to raise additional capital or generate
sufficient cash flow to conduct our Travel Division operations and/or to
complete the construction of our planned vacation homes, we may be required to
30
delay the acquisition of additional travel agencies and restructure or refinance
all or a portion of our outstanding debt. The accompanying financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
REVENUE RECOGNITION
--------------------
We recognize revenues on the accrual method of accounting. Revenues from Hickory
are recognized as earned, which is primarily at the time of delivery of the
related service, publication or promotional material. Fees from advertisers to
be included in the hotel book and web service operated by Hickory are recognized
upon the annual publication of the book or when performance levels are achieved.
Revenue from the delivery of services is recognized when it is invoiced to the
recipient of the service.
One of our principal sources of revenue is associated with access to the travel
portals that provide a database of discounted travel services. Annual renewals
occur at various times during the year. Costs and revenue related to portal
usage charges are incurred in the month prior to billing. Customers are charged
additional fees for hard copies of the site access information. Occasionally
these items are printed and shipped at a later date, at which time both revenue
and expenses are recognized.
Revenues and expenses from our TraveLeaders business are recognized as earned,
which is primarily at the time of delivery of the related service. Specifically,
commission revenues for cruises, hotel and car rentals are recognized upon
completion of travel, hotel stay or car rental. Commission fees for ticketing
are recognized at the time of departure.
We have entered into approximately 653 pre-construction sales contracts for
units in the Sonesta Orlando Resort at Tierra Del Sol. We will recognize revenue
when title is transferred to the buyer.
Revenues include property sales which are accounted for as the profits on the
sales at the time of closing.
GOODWILL
--------
We adopted the provisions of Statement of Financial Accounting Standards
("SFAS") No. 142, "Goodwill and Other Intangible Assets." This statement
requires that goodwill and intangible assets deemed to have indefinite lives not
be amortized, but rather be tested for impairment on an annual basis.
Finite-lived intangible assets are required to be amortized over their useful
lives and are subject to impairment evaluation under the provisions of SFAS No.
144. In 2004, we recorded an impairment of $1,500,000 related to the acquisition
of the TraveLeaders assets in December 2004, based on our payment of more than
fair value. The remaining goodwill of $14,425,437 as of December 31, 2004 was
composed of $12,585,435 from the TraveLeaders acquisition and $1,840,002 from
31
the Hickory acquisition. In 2005 we renegotiated and ultimately reached a
settlement on the acquisition which resulted in an acquisition of goodwill of
$5,585,435 of which $1,500,000 was previously impaired resulting in a goodwill
balance of $4,085,435. Our remaining goodwill of $1,840,002 is related to the
Hickory acquisition and has not been further impaired as of either March 31,
2006 or December 31, 2005. Therefore, total goodwill amounts to $5,925,437. The
goodwill will be evaluated on an annual basis and impaired whenever events or
circumstances indicate the carrying value of the goodwill may not be
recoverable.
COMPARISON OF OPERATING RESULTS
THREE MONTHS ENDED MARCH 31, 2006 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
2005
We had total revenue for the three months ended March 31, 2006 of $19,508,619,
which was composed of operating revenues of $6,379,373 and undeveloped land
sales of $13,129,246. This represented an increase in total revenues of
$8,636,248, from total revenues of $10,872,371 of total revenues for the three
months ended March 31, 2005. The reasons for the increase in total revenue for
the three months ended March 31, 2006; compared to the three months ended March
31, 2005 were the $8,996,335 or 217.7% increase in undeveloped land sales
relating to sale of forty-two acres of land to the District, other real estate
revenues of $167,338, the start of the operations at the call center with
revenues of $64,484 and a decrease of travel business revenues of $591,909 or
9%.
Total cost of undeveloped land sales for the three months ended March 31, 2006,
was $9,796,634, compared to cost of undeveloped land sales of $3,062,991 for the
three months ended March 31, 2005, an increase of $6,733,643 or 219.8% from the
prior period. The increase in cost of undeveloped land sales was directly
related to the increased land sales for the three months ended March 31, 2006,
compared to the three months ended March 31, 2005.
We had a gross margin of $3,517,759 for the three months ended March 31, 2006,
compared to a gross margin of $981,759 for the three months ended March 31,
2005, an increase of $2,536,000 or 258.3% from the prior period, which increase
in gross margin was mainly due to the 79.4% increase in total revenue offset by
the 219.8% increase in cost of undeveloped land sales for the three months ended
March 31, 2006, compared to the three months ended March 31, 2005.
We had total operating expenses of $1,198,168 for the three months ended March
31, 2006, compared to total operating expenses of $1,142,623 for the three
months ended March 31, 2005, a increase in total operating expenses of $55,545
or 4.9% from the prior period. The increase in total operating expenses from the
prior period was mainly due to the $56,684 or 7.1% increase in general and
administrative expenses.
32
We had total income from operations of $2,319,590 for the three months ended
March 31, 2006, compared to total loss from operations of $160,864 for the three
months ended March 31, 2005, an increase in income from operations of $2,480,454
from the prior period. The increase in total income from operations was mainly
due to the sale of forty-two acres of undeveloped land to the District, as
described above.
We had total interest expense of $1,240,148 for the three months ended March 31,
2006, compared to total interest expense of $393,319 for the three months ended
March 31, 2005, an increase in interest expense of $846,829 or 215% from the
prior period. The increase in interest expense was mainly due to interest on
loans from Stanford that were not in place in the first quarter of 2005 and the
amortization of deferred financing costs.
We had equity in operations of unconsolidated affiliate of $64,484 for the three
months ended March 31, 2006, compared to equity in operations of unconsolidated
affiliate of $-0- for the three months ended March 31, 2006. Equity in
operations of unconsolidated affiliate for the three months ended March 31, 2006
was due to the call center operations of Caribbean Media Group, Ltd. Caribbean
Leisure Marketing, Ltd., our wholly owned subsidiary, owns 49% of Caribbean
Media Group, Ltd.
We had income before income taxes of $1,143,926 for the three months ended March
31, 2006, compared to loss before income taxes of $554,183 for the three months
ended March 31, 2005, an increase in income before income taxes of $1,633,625 or
294.8% from the prior quarter.
We had provision for income taxes of $1,399 for the three months ended March 31,
2006, compared to provision for income taxes of $-0- for the three months ended
March 31, 2005.
We had net income of $1,142,527 for the three months ended March 31, 2006,
compared to net loss of $554,183 for the three months ended March 31, 2005, an
increase in net income of $1,696,710 or 306% from the prior period. The
increase in net income was due to the sale of forty-two acres of undeveloped
land.
LIQUIDITY AND CAPITAL RESOURCES
We had total current assets of $25,544,633 as of March 31, 2006, which included
cash of $335,416, restricted cash of $21,249,358, accounts receivable of
$1,080,412, other receivable of $5,788,553 and prepaid expenses and other of
$90,893. This represented an increase in total current assets of $6,414,308 from
December 31, 2005, when total current assets were $22,130,325. The main reason
for the increase in total current assets as of March 31, 2006, compared to
December 31, 2005, was an $8,074,004 increase in restricted cash in connection
with additional deposits on units in the Sonesta Resort and funds raised from
the sale of the District bond, as described above. Restricted cash consisted of
escrowed deposit funds from customers as well as funds devoted exclusively to
the development of the Sonesta Resort.
33
We had net property and equipment as of March 31, 2006 of $4,198,657, which was
a decrease of $385,196 from net property and equipment of $4,583,853 as of
December 31, 2005. The decrease in net property and equipment from prior period
was mainly caused by the depreciation of our equipment over the three months
ended March 31, 2006.
We had $49,312,308 of land held for development as of March 31, 2006, which was
an increase of $14,617,027 or 42% from land held for development of $34,695,281
as of December 31, 2005. The increase in land held for development was due to
capitalization of costs such as interest, professional fees, operating expenses
on Tierra Del Sol, Inc. until the units at the Sonesta Resort property are
completed and the acquisition of Reedy Creek Acquisition Company for $13,386,265
which increased our ownership in such entity and the undeveloped Reedy Creek
Property from 1% to 100%. The $49,312,308 of land held for development as of
March 31, 2006, represented the total costs capitalized since 2002 including the
cost of the land.
We had total other assets of $28,024,210 as of March 31, 2006, which included
prepaid sales commissions of $8,742,733; prepaid sales commissions from an
affiliated entity, Xpress, Ltd., of $3,469,838; investment senior notes
$5,170,000; goodwill of $5,925,437; trademark of $968,750 and other assets of
$3,747,452, which included deferred financing costs, member contracts and
customer lists. Trademark of $968,750 as of March 31, 2006, represented the
Company's trademark on "Traveleaders." Prepaid sales commissions are paid to a
sales agent at the point of sale and the agent then executes a note indicating
that if the customer does not ultimately close on the sale of the property, the
agent will return the advance. One half of the total sales commissions are paid
at the point of sale, with the remaining balance being paid to the agent at
closing.
We had total assets of $110,079,808 as of March 31, 2006, which included total
current assets of $28,544,633; net property and equipment of $4,198,657; land
held for development of $49,312,308 and total other assets of $28,024,210,
compared to total assets of $89,923,247 as of December 31, 2005. The increase in
total assets was mainly due to the increases in total current assets and total
other assets as described above.
We had total current liabilities of $26,828,766 as of March 31, 2006, which
included current maturities of long-term debt and notes payable of $18,117,620;
current maturities of notes payable-related parties of $1,095,541; accounts
payable and accrued expenses of $3,800,767; accrued expenses-officers of
$3,705,500 and other liabilities of $109,338. Accrued expenses-officers included
$2,900,000 in salaries due to our Chief Executive Officer and Chairman, Malcolm
J. Wright, as well as $558,000 in interest due on that amount (accrued officer
and director salaries bear interest at 12% per year, compounded annually until
paid), and $225,000 due to L. William Chiles, the Chief Executive Officer of
Hickory and our Director, and $22,500 of interest on such salary. This was an
increase in current liabilities of $16,308,092 from total current liabilities of
34
$10,520,674 as of December 31, 2005. The increase in current liabilities was
mainly attributable to an increase of $16,326,812 or 911.7% in current
maturities of long term debt and notes payable which increase was mainly due to
the Reedy Creek Acquisition Company loans with SIBL and Banker's Credit, which
we received during the three months ended March 31, 2006.
As of March 31, 2006, we owed $1,474,211 in connection with notes payable to
related parties including $225,615 owed to our Director, William Chiles;
$582,500 owed to Charles Sieberling, the Secretary of Hickory, $167,401 owed to
our Chief Executive Officer and Chairman, Malcolm J. Wright, and $174,433 owed
to Xpress, Ltd., of which Mr. Wright is the President.
We had total liabilities of $102,241,832 as of March 31, 2006, which included
total current liabilities of $26,828,766; long-term debt and notes payable of
$36,360,032; a put liability related to the purchase of the minority interest in
Tierra Del Sol, Inc. of $985,000, and deposits on pre-unit sales of $38,068,034.
This represents an increase in total liabilities of $18,536,939 or 22.1% from
total liabilities of $10,520,674 as of December 31, 2005, which increase was
mainly due to the $16,326,812 or 911.7% increase in current maturities of
long-term debt and notes payable, described in greater detail above.
We had total working capital of $1,715,867 and a ratio of current assets to
current liabilities of 1.06 as of March 31, 2006.
We had net cash flows provided by operating activities of $3,396,737 for the
three months ended March 31, 2006, which was mainly attributable to an increase
in prepaid and other assets of $1,348,704, and an increase in prepaid
commissions of $925,413 in connection with prepaid commissions paid on sales of
condominiums and town homes in the Sonesta Resort, offset by a $962,729 decrease
in receivables, $1,148,515 of interest expense and $1,142,527 of net income. The
increase in prepaid and other assets was caused by our settlement of the Around
The World Travel, Inc. ("AWT") Asset Purchase Agreement, described in greater
detail above, which caused certain funds and assets that had been remitted to
AWT to be treated as receivables.
We had total cash flows used in investing activities of $1,260,938 for the three
months ended March 31, 2006, which included $30,176 spent for the acquisition of
fixed assets and $10,361,734 in capitalization of real estate carrying costs,
offset by $9,130,972 of income from financing activities in connection with the
property sold to the District, as described in greater detail above. The
$9,130,972 of capitalized real estate carrying costs are costs related to the
construction and development of the Sonesta Resort properties, which are
capitalized until the units are closed (ownership is transferred to the buyer),
and include the sale proceeds from the sale of the land to the District as
described above. Once the units close, the accumulation of costs related to that
particular unit is recognized as cost of goods sold.
We had net cash provided by financing activities of $4,768,036 for the three
months ended March 31, 2006, which was due to $4,896,909 of proceeds from notes
payable and $308 from proceeds from the exercise of warrants offset by $129,182
of payment of debt. The proceeds from note payable of approximately $3,267,000
was due to amounts advanced pursuant to the Land Loan with Keybank as of March
31, 2006.
35
The purchase of the 99% interest in Reedy Creek Acquisition Company was financed
through notes payable with SIBL and Banker's Credit Corporation.
We expect that we will require approximately $2,500,000 through the end of the
2006 fiscal year for working capital for our travel management and services
businesses.
We estimate that the cost to complete the construction of Phase I of the Sonesta
Resort will be approximately $135,500,000 of which $ 8,000,000 will be for
resort amenities, $64,000,000 will be for vertical construction on 294 units and
$49,500,000 will be for other costs such as contingencies, closing costs and
soft costs such as architectural, engineering, and legal costs. An additional
approximate amount of $14,000,000 will be expended for horizontal construction
costs which include all of Phase I requirements plus most of the infrastructure
requirements for the entire Project. As of March 31, 2006, approximately
$14,850,000 had been advanced to the Company pursuant to the Land Loan and $-0-
had been advanced to the Company pursuant to the Construction Loan (as described
and defined above).
On December 30, 2005, we closed on an aggregate of $54,850,000 in senior debt to
be used in the development of The Sonesta Orlando Resort at Tierra Del Sol.
KeyBank, N.A. is the lender of the senior debt, which was provided to us in the
form of two credit facilities. The first is a land loan in the amount of
$14,850,000, which is secured by Project land that is dedicated to specific
phases of the development. The second is a $40,000,000 revolving construction
loan that will fund the development and construction for Phase 1 of the Sonesta
Resort. Both loans are part of a comprehensive finance plan for the development
of the Project that also includes funding in the amount of $25,825,000 from the
Westridge Community Development District ("CDD"), which bonds will be used to
pay for infrastructure facilities for public purposes such as water supply and
retention systems, roadways, green space and nature recreation areas. In
addition to the KeyBank provided senior debt, the Project is also benefiting
from $25,825,000 in bonds issued by the CDD, a special purpose taxing district
formed for the purpose of financing the installation of vital public services
such as water supply and retention, sanitary and storm water sewer systems,
roadways and the landscaping attendant to those uses. The CDD supports these
initiatives, through the provision of capital and maintenance, via a tax upon
the property owners of the district that utilizes a low finance rate (5.8% per
annum) and a long-term amortization of the capital costs (30 years).
The first phase of site work on the Sonesta Resort, at an estimated cost
exceeding $19 million, will be funded by the CDD via the sale by the CDD of
bonds issued on a non-recourse basis to the Company ("CDD Bonds"). The CDD was
initially created by the Company in September 2003 and enabled by an order of a
Florida State District Court. The CDD Bond issue was underwritten by KeyBanc
Capital Markets Group in the amount of $25,825,000. The first issue of the CDD
Bonds were successfully sold and closed simultaneous with the closing of the Key
Bank senior debt facilities. Upon closing of the loan, we repaid $7,862,250 of
short-term debt plus accrued interest of approximately $256,512. This short-term
debt originally matured on March 31, 2005, but it was extended until the closing
of the KeyBank credit facilities in December 2005.
36
We believe that the sum of the construction loan and the bond sale proceeds will
provide sufficient capital for the construction of Phase 1 of The Sonesta
Orlando Resort at Tierra Del Sol. In June 2005, we began the earth moving and
clearing process on the land for the Sonesta Resort and we expect to begin the
vertical construction of Phase 1 in the third quarter of 2006. We will need to
raise additional capital to begin and complete Phase 2 of the Sonesta Resort,
assuming the construction of Phase 1 is successful, of which there can be no
assurance. Additionally, we will need to raise significant capital to plan and
construct our planned development activities on our Reedy Creek Property.
At March 31, 2006, we had an outstanding principal balance of $6,000,000 under
our secured revolving credit facility with Stanford, which bears interest at a
fixed rate of 6% per annum payable quarterly in arrears and matures on December
18, 2008. At the sole election of the lender, any amount outstanding under the
credit facility may be converted into shares of our common stock at a conversion
price of $15.00 per share. The $6,000,000 credit facility is guaranteed by
Malcolm J. Wright, our Chief Executive Officer and Chairman and is secured by a
second mortgage on our Sonesta Orlando Resort property, including all fixtures
and personal property located on or used in connection with these properties,
and all of the issued and outstanding capital stock and assets of two of our
subsidiaries, American Leisure Marketing & Technology, Inc. and Caribbean
Leisure Marketing Limited.
As of March 31, 2006, we had an outstanding principal balance of $4,250,000,
under another secured revolving credit facility with Stanford, which bears
interest at a fixed rate of 8% per annum payable quarterly in arrears. The
credit facility is comprised of two tranches. The first tranche of $1,250,000
matures on September 30, 2006, may solely be used for the working capital of our
Hickory and TraveLeaders travel business and must immediately be repaid to the
extent that the borrowed amount together with accrued and unpaid interest
exceeds a borrowing base which is generally calculated as the lesser of
$1,250,000, or 50% of the dollar amount of TraveLeaders eligible accounts
receivable minus such reserves as the lender may establish from time to time in
its discretion. The second tranche of $3,000,000 matures on April 22, 2007. At
the sole election of the lender, any amount outstanding under the credit
facility may be converted into shares of our common stock at a conversion price
of $10.00 per share. The credit facility is secured by collateral assignments of
our stock in the active Travel Division subsidiaries as well as a collateral
assignment of our first lien security interest in the assets formerly owned by
Around The World Travel, Inc.
As of March 31, 2006, we had a total of $1,355,000 outstanding under our secured
revolving credit facility with Stanford, which bears interest at a fixed rate of
8% per annum and matures on April 22, 2007. The proceeds of this facility may be
used solely for our call center operations in Antigua. Interest for the period
from January 1, 2005 to March 31, 2006 was due on April 3, 2006 and interest is
due quarterly in arrears for periods after April 1, 2006. At the sole election
of the lender, any amount outstanding under the credit facility may be converted
into shares of our common stock at a conversion price of $10.00 per share. The
credit facility is secured by all of the issued and outstanding stock of our
subsidiary, Caribbean Leisure Marketing Limited.
37
We entered into another credit facility in the amount of $305,000 with Stanford
in September 2005 of which $289,000 had been drawn as of March 31, 2006. The
credit facility bears interest at 8.0% per annum and is secured by the assets
and stock of the Company.
On December 29, 2005, Stanford International Bank, Ltd. ("SIBL") provided Tierra
Del Sol with financial assistance to facilitate the establishment of the Land
Loan and the Construction Loan. The financial assistance consisted of a loan to
Tierra Del Sol of $2,100,000 (the "SIBL Tierra Del Sol Loan"), and the
establishment of letters of credit in favor of KeyBank in the amount of
$4,000,000 and $2,000,000, respectively (the "Letters of Credit"). As additional
consideration for this financial assistance, we granted SIBL and its affiliates
warrants to purchase 308,000 shares of our common stock at an exercise price of
$5.00 per share and warrants to purchase 154,000 shares of our common stock at
an exercise price of $0.001 per share. Additionally, in January 2006, in
connection with the SIBL Reedy Creek Loan, we granted SIBL and its affiliates
warrants to purchase 308,000 shares of our common stock at an exercise price of
$5.00 per share and warrants to purchase 154,000 shares of the Company's common
stock at an exercise price of $0.001 per share. The warrants expire 5 years from
issuance. The warrants contain anti-dilution provisions, including a provision
which requires us to issue additional shares under the warrants if we issue or
sell any common stock at less than $1.02 per share, or grant, issue or sell any
options or warrants for shares of the Company's common stock to convert into
shares of our common stock at less than $1.02 per share. If we do issue or sell
common stock, which would cause a re-pricing of the warrants issued to SIBL, it
would likely have an adverse effect on the trading value of our common stock and
could cause substantial dilution to our then shareholders.
Our subsidiary Hickory Travel Systems, Inc. owes $250,000 pursuant to a note
payable to Sabre, Inc. ("Sabre"), which final payment of $250,000 on such note
was due December 31, 2003. The note originally accrued interest at 8% per annum
and is secured by the personal guaranty of William Chiles who is a Director of
the Company. Interest has not been paid or accrued on this note since December
31, 2003, as there is no interest penalty or default rate applicable to the
final unpaid payment. Sabre has not requested the final payment of $250,000 of
the promissory note from Hickory to date.
Additionally, Hickory has a $375,900 loan through the U.S. Small Business
Administration ("SBA") of which $367,367 has been drawn as of March 31, 2006.
The SBA loan is due by May 2033 and bears interest at 4% per annum with
principal and interest payments of $1,862 due monthly from May 2005 until May
2033. The SBA note is secured by Hickory's assets and the personal guaranty of
William Chiles, who is our Director.
In connection with our purchase of the assets of Around The World Travel, Inc.
("AWT"), as of March 31, 2006 there is a balance from those liabilities we
assumed from AWT of $3,801,886, of which approximately $376,375 is due in the
next twelve months.
All of our credit facilities with Stanford contain customary covenants and
restrictions, including covenants that prohibit us from incurring certain types
38
of indebtedness, paying dividends and making specified distributions. Failure to
comply with these covenants and restrictions would constitute an event of
default under our credit facilities, notwithstanding our ability to meet our
debt service obligations. Upon the occurrence of an event of default, the lender
may convert the debt to the company's common stock, accelerate amounts due under
the applicable credit facility and may foreclose on collateral and/or seek
payment from a guarantor of the credit facility. At March 31, 2006, we believe
we were in compliance with the covenants and other restrictions applicable to us
under each credit facility.
In connection with the exercise of the Reedy Creek Option, Reedy Creek
Acquisition Company and SIBL agreed to modify the terms of the SIBL Reedy Creek
Loan made by SIBL to Reedy Creek Acquisition Company. The modified loan terms
are evidenced by a Renewed, Amended and Increased Promissory Note (the "Amended
Note") made by Reedy Creek Acquisition Company in favor of SIBL. The Amended
Note has a maturity date of December 31, 2006, a principal balance of $8,000,000
and bears interest at the rate of 8% per year. Interest on the Amended Note is
payable quarterly on June 30, 2006, September 30, 2006 and on the maturity date
of the Amended Note. Upon an event of default as described in the Amended Note,
SIBL has several rights and remedies, including causing the Amended Note to be
immediately due and payable.
The Amended Note is secured by a second lien on the Reedy Creek Property. It is
guaranteed by the Company and Malcolm J. Wright, the Company's Chief Executive
Officer and Chairman pursuant to a Modification and Reaffirmation of Guaranty
and Environmental Indemnity Agreement. In consideration for Mr. Wright's
guarantee, and pursuant to an existing agreement between Mr. Wright and the
Company, Mr. Wright earned a fee equal to three percent (3%) of principal amount
of the Amended Note. The Company will pay this fee through the grant of 240,000
warrants to Mr. Wright to purchase shares of the Company's common stock at an
exercise price of $1.02 per share. These warrants will expire 5 years from the
expiration of the guaranty.
In connection with the exercise of the Reedy Creek Option, the Company and Reedy
Creek Acquisition Company arranged to receive a $7,000,000 loan from Bankers
Credit Corporation ("Bankers Credit"). Under the terms of the Bankers Credit
loan, Bankers Credit advanced Reedy Creek Acquisition Company $3,000,000 at
closing and an additional $4,000,000 subsequent to the date of closing, for an
aggregate of $7,000,000.
The Bankers Credit loan is evidenced by a Promissory Note (the "Bankers Credit
Note") and bears interest at the greater of the Wall Street Journal published
prime rate plus 7.75%, not to exceed the highest rate allowable under Florida
law or 15% per year. The interest rate of the Bankers Credit Note as of May 17,
2006 was 15% (with a prime rate, as reported by the Wall Street Journal of 8%).
Interest on the Bankers Credit Note is payable monthly. The maturity date of the
Bankers Credit Note is January 3, 2007, when all principal and unpaid interest
is due and payable. Pursuant to the Bankers Credit Note, Reedy Creek Acquisition
Company agreed to pay a 10% late charge on any amount of unpaid principal or
interest under the Bankers Credit Note. The Bankers Credit Note is subject to a
1% exit fee. Additionally, if repaid by Reedy Creek Acquisition Company prior to
July 3, 2006, the Bankers Credit Note is subject to an additional 1% repayment
39
fee; however, if repaid after July 3, 2006, the Bankers Credit Note is not
subject to the repayment fee. Upon an event of default as described in the
Bankers Credit Note, Bankers Credit has several rights and remedies, including
causing the Bankers Credit Note to be immediately due and payable.
The Bankers Credit Note is secured by a first lien on the Reedy Creek Property.
Additionally, the Bankers Credit Note is guaranteed by the Company and Malcolm
J. Wright, the Company's Chief Executive Officer and Chairman pursuant to a
Guaranty Agreement. In consideration for Mr. Wright's guarantee, and pursuant to
an existing agreement between Mr. Wright and the Company, Mr. Wright earned a
fee equal to three percent (3%) of the Bankers Credit Note. The Company will pay
this fee through the grant of 210,000 warrants to Mr. Wright to purchase shares
of the Company's common stock at an exercise price of $1.02 per share. These
warrants will expire 5 years from the expiration of the guaranty.
Reedy Creek Acquisition Company utilized the initial proceeds from the Bankers
Credit loan to pay a portion of the amount owed on the existing first mortgage
note issued to the sellers of the Reedy Creek Property. The holder of this
mortgage agreed to release the mortgage in exchange for this payment. Reedy
Creek Acquisition Company has now paid the balance of this mortgage note upon
the receipt of the balance of the Bankers Credit loan.
While we currently believe we have sufficient funds to continue our business
plan and complete the construction of Phase 1 of the Sonesta Resort, moving
forward, our growth and continued operations may be impaired by limitations on
our access to the capital markets. In the event that our current anticipated
costs of developing the Sonesta Resort and/or the Reedy Creek Property, are more
than we anticipate, and/or our other travel service operations do not continue
to generate revenue at their current levels, we may not have sufficient funds to
complete such construction projects and/or repay amounts owed on the notes
payable described above. As a result, we may be forced to abandon our
development and construction plans and/or scale back our operations which would
have a material adverse impact upon our ability to pursue our business plan
and/or the value or common stock. There can be no assurance that capital from
outside sources will be available, or if such financing is available, that it
will not involve issuing further securities senior to our common stock or equity
financings which are dilutive to holders of our common stock.
RISK FACTORS
-------------------------
RISKS RELATING TO OUR CAPITAL AND LIQUIDITY NEEDS
WE HAVE A LIMITED HISTORY OF OPERATIONS AND WE HAVE A HISTORY OF OPERATING
LOSSES.
Since our inception, we have been assembling our Travel Division including the
acquisition of Hickory in October 2003 and TraveLeaders in December 2004,
planning The Sonesta Orlando Resort at Tierra Del Sol, building travel club
40
membership databases, and assembling our management team. We have incurred net
operating losses since our inception. As of December 31, 2005, we had an
accumulated deficit of $13,499,420 and as of March 31, 2006, we had an
accumulated deficit of $12,155,007.
WE MAY NOT GENERATE ENOUGH OPERATING REVENUE OR CAPITAL TO MEET OUR OPERATING
AND DEVELOPMENT COSTS.
Our costs of establishing our business models for both the Travel Division and
the Resort Development Division, including acquisitions and the due diligence
costs of that process, together with the un-financed development costs incurred
in the Resort Development Division requires significant capital. Historically,
our sources for capital have been through loans from our founding and majority
shareholders as well as from loans from our capital partner, Stanford. On
December 29, 2005, certain affiliates of the Company closed two (2) credit
facilities with Key Bank related to the Sonesta Resort. The credit facilities
consisted of a $40,000,000 revolving construction loan to be used to construct
Phase 1 of the Sonesta Resort (the "Construction Loan") and a $14,850,000 term
loan used to finance the acquisition of the property for the Resort and to pay
certain related costs (the "Land Loan"). If we are unable to generate enough
operating revenue to satisfy our capital needs, or we cannot obtain future
capital from our founding and majority shareholders or from Stanford, and/or if
we are not able to repay the Construction Loan or the Land Loan, it will have a
material adverse effect on our financial condition and results of operation.
WE OWE A SIGNIFICANT AMOUNT OF MONEY TO KEYBANK IN CONNECTION WITH THE
CONSTRUCTION LOAN AND LAND LOAN, WHICH MONEY WE DO NOT CURRENTLY HAVE, AND WHICH
LOANS ARE SECURED BY THE SONESTA RESORT.
The occurrence of any one or more "events of default" under the Land Loan and/or
Construction Loan would allow KeyBank to pursue certain remedies against us
including taking possession of the Sonesta Resort project; withholding further
disbursement of the proceeds of the loan and/or terminate KeyBank's obligations
to make further disbursements thereunder; and/or declaring the note evidencing
the loans to be immediately due and payable. We do not currently have cash on
hand sufficient to repay the approximately $14,850,000 which was borrowed from
KeyBank pursuant to the Land Loan and Construction Loan as of March 31, 2006.
The Land Loan and Construction Loan are due on June 28, 2007 and December 28,
2007, respectively, and we do not currently have sufficient cash to repay such
loans when due. Furthermore, we will likely not have sufficient cash to repay
such loans until the completion of the units in the Sonesta Report, if at all.
If we do not repay the amounts owning under the Construction Loan and Land Loan
when due, KeyBank may take possession of the Sonesta Resort project, and we may
be forced to curtail or abandon our current business plans, which could cause
the value of our securities to become worthless.
WE HAVE RECEIVED $11,605,000 MILLION OF CONVERTIBLE DEBT FINANCING FROM
STANFORD, WHICH IS SECURED BY MORTGAGES ON OUR PROPERTY AND LIENS ON OUR ASSETS.
41
We have received an aggregate of $11,605,000 million of convertible debt
financing from Stanford. The terms of our financial arrangements with Stanford
are secured by the following mortgages on our properties and liens on our
assets:
- Our $6,000,000 credit facility has been re-structured to be
secured by a first mortgage on land owned by third parties. However,
Stanford has agreed that the mortgage securing the $6,000,000 credit
facility shall be released in exchange for payment of the primary
obligations it secures, which includes the $2,100,000 loan to Tierra
Del Sol and the release of the Letters Of Credit. In consideration of
Stanford's release of the mortgage securing the $6,000,000 credit
facility, we have granted Stanford warrants to acquire up to 2% of
each of the Development Partnerships. A component of that collateral
is that Stanford has an option to elect to receive warrants to
purchase Series E Preferred Stock in lieu of and equivalent to
distributions (after tax) from the Development Partnerships. Series E
Preferred Stock has a conversion value to common stock at $15.00 per
common share. Other assets previously provided to secure this credit
facility, including all of the issued and outstanding capital stock
and assets of two of our subsidiaries, American Leisure Marketing &
Technology, Inc. and Caribbean Leisure Marketing Limited remain as
security for the debt.
- Our $4,250,000 credit facility is secured by collateral
assignments of our stock in the active Travel Division subsidiaries as
well as a collateral assignment of our first lien security interest in
the assets formerly owned by Around The World Travel, Inc.
- Our $1,355,000 credit facility is secured by all of the issued
and outstanding stock of our subsidiary, Caribbean Leisure Marketing
Limited. This facility is non-recourse to the Company but for the
assets and revenues of that subsidiary.
In addition, Malcolm J. Wright, our Chief Executive Officer and Chairman
provided a personal guarantee for our $6,000,000 credit facility. If we fail to
comply with the covenants in our credit facilities, Stanford can elect to
accelerate the amounts due under the credit facilities and may foreclose on our
assets and property that secure the loans.
BUSINESS ACQUISITIONS OR JOINT VENTURES MAY DISRUPT OUR BUSINESS, DILUTE
SHAREHOLDER VALUE OR DISTRACT MANAGEMENT ATTENTION.
As part of our business strategy, we may consider the acquisition of, or
investments in, other businesses that offer services and technologies
complementary to ours. If the analysis used to value acquisitions is faulty, the
acquisitions could have a material adverse affect on our operating results
and/or the price of our common stock. Acquisitions also entail numerous risks,
including:
42
- difficulty in assimilating the operations, products and personnel
of the acquired business;
- potential disruption of our ongoing business;
- unanticipated costs associated with the acquisition;
- inability of management to manage the financial and strategic
position of acquired or developed services and technologies;
- the diversion of management's attention from our core business;
- inability to maintain uniform standards, controls, policies and
procedures;
- impairment of relationships with employees and customers, which
may occur as a result of integration of the acquired business;
- potential loss of key employees of acquired organizations;
- problems integrating the acquired business, including its
information systems and personnel;
- unanticipated costs that may harm operating results; and
- risks associated with entering an industry in which we have no
(or limited) prior experience.
If any of these occur, our business, results of operations and financial
condition may be materially adversely affected.
RISKS RELATED TO OUR RESORT DEVELOPMENT DIVISION
WE OWE A SIGNIFICANT AMOUNT OF MONEY TO KEYBANK, NATIONAL ASSOCIATION, WHICH WE
DO NOT CURRENTLY HAVE FUNDS TO RE-PAY, AND WHICH LOANS INCLUDE LIENS ON OUR
PROPERTIES.
In December 2005, we closed two credit facilities with KeyBank, National
Association ("KeyBank") related to the Sonesta Resort. The credit facilities
consisted of a $40,000,000 revolving credit line, for financing up to
$72,550,000 (the "Construction Loan") and a $14,850,000 term loan to be used to
finance the acquisition of the property for the resort (the "Land Loan"). The
Construction Loan and the Land Loan bear interest at the rate of the daily
London Interbank Offered Rate ("LIBOR") plus 2.75%, and plus 3.10%,
respectively, currently 8.16% and 8.51%, respectively, with the LIBOR equal to
5.51% as of May 17, 2006. The maturity date of the Construction Loan is December
28, 2007 and the maturity date of the Land Loan is June 28, 2007. The
Construction Loan and the Land Loan are secured by a first lien on the land
within Phase 1 and Phase 2, respectively of the Sonesta Resort, including any
improvements, easements, and rights of way; a first lien and security interest
in all fixtures and personal property, an assignment of all leases, subleases
and other agreements relating to the property; an assignment of construction
documents; a collateral assignment of all contracts and agreements related to
the sale of each condominium unit; a collateral assignment of all purchase
deposits and any management and/or operating agreement. As of the date of this
filing we have borrowed $0.00 from KeyBank pursuant to the Construction Loan and
$14,850,000 under the Land Loan, which amount we do not currently have funds on
hand to repay. We are under no pressure to repay the Land Loan. Our business
plan includes retiring that debt with a construction loan to build Phase 2 of
43
the Sonesta Resort. We intend to use the proceeds of the sale of the units built
with the Phase 1 Construction Loan. Since any units that are built with the
Construction Loan are subject to bona fide third party sales agreements that
have been approved by Key Bank, we believe that the risk of not repaying any
amounts drawn under the Construction Loan is manageable.
WE NEED SIGNIFICANT ADDITIONAL FINANCE FACILITIES TO BEGIN AND COMPLETE THE
DEVELOPMENT OF PHASE 2 OF THE SONESTA RESORT AND OUR PLANNED CONSTRUCTION OF THE
REEDY CREEK PROPERTY.
While we currently believe we have sufficient capital to complete the
development of Phase 1 of the Sonesta Resort, we do not plan to use Company's
revenue to begin or complete Phase 2 of the Sonesta Resort and/or our planned
development of the Reedy Creek Property (as described above). Our plan for the
financing of the Phase 2 town homes is to use a program from a national mortgage
lender to employ construction loans issued to each purchaser that will, upon
completion, convert to permanent, conventional mortgages. The finance plan for
the Phase 2 amenities is to employ a line of credit secured by a segment of the
profits from the sale of the residential units. We will employ a conventional
construction loan for the condominium units. As of this date, the Company has
not yet secured the line of credit for the amenities or the construction loan
for the condominium units. It is impossible at this time for us to estimate the
cost of completing Phase 2 of the Sonesta Resort and/or the development of the
Reedy Creek Property, however, based upon the size of the projects, we would
anticipate such costs to be substantial. We will not begin the construction of
Phase 2 until we have capitalized the construction appropriately. If we cannot
obtain the appropriate financing, we may have to delay the commencement of the
construction of Phase 2 until such time as we have adequate funding available.
We may never have sufficient capital to begin or complete the development of
Phase 2 of the Sonesta Resort which could force us to modify the development
plan for the Sonesta Resort. Our business plan for the development of the Reedy
Creek Property is to enter into a partnership agreement with an experienced and
high credit development partner, and as such, we do not expect to raise capital
or incur debt to begin or complete that project. At present, the Company has not
yet chosen such partner although we are in receipt of proposals from qualified
developers that are consistent with our business plan.
THE CONSTRUCTION OF THE SONESTA RESORT IS SUBJECT TO DELAYS AND COST OVERRUNS,
WHICH COULD CAUSE THE ESTIMATED COST OF THE RESORT TO INCREASE AND WHICH COULD
CAUSE US TO CURTAIL OR ABANDON THE CONSTRUCTION OF THE SONESTA RESORT.
We believe that we currently have sufficient capital to complete Phase 1 of the
Sonesta Resort. However, all construction projects, especially construction
projects as large as our planned Sonesta Resort are subject to delays and cost
overruns. We have experienced cost increases and overruns since sales commenced
in 2004, due to significant price increases in construction materials, which
have been exacerbated by the hurricanes of 2004 and 2005. The increased costs
have impacted construction throughout the southeastern United States and are not
unique to us. Because of the significant cost increases, we are evaluating and
plan to implement a program to revise upwards the price of sold and unsold units
44
or to cancel contracts on units because of cost overruns. If we continue to
experience substantial delays or additional cost overruns during the
construction of Phase 1 of the Sonesta Resort, or both, we could be forced to
obtain additional financing to complete the project, which could be at terms
worse than our current funding, and could force us to curtail or abandon our
current plans for Phases 1 and 2 of the Sonesta Resort. As a result, sales of
our town homes and condominiums could be severely effected, which could force us
to curtail or abandon our business plans and/or could make it difficult if not
impossible to repay the significant amount of money due to KeyBank (as explained
above), which as a result could cause the value of our securities to become
worthless.
EXCESSIVE CLAIMS FOR DEVELOPMENT-RELATED DEFECTS IN ANY REAL ESTATE PROPERTIES
THAT WE PLAN TO BUILD THROUGH OUR RESORT DEVELOPMENT DIVISION COULD ADVERSELY
AFFECT OUR LIQUIDITY, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
We will engage third-party contractors to construct our resorts. However, our
customers may assert claims against us for construction defects or other
perceived development defects including, but not limited to, structural
integrity, the presence of mold as a result of leaks or other defects,
electrical issues, plumbing issues, or road construction, water or sewer
defects. In addition, certain state and local laws may impose liability on
property developers with respect to development defects discovered in the
future. To the extent that the contractors do not satisfy any proper claims as
they are primarily responsible, a significant number of claims for
development-related defects could be brought against us. To the extent that
claims brought against us are not covered by insurance, our payment of those
claims could adversely affect our liquidity, financial condition, and results of
operations.
MALCOLM J. WRIGHT, WHO SERVES AS OUR CHIEF EXECUTIVE OFFICER, CHIEF FINANCIAL
OFFICER AND AS CHAIRMAN OF THE BOARD OF DIRECTORS, IS INVOLVED IN OTHER
BUSINESSES THAT HAVE CONTRACTED WITH US AND IS ALSO INVOLVED WITH PROPERTY
DEVELOPMENT PROJECTS THAT MAY BE IN COMPETITION WITH US.
Malcolm J. Wright is the President of American Leisure Real Estate Group, Inc.,
a real estate development company with which we have contracted for the
development of our resorts including The Sonesta Orlando Resort at Tierra Del
Sol ("ALREG"). Mr. Wright has an 81% interest in ALREG; however, we have no
interest in ALREG. Additionally, Mr. Wright is an officer of Xpress Ltd., with
which we have contracted for exclusive sales and marketing for The Sonesta
Orlando Resort at Tierra Del Sol. Mr. Wright is also an officer and shareholder
of Inovative Concepts, Inc., which operates a landscaping business, M J Wright
Productions, Inc., which owns our Internet domain names, Resorts Development
Group, LLC which develops resort properties in Orlando including Bella Citta,
Los Jardines Del Sol, The Preserve, Tortuga Cay and Sherberth Development LLC,
Resorts Construction, LLC with whom we intend to contract to construct part of
the Sonesta Resort as described above, Resorts Concepts, LLC which operates a
design business, Titan Manufacturing, LLC from whom we intend to purchase roof
tiles for our developments, South Beach Resorts LLC in conjunction with Mr.
Pauzar and Mr. Maddock which is redeveloping the Boulevard Hotel on South Beach,
Miami. Because Mr. Wright is employed by us and the other party to these
transactions, Mr. Wright might profit from a transaction when we do not.
45
Management believes that these transactions are in the best interest of, or not
detrimental to, the Company, and are as good or better than could be achieved,
if even possible to achieve, by contracting with a wholly unrelated party.
Additionally, the transactions were negotiated by us in a manner akin to an arms
length transaction. Additionally, from time to time, Mr. Wright pursues real
estate investment and sales ventures that may be in competition with ventures
that we pursue or plan to pursue. Mr. Wright, however, has personally guaranteed
our debts, and has encumbered his personal assets to secure financing for the
above described projects. Additionally, to preserve Company liquidity, Mr.
Wright has been deferring his annual base salary since 2002.
BECAUSE MALCOLM J. WRIGHT, WHO SERVES AS OUR CHIEF EXECUTIVE OFFICER AND CHIEF
FINANCIAL OFFICER AND THE CHAIRMAN OF THE BOARD OF DIRECTORS, IS INVOLVED IN A
NUMBER OF OTHER BUSINESSES, HE MAY NOT BE ABLE OR WILLING TO DEVOTE A SUFFICIENT
AMOUNT OF TIME TO OUR BUSINESS OPERATIONS.
Malcolm J. Wright is the President of ALREG, Xpress Ltd., Inovative Concepts,
Inc., M J Wright Productions, Inc., Resorts Development Group, LLC, Resorts
Construction, LLC, Titan Manufacturing LLC, Tortuga Cay Resort, LLC, Osceola
Business Managers, Inc., Florida World, Inc., SBR Holding LLC (a non trading
holding company of South Beach Resorts, LLC), RDG LLC, and SunGate Resort
Villas, Inc., It is possible that the demands on Mr. Wright from these other
businesses could increase with the result that he may have less time to devote
to our business. We do not have an employment agreement with Mr. Wright and he
is under no requirement to spend a specified amount of time on our business. As
a result, Mr. Wright may not spend sufficient time in his roles as an executive
officer and as Chairman of our company to realize our business plan. If Mr.
Wright does not have sufficient time to serve our company, it could have a
material adverse effect on our business and results of operations.
WE MAY PROVIDE THE EXECUTIVE OFFICERS OF OUR SUBSIDIARIES AN AGGREGATE BONUS OF
UP TO 19% OF THE PRE-TAX PROFITS OF THE SUBSIDIARY IN WHICH THEY SERVE AS OUR
EXECUTIVE OFFICERS, WHICH WOULD REDUCE ANY PROFITS THAT WE MAY EARN.
We may provide the executive officers of each of our subsidiaries an aggregate
bonus of up to 19% of the pre-tax profits, if any, of the subsidiaries in which
they serve as executive officers. For example, Malcolm J. Wright would receive
19% of the pre-tax profits of Leisureshare International Ltd, Leisureshare
International Espanola SA, American Leisure Homes, Inc., Advantage Professional
Management Group, Inc., Tierra Del Sol Resort, Inc., and Wright Resorts Villas &
Hotels, Inc. However, we do not have any agreements with our officers regarding
the bonus other than our agreement with L. William Chiles. Mr. Chiles is
entitled to receive 19% of the profits of Hickory up to a maximum payment over
the life of his contract of $2,700,000. As Mr. Chiles' bonus is limited, it is
not subject to the buy-out by us described below. The executive officers of our
other subsidiaries would share a bonus of up to 19% of the pre-tax profits of
the subsidiary in which they serve as executive officers. We would retain the
right, but not the obligation to buy out all of the above agreements after a
period of five years by issuing such number of shares of our common stock equal
46
to the product of 19% of the average after-tax profits for the five-year period
multiplied by one-third of the price-earnings ratio of our common stock at the
time of the buyout divided by the greater of the market price of our common
stock or $5.00. If we pay bonuses in the future, it will reduce our profits and
the amount, if any, that we may otherwise have available to pay dividends to our
preferred and common stockholders. Additionally, if we pay bonuses in the future
it will take away from the amount of money we have to repay our outstanding
loans and the amount of money we have available for reinvestment in our
operations and as a result, our future results of operations and business plan
could be affected by such bonuses, and we could be forced to curtail or abandon
our current business plan and plans for future expansion.
WE HAVE EXPERIENCED DELAYS IN OBTAINING SIGNATURES FOR AGREEMENTS AND
TRANSACTIONS, WHICH HAVE PREVENTED THEM FROM BEING FINALIZED AND/OR DISCLOSED IN
OUR FILINGS.
We have experienced delays in obtaining signatures for various agreements and
transactions in the past. In some cases, we have either disclosed the terms of
these agreements and transactions in our periodic and other filings with the SEC
and/or filed such agreements with only the limited signatures which we could
obtain by the required filing dates of such reports, with the intention to
re-file such agreements at a later date once we are able to obtain all of the
required signatures; however, these agreements and transactions are not final.
Until they are finalized, their terms are subject to change although we do not
have any present intention to do so. If the terms of these agreements and
transactions were to change, we may be required to amend our prior disclosure
and any revisions could be substantial.
WE RELY ON KEY MANAGEMENT AND IF WE LOSE ANY OF THEM, IT COULD HAVE A MATERIAL
ADVERSE AFFECT ON OUR BUSINESS AND RESULTS OF OPERATIONS.
Our success depends, in part, upon the personal efforts and abilities of Malcolm
J. Wright and Frederick Pauzar. Mr. Wright is the Chairman of the Company and
the Company's Chief Executive Officer. Mr. Pauzar is the President, Chief
Operating Officer and a Director of the Company. Our ability to operate and
implement our business plan is dependent on the continued service of Messrs.
Wright and Pauzar. We are in the process of entering into written employment
agreements with Mr. Wright and Mr. Pauzar. If we are unable to retain and
motivate them on economically feasible terms, our business and results of
operations will be materially adversely affected. In addition, the absence of
Mr. Wright or Mr. Pauzar may force us to seek a replacement who may have less
experience or who may not understand our business as well.
47
IF WE DO NOT EVENTUALLY PAY MALCOLM J. WRIGHT, OUR CHIEF EXECUTIVE OFFICER AND
DIRECTOR FOR HIS SERVICES AS AN EXECUTIVE OFFICER AND A DIRECTOR, WE COULD LOSE
HIS SERVICES.
We have not paid cash to Malcolm J. Wright for his services as an executive
officer and a Director as of the filing of this report; however, he is entitled
to receive various forms of remuneration from us such as accrued salary of
$500,000 per year beginning in 2004, accrued salary of $250,000 per year from
2002 to 2004, and accrued compensation of $18,000 per year for serving as a
director. We may pay Mr. Wright a bonus of up to 19% of the pre-tax profits, if
any, of various subsidiaries as discussed above. We have made payments to
entities controlled by Mr. Wright in consideration for substantial valuable
services that those entities have provided to us for The Sonesta Orlando Resort
at Tierra Del Sol. As of March 31, 2006, the total remuneration which Mr. Wright
had accrued in connection with his salary as an officer of the Company had
totaled $2,900,000 and such salary had accrued $558,000 in interest as of March
31, 2006. If we do not eventually pay cash to Mr. Wright for his salary,
director's compensation and bonus, he may determine to spend less of his time on
our business or to resign his positions as an officer and a director.
COMPANY'S AFFILIATED WITH OUR CHIEF EXECUTIVE OFFICER AND DIRECTOR, MALCOLM J.
WRIGHT ARE PAID A SUBSTANTIAL AMOUNT OF OUR REVENUES IN CONNECTION WITH SERVICES
RENDERED.
Certain companies controlled by our Chief Executive Officer and Director,
Malcolm J. Wright, including American Leisure Real Estate Group, Inc. ("ALRG"),
which entered into an exclusive Development Agreement with our subsidiary,
Tierra del Sol Resort, Inc. ("TDSR") and Xpress, Ltd. ("Xpress"), which entered
into an exclusive sales and marketing agreement with TDSR in November 2003, are
paid substantial fees in connection with services rendered to us in connection
with such agreements. In connection with ALRG's Development Agreement with
TDSR, we are required to pay ALRG a fee in the amount of 4% of the total costs
of the development of the Sonesta Resort paid by ALRG. As of March 31, 2006,
the total costs and fees paid by ALRG amounted to $19,829,898, of which 4% of
such amount is equal to approximately $793,196. In connection with Xpress'
sales and marketing agreement, we agreed to pay Xpress a sales fee in the amount
of 3% of the total sales prices received by TDSR in connection with sales of
units in the Sonesta Resort, which shares are payable in two installments,
one-half when the rescission period has elapsed in a unit sales agreement and
the other half upon the actual conveyance of the unit. As of March 31, 2006,
total sales of units in the Sonesta Resort were approximately $231,322,549, and
as a result, TDSR was obligated to pay Xpress a fee of $6,939,677 in connection
with sales and management fees, and as of March 31, 2006, $6,765,244 had been
paid to Xpress and $174,433 remains. Additionally, TDSR will be obligated to
pay Xpress $3,469,838, the other half of the sales fees upon conveyance of the
units. These payments represent a significant portion of our non-restricted
current cash and equivalents and as a result of such payments, we could have
less cash on hand than we will require for our operations and upcoming
liabilities. Additionally, as a result of such payments, we may be forced to
curtail or scale back our business plan, which could have a material adverse
effect on the trading value of our common stock.
48
RISKS RELATED TO OUR TRAVEL DIVISION
WE NEED APPROXIMATELY $2,500,000 OF CAPITAL THROUGH THE END OF THE 2005 FISCAL
YEAR FOR OUR TRAVEL DIVISION OPERATIONS AND THE OPERATIONS OF HICKORY, WHICH MAY
NOT BE AVAILABLE TO US ON FAVORABLE TERMS, IF AT ALL.
We anticipate needing to raise approximately $2,000,000 through the end of the
2006 fiscal year for the working capital needs for the Travel Division, as well
as approximately $500,000 for the operations of Hickory, which includes
Hickory's requirement to cover its seasonal losses, and TraveLeaders'
requirements during its reorganization to adopt our business models. If we do
not receive a sufficient amount of additional capital on acceptable terms, or at
all, we may be unable to fully implement our business plan. We have identified
sources of additional working capital, but we do not have any written
commitments from third parties or from our officers, directors or majority
shareholders. Additional capital may not be available to us on favorable terms,
if at all. If we cannot obtain a sufficient amount of additional capital, we
will have to delay, curtail or scale back some or all of our travel operations,
any of which would materially adversely affect our travel businesses. In
addition, we may be required to delay the acquisition of additional travel
agencies and restructure or refinance all or a portion of our outstanding debt.
OUR COMMISSIONS AND FEES ON CONTRACTS WITH SUPPLIERS OF TRAVEL SERVICES FOR OUR
TRAVEL DIVISION MAY BE REDUCED OR THESE CONTRACTS MAY BE CANCELLED AT WILL BY
THE SUPPLIERS BASED ON OUR VOLUME OF BUSINESS, WHICH COULD HAVE A MATERIAL
ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL CONDITION OR RESULTS OF OPERATIONS.
Our suppliers of travel services including airline, hotel, cruise, tour and car
rental suppliers may reduce the commissions and fees that we earn under contract
with them based on the volume of business that we generate for them. These
contracts generally renew annually and in some cases may be cancelled at will by
the suppliers. If we cannot maintain our volume of business, our suppliers could
contract with us on terms less favorable than the current terms of our contracts
or the terms of their contracts with our competitors, exclude us from the
products and services that they provide to our competitors, refuse to renew our
contracts, or, in some cases, cancel their contracts with us at will. In
addition, our suppliers may not continue to sell services and products through
global distribution systems on terms satisfactory to us. If we are unable to
maintain or expand our volume of business, our 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 our customers from
accessing or purchasing particular travel services through us. If these
suppliers were to cancel or refuse to renew our contracts or renew them on less
favorable terms, it could have a material adverse effect on our business,
financial condition or results of operations.
49
OUR SUPPLIERS OF TRAVEL SERVICES TO OUR TRAVEL DIVISION COULD REDUCE OR
ELIMINATE OUR COMMISSION RATES ON BOOKINGS MADE THROUGH US BY PHONE AND OVER THE
INTERNET, WHICH COULD REDUCE OUR REVENUES.
We receive commissions paid to us by our travel suppliers such as hotel chains
and cruise companies for bookings that our customers make through us by phone
and over the Internet. Consistent with industry practices, our suppliers are not
obligated by regulation to pay any specified commission rates for bookings made
through us or to pay commissions at all. Over the last several years, travel
suppliers have substantially reduced commission rates and our travel suppliers
have reduced our commission rates in certain instances. Future reductions, if
any, in our commission rates that are not offset by lower operating costs or
increased volume could have a material adverse effect on our business and
results of operations.
FAILURE TO MAINTAIN RELATIONSHIPS WITH TRADITIONAL TRAVEL AGENTS FOR OUR TRAVEL
DIVISION COULD ADVERSELY AFFECT OUR BUSINESS AND RESULTS OF OPERATIONS.
Hickory has historically received, and expects to continue to receive, a
significant portion of its revenue through relationships with traditional travel
agents. Maintenance of good relationships with these travel agents depends in
large part on continued offerings of travel services in demand, and good levels
of service and availability. If Hickory does not maintain good relations with
its travel agents, these agents could terminate their memberships and use of
Hickory's products and services, which would have a material adverse effect on
our business and results of operations.
DECLINES OR DISRUPTIONS IN THE TRAVEL INDUSTRY COULD SIGNIFICANTLY REDUCE OUR
REVENUE FROM THE TRAVEL DIVISION.
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/or
- economic downturns and recessions.
OUR TRAVEL REVENUES MAY FLUCTUATE FROM QUARTER TO QUARTER DUE TO SEVERAL FACTORS
INCLUDING FACTORS THAT ARE OUTSIDE OF OUR CONTROL, AND IF BECAUSE OF THESE
FACTORS, OUR REVENUES ARE BELOW OUR EXPECTATIONS IT WOULD LIKELY HAVE A MATERIAL
ADVERSE EFFECT ON OUR RESULTS OF OPERATIONS.
50
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 and the travel agency members
of Hickory. 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.
GLOBAL TRAVEL DISTRIBUTION SYSTEM CONTRACTS THAT WE MAY ENTER INTO GENERALLY
PROVIDE FOR FINANCIAL PENALTIES FOR NOT ACHIEVING PERFORMANCE OBJECTIVES.
We are seeking to enter into multi-year global distribution system contracts.
These contracts typically cover a five-year period and would require us to meet
certain performance objectives. If we do not structure a global distribution
system contract effectively, it may trigger financial penalties if the
performance objectives are not met. In the event that we enter into global
distribution system contracts and are unable to meet the performance objectives,
it would have a material adverse effect on our business, liquidity and results
of operations.
OUR CONTRACTS WITH CLIENTS OF THE TRAVELEADERS BUSINESS DO NOT GUARANTEE THAT WE
WILL RECEIVE A MINIMUM LEVEL OF REVENUE, ARE NOT EXCLUSIVE, AND MAY BE
TERMINATED ON RELATIVELY SHORT NOTICE.
Our contracts with clients of the TraveLeaders business do not ensure that we
will generate a minimum level of revenue, and the profitability of each client
may fluctuate, sometimes significantly, throughout the various stages of our
sales cycles. Although we will seek to enter into multi-year contracts with our
clients, our 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 we will be
able to collect such amount or that such amount, if received, will sufficiently
compensate us for our investment in any canceled sales campaign or for the
revenues we may lose as a result of the early termination. If we do not generate
minimum levels of revenue from our contracts or our clients terminate our
multi-year contracts, it will have a material adverse effect on our business,
results of operation and financial condition.
51
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.
WE RELY AND PLAN TO RELY ON ONLY A FEW MAJOR CLIENTS FOR OUR REVENUES.
We plan to focus our marketing efforts on developing long-term relationships
with companies in our targeted travel and vacation resort industry. As a result,
we will derive a substantial portion of our revenues from relatively few
clients. There can be no assurances that we will not continue to be dependent on
a few significant clients, that we will be able to retain those clients, that
the volumes of profit margins will not be reduced or that we would be able to
replace such clients or programs with similar clients or programs that would
generate a comparable profit margin. Consequently, the loss of one or more of
those clients could have a material adverse effect on our business, results of
operations or financial condition.
52
RISKS RELATED TO OUR COMMUNICATIONS DIVISION
WE MAY NOT BE ABLE TO KEEP UP WITH CURRENT AND CHANGING TECHNOLOGY ON WHICH OUR
BUSINESS IS DEPENDENT.
Our call center and communications business is dependent on our computer and
communications equipment and software capabilities. The underlying technology is
continually changing. Our continued growth and future profitability depends on a
number of factors affected by current and changing technology, including our
ability to:
- expand our existing service offerings;
- achieve cost efficiencies in our existing call centers; and
- introduce new services and products that leverage and respond to
changing technological developments.
The technologies or services developed by our competitors may render our
products or services non competitive or obsolete. We may not be able to develop
and market any commercially successful new services or products. We have
considered integrating and automating our customer support capabilities, which
we expect would decrease costs by a greater amount than any decrease in
revenues; however, we could be wrong in these expectations. Our failure to
maintain our technological capabilities or respond effectively to technological
changes could have a material adverse effect on our business, results of
operations or financial condition.
A BUSINESS INTERRUPTION AT OUR CALL CENTER, WHETHER OR NOT PROLONGED, COULD HAVE
A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL
CONDITION.
Our call center business operations depend upon our ability to protect our call
center, computer and telecommunications equipment and software systems against
damage from fire, power loss, telecommunications interruption or failure,
computer viruses, natural disaster and other similar events. In the event we
experience a temporary or permanent interruption at our call center and our
contracts do not provide relief, our business could be materially adversely
affected and we could be required to pay contractual damages to some clients or
allow some clients to terminate or renegotiate their contracts with us. In the
event that we experience business interruptions, it would have a material
adverse effect on our business, results of operations and financial condition.
53
RISKS RELATING TO OUR STOCK AND GENERAL BUSINESS RISKS
RE-PRICING WARRANTS AND ISSUING ADDITIONAL WARRANTS TO OBTAIN FINANCING HAS
CAUSED AND MAY CAUSE ADDITIONAL DILUTION TO OUR EXISTING STOCKHOLDERS.
In the past, to obtain additional financing, we have modified the terms of our
warrant agreements to lower the exercise price per share to $.001 from $5.00
with respect to warrants to purchase 100,000 shares of our common stock and to
$.001 from $2.96 with respect to warrants to purchase 1,350,000 shares of our
common stock. Additionally, we have granted an additional 616,000 warrants to
SIBL and affiliates to purchase shares of our Common Stock at $5.00 per share
and 308,000 warrants to SIBL and affiliates to purchase shares of our Common
Stock at $0.001 per share. Re-pricing of our warrants and issuing additional
warrants has caused and may cause substantial additional dilution to our
existing shareholders and shareholders owning shares of our common stock at the
time of the exercise of such warrants described above, if exercised.
WARRANTS GRANTED TO STANFORD INTERNATIONAL BANK, LTD., IN CONNECTION WITH THE
TIERRA DEL SOL LOAN AND LETTERS OF CREDIT CONTAIN ANTI-DILUTION FEATURES, WHICH
COULD EFFECT THE VALUE OF OUR COMMON STOCK.
On December 29, 2005, Stanford International Bank, Ltd. ("SIBL") provided Tierra
Del Sol with financial assistance to facilitate the establishment of the Land
Loan and the Construction Loan. The financial assistance consisted of a loan to
Tierra Del Sol of $2,100,000 (the "SIBL Tierra Del Sol Loan"), and the
establishment of letters of credit in favor of KeyBank in the amount of
$4,000,000 and $2,000,000, respectively (the "Letters of Credit"). As additional
consideration for this financial assistance, we granted SIBL and its affiliates
warrants to purchase 308,000 shares of our common stock at an exercise price of
$5.00 per share and warrants to purchase 154,000 shares of our common stock at
an exercise price of $0.001 per share. Additionally, in January 2006, in
connection with the SIBL Reedy Creek Loan, we granted SIBL and its affiliates
warrants to purchase 308,000 shares of our common stock at an exercise price of
$5.00 per share and warrants to purchase 154,000 shares of the Company's common
stock at an exercise price of $0.001 per share. The warrants expire 5 years from
the dates of issuance. The warrants contain anti-dilution provisions, including
a provision which requires us to issue additional shares under the warrants if
we issue or sell any common stock at less than $1.02 per share, or grant, issue
or sell any options or warrants for shares of the Company's common stock to
convert into shares of our common stock at less than $1.02 per share. If we do
issue or sell common stock which causes a re-pricing of the warrants issued to
SIBL, it would likely have an adverse effect on the trading value of our common
stock and could cause substantial dilution to our then shareholders.
THERE MAY NOT BE AN ACTIVE OR LIQUID TRADING MARKET FOR OUR COMMON STOCK, WHICH
MAY LIMIT INVESTORS' ABILITY TO RESELL THEIR SHARES.
An active and liquid trading market for our common stock may not develop or, if
developed, such a market may not be sustained. In addition, we cannot predict
the price at which our common stock will trade. If there is not an active or
liquid trading market for our common stock, investors in our common stock may
have limited ability to resell their shares.
54
WE HAVE AND MAY CONTINUE TO ISSUE PREFERRED STOCK THAT HAS RIGHTS AND
PREFERENCES OVER OUR COMMON STOCK.
Our Articles of Incorporation, as amended, authorize our Board of Directors to
issue preferred stock, the relative rights, powers, preferences, limitations,
and restrictions of which may be fixed or altered from time to time by the Board
of Directors. Accordingly, the Board of Directors may, without approval from the
shareholders of our common stock, issue preferred stock with dividend,
liquidation, conversion, voting, or other rights that could adversely affect the
voting power and other rights of the holders of our common stock. The preferred
stock can be utilized, under certain circumstances, as a method of discouraging,
delaying, or preventing a change in our ownership and management that
shareholders might not consider to be in their best interests. We have issued
various series of preferred stock, which have rights and preferences over our
common stock including, but not limited to, cumulative dividends and preferences
upon liquidation or dissolution.
WE DO NOT EXPECT TO PAY DIVIDENDS IN THE NEAR FUTURE.
We have never declared or paid dividends on our common stock. We do not
anticipate paying dividends on our common stock in the near future. Our ability
to pay dividends is dependent upon, among other things, future earnings as well
as our operating and financial condition, capital requirements, general business
conditions and other pertinent factors. We intend to reinvest in our business
operations any funds that could be used to pay dividends. Our common stock is
junior in priority to our preferred stock with respect to dividends. Cumulative
dividends on our issued and outstanding Series A preferred stock, Series B
preferred stock, Series C preferred stock and Series E preferred stock accrue
dividends at a rate of $1.20, $12.00, $4.00, and $4.00, respectively, per share
per annum, payable in preference and priority to any payment of any cash
dividend on our common stock. We have authorized Series F preferred stock with
cumulative dividends that accrue at a rate of $1.00 per share per annum and are
also payable in preference and priority to any payment of any cash dividend on
our common stock. Dividends on our preferred stock accrue from the date on which
we agree to issue such preferred shares and thereafter from day to day whether
or not earned or declared and whether or not there exists profits, surplus or
other funds legally available for the payment of dividends. We have never paid
any cash dividends on our preferred stock. We will be required to pay accrued
dividends on our preferred stock before we can pay any dividends on our common
stock.
BECAUSE OF THE SIGNIFICANT NUMBER OF SHARES OWNED BY OUR DIRECTORS, OFFICERS AND
PRINCIPAL SHAREHOLDERS, OTHER SHAREHOLDERS MAY NOT BE ABLE TO SIGNIFICANTLY
INFLUENCE OUR MANAGEMENT.
Our directors, officers, and principal shareholders beneficially own a
substantial portion of our outstanding common and preferred stock. Malcolm J.
Wright, who serves as our Chief Executive Officer and Chief Financial Officer
and as a Director, and Roger Maddock, one of our majority shareholders, own,
directly and indirectly, approximately an aggregate of 73% of the voting power
in our company. As a result, these persons control our affairs and management,
55
as well as all matters requiring shareholder approval, including the election
and removal of members of the Board of Directors, transactions with directors,
officers or affiliated entities, the sale or merger of the Company or
substantially all of our assets, and changes in dividend policy. This
concentration of ownership and control could have the effect of delaying,
deferring, or preventing a change in our ownership or management, even when a
change would be in the best interest of other shareholders.
IF WE ARE LATE IN FILING OUR QUARTERLY OR ANNUAL REPORTS WITH THE SEC, WE MAY BE
DE-LISTED FROM THE OVER-THE-COUNTER BULLETIN BOARD.
Pursuant to new Over-The-Counter Bulletin Board ("OTCBB") rules relating to the
timely filing of periodic reports with the SEC, any OTCBB issuer which fails to
file a periodic report (Form 10-QSB's or 10-KSB's) by the due date of such
report (not withstanding any extension granted by the filing of a Form 12b-25),
three (3) times during any twenty-four (24) month period is automatically
de-listed from the OTCBB. Such removed issuer would not be re-eligible to be
listed on the OTCBB for a period of one-year, during which time any subsequent
late filing would reset the one-year period of de-listing. If we are late in our
filings three times in any twenty-four (24) month period and are de-listed from
the OTCBB, our securities may become worthless and we may be forced to curtail
or abandon our business plan.
IF THERE IS A MARKET FOR OUR COMMON STOCK, OUR STOCK PRICE MAY BE VOLATILE.
If there is a market for our common stock, we anticipate that such market will
be subject to wide fluctuations in response to several factors, including, but
not limited to:
(1) actual or anticipated variations in our results of operations;
(2) our ability or inability to generate new revenues;
(3) the number of shares in our public float;
(4) increased competition; and
(5) conditions and trends in the travel services, vacation, and/or
real estate and construction markets.
Furthermore, because our Common Stock is traded on the NASD over the counter
bulletin board, our stock price may be impacted by factors that are unrelated or
disproportionate to our operating performance. These market fluctuations, as
well as general economic, political and market conditions, such as recessions,
interest rates or international currency fluctuations may adversely affect the
market price of our common stock. Additionally, at present, we have a limited
number of shares in our public float, and as a result, there could be extreme
fluctuations in the price of our common stock. Further, due to the limited
volume of our shares which trade and our limited public float, we believe that
our stock prices (bid, asked and closing prices) are entirely arbitrary, are not
related to the actual value of the Company, and do not reflect the actual value
of our common stock (and in fact reflect a value that is much higher than the
actual value of our Common Stock). Shareholders and potential investors in our
Common Stock should exercise caution before making an investment in the Company,
56
and should not rely on the publicly quoted or traded stock prices in determining
our Common Stock value, but should instead determine value of our Common Stock
based on the information contained in the Company's public reports, industry
information, and those business valuation methods commonly used to value private
companies.
ITEM 3. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. Our Chief Executive
Officer and Chief Financial Officer, after evaluating the effectiveness of
the Company's "disclosure controls and procedures" (as defined in the
Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) as of the
end of the period covered by this quarterly report (the "Evaluation Date"),
has concluded that as of the Evaluation Date, our disclosure controls and
procedures are effective to provide reasonable assurance that information
we are required to disclose in reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commission rules and
forms, and that such information is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosure.
However, because we have not fully integrated our administrative
operations, we face increased pressure related to recording, processing,
summarizing and reporting consolidated financial information required to be
disclosed by us in the reports that we file or submit under the Exchange
Act in a timely manner as well as accumulating and communicating such
information to our management, including our Chief Executive Officer and
Chief Financial Officer, as appropriate to allow timely decisions regarding
required disclosure. We believe that until we have fully integrated our
administrative operations, we will continue to face such pressure regarding
the timeliness of our filings as specified in the Commission's rules and
forms which could lead to a future determination that our disclosure
controls and procedures are not effective as of a future evaluation date.
(b) Changes in internal control over financial reporting. There were no
significant changes in the Company's internal control over financial
reporting during the fiscal quarter covered by this report that materially
affected, or are reasonably likely to materially affect, the Company's
internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Our subsidiary American Leisure, Inc. and our Chief Executive Officer and
Chairman, Malcolm J. Wright are parties to an action that was filed in Orange
County, Florida and styled as Rock Investment Trust, P.L.C. and RIT, L.L.C. vs.
Malcolm J. Wright, American Vacation Resorts, Inc., American Leisure, Inc.,
57
Inversora Tetuan, S.A., Sunstone Golf Resort, Inc., and Sun Gate Resort Villas,
Inc., Case No. CIO-01-4874, Ninth Judicial Circuit, Orange County, Florida. In
June, 2001, after almost 2 years from receiving notice from Malcolm J. Wright
that one Mr. Roger Smee, doing business under the names Rock Investment Trust,
PLC (a British limited company) and RIT, LLC (a Florida limited liability
company) (collectively, the "Smee Entities") had defaulted under various
agreements to loan or to joint venture or to fund investment into various real
estate enterprises founded by Mr. Wright, the Smee Entities brought the lawsuit
against Mr. Wright, American Leisure, Inc. and several other entities. The
gravamen of the initial complaint is that the Smee Entities made financial
advances to Wright with some expectation of participation in a Wright real
estate enterprise. In general, the suit requests either a return of the Smee
Entities' alleged advances of $500,000 or an undefined ownership interest in one
or more of the defendant entities. Mr. Wright, American Leisure, Inc., and
Inversora Tetuan, S.A., have filed a counterclaim and cross complaint against
the Smee Entities and Mr. Smee denying the claims and such damages in the amount
of $10 million. If the court rules that Mr. Wright is liable under his guarantee
of an American Leisure, Inc. obligation to Smee, it is believed that such a
ruling would not directly affect American Leisure Holdings, Inc. The litigation
is in the discovery phase and is not currently set for trial. We have been
advised by our attorneys in this matter that Mr. Wright's position on the facts
and the law is stronger than the positions asserted by the Smee Entities.
In March 2004, Manuel Sanchez and Luis Vanegas as plaintiffs filed a lawsuit,
Case No. 04-4549 CA 09, in the Circuit Court of the Eleventh Judicial Circuit in
and for Miami Dade County, Florida which includes American Leisure Holdings,
Inc., Hickory Travel Systems, Inc., Malcolm J. Wright and L. William Chiles as
defendants. They are claiming securities fraud, violation of Florida Securities
and Investor Protection Act, breach of their employment contracts, and claims
for fraudulent inducement. We and the other defendants have denied all claims
and have a counterclaim against Manuel Sanchez and Luis Vanegas for damages. The
litigation will shortly enter the discovery phase and is not currently set for
trial. We believe that Manuel Sanchez' and Luis Vanegas' claims are without
merit and the claims are not material to us. We intend to vigorously defend the
lawsuit.
In early May 2004, Around The World Travel, Inc., of which we subsequently
purchased substantially all of the assets, 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. We 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 Around The World
Travel and American Leisure Holdings, Inc. in an action styled Seamless
Technologies, Inc. et al. v. Keith St. Clair et al. This suit alleges that
Around The World Travel has breached the contracts and also that American
Leisure Holdings, Inc. and Around The World Travel's Chief Executive Officer
were complicit with certain officers and directors of Around The World Travel in
securing ownership of certain assets for American Leisure Holdings, Inc. that
were alleged to have been a business opportunity for Around The World Travel.
58
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 Around The World Travel. 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
American Leisure Holdings, Inc. includes monetary damages and litigation costs.
We intend to vigorously support the original litigation filed against Seamless
and defend the counterclaim and allegations against us. In June of 2005, the
court dismissed certain claims of tortious interference against the Company and
Malcolm J. Wright and provided Seamless with leave to amend all of their other
claims with specificity. In addition, the court dismissed a claim of conspiracy
and a demand for judgment. As of January 18, 2006, the Defendants filed their
amended answer and amended counterclaim. The Company's attorneys have filed a
comprehensive reply seeking to dismiss the counterclaim against the Company and
Mr. Wright.
On May 4, 2005, Simon Hassine, along with members of his family, filed a lawsuit
against us and Around The World Travel in the Circuit Court of Dade County,
Florida, Civil Division, Case Number 05-09137CA. The plaintiffs are the former
majority shareholders of Around The World Travel. The plaintiffs allege that
that they have not been paid for i) a subordinated promissory note owed by AWT
in the principal amount of $3,550,000 plus interest on such note which they
allege was issued to them by Around The World Travel in connection with their
sale of 88% of the common stock in Around The World Travel to Around The World
Holdings, LLC; 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 to Around The World Holdings, LLC. The plaintiffs allege
that the note was issued to them net of $450,000 of preferred stock of Around
The World Travel that they further allege they never received. Despite the
absence of any executed agreements, the plaintiffs also allege that in December
2004 they entered into a settlement agreement with the Company regarding some of
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. The Plaintiffs also
seek a declaratory judgment that they are not bound by a provision in the
underlying documents on which they rely that their action is barred by said
provision. In the alternative, the Plaintiffs seek a ruling that the promissory
note, undistributed retained earnings and accrued bonuses are not subordinated
to the Galileo Debt. The suit seeks 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. Despite the
absence of any executed agreements, the plaintiffs are also pursuing a claim for
breach of contract regarding the preferred stock of Around The World Travel 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 Around The World Travel and
seeking unspecified amounts. We intend to vigorously defend the lawsuit. We
filed various motions including a motion to dismiss the complaint in its
entirety as against us and Malcolm J. Wright due to the failure by the
plaintiffs to comply with a provision in the underlying documents that grants
exclusive jurisdiction to the courts located in Cook County, Illinois; a motion
to disqualify, based upon an alleged conflict of interest by the plaintiff's
59
attorneys. A hearing on the case has been postponed to a to be determined date
later in 2006 due to a declared conflict of interest held by the sitting judge
who has recused herself as a result of the potential for a conflict of interest.
In the ordinary course of our business, we may from time to time become subject
to routine litigation or administrative proceedings, which are incidental to our
business.
We are not aware of any proceeding to which any of our directors, officers,
affiliates or security holders are a party adverse to us or have a material
interest adverse to us.
ITEM 2. CHANGES IN SECURITIES
In January 2006, in connection with the SIBL Reedy Creek Loan, the Company
granted SIBL warrants to purchase 154,000 shares of the Company's common stock
at an exercise price of $5.00 per share and warrants to purchase 77,000 shares
of the Company's common stock at an exercise price of $0.001 per share, which
warrants expire five years from their grant date. We claim an exemption from
registration afforded by Section 4(2) of the Act since the foregoing issuance
did not involve a public offering, the recipient took the warrants for
investment and not resale and we took appropriate measures to restrict transfer.
In January 2006, in connection with the SIBL Reedy Creek Loan, the Company
granted warrants to four separate affiliates of SIBL entitling them to purchase
an aggregate of 154,000 shares of the Company's common stock at an exercise
price of $5.00 per share and 77,000 shares at an exercise price of $.001 per
share. The warrants have a term of five years and are immediately exercisable.
The warrants have an exercise price of $1.02 per share. We claim an exemption
from registration afforded by Section 4(2) of the Act since the foregoing grant
did not involve a public offering, the recipient took the warrants for
investment and not resale and we took appropriate measures to restrict transfer.
In January 2006, in connection with Mr. Wright's guarantee of the Amended Note,
the Company agreed to grant Mr. Wright warrants to purchase 240,000 shares of
the Company's common stock at an exercise price of $1.02 per share. The warrants
are being granted pursuant to an existing agreement between the Company and Mr.
Wright and expire 5 years from the expiration date of the guarantees. In
addition, the Company has agreed to register the shares underlying the warrants
granted to Mr. Wright on its next registration statement. The Warrants have an
exercise price of $1.02 per share. We claim an exemption from registration
afforded by Section 4(2) of the Act since the foregoing grant did not involve a
public offering, the recipient took the warrants for investment and not resale
and we took appropriate measures to restrict transfer.
In connection with Mr. Crosbie's Employment Agreement, described above, pursuant
to which he agreed to serve as our Executive Vice President, General Counsel and
Secretary, which we entered into in May 2006, with an effective date of March
15, 2006, we agreed to grant him 50,000 warrants which vested as of the
effective date of the Employment Agreement; and 25,000 warrants vesting each
year, on the anniversary of the effective date of his employment, that Mr.
Crosbie is employed by the Company pursuant to the Employment Agreement. The
60
warrants have an exercise price of $1.02 per share. We claim an exemption from
registration afforded by Section 4(2) of the Act since the foregoing grant did
not involve a public offering, the recipient took the warrants for investment
and not resale and we took appropriate measures to restrict transfer.
In March 2006, we appointed Jeffrey Scott as President of Hickory. In connection
with Mr. Scott's appointment and continued employment, we agreed to grant him
warrants to purchase 100,000 shares of the Company's common stock. The warrants
have an exercise price of $5.00 per share. One half, or 50,000 of Mr. Scott's
warrants vested on March 2, 2006, with the remaining 50,000 warrants vesting as
follows, 25,000 warrants on March 2, 2007 and the remaining 25,000 warrants on
March 2, 2008, assuming Mr. Scott is still employed by the Company on those
dates. The Company will rely on the exemption from registration set forth in
Section 4(2) of the Act in issuing these warrants as the issuance of these
securities will not involve a public offering, the recipient acquired the
warrants for investment purposes and the Company will take appropriate measures
to restrict transfer. No underwriters or agents were involved in the foregoing
issuances and no underwriting discounts were paid by the Company.
On March 23, 2006, and effective as of December 30, 2005, we purchased the
minority interest of our now wholly owned subsidiary, Tierra Del Sol, Inc. (the
"Minority Interest") from Harborage Leasing Corporation ("Harborage"). The
purchase price of the Minority Interest from Harborage was a promissory note for
$1,411,705 ("Harborage Note"); the right to receive, without payment, two (2)
three-bedroom condominium units to be constructed in Phase 2 of the Tierra Del
Sol Resort, or in the event title to both such units is not delivered by
December 31, 2007, then, in lieu thereof, payment of $500,000.00 for each such
unit that is not transferred by such date; 197,000 shares of the Company's
common stock; and warrants to acquire 300,000 additional shares of the Company's
common stock at a price of $5.00 per share. The warrants expire if unexercised
five (5) years from their date of grant. Pursuant to the Stock Purchase
Agreement, Harborage has the right to require the Company to purchase all or a
portion of the Harborage 197,000 shares at $5.00 per share, for sixty (60) days,
beginning January 1, 2007 (the "Put Option"). The Put Option will no longer be
in effect provided that both of the following events occur: (i) Harborage is
able to sell the Harborage Shares pursuant to an effective Registration
Statement under the Securities Act of 1933 (the "Act"), or pursuant to Rule 144
of the Act; and after the fulfillment of (i) above, the average closing price of
the Company on the Over-The-Counter Bulletin Board or principal exchange on
which the Company's common stock then trades, exceeds $5.00 per share for a
period of thirty (30) consecutive days. The Harborage Note and shares are
guaranteed by Malcolm J. Wright, the Company's Chief Executive Officer and
Chairman, for which he received a guaranty fee equal to three percent (3%)_of
the amount guaranteed. The Company paid this fee through the grant of 102,351
warrants to purchase shares of the Company's common stock at an exercise price
of $1.02 per share. These warrants will expire 5 years from the expiration date
of the guaranty.
In May 2006, Daniel Bogar exercised 19,250 of his outstanding stock
options, which options had an exercise price of $0.001 per share, in
consideration for an aggregate of $19.25, and was issued 19,250 shares of our
restricted common stock in consideration for such issuance. The Company relied
on the exemption from registration set forth in Section 4(2) of the Act in
61
issuing the shares as the issuance of the securities did not involve a public
offering, the recipient acquired the shares for investment purposes and the
Company took appropriate measures to restrict transfer. No underwriters or
agents were involved in the foregoing issuance and no underwriting discounts
were paid by the Company.
In May 2006, Osvaldo Pi exercised 19,250 of his outstanding stock options, which
options had an exercise price of $0.001 per share, in consideration for an
aggregate of $19.25, and was issued 19,250 shares of our restricted common stock
in consideration for such issuance. The Company relied on the exemption from
registration set forth in Section 4(2) of the Act in issuing the shares as the
issuance of the securities did not involve a public offering, the recipient
acquired the shares for investment purposes and the Company took appropriate
measures to restrict transfer. No underwriters or agents were involved in the
foregoing issuance and no underwriting discounts were paid by the Company.
In May 2006, SIBL exercised 231,000 of its outstanding stock options, which
options had an exercise price of $0.001 per share, in consideration for an
aggregate of $231, and was issued 231,000 shares of our restricted common stock
in consideration for such issuance. The Company relied on the exemption from
registration set forth in Section 4(2) of the Act in issuing the shares as the
issuance of the securities did not involve a public offering, the recipient
acquired the shares for investment purposes and the Company took appropriate
measures to restrict transfer. No underwriters or agents were involved in the
foregoing issuance and no underwriting discounts were paid by the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
Exhibit No. Description
----------- ------------
10.01(1) Commitment Letter with KeyBank National Association for
$96,000,000 for Phase I
10.02(1) Commitment Letter with KeyBank National Association for
$14,850,000 for Phase II
10.03(2) Re-Stated Promissory Note for $6,356,740 issued in favor of
Around The World Travel, Inc. dated June 30, 2005.
10.04(3) Commitment Letter with KeyBank National Association for
$96,000,000 for Phase I
62
10.05(4) Commitment Letter with KeyBank National Association for
$14,850,000 for Phase II
10.06(4) Commitment Letter with KeyBank National Association for up
To 72,550,000, with a maximum principal balance of
$40,000,000 for Phase 1 dated December 1, 2005
10.07(4) Commitment Letter with KeyBank National Association for up
to $14,850,000 for Phase 2 dated December 1, 2005
10.08(5) Construction Loan Agreement with KeyBank National Association
for $40,000,000 for Phase 1 dated December 29, 2005
10.09(5) Promissory Note with KeyBank National Association for
$40,000,000
10.10(5) Loan Agreement with KeyBank National Association for
14,850,000 for Phase 2 dated December 29, 2005
10.11(5) Promissory Note with KeyBank National Association for
$14,850,000
10.12(5) Promissory Note for $4,000,000 issued by TDS Management, LLC
in favor of PCL Construction Enterprises, Inc.
10.13(5) Guaranty by the Registrant of the $4,000,000 Promissory Note
to PCL Construction Enterprises, Inc.
10.14(5) Guaranty of Malcolm J. Wright guaranteeing the $4,000,000
Promissory Note to PCL Construction Enterprises, Inc.
10.15(5) Addendum to Construction Loan Agreement Condominium and
Townhouse Project Development
10.16(5) Payment Guaranty Phase 1
10.17(5) Payment Guaranty Phase 2
10.18(5) Amended Debt Guarantor Agreement
10.19(5) Guaranty of Tierra Del Sol (Phase 1), Ltd. guaranteeing
the $4,000,000 Promissory Note to PCL Construction Enterprises,
Inc.
10.20(5) Performance and Completion Guaranty
10.21(5) Pledge and Security Agreement
10.22(6) Option Exercise Agreement with Stanford Financial Group
Company
10.23(6) Assignment of Interest in Reedy Creek Acquisition Company,
LLC
63
10.24(7) Registration Rights Agreement with SIBL dated January 4,
2006
10.25(7) Credit Agreement with SIBL
10.26(6) $7,000,000 Promissory Note with Bankers Credit Corporation
10.27(6) Modification and Reaffirmation of Guaranty and
Environmental Indemnity Agreement
10.28(6) Renewed, Amended and Increased Promissory Note
10.29(7) Stanford International Bank, Ltd. Warrant for 77,000 shares
at $0.001 per share
10.30(7) Stanford International Bank, Ltd. Warrant for 154,000 shares
at $5.00 per share
10.31(6) Irrevocable and Unconditional Guaranty
10.32(7) Registration Rights Agreement with SIBL dated December 28,
2005
10.33(6) SIBL $2.1 million note
10.34(7) Partnership Interest Pledge and Security Agreement and
Collateral Assignment (Phase 1)
10.35(7) Partnership Interest Pledge and Security Agreement and
Collateral Assignment (Phase 2)
10.36(7) SIBL Warrant Agreement for 2% Phase 1 interest
10.37(7) SIBL Warrant Agreement for 2% Phase 2 interest
10.38(6) Stanford International Bank, Ltd. Warrant for 154,000 at
$0.001 per share
10.39(6) Stanford International Bank, Ltd. Warrant for 308,000 at $5.00
per share
10.40(8) Original Purchase Agreement
10.41(9) First Amendment to Asset Purchase Agreement
10.42(10) Settlement Agreement effective as of December 31, 2005 by
and among American Leisure Holdings, Inc., American Leisure
Equities Corporation and Around The World Travel, Inc.
10.43(11) Stock Purchase Agreement between Harborage Leasing Corporation
and the Company
10.44(11) $1,411,705 Promissory Note payable to Harborage Leasing
Corporation
64
10.45(11) Malcolm J. Wright Guaranty Agreement regarding $1,411,705
Promissory Note with Harborage Leasing Corporation
10.46(11) Harborage Leasing Corporation warrant to purchase 300,000
shares of common stock at $5.00 per share
10.47(12) Third Party Debt Guarantor Agreement
10.48(12) Note Modification Agreement with SIBL
10.49(13) Michael D. Crosbie Employment Agreement
31.1* Certification of Chief Executive Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.2* Certification of Chief Financial Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32.1* Certification of Chief Executive Officer Pursuant to 10 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2* Certification of Chief Financial Officer Pursuant to 10 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
* Filed Herein.
(1) Filed as Exhibit 10.1 and 10.2, respectively to the Registrant's Form
8-K on August 18, 2005, and incorporated herein by reference.
(2) Filed as Exhibit 10.5 to the Registrant's Form 8-K on August 19, 2005,
and incorporated herein by reference.
(3) Filed as Exhibits to our Report on Form 8-K filed with the Commission
on August 18, 2005, and incorporated herein by reference.
(4) Filed as Exhibits to our Report on Form 8-K filed with the Commission
on December 15, 2005 and incorporated herein by reference.
(5) Filed as Exhibits to the Registrant's report on form 8-K on January
12, 2006 and incorporated by reference herein.
(6) Filed as Exhibits to the Registrant's report on Form 8-K filed on
January 19, 2006 and incorporated herein by reference.
(7) Filed as Exhibits to the Company's report on Form 8-K, which was filed
with the SEC on March 28, 2006.
(8) Filed as Exhibit 10.1 to the Company's report on Form 8-K, which was
filed with the SEC on January 6, 2005, and is incorporated herein by
reference.
(9) Filed as Exhibit 10.44 to the Company's report on Form 10-QSB for the
quarter ended March 31, 2005, which was filed with the SEC on May 23, 2005, and
is incorporated herein by reference.
(10) Filed as Exhibit 10.3 to the Company's report on Form 8-K, which was
filed with the SEC on March 2, 2006, and is incorporated herein by
reference.
(11) Filed as Exhibits to the Company's Report on Form 8-K, which was filed
with the SEC on March 29, 2006, and is incorporated herein by reference.
(12) Filed an Exhibit to the Company's Report on Form 10-KSB, which was filed
with the SEC on March 31, 2006, and is incorporated herein by reference.
(13) Filed as Exhibit 10.49 to the Company's Report on Form 10-QSB, which was
filed with the SEC on May 22, 2006, and is incorporated herein by reference.
65
b) REPORTS ON FORM 8-K
The Company filed the following reports on Form 8-K during the fiscal period
covered by this report:
o An amended Report on Form 8-K on January 12, 2006, to report the
entry into the Construction Loan and Land Loan with KeyBank regarding
the financing of the construction of the Sonesta Resort; our entry
into the Amended Debt Guarantor Agreement; and the appointment of Fred
Pauzar as our Secretary.
o A Report on Form 8-K on January 19, 2006, to report certain
transactions affected by our subsidiary, Reedy Creek Acquisition
Company and certain other transactions affected by us in connection
with the Keybank loan facilities.
o A Report on Form 8-K on March 2, 2006, to report the entry into a
settlement agreement between American Leisure Equities Corporation and
Around the World Travel, Inc.
o An amended Report on Form 8-K on March 7, 2006, to clarify the
terms of the settlement agreement between American Leisure Equities
Corporation and Around the World Travel as originally disclosed in our
Form 8-K filing on March 2, 2006.
o A Report on Form 8-K on March 22, 2006, to report the granting of
certain warrants to purchase shares of our common stock to Michael
Crosbie, our General Counsel and Executive Vice President and Jeff
Scott, the president of Hickory, as well as the appointment of Mr.
Crosbie and Mr. Scott to their respective positions with the Company.
o An amended Report on Form 8-K on March 28, 2006, to include the
electronic signature to several documents originally filed with the
SEC on January 19, 2006, in connection with the Keybank financing.
o A Report on Form 8-K on March 29, 2006, to report our entry into
a stock purchase agreement and other related agreements with Harborage
Leasing Corporation, whereby we purchased the minority interest in
Tierra del Sol Resort, Inc.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
AMERICAN LEISURE HOLDINGS, INC.
DATED: September 6, 2007 By: /s/ Malcolm J. Wright
------------------------
Malcolm J. Wright
Chief Executive Officer
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