Form 10QSB for TEDA TRAVEL GROUP INC

21-Nov-2005

Quarterly Report

Item 2. Management’s Discussion and Analysis or Plan of Operation.

Cautionary Statements

The following discussion and analysis should be read in conjunction with the Company’s Consolidated Financial Statements and the Notes thereto included herewith.

The following discussion regarding the Company and its business and operations contains “forward-looking statements” within the meaning of Private Securities Litigation Reform Act 1995. These statements consist of any statement other than a recitation of historical fact and can be identified by the use of forward-looking terminology such as “may,” “expect,” “anticipate,” “estimate” or “continue” or the negative thereof or other variations thereon or comparable terminology. The reader is cautioned that all forward-looking statements are necessarily speculative and there are certain risks and uncertainties that could cause actual events or results to differ materially from those referred to in such forward looking statements. The Company does not have a policy of updating or revising forward-looking statements and thus it should not be assumed that silence by management of the Company over time means that actual events are bearing out as estimated in such forward looking statements.

Item 2. Management’s Discussion and Analysis or Plan of Operation – continued

Overview

The Company is a Delaware corporation incorporated on September 10, 1993, currently headquartered in Hong Kong SAR, People’s Republic of China (“PRC”). It has since engaged in various ventures and was led by numerous different management teams for the last ten years. The most recent operating Company was previously known as Acola Corp. (“Acola”), which came into being on October 12, 2001. Acola was formed to attempt to distribute an anti-cancer drug in Mexico, where it was unable to secure enough capital to obtain the exclusive distribution rights to the drug and has had no business since 2002.

On March 10, 2004, Teda Travel Incorporated, a Florida Corporation (“Teda Florida”), entered into a Share Exchange Agreement (“Exchange Agreement”) with its wholly owned subsidiary, Teda Hotels Management Company Limited, a British Virgin Islands Corporation (“Teda BVI”) and Acola. The Exchange Agreement set forth certain terms and conditions of the exchange by which the entire issued share capital of Teda BVI is transferred to that of Acola in exchange for approximately 86% of the issued share capital of Acola. The closing of the Transaction occurred on March 12, 2004. On the closing date, pursuant to the Exchange Agreement, all of Acola’s existing officers and directors, except Mr. James N. Baxter, resigned and all the directors of Teda Florida were elected on the Board of Acola. Mr. James N. Baxter resigned on March 30, 2004. In order to better reflect the new operations of the Company, the Company amended its certificate of incorporation to change its name to that of Teda Travel Group, Inc. on April 20, 2004.

Prior to the share exchange, the Company had no material operations. The merger was accounted for as a recapitalization of Teda BVI, as the shareholders of Teda BVI acquired capital stock of the Company in a reverse acquisition. Accordingly, the assets and liabilities of Teda BVI were recorded at historical cost, and the shares of common stock issued by the Company were reflected in the consolidated financial statements with retroactive effect, as if the Company had been the parent company from inception. The Company’s former year-end date was June 30 and currently assumes the year-end date of the acquirer of December 31.

The Company primarily earns its revenues through the provision of management services, including training and consulting services, to hotels and resorts in the PRC through its operating subsidiaries, Teda BVI, and Teda Hotels Management Limited, a Hong Kong corporation; and a 60%-held subsidiary, Landmark International Hotel Group Limited, acquired through an acquisition that closed on November 8, 2004.

The Company is also an investor in real estate development projects in the PRC. In January 2002, the Company acquired a 35% interest in a real estate joint venture by the name of Tianjin Yide Real Estate Company Limited. The Company’s co-venturer is a real estate developer by the name of Tianjin Teda International Hotels Development Company Limited, a corporation owned by the Tianjin provincial government and formed under the laws of the People’s Republic of China. Through the real estate joint venture, the Company owns a 35% interest in a multi-use complex featuring apartment units for sale, as well as a hotel and clubhouse. For more information about the Company’s real estate joint venture, please see Item 2, “Properties,” in the Teda Travel Group, Inc.’s Annual Report on Form 10-KSB, as filed with the United States Securities and Exchange Commission on April 13, 2005.

Item 2. Management’s Discussion and Analysis or Plan of Operation – continued

Revenues are derived from the Company’s provision of management services to hotels and resorts which include management fees and incentive fees from the properties that it manages, pursuant to the terms and conditions of its management contracts. Each of the hotels and resorts is managed under a management contract with terms varying from 2-10 years. As of September 30, 2005, the Company has 18 management contracts of hotels and club houses located in various locations in the PRC, encompassing more than 3,700 rooms.

Under its management contracts with each of the hotel and resort properties, the Company is responsible for the supervision and day-to-day operations of the property in exchange for a basic management fee based on gross revenues. In addition, the Company may also earn an incentive fee based upon gross operating profits of the property managed.

The Company’s expansion plans for 2005 have not been successful due to the lack of sufficient funds. For this reason, management has decided to conserve cash and agreed with the owners of Teda Resort Alliance Development Co., Limited (“TRAC”) to rescind the Company’s acquisition of the TRAC on August 20, 2005. Moreover, the Board of Directors is seriously looking for different ways in which to raising capital for the Company, including but not limited to issuance of new shares and disposal of Company’s assets.

To conserve cash, on August 20, 2005, the Company rescinded its acquisition of Teda Resort Alliance Development Co., Limited (“TRAC”) by mutual consent.

Management of the Company plans to grow by acquiring peer hotel management companies and may diversify the Company’s business through entering new travel business sectors such as online reservation services and travel agencies.

For more information relating to the Company’s business, please see the section entitled “Business” in the Teda Travel Group, Inc.’s Annual Report on Form 10-KSB as filed with the United States Securities and Exchange Commission on April 13, 2005.

Critical Accounting Policies

The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including but not limited to those related to income taxes and impairment of long-lived assets. We base our estimates on historical experience and on various other assumptions and factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Based on our ongoing review, we plan to make adjustments to our judgments and estimates where facts and circumstances dictate. Actual results could differ from our estimates.

We believe the following critical accounting policies are important to the portrayal of our financial condition and results and require our management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

Item 2. Management’s Discussion and Analysis or Plan of Operation – continued

(i) Property and Equipment

Property and equipment are stated at cost, less accumulated depreciation. Depreciation is provided using the straight-line method over the estimated useful life of the assets from three to thirty nine years. Repairs and maintenance on property and equipment are expensed as incurred.

(ii) Revenue Recognition

The Company recognizes hotel and resort management service fees in the period when the services are rendered.

(iii) Foreign Currency Translation

The Company’s assets and liabilities that are denominated in foreign currencies are translated into the currency of United States dollars using the exchange rates at the balance sheet date. For revenues and expenses, the average exchange rate during the year was used to translate Hong Kong dollars and Chinese Renminbi into United States dollars. The translation gains and losses resulting from changes in the exchange rate are charged or credited directly to the stockholders’ equity section of the balance sheet when material. All realized and unrealized transaction gains and losses are included in the determination of income in the period in which they occur. Translation and transaction gains and losses are included in the statement of operations because they are not material as of September 30, 2005.

(iv) Stock-Based Compensation

The Company accounts for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations and elects the disclosure option of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”).

Accordingly, compensation cost for stock options is measured as the excess, if any, of the fair value of the Company’s stock at the date of grant over the amount an employee must pay to acquire the stock. The Company also records stock compensation expense for any options issued to non-employees using the fair value method prescribed in SFAS No. 123.

(v) Income Taxes

The Company accounts for income taxes under the Financial Accounting Standards Board Statement of Financial Accounting Standards No. 109 “Accounting for Income Taxes” (“SFAS No. 109”). Under SFAS No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS No. 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

Item 2. Management’s Discussion and Analysis or Plan of Operation – continued

(vi) Long-Lived Assets

The Company accounts for long-lived assets under the Statements of Financial Accounting Standards Nos. 142 and 144 “Accounting for Goodwill and Other Intangible Assets” and “Accounting for Impairment or Disposal of Long-Lived Assets” (“SFAS No. 142 and 144”). In accordance with SFAS No. 142 and 144, long-lived assets, goodwill and certain identifiable intangible assets held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. For purposes of evaluating the recoverability of long-lived assets, goodwill and intangible assets, the recoverability test is performed using undiscounted net cash flows related to the long-lived assets.

Consolidated Results of Operations

For the three and nine months ended September 30, 2005 compared to the three and nine months ended September 30, 2004

Revenues.

Revenues were $277,364 and $141,116 for the three months ended September 30, 2005 and 2004, and $600,149 and $386,446 for the nine months ended September 30, 2005 and 2004, representing an increase of $136,248 and $213,703, or 97% and 55%. We enjoyed a healthy growth this year, especially with the number of hotels under our management that has grown from 3 to 18.

Other Selling, G&A expenses.

Other selling, G&A expenses were $139,600 and $43,759 for the three months ended September 30, 2005 and 2004, and $489,771 and $106,473 for the nine months ended September 30, 2005 and 2004, representing an increase of $95,841 and $383,298, or 219% and 360%. The significant increases in Other Selling, G&A expenses is due to the counsel cost incurred on due diligence, acquisition agreement drafting and other costs incurred for implementing procedures to satisfy regulations within the Sarbanes-Oxley Act. The Company expects the legal costs to reduce significantly hereafter.

Loss from Operations.

The Company incurred a loss from operations of $60,044 and $402,424 for the three months ended September 30, 2005 and 2004, and $1,036,579 and $3,231,520 for the nine months ended September 30, 2005 and 2004. The loss from operations reflected a decrease in expenses related to stock issued for services and an increase in revenue.

Equity loss in associate.

The Company recorded an equity loss in affiliate of $140,047 and $225,036 for the three months ended September 30, 2005 and 2004, and $448,923 and $526,452 for the nine months ended September 30, 2005 and 2004, representing a decrease of $84,989 and $77,529, or 38% and 15%. The decrease in net loss was due to increased hotel accommodation revenue recorded by the associate during the quarter.

Income tax.

The Company derives its hotel management income in the People’s Republic of China and is subject to withholding income tax in the People’s Republic of China depending upon the province in which a particular hotel is located. Income tax expense the Company charged to the consolidated income statement for the three months ended September 30, 2005 and 2004 was $5,100 and $8,861, and for the nine months ended September 30, 2005 and 2004 was $28,312 and $24,178, representing an increase (decrease) of ($3,761) and $4,134, or 42% and 17%.

Item 2. Management’s Discussion and Analysis or Plan of Operation – continued

Net Income / (Loss).

The Company recorded a net loss of ($195,039) and ($636,317) for the three months ended September 30, 2005 and 2004, and a net income of $1,846,444 and a net loss of ($3,782,110) for the nine months ended September 30, 2005 and 2004. The significant decrease was mainly due to the non-recurring expense of $808,396 and $1,977,325 derived from the stock issued for services in comparison to the three and nine months ended September 30, 2004 and a gain of $3,350,000 recorded in the current year for the forgiveness of liabilities by its former parent corporation upon completion of the spin of by the parent corporation to its stockholders described above, in addition to increase in gross revenue.

Consolidated Financial Condition

Liquidity and Capital Resources – September 30, 2005

Operating.

For the period ended September 30, 2005, the Group’s operations utilized cash resources of $259,263, as compared to utilizing cash of $104,515 for the period ended September 30, 2004, an increase of $154,748. This is mainly attributable to the increase in the payment of payroll and other operating expenses.

Based on current expectations, we believe that our cash and cash equivalents, and cash generated from operations will not satisfy our working capital needs, and other liquidity requirements associated with our existing operations through at least the next 12 months. There are no transactions, arrangements, and other relationships with unconsolidated entities or other persons that are reasonably likely to materially affect liquidity or the availability of our requirements for capital.

The report from our independent registered public accounting firm on our audited financial statements at December 31, 2004 contains an explanatory paragraph regarding doubt as to our ability to continue as a going concern as a result of our significant recurring losses from operations since inception. We do not have sufficient working capital to pay our operating costs for the next 12 months. In view of the above, the Board of Directors is seriously looking for different ways in which to raising capital for the Company, including but not limited to issuance of new shares and disposal of Company’s assets.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet financing arrangements.