Item 6. Management's Discussion and Analysis or Plan of Operation
REZconnect Technologies, Inc. is a leading internet provider of online travel stores for travel agencies and home-based representatives using our services and technology. As described elsewhere, YTB International, Inc. became the successor to the Company following the December 8, 2004 merger and its January 4, 2005 reincorporation in Delaware. For the period of this report (and specifically the December 8, 2004 merger date, December 31, 2004 year-end), the Company operated as 3 operating groups (respectively Technologies, Booking and Marketing). Post- reincorporation, those operating groups became three distinct wholly owned subsidiaries consisting of YourTravelBiz.com, REZconnect Technologies Inc. and the YTB Travel Network Division.
We operate under various trade names, including Your Travel Biz, YTBnet.com Travel Network, Global Travel Network, Travel Network Vacation Central, YourTravelBiz.com, YTBnet.com and the following web sites:
Bookmytravel.com, REZconnect.com and RezCity.com.
REZconnect Technologies operations are comprised of 3 operating groups. The first is an extension of its travel franchise system. The extension markets itself as REZcity.com, an online local city guide and online travel store. The other includes our technology section, which builds reservation systems using proprietary patent pending applications for suppliers within the travel industry; builds online travel stores for consumers of travel agents, as well as Super Sites for Travel Agents to book their clients travel and oversees and processes travel bookings from the websites. REZconnect Technologies, Inc. has signed contracts with numerous Consortium groups to build online super sites for their agent base. Contracts that have been signed include: Hickory Leisure, InteleTravel, OSSN, ARTA, GTM and the IT Group.
We operate the business under our trade names "Travel Network," "Global Travel Network", "Travel Network Vacation Central", as well as web sites "Bookmytravel.com," and "REZconnect.com." We are also a full-service provider of discount travel products and services to the leisure and small business traveler. We offer our customers a reliable source of travel products and services through our agreements with selected travel providers, including major airlines, cruise lines, hotels and car rental agencies, as well as wholesale travel providers. In addition, we offer our customers the ability to make reservations on over 424 airlines, at more than 35,000 hotels and with most major car rental companies, cruise lines and tour package operators.
Our brick and mortar franchisee Travel Network and Global Travel Network fees range from $3,000 to $29,900 for domestic franchises and from $50,000 to $350,000 for individual international territories. Yearly service fees range from $2,000 to $9,000 per location. Commission rates paid by travel suppliers have been approximately 10% for hotel reservations, 5-10% for car rentals, and 10-15% for cruises and vacation packages. Airline tickets are a non-commissionable item and revenues are earned from service fees, which range from $4 to $15 per ticket.
Our revenues are divided amongst our franchise systems. Travel Network and RezCity plus our online website (Book My Travel), fees and travel services to date has come from the franchise system, travel services and online site fees. We expect that REZconnect(R) Technologies will continue to play an important part in our 2005 revenue projections as we release the various applications within the travel and entertainment industries. During the last 3 years a larger portion of our expenses were related to our technology development. These expenses have been substantially reduced and should reflect in higher revenues in 2005.
REZconnect's consumer driven websites provide strong content and book-ability with over 60 booking engines incorporated into one site, covering all aspects of the travel industry. Sites are available for use 24 hours, 7 days a week, allowing travel agents the ability to personally follow-up with the online consumer and provide customer service.
REZconnect typically charges $49.95 per month, on a non-contract basis, to own and operate on an online travel site. If an agent signs a one year contract, the cost is reduced and the agent only pays for 11 months of service. The agencies that pay month to month must pay by credit card while yearly contracts can be paid either by check or credit card.
Currently, there are over 10,000 consumer websites in operation. Site owners are permitted to solicit other organizations and associations to clone travel sites allowing for site owners to earn more revenue. The fee associated with a travel site clone is $25 per site, monthly.
The REZcity.com is an extension of the Technologies activities who builds online travel stores for consumer use, as well as "Super Sites" for Travel Agents to book their clients travel and is an extension of the travel franchise system. The extension markets itself as an online local city guide and online travel store for over 53,000 towns throughout the United States. It provides a unique model for entrepreneurs and travel agencies to participate by licensing the local community content with rights to sell advertising and e-commerce solutions. The pricing of a local town of 25,000 in population is $1,500 for a one-time fee and an annual hosting fee of $150.00.
We are the only company in this field offering every postal zip code in the U.S. with strong rich content provided by over 100 sources, including weather, entertainment, sports, news, various information guides with yellow page listings of over 15,000,000 businesses. This site is up and running and was first available in 1998. REZconnect took over the site in 2002 and is currently offering this product to companies within the travel community.
To date, REZcity has signed 249 Single Unit franchises. A single unit franchise consists of a single town or zip code with a population of 25,000 or less. Franchisees are required to sell e-commerce and advertising solutions, to earn revenue, within their purchased territory and market their website to local residents residing in the community.
In-house sales personnel have generally handled marketing of franchisees. All of the Company's franchised operations are independently owned and operated. REZcity operates two company-owned travel agencies. All sales of travel products by REZcity is made through its franchisees or through its interactive web site. Operational expenses consist of franchise system sales and support personnel, executive management and minimal administrative personnel.
The Booking operating group, is a travel management company who operates several different franchise systems including storefront and online business models who processes and handles bookings (reservations) from over 10,000 websites.
The Marketing operating group is a referral marketing group providing support services for the 8750 representatives, that are currently in the system. YourTravelBiz conducts business through recruitment, enrollment, initial training, and support of its sales force. This operating subsidiary is a referral marketing group providing support products and services for the 8,700 plus representatives. The representatives have the ability to book individual and group travel. The fulfillment is offered through interactive, real time booking engines and access to preferred deals with leading travel industry suppliers. The emerging market shift to internet for travel services presents the opportunity for advancement of products and services by referral relationships.
OVERVIEW
Our revenues to date is predominately comprised of franchise fees and franchise service fees, commissions paid by travel providers and the retail value of travel agency related sales plus online hosting fees for websites. In addition, certain travel suppliers pay performance-based compensation known as "override commissions" or "overrides." Commission revenues and gross retail sales, net of allowances for cancellations, are recognized generally based on the expected date of travel. Overrides are recognized on an accrual basis once the amount has been confirmed with the travel supplier. Franchise fees are recognized when all material services and conditions required have been performed and the collect ability of the franchise fee is relatively assured. We generally defer recognition of franchise fees until such amounts have been collected from the franchisee. Franchise service fees are recognized on the accrual basis as earned. Online travel income is recorded when earned and is recognized based on the websites hosted.
With respect to travel services, revenues are generated by transactions with customers who make offers to purchase tickets supplied by participating vendors. Because the Company is the merchant of record in these transactions, revenue for these services includes the total amount billed to the customer.
The commission rates paid by travel suppliers, in addition to overrides, are determined by individual travel suppliers and are subject to change. Historically, typical standard base commission rates paid by travel suppliers have been approximately 10% for hotel reservations, 5% to 10% for car rentals and 10% to 16% for cruises and vacation packages. Based on the past several years leisure vendors (including tour operators, cruise lines and hotel and car packagers) have not reduced their commission levels but in fact have offered the Travel Network incentive commissions above the standard compensation for its volume business. The YTB Travel Network expects that its weighted average commission of online transaction revenues will increase due to the fact that its leisure bookings are much greater as a percentage of total sales than airline ticketing, the later offering the Company lower commissions. There can be no assurance that travel suppliers will not reduce commission rates paid to YTB Travel Network or eliminate such commissions entirely, which could, individually or in the aggregate, have a material adverse effect on the Company's business, operating results and financial condition. Each website travel storeowner pays a monthly fee of $5.00-$49.95 (depending upon multiple user contracts) plus the YTB International can earn transactional compensation from travel purchased off each website.
The Company believes it is at the forefront of several growing trends:
the increase in consumer spending in the travel industry, the boom in home-based businesses and the growing acceptance of conducting retail business on the internet. Tourism accounts for nearly 11% of all consumer spending worldwide. The travel industry, currently a $5 trillion business, is growing 23% faster than the global economy and spending on travel is expected to double in the next 5 years. Industry research shows that one "baby boomer", a segment comprised of nearly a billion people worldwide, will retire every eight seconds for the next 20 years. Luxury cruise ship companies and resort builders are gearing up for this wave of retirees. Secondly, with job security, as well as an ability to spend time with the family, an ever-increasing concern, we believe the ability to own a home-based business is becoming an even more attractive option. Finally, we believe online travel planning will continue to make tremendous inroads in the marketplace as more people use the Internet to become better informed and save time and money.
Results of Operations
The following table sets forth, for the periods indicated, the percentage relationship of certain items from the Company's consolidated statement of operations to total revenues:
Year Ended Year Ended
December 31, December 31,
2003 2004
Revenues
Franchise fees 4.8 % 2.6%
Franchise service fees and other fees 23.7 % 19.2%
Travel products and services 56.1 % 55.0%
Advertising and other 3.6 % - 0 -
Online Travel Stores (Net of Returns/Allowances) 11.8 % 12.8%
New RTA Sales - 0 - 2.3%
Monthly Maintenance Fees - 0 - 6.6%
Printing and Administrative Service Fees - 0 - 1.5%
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TOTAL REVENUES 100 % 100 %
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Operating Expenses
Cost of travel products and sales 21.9 % 24.9%
Marketing and selling 1.3 % 2.8%
Franchise services and products -0 - 4.1%
General and administrative 36.8 % 33.1%
Impairment of advertising receivable - 0 - -0 -
Impairment of capitalized software costs 32.6 % -0-
Impairment of goodwill - 0 - - 0 -
Depreciation and amortization 15.7 % 2.3%
Returns and Allowances (Netted against revenue above) N/A N/A
Commissions 37.8 % 40.7%
TOTAL OPERATING EXPENSES 146.1 % 107.9%
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LOSS FROM OPERATIONS (46.1 %) (7.9%)
Other Income (Expenses)
Loss from Sales of Short-term Investments (0.6 %) - (0.2)%
Interest and Dividend Income 0.8 % 1.0%
Interest Expense (0.1) (0.6)%
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TOTAL OTHER INCOME 0.1% - 0.2%
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Income (loss) before income taxes (46.0 )% (7.7)%
Income taxes -0- -0-
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Net income (loss) (46.0)% (7.7)%
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REVENUES
Franchise Fees. Franchise fees decreased in 2004 as compared to 2003 by approximately $17,774 as a result of increasing market conditions and management's decision in 2003.
Franchise Service Fees and online service fees in 2004 increased similarly as compared to 2003 by approx-imately $147,256 an increase of 25.9% This was attributable to more franchisees in the system, partially offset by higher average franchise fees. Our franchise agreements require franchisees to pay monthly franchise fees or hosting fees, which have annual scheduled increases. Individual franchise arrangements can provide the REZconnect with annual fees ranging from $3,000 to $9,000 for Travel Network. In addition, each franchise agreement has a provision for an increase in our service fee based on year-over-year change in the consumer price index.
Travel Products and Services. Travel products and services increased by approximately $709,687 from 2003 to 2004, an increase of approximately 52%. The increase is attributable to an increase in the number of representatives utilizing the Company as their travel provider in 2004.
Online Travel Income. Online Travel Income increased by approximately $225,037 from 2003 to 2004, an increase of approximately 79%. The increase is attributable to an increase in the number of representatives promoting their website to their customer base creating greater sales.
OPERATING EXPENSES
Commissions. Commissions increased by approximately $614,910 or 67.8% in 2004 as compared to 2003. The increase is a result of higher travel related revenues.
Cost of Travel Products and Services. Cost of travel products and services increased by approximately $404,378 or 77% in 2004 as compared to 2003. These costs increased as a result of higher travel related revenues. Cost of travel products and services as a percentage of travel products and services sales was approximately 45% for 2004 and 39% for 2003.
Marketing and Selling. The Marketing and selling expenses decreased by approximately $11,411 from 2003 to 2004. The decrease represents a change of approximately 1.5%. There were no significant changes in payroll costs, commissions and startup fees paid on the accounts receivable of the franchisees.
General and Administrative. The General and administrative increased by approximately $353,830 or 40% from 2003 to 2004. The increase in general and administrative expense in 2004 is attributable to the merger of the two Companies.
Goodwill. Goodwill amounted to $9,436,118 and the net intangible assets amounted to $6,458,333 in 2004. These two items resulted from the merger with YTB.
Variability of Results
The Company's travel products and services gross bookings have increased from 2003 to 2004 due to increase in the number of hosted websites including additional franchises derived from REZcity.com and an increase in products and services sold to travel agencies utilizing our unique private label agent only web-based booking site. Cost of travel revenues have similarly increased from 2003 to 2004.
As a result of the Company's operating history in online commerce and the variability that can be experienced by our franchising operations, the Company is unable to accurately forecast its revenues. The Company's current and future expense levels are based predominantly on its operating plans. The Company may be unable to adjust spending in a timely manner to compensate for any unexpected revenue shortfall. Accordingly, any significant shortfall in revenues would likely have an adverse effect on the Company's business, operating results and financial condition. Further, the Company currently intends to substantially increase its operating expenses to develop and offer new and expanded travel services, to fund increased sales and marketing and customer service operations to develop its technology and transaction processing systems. To the extent such expenses precede or are not subsequently followed by increased revenues, the Company's operating results will fluctuate and anticipated net losses in a given period may be greater than expected. \
The Company expects to experience fluctuations in its future quarterly operating results due to a variety of other factors, many of which are outside the Company's control. Factors that may adversely affect the Company's quarterly operating results include, but are not limited to (i) the Company's ability to retain existing customers, attract new customers at a steady rate and maintain customer satisfaction, (ii) changes in inventory availability from third party suppliers or commission rates paid by travel suppliers, (iii) the announcement or introduction of new or enhanced sites, services and products by the Company or its competitors, (iv) general economic conditions specific to the Internet, online commerce or the travel industry, (v) the level of use of online services and consumer acceptance of the Internet and commercial online services for the purchase of consumer products and services such as those offered by the Company,
(vi) the Company's ability to upgrade and develop its systems and infrastructure and to attract new personnel in a timely and effective manner, (vii) the level of traffic on the Company's online sites, (viii) technical difficulties, system downtime or Internet brownouts, (ix) the amount and timing of operating costs and capital expenditures relating to expansion of the Company's business, operations and infrastructure, (x) governmental regulation and (xi) unforeseen events affecting the travel industry, including terrorist activities similar to September 11 and the conflict with Iraq.
In addition, the Company expects that it will experience seasonal business, reflecting seasonal fluctuations in the travel industry, Internet and commercial online service usage and advertising expenditures. The Company anticipates that travel bookings will typically increase during the first and second quarter in anticipation of summer travel and will typically decline during the third quarter. Internet and commercial online service usage and the rate of growth of such usage may be expected typically to decline during the summer. Depending on the extent to which the Internet and commercial online services are accepted as an advertising medium, seasonality in the level of advertising expenditures could become more pronounced for Internet-based advertising.
Due to the foregoing factors, quarterly revenues and operating results are difficult to forecast, and the Company believes that period-to-period comparisons of its operating results will not necessarily be meaningful and should not be relied upon as an indication of future performance. It is likely that the Company's future quarterly operating results from time to time will not meet the expectations of security analysts or investors. In such event, the price of the Company's Common Stock would likely be materially and adversely affected.
The material effects on our operations that we anticipate as a result of the merger with YTB will be a significant increase in RTAs and membership revenue, as well as a commensurate increase in related commission expense.
LIQUIDITY AND CAPITAL RESOURCES
Cash used by operating activities in 2004 was approximately $866,000 as compared to cash provided by in operating activities of $554,000 in 2003.
Cash provided by investing activities was approximately $476,000 in 2004 as compared to cash used by investing activities of approximately $551,000 in 2003.
Cash provided by financing activities was approximately $353,000 in 2004 and used by financing activities was approximately $3,000 in 2003. As of December 31, 2004, we had approximately $25,449 in cash and approximately $528,311 in short-term investments. Based on the raising of capital from the sale of a convertible note which occurred in January 2005 for 2 million dollars and from an investment from issuance of stock in a private placement to investors in February 2005 for of $960,000.
The Company believes that cash and short term investments on hand at December 31, 2004, its cash flow from operations and 2005 funding will be sufficient to meet its obligation on a timely basis for the next 12 months. That conclusion is reinforced because the consolidated Company has minimal debt service, development costs incurred in prior years are expected to decline as will its cash requirements since it expects greater revenues and income from YTB operations in 2005 (and are expected to have an even greater impact in 2006).
To the extent that the Company is contingently liable under the terms of a secured convertible note if the price falls below a specified $__.80__minimum amount (up to $278,000 in 2005 and $667,000 in 2006 and beyond but an unlikely scenario in view of the common stock's recent price run up), see Note 6 to the 2004 financial statements.
FORWARD-LOOKING STATEMENTS
All statements other than statements of historical fact included in this annual report, including without limitation statements regarding the company's financial position, business strategy and the plans and objectives of the company's management for future operations is forward-looking statements. When used in this annual report, words such as "anticipate", "believe," "estimate," "expect," "intend", and similar expressions, as they relate to the company or its management, identify forward-looking statements. Such forward-looking statements are based on the beliefs of the company's management, as well as assumptions made by and information currently available to the Company's management. Actual results could differ materially from those contemplated by the forward-looking statements as a result of certain factors, including but not limited to, business and economic conditions. Competitive factors and pricing pressures, capacity and supply constraints. Such statements reflect the views of the Company with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to the operations, results of operations, growth strategy And liquidity of the company. Readers are cautioned not to place undue reliance on these forward-looking statements. The Company does not undertake any obligation to release publicly any revisions to these forward-looking statements to reflect future events or circumstances or to reflect the occurrence of unanticipated events.
