UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
AMENDMENT NO. 1
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2005
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from to
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Commission file number 333-48312
AMERICAN LEISURE HOLDINGS, INC.
-------------------------------
(Exact name of the small business issuer as specified in its charter)
Nevada 75-2877111
---------------------- -------------------------------
(State of incorporation) (IRS Employer Identification No.)
2462 Sand Lake Road, Orlando, FL, 32809
------------------------------------------
(Address of principal executive offices)
407-251-2240
------------------------
(Issuer's telephone number)
2701 Spivey Lane, Orlando, FL 32837
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(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
At November 9, 2005, there were outstanding 10,137,974 shares of the Issuer's
common stock, $.001 par value per share.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
The registrant has restated the financial statements for the nine months ended
September 30, 2005 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 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 September 30,
2005, unless otherwise stated. This report also includes new disclosure under
"Item 2. Unregistered Sales of Equity Securities and Use of Proceeds" and other
revised disclosure in "Item 3. Legal Proceedings" and "Item 5. Other
Information" under the heading "Related Party Transactions." The other revised
disclosures are current through the filing of this report, unless otherwise
stated. Investors should read this report in its entirety along with our second
amended Form 10-KSB, which we are filing simultaneously with this filing.
1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERICAN LEISURE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2005 AND DECEMBER 31, 2004
SEPTEMBER 30, 2005 DECEMBER 31, 2004
-------------------- -------------------
UNAUDITED AUDITED
(Restated) (Restated)
ASSETS
CURRENT ASSETS:
Cash $ 479,630 $ 2,266,042
Cash - Restricted 6,231,933 0
Accounts receivable, net 768,464 3,539,387
Note receivable 82,255 113,000
Prepaid expenses and other 1,271,186 51,460
Other Current Assets 0 30,476
-------------------- -------------------
Total Current Assets 8,833,468 6,000,365
-------------------- -------------------
PROPERTY AND EQUIPMENT, NET 4,962,436 6,088,500
-------------------- -------------------
LAND HELD FOR DEVELOPMENT 31,838,412 23,448,214
-------------------- -------------------
OTHER ASSETS
Prepaid Sales Commissions 7,649,816 5,966,504
Prepaid Sales Commissions - affiliated entity 3,546,136 2,665,387
Investment-Senior Notes 5,170,000 5,170,000
Goodwill 14,425,437 14,425,437
Trademark 993,109 1,000,000
Other 425,950 2,637,574
-------------------- -------------------
Total Other Assets 32,210,448 31,864,902
-------------------- -------------------
TOTAL ASSETS $ 77,844,764 $ 67,401,981
==================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt and notes payable $ 8,519,468 $ 9,605,235
Current maturities of notes payable-related parties 916,317 1,910,629
Accounts payable and accrued expenses 3,467,878 5,618,973
Accrued expenses - officers 1,767,500 1,355,000
Customer deposits 3,012,032 2,752,535
Other 104,635 2,332,886
Shareholder advances 0 273,312
-------------------- -------------------
Total Current Liabilities 17,787,830 23,848,570
Long-term debt and notes payable 26,883,742 20,600,062
Deposits on unit pre-sales 32,059,864 16,669,347
-------------------- -------------------
Total liabilities 76,731,436 61,117,979
-------------------- -------------------
STOCKHOLDERS' EQUITY:
Preferred stock; 1,000,000 shares authorized; $.001 par value;
1,000,000 Series "A" shares issued and outstanding at
September 30, 2005 and December 31, 2004 10,000 10,000
Preferred stock; 100,000 shares authorized; $.01 par value;
2,825 Series "B" shares issued and outstanding at
September 30, 2005 and December 31, 2004 28 28
Preferred stock, 28,000 shares authorized; $.01 par value
27,189 Series "C" shares issued and outstanding at
September 30, 2005 and December 31, 2004 272 272
Preferred stock; 50,000 shares authorized; $.001 par value;
24,101 Series "E" shares issued and outstanding at
September 30, 2005 and December 31, 2004 24 24
Preferred stock; 150,000 shares authorized; $.01 par value;
0 and 1,936 Series "F" shares issued and outstanding at
September 30, 2005 and December 31, 2004 0 19
Common stock, $.001 par value; 100,000,000 shares authorized;
10,137,974 and 9,977,974 shares issued and outstanding at
September 30, 2005 and December 31, 2004 10,138 9,978
Additional paid-in capital 15,442,693 15,636,322
Accumulated deficit (14,349,827) (9,372,641)
-------------------- -------------------
Total Stockholders' Equity 1,113,328 6,284,002
-------------------- -------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 77,844,764 $ 67,401,981
==================== ===================
See accompanying notes to financial statements.
2
AMERICAN LEISURE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
(UNAUDITED)
NINE MONTHS ENDED NINE MONTHS ENDED THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, 2005 SEPTEMBER 30, 2004 SEPTEMBER 30, 2005 SEPTEMBER 30, 2004
------------------- ------------------ ------------------ ------------------
UNAUDITED UNAUDITED UNAUDITED UNAUDITED
(Restated) (Restated) (Restated) (Restated)
Revenue $ 19,808,512 $ 3,701,469 $ 5,873,844 $ 1,356,522
Cost of Service Revenues (19,395,516) (4,551,481) (6,386,538) (1,609,938)
------------------- ------------------ ------------------ ------------------
Gross Margin 412,996 (850,012) (512,694) (253,416)
Operating Expenses:
Depreciation and amortization (1,027,159) (536,525) (341,853) (181,906)
General and administrative expenses (2,914,511) (1,686,410) (1,467,127) (653,771)
------------------- ------------------ ------------------ ------------------
Total Operating Expenses (3,941,670) (2,222,935) (1,808,980) (835,677)
------------------- ------------------ ------------------ ------------------
Loss from Operations (3,528,674) (3,072,947) (2,321,674) (1,089,093)
Interest Expense (1,448,512) (215,251) (711,668) (126,305)
Minority Interest - 510,348 - 26,062
------------------- ------------------ ------------------ ------------------
Loss before Income Taxes (4,977,186) (2,777,850) (3,033,342) (1,189,336)
PROVISIONS FOR INCOME TAXES - (5,322) - (1,452)
------------------- ------------------ ------------------ -------------------
NET LOSS $ (4,977,186) $ (2,783,172) $ (3,033,342) $ (1,190,788)
=================== =================== ================== ==================
NET INCOME (LOSS) PER SHARE:
BASIC AND DILUTED $ (0.60) $ (0.41) $ (0.33) $ (0.16)
=================== =================== ================== ==================
WEIGHTED AVERAGE SHARES OUTSTANDING
BASIC AND DILUTED 10,047,718 8,211,027 10,137,974 9,103,983
=================== ==================== ================== ==================
See accompanying notes to financial statements.
3
AMERICAN LEISURE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
(UNAUDITED)
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2005 SEPTEMBER 30, 2004
------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) $ (4,977,186) $ (2,783,172)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 1,231,892 679,543
Non-cash interest expense 1,448,510 255,117
Loss on sale of AVR - (32,085)
Gain on settlement of litigation - 75,000
Changes in assets and liabilities:
Decrease in receivables 1,739,931 1,135,084
Increase in prepaid and other assets (440,325) (63,663)
Increase in advances receivable - (134,685)
Increase in prepaid commissions (2,840,542) -
Decrease in shareholder advances & notes payable (596,265) -
Increase in deposits on unit pre-sales 15,390,516 12,484,673
Increase (Decrease) in customer deposits 3,012,032 (5,335,524)
Increase (Decrease) in accounts payable and accrued expenses 1,879,537 (614,798)
------------------ ------------------
Net cash provided by (used in) operating activities 15,848,100 5,665,490
------------------ ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of AWT Assets (767,291) -
Advances to Around The World Travel, Inc - (3,148,082)
Advances to affiliates - (3,786,218)
Acquisition of fixed assets (105,828) (187,277)
Increase in restricted cash (6,231,933) -
Capitalization of real estate carrying costs (8,390,036) (1,933,407)
------------------ ------------------
Net cash used in investing activities (15,495,088) (9,054,984)
------------------ ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of debt (1,980,189) -
Proceeds from notes payable 512,124 6,968,757
Payments of notes payable - related parties (913,084) (746,249)
Proceeds of notes payable - related parties 241,725 -
Proceeds from shareholder advances - (732,225)
------------------ ------------------
Net cash provided by financing activities (2,139,424) 5,490,283
------------------ ------------------
Net decrease in cash (1,786,412) 2,100,789
CASH AT BEGINNING PERIOD 2,266,042 734,852
------------------ ------------------
CASH AT END OF PERIOD $ 479,630 $ 2,835,641
=================== ==================
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 696,065 $ 432,308
=================== ==================
Cash paid for income taxes $ - $ -
=================== ==================
NON-CASH TRANSACTION
Stock issued in exchange for senior, secured notes $ - $ 5,170,000
=================== ==================
Preferred stock and debt issued for non-marketable securities $ - $ 4,108,440
=================== ==================
See accompanying notes to financial statements.
4
NOTES TO FINANCIAL STATEMENTS
September 30, 2005
(Unaudited)
NOTE A - PRESENTATION
The consolidated balance sheets of the Company as of September 30, 2005 and
December 31, 2004, the related consolidated statements of operations for the
nine and three months ended September 30, 2005 and 2004, and the consolidated
statements of cash flows for the nine months ended September 30, 2005 and 2004,
(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 nine
months ended September 30, 2005 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, 2004, Form 10-KSB & 10-KSB/A, Amendment
No. 2, the Company's June 30, 2005 Form 10-QSB/A, Amendment No. 1 and March 31,
2005 Form 10-QSB/A, Amendment No. 2 and the Company's Forms 8K & 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, revenues will be recognized upon the
close of escrow for the sales of its real estate. Operating revenues earned will
be recognized upon the completion of the earning process.
Revenues from American Leisure's call center are recognized on the equity basis
from the joint venture entity, Caribbean Media Group, Ltd.
Revenues from Hickory Travel Systems, Inc. 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.
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.
One of American Leisure's principal sources of revenue is associated with access
to the travel portal that provides a database of discounted travel services.
Annual renewals occur at various times during the year. Costs related to site
changes are incurred in the months prior to annual billing renewals. 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.
5
NOTE C - PROPERTY AND EQUIPMENT, NET
As of September 30, 2005, property and equipment consisted of the following:
Useful
Lives Amount
---------- ----------
Equipment 3-5 $7,658,032
Furniture & fixtures 5-7 1,588,821
----------
Subtotal 9,246,853
Less: accumulated depreciation and amortization 4,284,417
----------
Property and equipment, net $4,962,436
==========
Depreciation expense for the nine-month and three-month period ended September
30, 2005 amounts to $1,231,892 and $417,965 respectively.
NOTE D - LONG-TERM DEBT AND NOTES PAYABLE
Two notes which amount to $7,853,266 ($6 million with Grand Bank and $1,853,266
with Raster Investments) matured on March 31, 2005 and were extended through
September 30, 2005. These notes are not in default and the terms are being
extended to coincide with the closing of the credit facilities from KeyBank,
N.A. (see below).
On August 16, 2005, TDSR received two commitments from KeyBank, N.A. for
credit facilities that will be used for the development of TDSR Phase I. One
credit facility provides $96.6 million for a term of twenty-four months as a
development loan at 275 basis points over the 30-day LIBOR. An additional credit
facility provides $14.85 million for a term of eighteen months as a land loan
secured by Phase II at 310 basis points over the 30-day LIBOR. The total credit
facility amounts to $111.45 million. The industry standard fees to KeyBank, N.A.
for the credit facilities include a 1% commitment fee ($1,114,500) plus an
administration fee of $150,000 per annum.
NOTE E - NOTES PAYABLE - RELATED PARTIES
The Current maturities of notes payable - related parties is as follows:
Xpress Ltd $ 327,028
Officers of Hickory Travel Services 438,445
Malcolm Wright 26,582
Peter Webb 124,262
---------
Notes payable - related parties $ 916,317
=========
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
$438,445. $131,945 of such amount is owed to L. William Chiles, a Director of
the Company.
6
Included in Long-term debt and notes payable are debts and notes payable to the
following related parties:
Officers of Hickory Travel Services $385,263
--------
Related party debt and notes $385,263
========
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
$385,263. $100,263 of such amount is owed to L. William Chiles, a Director of
the Company.
NOTE F - ACQUISITIONS
On December 31, 2004, American Leisure Equities Corporation (the "Purchaser") a
wholly-owned subsidiary of American Leisure, entered into an Asset Purchase
Agreement (hereinafter referred to as "APA") with Around The World Travel, Inc.
(the "Seller"), pursuant to which the Seller agreed to sell substantially all of
its assets to the Purchaser. Under the terms of the APA, the Seller conveyed to
the Purchaser all of the assets necessary to operate the Business, including
substantially all of the Seller's tangible and intangible assets and certain
agreed operating liabilities.
The purchase price for the assets transferred under the APA is an amount equal
to the fair value of the Business ($16 million, established by an unaffiliated
investment-banking firm, calculated on a going concern basis), plus $1.5
million, for a total purchase price of $17.5 million. On the date of acquisition
the company impaired the value of the acquired assets in the amount of
$1,500,000 resulting in total assets acquired of $16,000,000.
The APA was amended on March 31, 2005. The original APA indicated that the
Purchaser will pay the purchase price on or before June 30, 2005 through a
combination of a number of different currencies including but limited to the
application of short term debt owed to the Company, the assumption of specific
liabilities, the payment to certain AWT creditors on behalf of AWT and
potentially certain preferred stock of the Company. Pursuant to the terms of the
APA, the Seller and the Purchaser have entered into a Management Agreement,
under which the Seller manages the Business on behalf of the Purchaser. The
Seller and the Purchaser also entered into a License Agreement, under which the
Purchaser grants the Seller a non-exclusive license to use certain trade names
and related intellectual property in connection with the performance of its
duties under the Management Agreement. The License Agreement will expire
simultaneously with the Management Agreement. The amendment changed the
consideration for the purchase price to a combination of 1) issuance to Seller
of a note payable in the amount of $8,483,330; 2) reduction of certain amounts
owed by the Seller to Purchaser in the amount of $4,774,619; and 3) the
assumption of certain liabilities of the Seller in the amount of $4,242,051. The
Series F preferred stock issuance in the original APA was cancelled. During the
first quarter, certain of the assets, doubtful receivables, pre-paids and
security deposits were transferred to Seller as reduction of the note payable.
The note was further reduced by a set-off of the amount of the Accounts
Receivable deemed received and retained by AWT. AWT had sold the Accounts
Receivable to the Company on 12/31/04. In lieu of segregating and remitting the
7
payments received on the Accounts Receivables, AWT was permitted to apply said
amounts as a credit to the Company's note payable. The balance due under the
note payable, as determined on June 30, 2005, by application of the known
credits for accounts receivable and other authorized offsets was $6,356,740. The
note provides for the right of the holder to set off any sums incurred by the
holder for the business affairs of the maker and any cash advances made by
holder to maker outside of the amortization schedule. As of September 30, 2005
the balance due under the note payable was $5,297,788.
The excess purchase price over the fair value of net tangible assets was
$12,585,435, all of which was allocated to goodwill. No impairment of the
goodwill amount occurred during the quarter covered by this report.
The following table summarizes the estimated fair value of the net assets
acquired and liabilities assumed at the acquisition dates.
Total
-------------
Current assets $ 1,850,109
Property and equipment 287,975
Deposits 276,481
Trademark 1,000,000
Goodwill 12,585,435
-------------
Total assets acquired $ 16,000,000
=============
Notes assumed 4,424,051
Debt forgiven 4,774,619
Note issued 8,483,330
-------------
Consideration $ 17,500,000
=============
The Company is still in negotiations with AWT as to the final consideration for
the APA.
NOTE G - 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
September 30, 2005, the amount of salaries payable accrued to Mr. Wright amounts
to $1,581,250.
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
$159,000.
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 September 30, 2005 the total costs plus fees amounted to
$9,232,678.
8
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 September 30, 2005 the
total sales amounted to approximately $236,409,099. As a result of the sales,
TDSR was obligated to pay Xpress a fee of $7,092,273, consisting of one-half of
the sales fee and the full amount of the marketing fee. As of September 30,
2005, $6,765,244 has been paid to Xpress and $327,029 remains unpaid and is
included in Current maturities of notes payable - related parties (see Note E
regarding Notes payable - Related parties). Based on the sales contracts as of
September 30, 2005, TDSR will be obligated to pay Xpress $3,546,136, the other
half of the sales fee, upon the conveyance of the units.
NOTE H - 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 Nine months Nine months Three months Three months
ended ended ended ended
9/30/2005 9/30/2004 9/30/2005 9/30/2004
----------- ----------- ------------ ------------
NET LOSS (as reported) (4,977,186) (2,783,172) (3,033,342) (1,190,788)
UNDECLARED PREFERRED
STOCK DIVIDEND (1,052,670) (551,938) (350,890) (275,969)
----------- ----------- ------------ ------------
NET LOSS AFTER PREFERRED
STOCK DIVIDEND (6,029,856) (3,335,110) (3,384,232) (1,466,757)
NET INCOME (LOSS) PER SHARE
BASIC AND DILUTED (0.60) (0.41) (0.33) (0.16)
NOTE I - RECLASSIFICATIONS
Certain amounts in the September 30, 2004 financial statements have been
reclassified to conform with the September 30, 2005 financial statement
presentation.
9
NOTE J - RESTATEMENT
American Leisure has restated the financial statements for the three and nine
months ended September 30, 2005, to include gross revenues and expenses for the
TraveLeaders business interests acquired from Around the World Travel on
December 31, 2004, which business assets and interests were thereupon combined
with American Leisure. The revenues and expenses were previously reported on a
net basis in connection with the terms of the Management Agreement pursuant to
which AWT acted as the manager. As such, AWT was responsible for such
TraveLeaders revenues and related expenses. The entitlement of American Leisure
in relation to TraveLeaders and the combined business interests was an
entitlement to a net operating result pursuant to the Management Agreement.
Therefore, the restated financial statements do not involve any change to the
cash flow, net income or balance sheet of American Leisure.
A summary of the restatement is as follows:
Increase As
As previously reported (Decrease) Restated
------------------------ -------------------- ---------------------
Nine months ended
September 30, 2005:
Statements of Operations:
Revenue $ 5,640,341 $ 14,168,171 $ 19,808,512
Cost of Service Revenues $ - $ (19,395,516) $ (19,395,516)
Gross Margin $ 5,640,341 $ (5,227,345) $ 412,996
Depreciation and
Amortization $ (1,231,892) $ 204,733 $ (1,027,159)
General and
administrative expenses $ (7,662,588) $ 4,748,077 $ (2,914,511)
Loss From Operations $ (3,254,139) $ (274,535) $ (3,528,674)
Equity in Operations of
unconsolidated entities $ (274,535) $ 274,535 $ -
Nine months ended
September 30, 2004:
Statements of Operations:
Cost of Service Revenues $ - $ (4,551,481) $ (4,551,481)
Depreciation and
Amortization $ (679,543) $ 143,018 $ (536,525)
General and
Administrative expenses $ (6,094,873) $ 4,408,463 $ (1,686,410)
Three months ended
September 30, 2005:
Statements of Operations:
Revenue $ 1,141,422 $ 4,732,422 $ 5,873,844
Cost of Service Revenues $ - $ (6,386,538) $ (6,386,538)
Gross Margin $ 1,141,422 $ (1,654,116) $ (512,694)
Depreciation and
Amortization $ (417,965) $ 76,112 $ (341,853)
General and
administrative expenses $ (2,985,390) $ 1,518,263 $ (1,467,127)
Loss From Operations $ (2,261,933) $ (59,741) $ (2,321,674)
Equity in Operations of
unconsolidated entities $ (59,741) $ 59,741 $ -
Three months ended
September 30, 2004:
Statements of Operations:
Cost of Service Revenues $ - $ (1,609,938) $ (1,609,938)
Depreciation and
amortization $ (236,551) $ 54,645 $ 181,906
General and
Administrative expenses $ (2,209,064) $ 1,555,293 $ (653,771)
10
NOTE J - SHARES FOR SERVICES
The Company accounts for non-cash stock-based compensation issued to employees
in accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, Accounting for Stock Issued to Employees, and complies with the
disclosure provisions of SFAS No. 123, Accounting for Stock-Based Compensation,
issued by the Financial Accounting Standards Board and EITF No. 96-18,
Accounting for Equity (deficit) Investments That Are Issued to Non-Employees for
Acquiring, or in Conjunction with Selling, Goods or Services. Under APB No. 25,
compensation cost is recognized over the vesting period based on the difference,
if any, on the date of grant between the fair value of the Company's stock and
the amount an employee must pay to acquire the stock. Common stock issued to
non-employees and consultants is based upon the value of the services received
or the quoted market price, whichever value is more readily determinable.
Accordingly, no compensation expense has been recognized for grants of options
to employees with the exercise prices at or above market price of the Company's
common stock on the measurement dates.
Had compensation expense been determined based on the estimated fair value at
the measurement dates of awards under those plans consistent with the method
prescribed by SFAS No. 123, the Company's September 30, 2005 and 2004, net loss
would have been changed to the pro forma amounts indicated below.
September 30, September 30,
2005 2004
------------ ------------
Net loss:
As reported after Preferred Stock Dividend $ (6,029,856) $ (3,335,110)
Stock based compensation under fair value method (36,766) -
------------ ------------
Pro forma $ (6,066,622) $ (3,335,110)
Net income (loss) per share - basic and diluted:
As reported $ (0.60) $ (0.27)
Stock based compensation under fair value method (0.00) (0.00)
Pro forma $ (0.60) $ (0.27)
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 160% for 2005 and 161% for 2004 with no
assumed dividend yield; and expected lives of five years.
During the nine months ended September 30, 2005 the Company has issued
100,000 warrants to a director of the Company; 50,000 were immediately vested
and the other 50,000 will vest in equal amounts in the next two years. As of
September 30, 2005, there are 1,758,064 warrants outstanding to officers and
directors and 870,000 warrants outstanding to third parties.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
All statements in this discussion and elsewhere in this report that are not
historical are forward-looking statements within the meaning of Section 21E of
the Securities Exchange Act of 1934, as amended. Statements preceded by,
followed by or that otherwise include the words "believes", "expects",
"anticipates", "intends", "projects", "estimates", "plans", "may increase", "may
fluctuate" and similar expressions or future or conditional verbs such as
"should", "would", "may" and "could" are generally forward-looking in nature and
not historical facts. These forward-looking statements were based on various
factors and were derived utilizing numerous important assumptions and other
important factors that could cause actual results to differ materially from
those in the forward-looking statements. Forward-looking statements include the
information concerning our future financial performance, business strategy,
projected plans and objectives. These factors include, among others, the
factors set forth under the heading "Risk Factors." Although we believe that
the expectations reflected in the forward-looking statements are reasonable, we
cannot guarantee future results, levels of activity, performance or
achievements. Most of these factors are difficult to predict accurately and are
generally beyond our control. We are under no obligation to publicly update any
of the forward-looking statements to reflect events or circumstances after the
date hereof or to reflect the occurrence of unanticipated events. Readers are
cautioned not to place undue reliance on these forward-looking statements.
OVERVIEW
--------
American Leisure Holdings, Inc. (the "Company") is in the process of
developing an organization that will provide, on an integrated basis, travel
services, travel distribution as well as development, sales, management and
rentals of destination resorts. To that end we have acquired or established
businesses that manage and distribute travel services, develop vacation home
ownership and travel destination resorts and develop and operate affinity-based
travel and rewards clubs. There is a trend toward consolidation in the travel
industry, which has caused us to seek to create a vertically integrated travel
services organization that provides comprehensive services to our clients and
generates revenue from several sources. We believe that we have a synergistic
strategy that involves using our travel distribution, fulfillment and
management services to provide consumer bookings at our planned resorts,
selling and renting vacation homes that we plan to manage at these resorts, and
fulfilling the travel service needs of our affinity-based travel clubs. We
also own a call center in Antigua-Barbuda.
Except as expressly indicated or unless the context otherwise requires,
"we," "our," or "us" means American Leisure Holdings, Inc. and its subsidiaries.
Malcolm J. Wright, our President, Chief Executive Officer, Chief Financial
Officer, a Director and one of our founders, has successfully developed vacation
properties in Europe. We are currently developing our first luxury vacation home
12
and destination resort, The Sonesta Orlando Resort at Tierra del Sol. We will
benefit from Mr. Wright's experience and expertise in this endeavor. The resort
will include 540 town homes and 432 condominiums. The resort will be constructed
in two phases. The first phase is scheduled to include a total of 430 units, a
126,000 square foot clubhouse (approximately 84,000 square footage under air),
and a large swimming and recreation complex which will include a combination
pool and lazy river swimming feature, an outdoor sports bar and food service
area, restroom facilities, showers, water-slides, beach volleyball and extensive
sundecks. In June 2005, we began the earth moving and clearing process on the
land for the resort. Construction on the second phase is expected to start
during 2006 and overlap with construction on the first phase. The second phase
is scheduled to include 542 units and additional resort amenities, including
miniature golf, a flow rider water attraction, a wave pool, a rapid river and a
children's multilevel interactive water park as well as additional clubhouse
improvements, include the finishing, equipping and furnishing of banquet and
meeting rooms, casual and fine dining restaurants, a full service spa, a sales
center and an owners' club. The first phase has been fully pre-sold for
$171,823,583. Total sales to date on both phases currently totals $236,409,100.
Upon completion of these units, we will offer our management services to certain
purchasers to permit them to voluntarily include their qualifying units in a
rental program that we will operate. In addition, we will retain a 45-day, right
of first refusal to repurchase the units in the resort that become available for
resale. In August 2005, we obtained commitments from KeyBank National
Association ("KeyBank") for two credit facilities: one in the amount of
$96,600,000 as a development and construction facility for the first phase of
the resort, and the other in the amount of $14,850,000 as a land loan for the
second phase of the resort. In addition, KeyBank Capital Markets, an entity
related to KeyBank, will underwrite the sale of $25,995,000 in bonds issued by
the Westridge Community Development District to fund the first phase of sitework
for the resort and to purchase from us certain land to be owned by the district.
The credit facilities and the bond sale are discussed below in more detail in
"Liquidity and Capital Resources" under the heading "KeyBank Commitments."
Our TraveLeaders business 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. We acquired the assets of TraveLeaders
effective December 31, 2004, from Around The World Travel, Inc. Around The World
Travel is currently managing the assets for us. See the discussion below under
"Other Events."
In October 2003, we acquired a 51% interest in Hickory Travel Systems, Inc.
Hickory is a travel management service organization that primarily serves its
network/consortium of approximately 160 well-established travel agency members,
comprised of over 3,000 travel agents worldwide that focus on corporate travel.
The services provided by Hickory include a 24-hour reservation service,
international rate desk services, discount hotel programs, preferred supplier
discounts, commission enhancement programs and marketing services.
We are in the process of integrating the administrative operations of
Hickory and TraveLeaders. The integration process has been slower than we
anticipated because time has been required to analyze and determine the impact,
if any, of certain litigation commenced by Around the World Travel regarding
13
its contracts with Seamless Technologies, Inc. and others. As such,
expenditures have been higher than anticipated.
Our American Travel & Marketing Group business develops and operates
Internet structured clubs that specialize in using demographic affinities to
promote brand loyalty through the delivery of customized travel and other
benefits to a constituency that is built under the auspices of a national
retailer, publisher or national cause. A vital component to the benefits
provided to club members and the sponsors is the inclusion of a sophisticated
rewards program that will provide customer retention tracking data to those
sponsors while enabling the members to enjoy significant discounts and rewards
for their loyalty. We have entered into agreements with a prominent sports
media organization, a national publisher and an international retail food
service company. Based upon current agreements, we expect to launch a new club
on an average of one every six months for the next twenty-four months. We
fulfill travel service orders produced by these clubs through TraveLeaders.
In December 2004, we entered into a joint venture with IMA Antigua, Ltd. to
operate a call center that we own located in Antigua. The joint venture is
operated through Caribbean Media Group, Ltd. We own 49% of this joint venture
company. The call center provides in-bound and out-bound traffic for customer
service, customer retention and accounts receivable management. The clients of
the call center are well known national businesses with well-established credit
and operational systems.
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 also currently generate modest revenue from our call center joint
venture in Antigua. We expect revenues from our call center operations to
increase during the fourth quarter based on new orders from a major client
which ordered more seats in October of 2005.
OTHER EVENTS
On January 29, 2005, we entered into an operating agreement with a
subsidiary of Sonesta International Hotels Corporation of Boston, Massachusetts,
a luxury resort hospitality management company. Pursuant to the operating
agreement, we sub-contracted to Sonesta substantially all of the hospitality
responsibilities for The Sonesta Orlando Resort at Tierra del Sol. We retain
primary management control of the resort. We utilized the architectural firm
of Fugelberg Koch to design the residential units of the resort, amenities and
the clubhouse. In February 2005, we held the official groundbreaking ceremony
for the resort.
On March 7, 2005, we sold land located in Davenport, Florida that had been
held for commercial development. The land was acquired in 2002 for approximately
$1,975,359 and sold for $4,020,000 and paid-off secured debt on the property in
the amount of $1,300,000 plus accrued interest and other costs. We received
approximately $2,100,000 in net proceeds from the sale and realized a profit of
$1,100,000. We used the net proceeds for working capital and to pay $1,948,411
of notes payable to related parties attributable to the acquisition and
retention of the property.
14
We amended our agreement with Around The World Travel, Inc. effective March
31, 2005, to change the manner in which we paid for the TraveLeaders assets that
we acquired on December 31, 2004. The purchase price of $17,500,000 was
determined by adding $1,500,000 to the fair value ($16,000,000) of the business
as a going concern as determined by management using an appraisal performed by
an independent investment banking firm. Pursuant to the terms of the original
asset purchase agreement and prior to the completion of the independent
valuation, we were to assume and forgive an aggregate of $17,306,352 in
liabilities and issue 1,936 shares of our Series F preferred stock valued at
$193,648 in consideration for the assets. Under the amendment, the liabilities
assumed were reduced to $4,242,051, we forgave certain working capital loans in
the amount of $4,774,619 that Around The World Travel owed to us and we
cancelled the issuance of Series F preferred stock. In addition, we issued a 60
month, 6% per annum note in favor of Around The World Travel in the principal
amount of $8,483,330. During the first quarter of 2005, we transferred to Around
The World Travel doubtful receivables, pre-paids and security deposits that we
had acquired pursuant to the asset purchase agreement to reduce the amount of
the note. We also allowed Around The World Travel to retain an amount of
accounts receivable that we had acquired, which further offset the note. The
final balance due under the note after the offsets, was $6,356,740, which was
evidenced by a new note. TraveLeaders has generated revenues during 2005 that
are lower than the projected revenues provided by Around The World Travel, Inc.
when we were negotiating the acquisition. These projections may have been used
by the third-party investment banking firm that provided a valuation of the
assets. We are continuing to negotiate with Around The World Travel, Inc.
regarding the purchase price and the terms of our payment. See "Risks Related To
Our Travel Division," below.
In May 2005, we extended the maturity dates of two notes payable to third
parties in the aggregate amount of $7,853,266 that matured on March 31, 2005 to
September 30, 2005. By virtue of the pending closing of our credit facilities
with KeyBank and a verbal extension through the closing of our credit
facilities, we have avoided default on these loans.
KNOWN TRENDS, EVENTS, AND UNCERTAINTIES
We expect to experience seasonal fluctuations in our gross revenues and net
earnings from our Travel Division. This seasonality may cause significant
fluctuations in our quarterly operating results. In addition, other material
fluctuations in operating results may occur due to the timing of development of
certain 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 2005 and in the years ahead.
On September 8, 2005, we executed a non-binding term sheet to acquire 100%
of the membership interests of Vici Marketing Group, LLC solely in exchange for
our common stock. We disclosed details of the term sheet in a Form 8-K filed
with the Securities and Exchange Commission (the "Commission") on September 22,
2005. We are continuing to perform due diligence regarding the transaction,
however, there can be no assurance that we will close such transaction.
15
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of
operations is based upon our unaudited 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.
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 predictable losses while developing our business, and we
have negative retained earnings. We expect our travel operations through the
end of the current fiscal year to require additional working capital of
approximately $750,000. We may need more capital than originally expected for
TraveLeaders as discussed below, under the heading "Risks Related to Our Travel
Division." 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, we may be required to 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. 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.
16
Revenues from our call center are recognized on the equity basis from the
joint venture that operates the call center. We own 49% of the joint venture.
We have entered into 685 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.
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 December 2004, we recorded an impairment of $1,500,000 related to the
acquisition of the TraveLeaders assets based on our payment of more than fair
value as determined by an independent investment bank. Our remaining goodwill of
$14,425,437 has not been impaired as of September 30, 2005, and is evaluated on
an annual basis or whenever events or circumstances indicate the carrying value
of the goodwill may not be recoverable. TraveLeaders has generated revenues
during 2005 that are lower than the projected revenues provided by Around The
World Travel, Inc. when we were negotiating the acquisition. These projections
may have been used by the third-party investment banking firm that provided a
valuation of the assets, which could affect the value that we paid to acquire
the business from them, lead to a determination by us or our auditors that that
goodwill is materially impaired and/or require us to restate our financial
statements. See "Risk Factors" under the heading "Risks Related to Our Travel
Division." We are continuing to negotiate with Around The World Travel, Inc.
regarding the purchase price and the terms of our payment.
RESULTS OF OPERATIONS
Three Months ended September 30, 2005 Compared to Three Months Ended
-----------------------------------------------------------------------------
September 30, 2004
------------------
Revenue increased $4,517,322, or 333%, to $5,873,844 for the three months
ended September 30, 2005, as compared to revenue of $1,356,522 for the three
months ended September 30, 2004. The increase in revenue was primarily
attributable to increased travel revenues for summer travel which was offset
by a higher than expected loss from the call center operations and
TraveLeaders. We acquired TraveLeaders in the fourth quarter of 2004.
Cost of revenue increased $4,776,600, or 297%, to $6,386,538 for the three
months ended Septmeber 30, 2005, as compared to cost of revenue of $1,609,938
for the three months ended September 30, 2004. The increase in cost of revenue
was attributable to TraveLeaders. We acquired TraveLeaders in the fourth quarter
of 2004.
Depreciation and amortization expense increased $159,947, or 88%, to
$341,853 for the three months ended September 30, 2005, as compared to
depreciation and amortization expense of $181,906 for the three months ended
September 30, 2004. The increase in depreciation and amortization expense was
primarily attributable to the additional assets that we acquired from Around The
World Travel, Inc. and the call center assets becoming eligible for depreciation
when our call center operations began in January 2005. Our depreciable assets
consisted of office equipment, furniture and fixtures and telecommunications
equipment.
17
General and administrative expenses increased $813,356, or 124%, to
$1,467,127 for the three months ended September 30, 2005, as compared to general
and administrative expenses of $653,771 for the three months ended September
30, 2004. The increase in general and administrative expenses was primarily
attributable to general expenses, personnel and rent for the call center
operations which began in January 2005,an increase in general and personnel
expenses incurred by American Travel & Marketing Group, Inc., which develops and
operates Internet structured affinity clubs, increases in general expenses
incurred by Comtech Fibernet, Inc., which operates a fiber optics business, and
a write-off of accounts receivable by American Leisure Marketing and Technology,
Inc., which is non-operating. Our general and administrative expenses consisted
of the following categories: personnel, facility, technology and
telecommunications, professional fees and other general and administrative
expenses.
Loss from operations increased $1,232,581, or 113%, to $2,321,674 for the
three months ended September 30, 2005, as compared to a loss from operations of
$1,089,093 for the three months ended September 30, 2004. The increase in loss
from operations was due to the decrease in revenue and the increase in
depreciation and amortization expense and general and administrative expenses.
Interest expense increased $585,363, or 463%, to $711,668 for the three
months ended September 30, 2005, as compared to interest expense of $126,305 for
the three months ended September 30, 2004. During the period from December 2003
to December 2004, we received a total of $11,505,000 of convertible debt
financing from Stanford Venture Capital Holdings, Inc. ("Stanford"). Interest
expense increased as a result of the debt financing that we received from
Stanford and interest on additional debt that we either assumed or incurred in
acquiring substantially all of the assets of Around The World Travel, Inc.
We did not have income or loss attributable to minority interest of Hickory
for the three months ended September 30, 2005, as compared to income
attributable to minority interest of $26,062 for the three months ended
September 30, 2004.
Loss before income taxes increased $1,844,006, or 155%, to $3,033,342 for
the three months ended September 30, 2005, as compared to loss before income
taxes of $1,189,336 for the three months ended September 30, 2004. The increase
in loss before income taxes was due to the increase in interest expense, the
loss from equity in operations of unconsolidated affiliate and the decrease in
income attributable to minority interest in addition to the increase in loss
from operations.
We did not record a provision for income taxes for the three months ended
September 30, 2005. We recorded a provision for income taxes of $(1,452) for
the three months ended September 30, 2004. Although we have net operating loss
carry-forwards that may be used to offset future taxable income and generally
expire in varying amounts through 2024, no tax benefit has been reported in the
financial statements.
18
Net loss increased $1,842,554, or 155%, to $3,033,342 for the three months
ended September 30, 2005, as compared to net loss of $1,190,788 for the three
months ended September 30, 2004. The increase in net loss was primarily due to
the increase in depreciation and amortization expense, the increase in general
and administrative expenses, the increase in interest expense, the loss from
equity in operations of unconsolidated affiliate and the decrease in income
attributable to minority interest.
We accrued undeclared preferred stock dividend of $350,890 for the three
months ended September 30, 2005, as compared to undeclared preferred stock
dividend of $275,969 for the three months ended September 30, 2004. Information
regarding undeclared preferred stock dividend can be found in Note H of the
Notes to Financial Statements included elsewhere in this report. The increase
in undeclared preferred stock dividend was due to the issuance of additional
shares of preferred stock with cumulative dividends.
Net loss after preferred stock dividend increased $1,917,474, or 131%, to
$3,384,232 with basic and diluted net loss per share of $0.33 for the three
months ended September 30, 2005, as compared to net loss of $1,466,757 with
basic and diluted net loss per share of $0.16 for the three months ended
September 30, 2004. Information regarding net loss after preferred stock
dividend can be found in Note H of the Notes to Financial Statements included
elsewhere in this report. The increase in net loss after preferred stock
dividend and basic and diluted net loss per share was due to the increase in
preferred stock dividend in addition to the increase in net loss.
Nine Months ended September 30, 2005 Compared to Nine Months Ended
----------------------------------------------------------------------------
September 30, 2004
------------------
Revenue increased $16,107,043, or 435%, to $19,808,512 for the nine months
ended September 30, 2005, as compared to revenue of $3,701,469 for the nine
months ended September 30, 2004. The increase in revenue was primarily
attributable to additional revenue from the assets that we acquired from Around
The World Travel, Inc. and the gain from the sale of property in March 2005.
Cost of revenue increased $14,844,035, or 326%, to $19,395,516 for the nine
months ended Septmeber 30, 2005, as compared to cost of revenue of $4,551,481
for the nine months ended September 30, 2004. The increase in cost of revenue
was attributable to TraveLeaders. We acquired TraveLeaders in the fourth quarter
of 2004.
Depreciation and amortization expense increased $490,634, or 91%, to
$1,027,159 for the nine months ended September 30, 2005, as compared to
depreciation and amortization expense of $536,525 for the nine months ended
September 30, 2004. The increase in depreciation and amortization expense was
primarily attributable to the additional assets that we acquired from Around The
World Travel, Inc. and the call center assets becoming eligible for depreciation
when our call center operations began in January 2005. Our depreciable assets
consisted of office equipment, furniture and fixtures and telecommunications
equipment.
General and administrative expenses increased $1,228,101, or 73%, to
$2,914,511 for the nine months ended September 30, 2005, as compared to general
and administrative expenses of $1,686,410 for the nine months ended September
30, 2004. The increase in general and administrative expenses was primarily
attributable to general expenses, personnel and rent for the call center
operations which began in January 2005, an increase in general and personnel
expenses incurred by American Travel & Marketing Group, Inc., which develops and
operates Internet structured affinity clubs, increases in general expenses
incurred by Comtech Fibernet, Inc., which operates a fiber optics business, and
a write-off of accounts receivable by American Leisure Marketing and Technology,
Inc., which is non-operating. Our general and administrative expenses consisted
of the following categories: personnel, facility, technology and
telecommunications, professional fees and other general and administrative
expenses.
19
Loss from operations increased $455,727, or 15%, to $3,528,674 for the
nine months ended September 30, 2005, as compared to a loss from operations of
$3,072,947 for the nine months ended September 30, 2004. The increase in loss
from operations was primarily due to the increase in depreciation and
amortization expense and general and administrative expenses.
Interest expense increased $1,233,261, or 573%, to $1,448,512 for the nine
months ended September 30, 2005, as compared to interest expense of $215,251 for
the nine months ended September 30, 2004. During the period from December 2003
to December 2004, we received a total of $11,505,000 of convertible debt
financing from Stanford. Interest expense increased as a result of the debt
financing that we received from Stanford and interest on additional debt that we
either assumed or incurred in acquiring substantially all of the assets of
Around The World Travel, Inc.
We did not have income or loss attributable to minority interest of Hickory
for the nine months ended September 30, 2005, as compared to income attributable
to minority interest of $510,348 for the nine months ended September 30, 2004.
Loss before income taxes increased $2,199,336, or 79%, to $4,977,186 for
the nine months ended September 30, 2005, as compared to loss before income
taxes of $2,777,850 for the nine months ended September 30, 2004. The increase
in loss before income taxes was due to the increase in interest expense, the
loss from equity in operations of unconsolidated affiliate and the decrease in
income attributable to minority interest in addition to the increase in loss
from operations.
We did not record a provision for income taxes for the nine months ended
September 30, 2005. We recorded a provision for income taxes of $(5,322) for the
nine months ended September 30, 2004. Although we have net operating loss
carry-forwards that may be used to offset future taxable income and generally
expire in varying amounts through 2024, no tax benefit has been reported in the
financial statements.
Net loss increased $2,194,014, or 79%, to $4,977,186 for the nine months
ended September 30, 2005, as compared to net loss of $2,783,172 for the nine
months ended September 30, 2004. The increase in net loss was primarily due to
the increase in depreciation and amortization expense, the increase in general
and administrative expenses, the increase in interest expense, the loss from
equity in operations of unconsolidated affiliate and the decrease in income
attributable to minority interest.
20
We accrued undeclared preferred stock dividend of $1,052,670 for the nine
months ended September 30, 2005, as compared to undeclared preferred stock
dividend of $551,938 for the nine months ended September 30, 2004. Information
regarding undeclared preferred stock dividend can be found in Note H of the
Notes to Financial Statements included elsewhere in this report. The increase
in undeclared preferred stock dividend was due to the issuance of additional
shares of preferred stock with cumulative dividends.
Net loss after preferred stock dividend increased $2,694,746, or 81%, to
$6,029,856 with basic and diluted net loss per share of $0.60 for the nine
months ended September 30, 2005, as compared to net loss of $3,335,110 with
basic and diluted net loss per share of $0.41 for the nine months ended
September 30, 2004. Information regarding net loss after preferred stock
dividend can be found in Note H of the Note to Financial Statements included
elsewhere in this report. The increase in net loss after preferred stock
dividend was due to the increase in preferred stock dividend in addition to the
increase in net loss.
We had an accumulated deficit of $14,349,827 as of September 30, 2005.
LIQUIDITY AND CAPITAL RESOURCES
In September 2005, we received an additional $75,000 through an increase in
one of our credit facilities with Stanford. We expect that we will require
approximately $750,000 through the end of the current fiscal year for working
capital for our travel management and services businesses. TraveLeaders has
generated revenues during 2005 that are lower than the projected revenues
provided by Around The World Travel, Inc. when we were negotiating the
acquisition of substantially all of its assets. These projections may have been
used by the third-party investment banking firm that provided a valuation of the
assets. Our reliance on those projections and on the valuation may require the
further procurement of additional capital to support Traveleaders in the fourth
quarter of 2005 if the projections are not fully realized. See "Risks Relating
To Our Travel Division." Also, in November, 2005, $1,250,000 of our credit
facility with Stanford is scheduled to mature. Stanford has verbally agreed to
extend the maturity through the closing of the credit facilities with KeyBank
(discussed below). We anticipate either renewing the facility or repaying it
via refinancing our accounts receivable with a commercial bank. Two notes
payable to third parties in the aggregate amount of $7,853,266 plus accrued
interest of $534,764 as of September 30, 2005 were scheduled to mature on such
date. By virtue of the pending closing of our credit facilities with KeyBank and
a verbal extension through the closing of our credit facilities, we have avoided
default on these loans. We plan to repay the notes with part of the funds that
we plan to receive from KeyBank (as discussed below) and from the completion of
a contract for sale of the 40 acres of commercial land adjoining The Sonesta
Orlando Resort at Tierra Del Sol for $7,000,000, of which we have received a
deposit of $3,012,032. In November 2003, we entered into an agreement with Town
Center Commercial Group, LLC to sell the land; however, the closing was
conditioned upon us releasing this property from its mortgage with Grand Bank
& Trust of Florida, as disclosed in our Form 10-KSB filed on May 21, 2004. The
balance of the purchase price will be paid in cash. We plan to satisfy the
mortgages and close the sale upon closing the credit facilities with KeyBank.
21
We obtained commitments from KeyBank for two credit facilities in the aggregate
amount of $111,450,000 for The Sonesta Orlando Resort at Tierra del Sol. In
addition, KeyBank Capital Markets will underwrite the sale of $25,995,000 in
bonds issued by the Westridge Community Development District to fund the
first phase of sitework for the resort and to purchase from us certain land
to be owned by the district. KeyBank has confirmed to us that the underwriting
on the bonds is completed and the pre-sale bids have been received. We
anticipate that the bond sale will be consummated upon the completion of the
syndication by KeyBank of part of the credit facilities. The bonds will be
repaid by residential unit owners in the district over a 30-year period, through
a tax assessment by the district. We estimate that the sum of the funds from the
credit facilities, the completion of the sale of our 40 acres of commercial
land and the bond sale proceeds will provide sufficient capital for the
construction of the first phase of The Sonesta Orlando Resort at Tierra del Sol.
In addition, to partially fund our development costs at The Sonesta Orlando
Resort at Tierra del Sol, we have used cash from buyers' deposits, after
providing the disclosure required by Florida law, on the pre-sold town homes for
which the buyer has waived the requirements to maintain the funds in escrow. The
deposits on the town homes range from 10% to 20% of the purchase price. As of
November 15, 2005, approximately 90% of the buyers of town homes in the resort
have waived the escrow requirement and these funds have been expended for our
project related costs. Our contract for the condominiums requires a 20%
deposit. All of the deposits received on condominium contracts are
maintained in escrow and are shown on our balance sheet as restricted cash.
Provided the purchaser has waived escrow, we may use any condominium contract
deposit in excess of 10% to fund the hard costs of construction of their unit.
In the event we post a bond according to Florida law, we will also be permitted
to use the bonded portion of the deposits on the condominiums for the projects
development and construction costs.
We had total current assets of $8,833,468 as of September 30, 2005,
which consisted of cash of $6,711,563, of which $6,231,933 was restricted,
prepaid expenses and other assets of $1,271,186, accounts receivable of
$768,464, and note receivable of $82,255. The restricted cash is for deposits
received on pre-sale contracts, which are being held in escrow. The majority of
accounts receivable represent the travel receivables of Hickory.
We had total current liabilities of $17,787,830 as of September 30, 2005,
which consisted of current maturities of long-term debt and notes payable of
$8,519,468 accounts payable and accrued expenses of $3,467,878, customer
deposits of $3,012,032, accrued expenses to officers of $1,767,500, current
maturities of notes payable to related parties of $916,317 of which
approximately $150,844 was owed to our CEO/director and his affiliates and
$131,945 was owed to another director, and other current liabilities of
$104,635. We expect to close the credit facilities with KeyBank during the
fourth quarter of 2005, and use part of the funds to pay off current maturities
of long-term debt and notes payable of $8,519,468, which includes two notes
payable to third parties in the aggregate amount $7,853,266 plus accrued
interest of $534,764 as of September 30, 2005, which were scheduled to mature on
such date. By virtue of the pending closing of our credit facilities with
KeyBank and a verbal extension through the closing of our credit facilities, we
have avoided default on these loans.
We had negative net working capital of $8,954,362 as of September 30, 2005.
The ratio of total current assets to total current liabilities was approximately
22
50% as of September 30, 2005. That ratio will improve after we pay off current
maturities of long-term debt and notes payable with part of the funds that we
expect to receive from KeyBank and the sale of the commercial land as referred
to above.
Net cash provided by operating activities was $15,848,100 for the nine
months ended September 30, 2005, as compared to net cash provided by operating
activities of $5,665,490 for the nine months ended September 30, 2004. The
increase in net cash provided by operating activities for the nine months ended
September 30, 2005 was attributable to an increase in deposits on unit pre-sales
of $15,390,518, an increase in customer deposits of $3,012,032, an increase in
accounts payable and accrued expenses of $1,879,537, a decrease in receivables
of $1,739,931, an adjustment of $1,448,510 for non-cash interest expense, and
an adjustment of $1,231,892 for depreciation and amortization which were offset
by net loss of $4,977,186, an increase in prepaid commissions of $2,840,542, a
decrease in shareholder advances and notes payable of $596,265 and an increase
in prepaid and other assets of $440,325.
Net cash used in investing activities was $15,495,088 for the nine months
ended September 30, 2005, as compared to net cash used in investing activities
of $9,054,984 for the nine months ended September, 2004. The increase in net
cash used in investing activities was attributable to capitalization of real
estate carrying costs of $8,390,038, increase in restricted cash of $6,231,933,
the acquisition of AWT assets for which we used cash of $767,291 and acquisition
of fixed assets of $105,828 for the nine months ended September 30, 2005.
Net cash provided by financing activities was $(2,139,424) for the nine
months ended September 30, 2005, as compared to net cash provided by financing
activities of $5,490,283 for the nine months ended September 30, 2004. The
decrease in net cash provided by financing activities was due to the payment of
debt of $1,980,189 and payments of notes payable to related parties of $913,084
for the nine months ended September 30, 2005 which were offset by proceeds from
notes payable of $512,124 and proceeds of notes payable from related parties of
$241,725.
Previously we have relied on loans from third parties and from related
parties to provide working capital and other funding needs. Our outstanding debt
includes three credit facilities totaling $11,605,000 in principal amount
provided by Stanford. We recently obtained commitments from KeyBank for two
credit facilities in an aggregate of $111,450,000 for The Sonesta Orlando Resort
at Tierra del Sol. In addition, KeyBank Capital Markets will underwrite the sale
of $25,995,000 in bonds issued by the Westridge Community Development District
to fund the first phase of sitework for the resort and to purchase from us
certain land to be owned by the district.
Stanford Credit Facilities
--------------------------
At September 30, 2005, we had outstanding principal balance of $11,680,000
under our three credit facilities with Stanford. Our $6,000,000 secured
revolving credit facility with Stanford 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 Wright, our chief
executive officer 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.
23
Our $4,250,000 secured revolving credit facility with Stanford 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, which matures in November, 2005, 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. Stanford has verbally agreed to
extend the maturity through the closing of the credit facilities with KeyBank.
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.
Our $1,430,000 secured revolving credit facility with Stanford bears
interest at a fixed rate of 8% per annum and matures April 22, 2007. We
received $75,000 of this amount in September 2005. 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 is 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.
All of our credit facilities with Stanford contain customary covenants and
restrictions, including covenants that prohibit us from incurring certain types
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 our 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 September 30, 2005, we believe we
were in compliance with the covenants and other restrictions applicable to us
under each credit facility.
KeyBank Commitments
-------------------
On August 16, 2005, KeyBank and Tierra Del Sol Resort, Limited Partnership,
a special purpose development company of which a subsidiary of ours is the 99%
limited partner, along with seven special purpose entities that are owned by the
limited partnership, entered into commitment letter for KeyBank to provide a
credit facility to be used in the development of The Sonesta Orlando Resort at
Tierra del Sol. KeyBank has committed to fund or to syndicate $96,600,000 as a
development and construction facility for the first phase of the resort. KeyBank
has also committed to fund a second credit facility of $14,850,000 as a land
loan for the second phase of the resort, pursuant to a second commitment letter
that KeyBank entered into with TDS Resort Phase 2, L.P., a special purpose
development company of which a subsidiary of ours is the 99% limited partner.
24
The loans will be subject to various terms and conditions standard in the
industry for these types of loans as agreed to by the parties. See "Risk
Factors," below. In addition, KeyBank Capital Markets will underwrite the sale
of $25,995,000 in bonds issued by the Westridge Community Development District
to fund the first phase of sitework for the resort and to purchase from us
certain land to be owned by the district.
The $96,600,000 credit facility will be evidenced by a promissory note and
a construction loan agreement. The loan will be used to construct the first
phase of The Sonesta Orlando Resort at Tierra del Sol. The loan will be for a
term of twenty-four months from the date of closing. Advances of proceeds of the
loan will bear interest at the 30-Day LIBOR Adjusted Daily Rate plus the LIBOR
Rate Margin of 2.75% (as those terms are defined by the parties) subject to
adjustment for any applicable reserves and taxes if required by future
regulations. Interest will be due and payable monthly beginning on the fifth day
of the first month following closing. In the event of default, the interest rate
will be the greater of 3% in excess of the interest rate otherwise applicable on
each outstanding advance or 18%. KeyBank may require the borrowers to institute
an interest rate hedging program through the purchase of an interest rate swap,
cap, or other such interest rate protection product from KeyBank or any
qualified banking institution. The loan will be secured by a first lien on the
resort, including the land, improvements, easements, 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 resort; 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. We, our
Chief Executive Officer, Malcolm J. Wright and a Florida single purpose limited
liability company to be capitalized by PCL Construction Enterprises, Inc.
("PCL") will guarantee repayment of the loan. We and those other parties will
guaranty performance and completion. PCL, an international construction company
and parent to the company that will serve as general contractor, will guaranty
completion of the resort based on a fixed price and time schedule pursuant to a
construction contract. PCL will be required to pay substantial penalties if the
time schedule is not met. The borrowers and some of the guarantors will enter
into an environmental indemnity agreement. KeyBank will enter into a
subordination, nondisturbance and attornment agreement with each tenant under
any lease. KeyBank plans to hold approximately $50 million of the combined
commitments with the balance syndicated to other banking organizations.
Syndication of the loan, typical in projects of this size, is a condition of
closing (timing), but not a condition of the commitment except for a material
adverse change in our condition and of loan syndication market conditions
generally. The borrowers will pay 1% of the loan amount as a commitment fee. The
borrowers will pay $150,000 per year as a loan administration fee. The borrowers
are obligated to pay all costs and expenses of KeyBank in connection with the
commitment and closing of the loan. The borrowers are required to maintain
Project Equity (as that term is defined by the parties) in the project equal to
44% of the total cost, which must be deposited with KeyBank prior to closing or
used to pay costs approved by KeyBank. The borrowers are required to provide
KeyBank with pre-construction sales contracts on 100% of the units in the first
phase with net proceeds equal to or exceeding 120% of the loan amount. The
borrowers are required to deliver, or demonstrate valid expenditure of,
pre-construction sales deposits of $25,498,108 to KeyBank as part of the equity
requirement otherwise the equity requirement is increased, dollar-for-dollar for
each dollar that deposits are less than this amount.
25
We anticipate that the first phase of sitework for 600 units at an
estimated cost of $19,200,000 will be funded, in part, by the Westridge
Community Development District from the sale of $25,995,000 of Special
Assessment Capital Improvement bonds issued on a non-recourse basis to us. Bond
sale proceeds are to be used for infra-structure construction and the
acquisition of lands to be dedicated to the public purposes for which the
district was created. The district was initially proposed and underwritten by us
and enabled by an order of a Florida State District Court. KeyBank has confirmed
to us that the underwriting on the bonds is completed and the pre-sale bids have
been received. We anticipate that the bond sale will be consummated upon the
syndication by KeyBank of part of the credit facilities. The bonds will be
repaid by residential unit owners in the district over a 30-year period, through
a tax assessment by the district. The Borrowers will assign to KeyBank the
proceeds to be received from the funding of the bonds. KeyBank Capital Markets
will underwrite the bond issuance, with net proceeds in the amount of
approximately $21,139,322, of which $8,038,370 will be used for land, $6,038,370
will be used for costs to construct the resort, and $2,000,000 will be placed in
a collateral account to be pledged as additional security for the $96,600,000
construction loan.
The $14,850,000 credit facility will be evidenced by a promissory note,
mortgage and a loan agreement. The loan will be used for investing in the equity
in the first phase of The Sonesta Orlando Resort at Tierra del Sol and to pay
off existing land loans encumbering the second phase of the resort. The loan
will be for a term of eighteen months from the date of closing. Advances of
proceeds of the loan will bear interest at the 30-Day LIBOR Adjusted Daily Rate
plus the LIBOR Rate Margin of 3.10% subject to adjustment for any applicable
reserves and taxes if required by future regulations. Interest will be due and
payable monthly beginning on the fifth day of the first month following closing.
In the event of default, the interest rate will be the greater of 3% in excess
of the interest rate otherwise applicable on each outstanding advance or 18%.
KeyBank may require the borrower to institute an interest rate hedging program
through the purchase of an interest rate swap, cap, or other such interest rate
protection product from KeyBank or another qualified banking institution. The
loan will be secured by a first lien on the second phase of the resort,
including the second phase land, improvements, easements, rights of way,
fixtures; a first lien and security interest in all fixtures and personal
property, an assignment of all leases, subleases and other agreements relating
to the resort; a guaranty of payment by us and our Chief Executive Officer,
Malcolm J. Wright; an environmental indemnity agreement by us, Mr. Wright and
the borrower; a subordination, nondisturbance and attornment agreement relating
to any leases; a collateral assignment of security agreements and contracts
related to the resort; and a collateral assignment of all purchase contracts and
purchase deposits. The borrower will pay 1% of the loan amount as a commitment
fee. The borrower will pay an exit fee equal to 4% of the maximum loan amount
for the second phase unless the loan is repaid with a construction loan from
KeyBank or KeyBank declines to grant a construction loan. The borrower is
obligated to pay all costs and expenses of KeyBank in connection with the
commitment and the closing of the loan. The borrower is required to provide
KeyBank with evidence that the land appreciation equity invested in the resort
indicates a loan-to-value ratio of not more than 50%. KeyBank received a written
appraisal from Integra Realty Resources on March 15, 2005 reflecting an
appraised land value of $29,700,000 which satisfies the borrower's equity
requirement.
26
Our ability to construct The Sonesta Orlando Resort at Tierra del Sol and
repay our current debt is contingent upon us closing the construction financing
and receiving the district bond sale proceeds. Both credit facilities are
expected to close by the end of 2005; however, there is no assurance that we
will not experience delays in closing the construction loan and bond financing.
If we are unable to obtain financing for our working capital needs or close the
construction loan or the bond financing, we will be required to find alternative
sources of capital that may not be available when needed or on terms
satisfactory to us, if at all. In the past, most of our working capital has been
obtained through loans from or the purchase of equity by our officers,
directors, large shareholders and some third parties. At this time, we do not
have any written commitments for additional capital from any of these parties,
other than the commitments from KeyBank which are to be used specifically for
The Sonesta Orlando Resort at Tierra del Sol.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off balance sheet arrangements that have or are
reasonably likely to have a current or future effect on our financial
condition, changes in financial condition, revenues or expenses, results
of operations, liquidity, capital expenditures, or capital resources that
are material to investors.
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
membership databases, and assembling our management team. We have incurred net
operating losses since our inception. As of September 30, 2005, we had an
accumulated deficit of $14,349,827.
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 require 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. 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, it will have a material adverse effect on our
financial condition and results of operation.
27
WE HAVE RECEIVED $11,680,000 MILLION OF CONVERTIBLE DEBT FINANCING FROM
STANFORD, WHICH IS SECURED BY MORTGAGES ON OUR PROPERTY AND LIENS ON OUR ASSETS.
We have received an aggregate of $11,680,000 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 is secured by a second mortgage on
The Sonesta Orlando Resort at Tierra del Sol which we plan to develop,
including all fixtures and personal property to be located on or used
in connection with this property, 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.
- 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 $1,430,000 credit facility is secured by all of the issued
and outstanding stock of our subsidiary, Caribbean Leisure Marketing
Limited.
In addition, Malcolm J. Wright, our President, Chief Executive Officer, Chief
Financial Officer and a member of our board of directors provided a personal
guarantee for our $6,000,000 credit facility. If we fail to comply with the
covenants in our credit facility, Stanford can elect to accelerate the amounts
due under the credit facility 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:
- 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.
28
If any of these occur, our business, results of operations and financial
condition may be materially adversely affected.
HURRICANES AND OTHER ACTS OF GOD HAVE OCCURRED WHICH HAVE HAD A MATERIALLY
ADVERSE AFFECT ON OUR TRAVEL DIVISION AND ARE LIKELY TO INCREASE OUR COSTS TO
BUILD THE SONESTA ORLANDO RESORT AT TIERRA DEL SOL. THESE AND OTHER ACTS OF
GOD COULD HAVE A MATERIALLY ADVERSE EFFECT ON ALL OF OUR DIVISIONS.
The destruction to Florida and the Gulf Coast caused by hurricanes Wilma and
Katrina, tornadoes and severe thunderstorms during the period from August 2005
to October 2005 caused TraveLeaders' offices in South Florida to close for two
weeks. These closures had a materially adverse effect on cash flows from the
TraveLeaders business during that period and may have a materially adverse
effect on cash flows or other aspects of our Travel Division going forward. The
destruction has increased the demand for construction labor and materials, which
will likely increase our costs to build The Sonesta Orlando Resort at Tierra del
Sol. We believe that we may be able to pass some or all of these increases to
our customers under their purchase contracts although there is no certainty that
we can achieve this with all of our customers. If we are required to pay more
for construction labor and materials or we are unable to obtain such labor or
materials at all, it would have a materially adverse effect on our Resort
Development Division, our liquidity and our financial condition. In addition,
these and other Acts of God may have a materially adverse effect on our
Communications Division as well as other operations within our Travel Division
and Resort Development Division.
RISKS RELATED TO OUR RESORT DEVELOPMENT DIVISION
WE NEED TO CLOSE A $96,600,000 CONSTRUCTION LOAN AND A $14,850,000 LAND LOAN FOR
THE RESORT DEVELOPMENT DIVISION IN ORDER TO BUILD THE SONESTA ORLANDO RESORT AT
TIERRA DEL SOL.
Certain conditions are required to be meet, some of which are outside of
our control, to close a $96,600,000 construction loan and a $14,850,000 land
loan for The Sonesta Orlando Resort at Tierra del Sol. Pursuant to the
commitment letters that we obtained from KeyBank, these conditions include, but
are not limited to, the following:
- Syndication by KeyBank of part of its interest in the credit
facilities;
- Our delivery of fully executed pre-construction sales contracts
on 100% of the units in the first phase which will produce aggregate
net sales proceeds sufficient to cover 120% of the $96,600,000 loan
amount;
- Our delivery or a demonstration by us of valid expenditure of,
pre-construction sales deposits of $25,498,108; and an environmental
assessment of the land on which the resort will be constructed.
Our compliance is also necessary to trigger the issuance and sale of $25,995,000
of Westridge Community Development District bonds, the net proceeds of which are
needed for the first phase of sitework for the resort and to purchase from us
certain land to be owned by the district. Proceeds from the sale of the bonds
are a necessary component to the capital structure of the project to develop
the resort. If we cannot close the loans as committed to by KeyBank in a
timely manner, or at all, it will cause a delay in the construction of the
resort. See "Risks Related to Our Travel Division," below, for information
regarding delays that we have experienced in closing the KeyBank loans.
29
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, PRESIDENT AND
CHIEF FINANCIAL OFFICER AND AS A DIRECTOR, 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 CEO of American Leisure Real Estate Group, Inc., a
real estate development company with which we have contracted for the
development of The Sonesta Orlando Resort at Tierra del Sol. Mr. Wright is the
CEO of Resorts Development Group LLC a real; estate development company. 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 of Innovative Concepts, Inc., which operates a landscaping
business, and M J Wright Productions, Inc., which owns our Internet domain
names. Because Mr. Wright is employed by us and the other party to these
transactions, these transactions may be or may be considered to be on terms that
are not arms'-length and may not be as advantageous to us as agreements with
unrelated third parties. 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.
BECAUSE MALCOLM J. WRIGHT, WHO SERVES AS OUR CHIEF EXECUTIVE OFFICER, PRESIDENT
AND CHIEF FINANCIAL OFFICER AND AS A DIRECTOR, 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 CEO of American Leisure Real Estate Group, Inc.,
Xpress Ltd., Innovative Concepts, Inc., M J Wright Productions, Inc., Resorts
Development Group, LLC, Osceola Business Managers, Inc., Florida World, Inc. 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 a director 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.
30
WE MAY PROVIDE THE EXECUTIVE OFFICERS OF OUR SUBSIDIARIES AN AGGREGATE PROFIT
SHARE 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 profit share of up to 19% of the pre-tax profits, if any, of the
subsidiaries in which they serve as executive officers. 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
Resort Villas and Hotels Inc., formerly American Leisure Hospitality Group, Inc.
We do not have any agreements with our officers regarding the profit share other
than 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' profit share is limited, it is not subject to the
buy-out by us described below. It is proposed that the executive officers of our
other subsidiaries may participate in a profit share of up to 19% of the pre-tax
profits of the subsidiary in which they serve as executive officers. We will
retain the right, but not have 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 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 profit shares 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.
WE HAVE EXPERIENCED DELAYS IN OBTAINING SIGNATURES FOR AGREEMENTS AND
TRANSACTIONS, WHICH HAVE PREVENTED THEM FROM BEING FINALIZED.
We have experienced delays in obtaining signatures for various agreements
and transactions. In some cases, we have either disclosed the terms of these
agreements and transactions in our periodic and other filings with the SEC;
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 ARE RELIANT 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 L. William Chiles. Mr. Wright is a Director of the Company
and the Company's Chief Executive Officer, President and Chief Financial
Officer. Mr. Chiles is a Director of the Company and President of Hickory. Our
ability to operate and implement our business plan is dependent on the continued
service of Messrs. Wright and Chiles. We have entered into an employment
agreement with Mr. Chiles, but not with Mr. Wright. If we are unable to
retain and motivate them on economically feasible terms, our business and
results of operations will be materially adversely affected.
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IF WE DO NOT EVENTUALLY PAY MALCOLM J. WRIGHT, OUR CHIEF EXECUTIVE OFFICER AND
CHIEF FINANCIAL OFFICER 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 and accrued compensation of $18,000 per year
for serving as a director. We may pay Mr. Wright a profit share of 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 services that those entities have provided to us for The Sonesta
Orlando Resort at Tierra del Sol. If we do not eventually pay cash to Mr. Wright
for his salary, director's compensation and profit shares, he may determine to
spend less of his time on our business or to resign his positions as an officer
and a director.
RISKS RELATED TO OUR TRAVEL DIVISION
WE NEED APPROXIMATELY $750,000 OF CAPITAL THROUGH THE END OF THE CURRENT FISCAL
YEAR FOR THE TRAVEL DIVISION THAT MAY NOT BE AVAILABLE TO US ON FAVORABLE TERMS,
IF AT ALL.
We need to raise approximately $750,000 through the end of the current
fiscal year for the working capital needs for the Travel Division which includes
Hickory's requirement through the third quarter of 2005 to cover its seasonal
losses, TraveLeaders' requirements during its reorganization to adopt our
business models, and our operating costs prior to closing a construction loan
(discussed elsewhere in this report). We may need more capital for TraveLeaders
than originally expected as discussed below. Also, in November, 2005, $1,250,000
of our credit facility with Stanford is scheduled to mature. Stanford has
verbally agreed to extend the maturity through the closing of the credit
facilities with KeyBank. Two notes payable to third parties in the aggregate
amount to $7,853,266 plus accrued interest of $534,764 as of September 30, 2005,
were scheduled to mature on such date. By virtue of the pending closing of our
credit facilities with KeyBank and a verbal extension through the closing of our
credit facilities, we have avoided default on these loans. We plan to repay the
notes with part of the funds that we plan to receive from KeyBank, and from the
completion of a contract for the sale of 40 acres of commercial land. We
originally planned to close the credit facilities with KeyBank in October 2005,
but we have changed the expected closing date to the end of 2005 to enable
KeyBank to syndicate the loan. 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 restructure or
refinance all or a portion of our outstanding debt.
WE HAVE EXPERIENCED DELAYS IN CLOSING THE CREDIT FACILITIES WITH KEYBANK WHICH
WE NEED IN ORDER TO PAY A SIGNIFICANT AMOUT OF OUR CURRENT LIABILITIES TO
PREVENT DEFAULTS.
We originally planned to close the credit facilities with KeyBank in
October 2005, and use part of the funds to pay the short term portion of
long-term debt and notes payable. We have changed the expected closing date to
the end of 2005 to enable KeyBank to syndicate the loan. There can be no
32
assurance that we will close the credit facilities with KeyBank as planned or
obtain other financing to satisfy our current liabilities. If we are unable to
close the credit facilities with KeyBank as scheduled, or at all, it would have
a materially adverse effect on our liquidity and financial condition and we
would be in risk of defaulting on a significant amount of our current
liabilities.
TRAVELEADERS HAS GENERATED REVENUES DURING 2005 THAT ARE LOWER THAN THOSE
PROJECTED BY AROUND THE WORLD TRAVEL, INC., WHICH HAS AND COULD CONTINUE TO HAVE
A MATERIALLY ADVERSE EFFECT ON OUR CASH FLOW, RESULTS OF OPERATION AND FINANCIAL
CONDITION.
TraveLeaders has generated revenues during 2005 that are lower than the
projected revenues provided by Around The World Travel, Inc. when we were
negotiating the acquisition of substantially all of its assets. These
projections may have been used by the third-party investment banking firm that
provided a valuation of the assets. We are continuing to negotiate with Around
The World Travel, Inc. regarding the purchase price we paid for the assets and
the terms of that payment. In addition, TraveLeaders' offices in South Florida
were closed for two weeks due to hurricanes as discussed under the heading
"Risks Relating To Our Capital and Liquidity Needs." The unrealized projections
and the closures have had a materially adverse effect on our cash flow, results
of operations and financial condition. They could continue to have a materially
adverse effect in the future and could require us to obtain additional capital
to support TraveLeaders in the fourth quarter of 2005 and beyond.
AROUND THE WORLD TRAVEL, INC. MAY HAVE MISREPRESENTED TO US AND THIRD PARTIES
THE PROJECTED REVENUES FROM TRAVELEADERS, WHICH COULD LEAD TO A DETERMINATION BY
US THAT GOODWILL IS MATERIALLY IMPAIRED AND REQUIRE US TO RESTATE OUR PREVIOUSLY
ISSUED FINANCIAL STATEMENTS AND/OR DISCLOSE THAT THE AUDIT REPORT OF OUR
INDEPENDENT ACOUNTANTS AND/OR THEIR COMPLETED INTERIM REVIEWS SHOULD NO LONGER
BE RELIED UPON.
We believe that Around The World Travel, Inc. may have misrepresented the
projected revenues of TraveLeaders which could affect the value that we paid to
acquire the assets from them. A third-party investment banking firm may have
used these projections in its valuation of the assets. We had goodwill of
$14,425,437 as of September 30, 2005, of which $12,585,435 was attributable to
the assets that we acquired from Around The World Travel, Inc. If Around The
World Travel, Inc. misrepresented the projected revenues of TraveLeaders, it
could lead to a determination by us that goodwill is materially impaired, which
would have a materially adverse effect on our business, results of operations
and financial condition and could require us to restate our previously issued
financial statements and/or disclose that the audit report of our independent
accountants and/or one or more of their completed interim reviews should no
longer be relied upon. We are continuing to negotiate with Around The World
Travel, Inc. regarding the purchase price for the assets and the terms of that
payment.
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
33
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.
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. 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 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
- economic downturns and recessions.
34
OUR TRAVEL REVENUES MAY FLUCTUATE FROM QUARTER TO QUARTER DUE TO SEVERAL FACTORS
INCLUDING ONES THAT ARE OUTSIDE OF OUR CONTROL, AND IF OUR REVENUES ARE BELOW
OUR EXPECTATIONS IT WOULD LIKELY HAVE A MATERIAL ADVERSE EFFECT ON OUR RESULTS
OF OPERATIONS.
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 investigating the economic attributes of entering into multi-year
global distribution system contracts. These contracts typically cover a
five-year period and could require us to meet certain performance objectives if
we receive advance consideration within such a contract in anticipation of
stated 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 could have a material adverse effect on our business, liquidity and results
of operations.
THE 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.
The 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.
35
WE RECEIVE CONTRACTUALLY SET SERVICE FEES AND HAVE LIMITED ABILITY TO INCREASE
OUR FEES TO MEET INCREASING COSTS.
Most of the 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 costs
increase and our manager cannot, in turn, increase the service fees or it
has to decrease the service fees due to a failure to achieve defined
performance objectives, it will have a material adverse effect on the
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.
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 do the following:
- 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
36
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, 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.
RISKS RELATING TO OUR COMMON STOCK
IF WE FAIL TO FILE OUR PERIODIC REPORTS AND REPORTS ON FORM 8-K WITH THE
COMMISSION IN A TIMELY MANNER, WE COULD RECEIVE AN "E" ON OUR TRADING SYMBOL OR
OUR COMMON STOCK COULD BE DE-LISTED FROM THE OVER-THE-COUNTER BULLETIN BOARD
(THE "OTCBB").
We are in the process of integrating the business operations of Hickory and
TraveLeaders, which includes the financial accounting, function. 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. We also face
increased pressure accumulating and communicating such information to our
management as appropriate to allow timely decisions regarding required
disclosure. We believe that until we have fully integrated our financial
accounting function, we will continue to face such pressure. If we are unable to
file our periodic reports with the Commission in a timely manner, we could
receive an "e" on our trading symbol, which could result in our common stock
being de-listed from the OTCBB. In addition, investors who hold restricted
shares of our common stock would be precluded from reselling their shares
pursuant to Rule 144 of the Securities Act until such time as we were able to
establish a history of current filings with the Commission. In the event that
our common stock is de-listed from the OTCBB, it is likely that our common stock
will have less liquidity than it has, and will trade at a lesser value than it
does, on the OTCBB.
There are new rules and regulations proposed to the SEC by NASDAQ, which
rules are proposed to be effective as October 1, 2005, and will amend the OTCBB
rules relating to the timely filing of periodic reports with the SEC. Pursuant
to the proposed rules, any OTCBB issuer who fails to file a periodic report
(Form 10-QSBs or 10-KSBs) by the due date of such report (or, if applicable,
the due date under any extension granted to the issuer by the filing of a Form
12b-25), three (3) times during any twenty-four (24) month period would be 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. As the proposed rule has
not been adopted as of the filing of this report, we can make no assurance that
the final rule, if any, will be more or less harsh and/or carry a lesser or
greater penalty. If the proposed rule change is adopted and/or any rule
relating to the late filing of our periodic reports, and we are late 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.
OUR COMMON STOCK COULD AND HAS FLUCTUATED, AND SHAREHOLDERS MAY BE UNABLE TO
RESELL THEIR SHARES AT A PROFIT.
The price of our common stock has fluctuated since it began trading. The
trading prices for small capitalization companies like ours often fluctuate
significantly. Market prices and trading volume for stocks of these types of
companies including ours have also been volatile. The market price of our common
stock is likely to continue to be highly volatile. If revenues or earnings are
37
less than expected for any quarter, the market price of our common stock could
significantly decline, whether or not there is a decline in our consolidated
revenues or earnings that reflects long-term problems with our business. Other
factors such as our issued and outstanding common stock becoming eligible for
sale under Rule 144, terms of any equity and/or debt financing, and market
conditions could have a significant impact on the future price of our common
stock and could have a depressive effect on the then market price of our common
stock.
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. We are currently in need of additional financing and may be
required to lower the exercise price of our existing warrants or issue
additional warrants in connection with future financing arrangements. Re-pricing
of our warrants and issuing additional warrants has caused and may cause
additional dilution to our existing 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.
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
38
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 President, Chief Executive Officer and Chief Financial
Officer and as a Director, and Roger Maddock, one of our majority shareholders,
own, directly and indirectly, an aggregate of 62.6% of the voting power in our
company. As a result, these persons control our affairs and management, 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.
ITEM 3. CONTROLS AND PROCEDURES.
Evaluation of disclosure controls and procedures. Our Chief Executive
Officer and Chief Financial Officer, after evaluating the effectiveness of our
"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 were effective. 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.
Changes in internal control over financial reporting. There were no
significant changes in our internal control over financial reporting during our
most recent fiscal quarter that materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
39
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
We are a party in 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., 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 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 February 2003, we and Malcolm J. Wright were joined in a lawsuit
captioned as Howard C. Warren v. Travelbyus, Inc., William Kerby, David Doerge,
DCM/Funding III, LLC, and Balis, Lewittes and Coleman, Inc. in the Circuit Court
of Cook County, Illinois, Law Division, which purported to state a claim against
us as a "joint venturer" with the primary defendants. The plaintiff alleged
damages in an amount of $5,557,195.70. On November 4, 2004, the plaintiff moved
to voluntarily dismiss its claim against us. Pursuant to an order granting the
voluntary dismissal, the plaintiff has one (1) year from the date of entry of
such order to seek to reinstate its claims.
40
On March 30, 2004, Malcolm Wright, was individually named as a third-party
defendant in the Circuit Court of Cook County, Illinois, Chancery Division,
under the caption: Cahnman v. Travelbyus, et al. On July 23, 2004, the primary
plaintiffs filed a motion to amend their complaint to add direct claims against
our subsidiary, American Leisure, Inc. as well as Mr. Wright. On August 4, 2004,
the plaintiffs withdrew that motion and have not asserted or threatened any
direct claims against American Leisure, Inc., Mr. Wright or us.
In early May 2004, Around The World Travel, Inc., of which we 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.
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. The court has dismissed
certain claims of tortious interference against the Company and Malcolm J.
Wright and provided Seamless with leave to amend those claims with specificity.
To date, the claims have not been amended by Seamless. In addition, the court
dismissed a claim of conspiracy and a demand for judgment.
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 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 of Around The World Travel; and ii) subordinated
undistributed retained earnings and accrued bonuses in an aggregate amount of
$1,108,806 which they allege were due to them as part of the sale. The
plaintiffs allege that the note was issued to them net of $450,000 of preferred
stock of 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 these matters. The plaintiffs are pursuing a claim of breach of the
alleged settlement agreement with damages in excess of $1,000,000, interest and
costs as well as performance under the alleged settlement agreement or, in the
alternative, a declaratory judgment that the promissory note, undistributed
retained earnings and accrued bonuses are not subordinated to the Galileo Debt
and full payment of the promissory note, undistributed retained earnings and
41
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 authorized our counsel to file 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 grant exclusive jurisdiction to the
courts located in Cook County, Illinois. A hearing on our motion is scheduled
in December 2005.
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 our.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
In July 2005, we issued 171 shares of Series E preferred stock to The
Martin Topolsky Trust in exchange for an equity interest in Around The World
Travel Holdings, Inc., consisting of 13,500 shares of its Series A preferred
stock and 21,687 shares of its common stock. 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 shares for investment
and not resale and we took appropriate measures to restrict transfer.
On July 1, 2005, we granted warrants to L. William Chiles, a Director, to
purchase 168,672 shares of our common stock at an exercise price of $1.02 per
share and warrants to Malcolm J. Wright, our Chief Executive Officer, Chief
Financial Officer and a Director, to purchase 347,860 shares of our common stock
at an exercise price of $1.02 per share. We issued the warrants to Mr. Chiles
and Mr. Wright as consideration for them renewing their personal guarantees
regarding the loan with Grand Bank & Trust of Florida in connection with our
renewal of that loan. We claim an exemption from registration afforded by
Section 4(2) of the Act since the foregoing grants did not involve a public
offering, the recipients took the warrants for investment and not resale and we
took appropriate measures to restrict transfer.
In September 2005, we granted warrants to purchase 100,000 shares of our
common stock at an exercise price of $1.02 per share to Frederick Pauzar for his
services as a director. The warrants vested immediately with respect to 25% of
the shares and will vest with respect to 25% of the shares on the next three
anniversaries of the date on which Mr. Pauzar became a director, provided that
Mr. Pauzar is still serving as a director on such dates. 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 September 2005, we received an additional $75,000 from Stanford through
an increase in one of our credit facilities with Stanford. Interest accrues at
a fixed rate of 8% per annum and matures April 22, 2007 pursuant to the credit
facility. Interest accrues through March 31, 2006 and is 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. We claim an
exemption from registration afforded by Section 4(2) of the Act since the
foregoing sale of securities did not involve a public offering, was for
investment by Stanford and not for resale and we took appropriate measures to
restrict transfer.
42
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
Related Party Transactions
--------------------------
We accrue $500,000 per year as salary payable to Malcolm J. Wright, our
Chief Executive Officer. Prior to 2004, we accrued $250,000 per year as salary
payable to Mr. Wright. We accrue interest at a rate of 12% compounded annually
on the salary owed to Mr. Wright. As of September 30, 2005, the aggregate
amount of salary payable accrued to Mr. Wright was $1,581,250. We also accrue
$100,000 per year as salary payable to L. William Chiles, a director of the
Company and the President of Hickory Travel Systems, Inc., for his services, and
interest at a rate of 12% compounded annually beginning in 2005. As of
September 30, 2005, the aggregate amount of salary payable accrued to Mr.
Chiles was $186,250, which includes interest of $11,250.
We pay or accrue directors' fees to each of our four directors in an
amount of $18,000 per year for their services as directors. As of September 30,
2005, we had accrued an aggregate amount of directors' fees of $159,000.
We entered into a debt guarantor agreement with Mr. Wright and Mr. Chiles
whereby we agreed to indemnify Mr. Wright and Mr. Chiles against all losses,
costs or expenses relating to the incursion of or the collection of our
indebtedness against Mr. Wright or Mr. Chiles or their collateral. This
indemnity extends to the cost of legal defense or other such reasonably incurred
expenses charged to or assessed against Mr. Wright or Mr. Chiles. In the event
that Mr. Wright or Mr. Chiles make a personal guarantee for our benefit in
conjunction with any third-party financing, and Mr. Wright or Mr. Chiles elect
to provide such guarantee, then Mr. Wright and/or Mr. Chiles shall earn a fee
for such guarantee equal to 3% of the total original indebtedness and 2% of any
collateral posted as security. This fee is to be paid by the issuance of
warrants to purchase our common stock at a fixed strike price of $1.02 per
share, when the debt is incurred. Mr. Wright personally guaranteed $6,000,000
that we received from Stanford pursuant to a convertible promissory note. In
addition, Mr. Wright pledged to Stanford 845,733 shares of our common stock held
by Mr. Wright. Stanford is currently in possession of the shares of our common
stock that Mr. Wright pledged; however, Mr. Wright retained the power to vote
(or to direct the voting) and the power to dispose (or direct the disposition)
of those shares. Mr. Chiles had personally guaranteed $2,000,000 of the
$6,000,000 received from Stanford and pledged to Stanford 850,000 shares of our
common stock held by Mr. Chiles. Stanford released Mr. Chiles from the personal
guarantee and released his common stock from the pledge when we closed the
$6,000,000 credit facility. Mr. Wright and Mr. Chiles have each also given a
personal guarantee regarding a loan in the principal amount of $6,000,000 that
was made to Tierra Del Sol Resort Inc. by Grand Bank & Trust of Florida. We have
authorized the issuance of warrants to Mr. Wright and Mr. Chiles to purchase
347,860 shares and 168,672 shares, respectively, of our common stock at an
exercise price of $1.02 per share. We are under a continuing obligation to issue
warrants at $1.02 to Messrs. Wright and Chiles for guarantees that they may be
required to give on our behalf going forward. Mr. Wright and Mr. Chiles
43
renewed their personal guarantees regarding the loan with Grand Bank & Trust of
Florida in connection with our renewal of that loan. We granted 168,672
warrants and 347,860 warrants to Mr. Chiles and Mr. Wright, respectively, at an
exercise price of $1.02 per share for their renewal guarantees. Mr. Wright has
agreed to personally guarantee repayment under the credit facilities that
we plan to close with KeyBank during the fourth quarter of 2005. Upon closing
the credit facilities from KeyBank, Mr. Wright will be granted additional
warrants pursuant to the debt guarantor agreement in consideration for his
personal guarantees.
We may provide the executive officers of each of our subsidiaries an
aggregate profit share of up to 19% of the pre-tax profits, if any, of the
subsidiaries in which they serve as executive officers. 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
Resort Villas and Hotels Inc., formerly American Leisure Hospitality Group, Inc.
We do not have any agreements with our officers regarding the profit share other
than 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' profit share is limited, it is not subject to the
buy-out by us (discussed below) as it will cease as soon as the $2,700,000
amount has been paid to him. It is proposed that the executive officers of our
other subsidiaries may participate in a profit share of up to 19% of the pre-tax
profits of the subsidiary in which they serve as executive officers. We will
retain the right, but not have 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 to the product of 19% of the average after-tax profits for
the five-year period multiplied by one-third of the price to 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. We have not paid or accrued any profit share
as of the filing of this report.
Malcolm J. Wright is the President and 81% majority shareholder of American
Leisure Real Estate Group, Inc. On November 3, 2003, we entered into an
exclusive development agreement with American Leisure Real Estate Group to
provide development services for the development of The Sonesta Orlando Resort
at Tierra del Sol. Pursuant to this development agreement, it is responsible for
all development logistics and we are obligated to reimburse it for all of its
costs and to pay it a development fee in the amount of 4% of the total costs of
the project paid by it. As of September 30, 2005, the total costs plus fees
amounted to $9,232,678 which resulted in a development fee of $369,307
under the development agreement.
Malcolm J. Wright and a trust of which Mr. Wright's natural heirs are the
beneficiaries are the majority shareholders of Xpress Ltd. Xpress has experience
marketing vacation homes in Europe. On November 3, 2003, we entered into an
exclusive sales and marketing agreement with Xpress to sell the units in The
Sonesta Orlando Resort at Tierra del Sol being developed by us. This agreement
provides for a sales fee in the amount of 3% of the total sales prices received
by us plus a marketing fee of 1.5%. Pursuant to the terms of the agreement,
one-half of the sales fee is payable upon entering into a sales contract (with
deposits paid as required by the sales contract) for a unit in the resort and
the other half is due upon closing the sale. During the period since the
contract was entered into and ended September 30, 2005, the total sales
made by Xpress amounted to approximately $236,409,099. As a result of the
sales, we are currently obligated to pay Xpress a sales fee of approximately
44
$3,546,136 and a marketing fee of $3,546,136. Based on the sales contracts as
of September 30, 2005, we will be obligated to pay Xpress the remaining sales
fee of $3,546,136 upon closing the sales of the units. As of September
30, 2005, we had paid Xpress $6,765,244 consisting of cash and other property.
We have included the remaining amount of $327,029 that we currently owe Xpress
in current maturities of notes payable to related parties.
In February 2004, Malcolm J. Wright, individually and on behalf of Xpress
Ltd., and Roger Maddock, individually and on behalf of Arvimex, Inc., entered
into contracts with us to purchase an aggregate of 32 town homes for
$13,116,800. Mr. Wright and Mr. Maddock paid an aggregate deposit of $1,311,680
and were given a 10% discount that we otherwise would have had to pay as a
commission to a third-party real estate broker. Roger Maddock is directly (and
indirectly through Arvimex) the beneficial owner of more than 5% of our common
stock.
We granted warrants to each of Malcolm J. Wright and L. William Chiles for
their services as directors to purchase 100,000 shares (or an aggregate of
200,000 shares) of our common stock at an exercise price of $1.02 per share.
Warrants to purchase 75,000 shares have vested to each of them. Warrants to
purchase the remaining 25,000 shares will vest to each of them on the next
anniversary date of each of their terms as a director, provided they are then
serving in said capacity.
M J Wright Productions, Inc., of which Mr. Wright is the President, owns
our Internet domain names.
In March 2005, we closed on the sale of 13.5 acres of commercial property
in Davenport, Polk County, Florida at the corner of U.S. Hwy. 27 and Sand Mine
Road. The property was sold for $4,020,000. We paid-off secured debt on the
property of $1,300,000 plus accrued interest and other costs. We used the net
proceeds for working capital and to pay $1,948,411 of notes payable to related
parties attributable to the acquisition and retention of the property.
We no longer have an advisory board, which during 2004 and 2005 included
Thomas Cornish, Charles J. Fernandez and David Levine. Messrs. Cornish,
Fernandez and Levine now provide consulting services to us. They may serve as
directors in the future. We authorized warrants to each of Thomas Cornish,
Charles J. Fernandez and David Levine to purchase 100,000 shares (or an
aggregate of 300,000 shares) of our common stock at an exercise price of
$1.02 per share in consideration for their services rendered or to be
rendered. The warrants vested immediately to each of them with respect to the
purchase of 50,000 shares. Warrants to purchase the remaining 50,000 shares will
vest to each of them in equal amounts on the next two anniversaries of the date
of their grants, provided they are then serving as a consultant or director.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBIT NO. DESCRIPTION OF EXHIBIT
10.1(1) Commitment Letter with KeyBank National Association for
$96,000,000 for Phase I
10.2(1) Commitment Letter with KeyBank National Association for
$14,850,000 for Phase II
10.3(2) Re-Stated Promissory Note for $6,356,740 issued in favor of
Around The World Travel, Inc. dated June 30, 2005.
45
99.1(3) Press Release issued September 6, 2005, announcing
Frederick W. Pauzar as Chief Operating Officer and a
Director
31.1* CEO Certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2* CFO Certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1* CEO Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2* CFO Certification 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 Exhibit 99.1 to the Registrant's Form 8-K on September
6, 2005, and incorporated herein by reference.
REPORTS ON FORM 8-K
We filed the following reports on Form 8-K with the Commission during the
quarter for which this report is filed:
(1) Report on Form 8-K filed on July 1, 2005, to report the issuance of
shares upon the exercise of warrants and to report that we had restated our
financial statements for the years ended December 31, 2004 and 2003, and
the quarter ended March 31, 2005, and that as a result of the restatements,
the financial statements and independent auditors' report should no longer
be relied upon and investors should review our restated financial
statements which appear in the following filings:
- Our Form SB-2 and Form SB-2/A filed on June 30, 2005 and July 27,
2005, respectively; and
- Our Form 10-KSB/A and Form 10-QSB/A, which were both filed on
July 22, 2005.
(2) Report on Form 8-K filed on August 18, 2005, to report two commitments
by KeyBank National Association for an aggregate of $111,450,000 of
financing for The Sonesta Orlando Resort at Tierra del Sol.
(3) Report on Form 8-K/A filed on August 19, 2005, to include audited
financial statements for Around The World Travel, Inc. as of December 31,
2004 and December 31, 2003 and proforma financial information, management's
discussion and analysis regarding the financial statements, and disclosure
regarding the business, property and legal proceedings related to the
acquired assets acquired from Around The World Travel, Inc.
(4) Report on Form 8-K filed on September 6, 2005, to report the
appointment of Frederick W. Pauzar as a director and as the Company's Chief
Operating Officer.
(5) Report on Form 8-K filed on September 22, 2005, to report a
non-binding term sheet to acquire 100% of the membership interests of Vici
Marketing Group, LLC solely in exchange for the Company's common stock.
46
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.
By: /s/ Malcolm J. Wright
---------------------
Name: Malcolm J. Wright
Title: Chief Executive Officer and
Chief Financial Officer
Date: August 23, 2007
47