Form 10QSB for TEDA TRAVEL GROUP INC
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 in Part I, Item 1 of this Report. All amounts are expressed in U.S. dollars.
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 operation Company was previously was 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 (“Teda HK”), a Hong Kong corporation; and a 60%-held subsidiary, Landmark International Hotel Group Limited (“Landmark”), acquired through an acquisition that closed on November 8, 2004. The Company is currently headquartered in Hong Kong SAR, the People’s Republic of China.
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 to 10 years. As of March 31, 2006, the Company manages eighteen hotel properties located in various parts of the PRC, encompassing more than 3,900 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.
At the end of 2005, we reformulated our business plan for 2006. Our vision is to add value to our customers via a nationwide hotel network in mainland China. We seek to provide quality service and support to the hotels we manage in a way that enables them to increase their profitability.
Our primary objectives are to increase the number of hotels under our management mainly through acquisition of hotel management companies in the PRC, renew existing management contracts and all new hotels to our portfolio of managed properties through acquisition.
We intend to build an Internet platform to provide a one-stop travel service to satisfy the needs of our customers, which include hotel owners and travelers. We intend to invest and develop businesses that would help build this network.
In addition to traditional hotel management services, we intend to diversify into other travel-related businesses, including travel agencies and car parking services. In pursuing this business direction, the Company is currently contemplating a number of such projects in mainland China.
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 17, 2006.
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.
(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 and earned, and collection is reasonably assured.
(iii) Foreign Currency Translation
The Company’s assets and liabilities that are denominated in foreign currencies are translated into the currency of U.S. 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 U.S. 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 March 31, 2006.
(iv) Stock-Based Compensation
In December 2004, the FASB issued SFAS No. 123R “Share-Based Payment” (“SFAS 123R”), a revision to SFAS No. 123 “Accounting for Stock-Based Compensation” (“SFAS 123”), and superseding APB Opinion No. 25 “Accounting for Stock Issued to Employees” and its related implementation guidance. SFAS 123R establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services, including obtaining employee services in share-based payment transactions. SFAS 123R applies to all awards granted after the required effective date and to awards modified, repurchased, or cancelled after that date. Adoption of the provisions of SFAS 123R is effective as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. The Company does not expect the adoption of this statement will have any material impact on its results of operations or financial position.
(v) Income Taxes
The Company accounts for income taxes under the FASB SFAS No. 109 “Accounting for Income Taxes”. 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.
(vi) Long-Lived Assets
The Company accounts for long-lived assets under SFAS Nos. 142 and 144 “Accounting for Goodwill and Other Intangible Assets” and “Accounting for Impairment or Disposal of Long-Lived Assets”. In accordance with SFAS Nos. 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 the 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 quarterly periods ended March 31, 2006 and March 31, 2005
Revenues. Revenues for the period ended March 31, 2006 were $189,262 as compared to revenues of $143,969 for the same period last year, an increase of $45,293, or 31%. The increase was mainly due to the growth of the number of hotels under our management from 13 to 18 with the establishment of Teda BJ and Landmark in late 2004. The impact of the additions of Teda BJ and Landmark began to surface in the latter half of 2005, contributing to the increase in revenues in the three months ended March, 2006 as compared to that in the previous period.
Total Expenses. Our total expenses during the period ended March 31, 2006 were $439,104, compared to expenses of $728,006 for the same period in 2005, a decrease of $288,902, or 40%. The decrease was primarily attributable to by a material reduction in stock issued for services and was offset by increases in payroll and professional fees.
Stock Issued for Services. Stock issued for services for the period ended March 31, 2006 were $30,625 as compared to $389,250 for the period ended March 31, 2005, a sharp decrease of $358,625 or 92%. The significant cost for shares issued to consultants for media relations in the previous period was not repeated in the current period.
Payroll. Payroll for the period ended March 31, 2006 was $170,351 as compared to $108,024 for the period ended March 31, 2005, an increase of $62,327 or 58%. The increase was due to the addition of several employees including a President and a new CFO.
Other Selling, General and Administrative Expenses. Other selling, general and administrative expenses for the period ended March 31, 2006 were $176,948 as compared to $179,295 for the period ended March 31, 2005, a slight decrease of $2,347 or 1%.
Loss from Continuing Operations. The Company incurred a loss from operations of $249,842 for the period ended March 31, 2006 as compared to a loss of $584,037 in the previous period. The decrease in loss of $334,195 was mainly due to a sharp reduction in stock issued for services as explained above. The increase in payroll was to a large extent offset by the increase in revenue.
Income Taxes. The Company derives its hotel management income in the People’s Republic of China and is subject to withholding tax in the People’s Republic of China depending upon the province in which a particular hotel is located. Income tax expenses charged to the consolidated income statement for period ended March 31, 2006 was $7,372 as compared to $10,173 for the period ended March 31, 2005, a decrease of $2,801 or 28%. Though revenue increased in the first three months of 2006 as compared to that of 2005, the increase was primarily earned by Teda BJ which operated at a loss, hence no income tax was payable in respect of its revenue.
Loss from Discontinued Operations. The equity loss attributable to our interest in Yide of $66,565 for the period ended March 31, 2005 was reclassified as loss from discontinued operations as a result of the Company’s loss of significant influence over Yide since October 1, 2005. With accounting treatment changed from equity method to cost method since October 1, 2005, there was no loss from discontinued operations in the current period.
Net Loss. The Company recorded a net loss of $248,822 as compared to a net loss of $663,778 for the same period last year, a decrease of $414,956 or 63%. That was mainly due to a reduction of $358,625 in stock issued for services, and the loss of $66,565 from discontinued operations did not recur in the current period.
Consolidated Financial Condition
Liquidity and Capital Resources – March 31, 2006
The cash and cash equivalents as of March 31, 2006 was $4,783,812 as compared with $88,182 as of March 31, 2005, a sharp increase of $4,695,630 or 5,325%. The increase was attributable to the following activities:
Net cash utilized by operating activities as of March 31, 2006 was $313,525, an increase of $153,607 as compared with $159,918 in the same quarter of 2005. The net cash outflow was mainly attributable to a net loss of $248,822 and an increase of $183,057 in accounts receivable.
Net cash provided by investing activities for the period ended March 31, 2006 was $1,954,299, as compared to net cash used of $3,016 in the same quarter of 2005. The increase of $1,957,315 was mainly attributable to the receipt of $3,000,000 for the sale of Yide pending its completion, which was partly offset by the placing of a $1,038,461 earnest deposit for a prospective project.
Net cash provided by financing activities was $3,057,119 for the period ended March 31, 2006, compared with $184,374 in the same quarter of 2005. The increase was primarily attributable to a private placement that raised gross proceeds of $4,000,000, from which we paid investment banking fees in the amount of $400,000.
The Company does not have any significant capital commitments outstanding at March 31, 2006.
Working Capital Requirements
We had cash of $4,783,812 at March 31, 2006 and our current assets totaled $6,246,028. Our current liabilities at March 31, 2006 were $3,698,105, so we had working capital of $2,547,923. Our long-term liabilities as of March 31, 2006 were not material.
Our ability to pay operating expenses will depend upon our future operating performance, which will be subject to economic, financial, competitive and other factors, some of which are beyond our control. With working capital in excess of $2.5 million as of March 31, 2005, and given the current economic climate and market conditions, the Company does not foresee any liquidity problem in maintaining its day-to-day operations over the next 12 months.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet financing arrangements.
RISKS AND UNCERTAINTIES
We are subject to various risks that could have a negative effect on the Company and its financial condition. You should understand that these risks could cause results to differ materially from those expressed in forward-looking statements contained in this report and in other Company communications. Because there is no way to
determine in advance whether, or to what extent, any present uncertainty will ultimately impact our business, you should give equal weight to each of the following:
The travel industry is highly competitive, which may impact our ability to compete successfully with other hotel and timeshare properties for customers.
We operate in markets that contain numerous competitors. Each of our hotel management companies competes with major hotel chains and independent operators in regional markets. Our ability to remain competitive and attract and retain business and leisure travelers depends on our success in distinguishing the quality, value and efficiency of our services from those offered by others. If we are unable to compete successfully in these areas, this could limit our operating margins, diminish our market share and reduce our earnings.
We are subject to the range of operating risks common to the hotel, real estate and travel-related industries.
The profitability of the hotel, real estate and travel-related industries that we operate in may be adversely affected by a number of factors, including:
(1) the availability of and demand for hotel rooms and apartments;
(2) international and regional economic conditions;
(3) the desirability of particular locations and changes in travel patterns of domestic and foreign travelers;
(4) taxes and government regulations that influence or determine wages, prices, interest rates, and other costs;
(5) the availability of capital to allow us and potential hotel owners and joint venture partners to fund investments;
(6) increases in wages and other labor costs, energy, mortgage interest rate, insurance, transportation and fuel, and other expenses central to the conduct of our business.
Any one or more of these factors could limit or reduce the demand, and therefore the prices we are able to obtain, for hotel rooms and corporate apartments.
The uncertain pace of the lodging industry’s recovery will continue to impact our financial results and growth.
Both the Company and the lodging industry were hurt by several events occurring over the last few years, including Severe Acute Respiratory Syndrome (SARS), and the terrorist attacks on New York and
Washington. Business and leisure travel decreased and remained depressed as some potential travelers reduced or avoided discretionary travel in light of increased delays and safety concerns and economic declines stemming from an erosion in consumer confidence. Weaker hotel performance reduced management fees and gave rise to losses and closures in connection with some hotels that we manage, which, in turn, has had a material adverse impact on our financial performance. Although both the lodging and travel industries are recovering, the pace, duration and full extent of that recovery remain unclear. Accordingly, our financial results and growth could be harmed if that recovery stalls or is reversed.
Our lodging operations are subject to international and regional conditions.
Although we conduct our business in China, our activities are susceptible to changes in the performance of international and regional economies, as foreign travelers constitute a fair percentage of hotel occupants. In recent years, our business has been hurt by decreases in travel resulting from SARS and downturns in global economic conditions. Our future economic performance is similarly subject to the uncertain magnitude and duration of the economic growth in China, the prospects of improving economic performance in other regions, the unknown pace of any business travel recovery that results, and the occurrence of any future incidents in China in which we operate.
Our growth strategy depends upon third-party owners/operators, and future arrangements with these third parties may be less favorable.
Our present growth strategy for development of additional lodging facilities entails entering into and maintaining various arrangements with property owners. The terms of our management agreements for each of our lodging facilities are influenced by contract terms offered by our competitors, among other things. We cannot assure you that any of our current arrangements will continue. Moreover, we may not be able to enter into future collaborations, or to renew or enter into agreements in the future, on terms that are as favorable to us as those under existing collaborations and agreements.
We may have disputes with the owners of the hotels that we manage.
Consistent with our focus on hotel management, we generally do not own any of our lodging properties. The nature of our responsibilities under our management agreements to manage each hotel and enforce the standards required under the management agreements may, in some instances, be subject to interpretation and may give rise to disagreements. We seek to resolve any disagreements in order to develop and maintain good relations
with current and potential hotel owners and joint venture partners, but have not always been able to do so. Failure to resolve such disagreements may result in litigation in the future.
Our ability to grow is in part dependent upon future acquisitions.
The process of identifying, acquiring and integrating future acquisitions may constrain valuable management resources, and our failure to effectively integrate future acquisitions may result in the loss of key employees and the dilution of stockholder value and have an adverse effect on our operating results. We have completed an acquisition and expect to continue to pursue strategic acquisitions in the future. Completing any potential future acquisitions could cause significant diversions of management time and resources.
Acquisition transactions involve inherent risks, such as:
? uncertainties in assessing the value, strengths, weaknesses, contingent and other liabilities and potential profitability of acquisition or other transaction candidates;
?the potential loss of key personnel of an acquired business;
? the ability to achieve identified operating and financial synergies anticipated to result from an acquisition or other transaction;
?problems that could arise from the integration of the acquired business;
? unanticipated changes in business, industry or general economic conditions that affect the assumptions underlying the acquisition or other transaction rationale; and
?unexpected development costs, that adversely affect our profitability.
Financing for future acquisitions may not be available on favorable terms, or at all. If we identify an appropriate acquisition candidate for our businesses, we may not be able to negotiate the terms of the
acquisition successfully, finance the acquisition or integrate the acquired business, technologies or employees into our existing business and operations. Future acquisitions may not be well-received by the investment community, which may cause our stock price to fluctuate. We cannot ensure that we will be able to identify or complete any acquisition in the future.
Our ability to grow our management systems is subject to the range of risks associated with real estate investments.
Our ability to sustain continued growth through management agreements for new or existing hotels is affected, and may potentially be limited, by a variety of factors influencing real estate development generally. These include site availability, financing, planning, zoning and other local approvals, and other limitations that may be imposed by market and submarket factors, such as projected room occupancy, growth in demand opposite projected supply, territorial restrictions in our management agreements, costs of construction and anticipated room rate structure.
We depend on capital to maintain hotels, and we may be unable to access capital when necessary.
In order to fund the refurbishment and improvement of existing hotels, both the Company and current and potential hotel owners must periodically spend money. The availability of funds for new investments and maintenance of existing hotels depends in large measure on capital markets and liquidity factors over which we can exert little control.
In the event of damage to or other potential losses involving properties that we own or manage, potential losses may not be covered by insurance.
We have comprehensive property and liability insurance policies with coverage features and insured limits to the hotels that we believe are customary. Market forces beyond our control may nonetheless limit both the scope of property and liability insurance coverage that we can obtain and our ability to obtain coverage at reasonable rates. There are certain types of losses, generally of a catastrophic nature, such as earthquakes and floods or terrorist acts that may be uninsurable or may be too expensive to justify insuring against. As a result, we may not be successful in obtaining insurance without increases in cost or decreases in coverage levels. In addition, we may carry insurance coverage that, in the event of a substantial loss, would not be sufficient to pay the full current market value or current replacement cost of our lost investment or that of hotel owners, or in some cases could also result in certain losses being totally uninsured. As a result, we could lose all, or a portion of, the capital we have invested in a property, as well as the anticipated future revenue from the property.
Risks relating to acts of God, terrorist activity and war could reduce the demand for lodging, which may adversely affect our revenues.
Acts of God, such as natural disasters and the spread of contagious diseases, in People’s Republic of China where we own and manage can cause a decline in the level of business and leisure travel and reduce
the demand for lodging. Wars (including the potential for war), terrorist activity (including threats of terrorist activity), political unrest and other forms of civil strife and geopolitical uncertainty can have a similar effect. Any one or more of these events may reduce the overall demand for hotel rooms and corporate apartments, or limit the prices that we are able to obtain for them, both of which could adversely affect our revenues.
The loss of key management personnel could harm our business and prospects.
We depend on key personnel who may not continue to work for us. Our success substantially depends on the continued employment of certain executive officers and key employees, particularly Godfrey Chin Tong Hui, Director and Chief . . .