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YTBLA.OB > SEC Filings for YTBLA.OB > Form 10KSB on 31-Mar-2008All Recent SEC Filings

Show all filings for YTB INTERNATIONAL, INC.



Annual Report

Item 6. Management's Discussion and Analysis or Plan of Operation.


We are a leading provider of Internet-based travel related services and operate primarily through three of our subsidiaries:, Inc., YTB Travel Network, Inc. and REZconnect Technologies, Inc., Inc. ("YTB Marketing") establishes online travel websites and compensates its Reps via a multilevel marketing commission structure. YTB Travel Network, Inc. ("YTB Travel") contracts with the online travel businesses, provides online booking systems, fulfills travel orders and pays travel commissions. REZconnect Technologies, Inc. ("REZconnect") operates as a travel vendor relationship management company and offers franchises to brick and mortar travel agencies. All of REZconnect's franchised operations are independently owned and operated. All sales of travel products by REZconnect are made through its independent agencies and franchisees, or through its interactive websites.

We offer our customers a reliable source of travel products and services through our relationships with selected travel providers, including major airlines, cruise lines, hotels and car rental agencies, as well as wholesale travel providers. We offer our customers the ability to make reservations on over 400 airlines, at more than 75,000 hotels and with most major car rental companies, cruise lines and tour package operators.

Our multi-segment operating model provides us with a competitive advantage because few travel related companies have expertise in both travel and marketing. We have been able to obtain more favorable pricing terms with our vendors as a result of economies of scale. In addition, more favorable commission rates are able to be realized based on the larger volume.

We also benefit from the synergies among our operating segments. YTB Marketing markets and establishes online travel websites on behalf of YTB Travel. YTB Marketing has a unique business model and strategy of creating a network of commissioned Reps who exclusively market the online travel websites of YTB Travel. A purchaser of an online travel website from YTB Travel is known as a Referring Travel Agent ("RTA"). Each RTA pays $449.95 for the purchase of an online travel store, plus the first month's RTA web hosting fee of $49.95. The monthly fee continues for as long as the RTA operates his/her online travel store. YTB Travel retains a percentage of the travel commissions generated by the RTAs. While Travelocity,, Expedia and Orbitz focus their promotion efforts on the customer, typically spending over 25% of their revenue on advertising, we spend less than 1% of our net revenues on advertising.

YTB Marketing's sales of online travel websites on behalf of YTB Travel are not subject to the seasonality of the travel business, nor should a decline in travel significantly impact YTB Marketing, since the $49.95 monthly fee is a primary source of YTB Marketing's revenue. Also, typical online travel merchants sell a commodity (travel), which does not engender strong customer loyalty. By contrast, each RTA develops personal relationships with his or her customers, who book travel through the RTA's own online travel store, thereby creating a significant advantage for YTB compared to the major online travel companies. The cost to book a trip through an RTA is usually nearly identical to booking a trip through a major online travel company. The RTAs' online stores provide access to more than 31 booking engines, including World Choice Travel (a subsidiary of Travelocity),, Apple Vacations, Collette Vacations, and more.

As of December 31, 2007, there are 131,065 RTA travel store websites in operation and numerous registered travel agents, which include franchisees and independent travel agents, using the Vacation Central travel portal site. Site owners are also permitted to solicit organizations and associations for travel sites.

YTB Travel is our travel management subsidiary that processes travel sales from online business models and processes and handles bookings (reservations) from approximately 131,065 websites, negotiates deals with over 60 preferred vendors, and receives incentives based on the volume of business that it produces. 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 the Internet for travel services presents the opportunity for advancement of products and services by referral relationships. Future revenue growth should accelerate as more RTAs are added to the system, and as each goes through the various training programs that YTB Travel provides. RTA sites are available for use 24 hours, 7 days a week.

REZconnect generates revenue through registered travel agents and 45 active franchised travel agencies. REZconnect offers consumer driven websites which provide strong content and travel booking ability with 55 booking engines incorporated into one site, covering virtually all aspects of the travel industry.

Our revenues derive primarily from online travel store sales, monthly RTA web hosting fees and commissions paid by travel providers. In addition, certain travel suppliers pay performance-based compensation known as "override commissions" or "overrides."
Commission revenues, net of allowances for cancellations, are recognized based on the expected date of travel.

Overrides are recognized on an accrual basis based on prior year's experience adjusted for current year volumes.

Franchise fees are recognized when all material services and conditions required have been performed and the ability to collect 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 an accrual basis as earned.

Revenue from online travel store sales is deferred and recognized ratably as revenue over a 12-month period, which represents the average lifespan during which an RTA remains an RTA with the Company.

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, 10% to 18% for cruises and vacation packages and a nominal service fee for airline tickets. During the past several years, leisure vendors (including tour operators, cruise lines, hotel and car packagers) have not reduced their commission levels but in fact have offered YTB Travel incentive commissions above the standard compensation for its volume business. YTB Travel expects that its commissions from 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 latter offering lower commissions. Each website travel storeowner pays a monthly web hosting fee of $49.95 to us, and can earn transactional compensation from travel purchased from his or her website. There can be no assurance that travel suppliers will not reduce commission rates paid to YTB Travel or eliminate such commissions entirely, which could, individually or in the aggregate, have a material adverse effect on our business, operating results and financial condition.

In order to expand our potential revenue base internationally, in early 2008 we expanded our services into Canada, the Bahamas, and Bermuda. YTB Bahamas commenced operations on January 11, 2008, and YTB Canada and YTB Bermuda commenced operations on February 8, 2008. As a result of this international expansion, our RTAs living in these countries can now sell travel through websites that they acquire from us, and, similarly, our Reps who are located there can market online travel websites to others in the U.S., Puerto Rico, the Bahamas, Bermuda and Canada.

It should be noted that while only the commissions arising from our RTAs' booking of travel services are reflected as a component of our revenues in our financial statements, we also keep track of the aggregate retail value of all travel services that are booked by our RTAs (which directly impacts our commission revenues). The value of such travel services increased 83.7% in 2007 to over $414,000,000, from approximately $225,000,000 in 2006.

Results of Operations

The following table sets forth, for the periods indicated, the percentage relationship of certain items from our consolidated statement of operations to our total revenues:

                               2007                               2006                            Variance
                            Year Ended        % of Net         Year Ended        % of Net         Increase
                           December 31,    Revenues 2007      December 31,    Revenues 2006      (Decrease)      Inc.(Decr.) %

Online travel stores
monthly fees              $  103,656,435             73.4 %  $   36,887,611             72.4 %  $  66,768,824             181.0 %
Travel commissions and
services                      20,495,954             14.5 %       7,364,413             14.5 %     13,131,541             178.3 %
Training programs and
marketing materials           14,014,632              9.9 %       5,766,081             11.3 %      8,248,551             143.1 %
Other                          3,118,453              2.2 %         878,625              1.8 %      2,239,828             254.9 %

Total net revenues           141,285,474            100.0 %      50,896,730            100.0 %     90,388,744             177.6 %

Marketing commissions         80,550,029             57.0 %      29,908,507             58.8 %     50,641,522             169.3 %
Travel commissions            13,426,540              9.5 %       4,893,012              9.6 %      8,533,528             174.4 %
Depreciation and
amortization                   1,151,548              0.8 %         408,025              0.8 %        743,523             182.2 %
Marketing and selling          6,219,485              4.4 %       3,144,211              6.2 %      3,075,274              97.8 %
General and
administrative                36,915,025             26.1 %      18,595,959             36.5 %     18,319,066              98.5 %

Total operating
expenses                     138,262,627             97.8 %      56,949,714            111.9 %     81,312,913             142.8 %

OPERATIONS                     3,022,847              2.2 %      (6,052,984 )          (11.9 %)     9,075,831             149.9 %

Interest and dividend
income                           447,369              0.3 %         170,224              0.4 %        277,145             162.8 %
Interest expense                 (38,130 )           (0.0 %)        (93,617 )           (0.2 %)        55,487             (59.3 %)
Gain (loss) on sale of
assets                            (9,991 )           (0.0 %)              -              0.0 %         (9,991 )             0.0 %

Total other
income/(expense)                 399,248              0.3 %          76,607              0.2 %        322,641             421.2 %

INCOME TAX PROVISION           3,422,095              2.5 %      (5,976,377 )          (11.7 %)     9,398,472             157.3 %

INCOME TAX PROVISION             213,200              0.2 %               -              0.0 %        213,200               0.0 %

NET INCOME (LOSS)         $    3,208,895              2.5 %  $   (5,976,377 )          (11.7 %) $   9,185,272             157.3 %

The following table sets forth the number of active RTAs as of the conclusion of each of our last two fiscal years, as well as the number of site sales during each such fiscal year:

    RTAs as of         RTAs as of
December 31, 2007  December 31, 2006
     131,065             59,736

Site sales for the Site sales for the
 12 months ended    12 months ended
December 31, 2007  December 31, 2006
     139,239             58,985

The above RTA figures represent the number of active RTAs paying $49.95 per month for monthly web hosting fees. The site sales figures represent the number of online travel store sites sold during the respective fiscal years. The number of sales, and the amount of recurring monthly web hosting fees paid, each directly impacts our revenues and expenses. As each new site is sold for $449.95, marketing commissions are paid on that sale. Likewise, each recurring monthly web hosting fee paid results in marketing commissions paid to our Reps. As the number of active RTAs grows, the amount of our travel commissions revenue grows as well. Correspondingly, our travel commissions expense follows suit.

The growth on a year-to-year basis of our organization that is evidenced by the above numbers directly impacts our financial results, both on the revenue side, and the expense side. As more sites are sold and maintained, the amount of marketing and travel commissions correspondingly increase, as do other volume related expenses, such as wage and benefit costs. As more sales are made, our entire infrastructure needs to keep pace with the sales volume.

At YTB Marketing, we engage network marketing as our method of distribution of the online travel websites to new RTAs. Reps are recruited, trained, motivated, recognized, supported, and compensated for the sale of our travel websites. A number of Company-sponsored events and programs are conducted annually to assist Reps in the building of their businesses. Below are some events and programs that occur throughout the year that assist Reps in building their businesses, while also training our RTAs:

National Convention: The YTB National Convention has been conducted annually in St. Louis since 2003. The registration fee of $100 - $200 provides participants with four days of training, motivation, and recognition for sales achievement. Planned for the August 2008 National Convention is "YTB University," a two-day school of business building and travel sales classes, conducted by YTB's leading field sales people, corporate staff, travel industry vendors and experts, and outside professionals. The final two days of the convention consist of a series of general sessions, comprised of instructional and motivational speakers, awards and recognition, special announcements, launch of contests, travel industry vendor presentations, and keynote speeches by our corporate founders and field leaders. In August 2007, attendance at the convention rose by over 200% relative to 2006, with 10,800 sales force individuals of our organization in attendance. It is anticipated that 2008 attendance could approach 20,000.

Convention attendance follows by year:

Year       Attendance
2004              700
2005            1,300
2006            3,200
2007           10,800

Regional Meetings - Throughout the year our founders, corporate staff, and field leaders plan and participate in various regional meetings around the nation for Reps and RTAs. These events, ranging from single-evening to two-day meetings and seminars, involve some of the elements of our National Convention. Attendance can range from a few hundred to several thousand attendees. These events usually begin in January with a "Founders Tour," during which our founders travel to 60 - 70 cities to conduct meetings.

CRTA Events - These events - "RTA Certification" or "CRTAs" - are conducted by our Sales Directors, our top sales achievers. They are primarily for the benefit of new RTAs and Reps. There is a $149 tuition payment required to become certified, but there is no payment required to attend the event. The one-day course consists of travel and marketing training, and is conducted normally on weekends on a monthly basis in up to 30 to 40 cities around the nation.

Coach's Birthday Bash - A sales contest - "Coach's Birthday Bash" - is launched annually at our National Convention and runs through the end of the year. The contest winners are treated to several days on a cruise or trip to an exotic location for socializing, recognition, and attendance of motivational and training seminars.

Number of Winners of Coach's Birthday Bash contest by year have been:

Jan. 2005        100
Jan. 2006        200
Jan. 2007        400
Jan. 2008      2,000

Funshine Travel Trade Shows - Historically, twice annually, in the spring on the west coast and in the fall on the east coast, a "Funshine Travel Trade Show" is generally conducted and attended by upwards of 5,000 of our RTAs. The Funshine event features major national travel vendors conducting travel seminars and distributing their vacation materials on cruises, golf packages, hotels and resorts, theme parks, and US and European packages, among others. Event planning starts a year in advance for these travel events which features major vendors such as Disney, Carnival Cruises, Apple Vacations, Trafalgar Tours, and many more. In October 2007, over 5,000 RTAs attended the Funshine event that was held in Orlando, Florida.

YTB E-Campus - In October 2007, we launched "YTB E-Campus," a proprietary web-based training certification and testing program for our RTAs. The program was designed by Dr. Marc Mancini, the creative force behind some of the best-known and most successful training programs in the travel business. The YTB E-Campus instructional series is designed to be one of the most ambitious and comprehensive-training programs ever offered by a host agency and will initially consist of 10 unique courses. We have been introducing a new course every six to eight weeks. The first course, Overview of the Travel Industry, was launched in October 2007, and has been/will continue to be followed by courses on lodging, tours/groups, cruising, air, rail/car rentals, sales/service/marketing, and three courses on destination geography. Each course is interactive, instructionally sound and entertaining., a San Antonio-based firm that specializes in travel-related training solutions, has designed the program's web site. has built and currently manages several of the most prominent certification programs in the travel industry.

These events contribute to rapid growth in the sales of online travel stores and also aid in the retention of Reps and RTAs throughout the year.


Net revenues totaled $141,285,474 and $50,896,730 for the years ended December 31, 2007 and 2006, respectively.

Online travel store sales and monthly web hosting fee revenue increased $66,768,824 or 181.0% in 2007 to $103,656,435 from $36,887,611 in 2006. The increase was due to the significant growth of YTB Marketing and an accompanying increase in the number of active RTAs. We believe that the significant growth in RTAs was attributable to (i) the emerging market shift to the Internet for travel services which presents the opportunity for advancement of products and services by referral relationships, and (ii) the boom in home-based businesses. In addition, an increase in the sales price for websites to RTAs from $399.95 to $449.95 effective October 1, 2006 was also partially responsible for the increase.

Travel booking commissions for 2007 increased $13,131,541 or 178.3% in 2007 to $20,495,954 from $7,364,413 reported in 2006. The increase was attributable to an increase in the number of customers who utilized the Company as their travel provider in 2007, due to the significant growth in the number of RTAs.

It should be noted that while only the commissions arising from our RTAs' booking of travel services are reflected as a component of our revenues in our financial statements, we also keep track of the aggregate retail value of all travel services that are booked by our RTAs (which directly impacts our commission revenues). The value of such travel services increased 83.7% in 2007 to $414,480,364, from $225,676,569 in 2006.

Training programs and marketing materials revenue increased in 2007 as compared to 2006 by $8,248,551 or 143.1% to $14,014,632 from $5,766,081. This increase was due to the significant growth of sales revenues primarily from training programs, sales aides and miscellaneous promotional and marketing materials purchased by an increasing number of Reps. Revenue from the sale of the "Success from Home" magazine, which began to be sold in 2006 but was sold in greater quantity in 2007, accounts for $3,369,494 million of the increase from 2006. Additional increases in 2007 stemmed from increases in training programs revenue and sales aides and miscellaneous marketing materials revenue in amounts of $1,092,022 and $336,603, respectively, compared to 2006.

Other revenue increased in 2007 as compared to 2006 by $2,239,828 or by 254.9% to $3,118,453 from $878,625 primarily due to the increase in convention revenue.

Operating Expenses

Marketing commissions increased by $50,641,522 or 169.3% in 2007 to $80,550,029 from $29,908,507 in 2006. This increase was due to the significant increase in the number of active RTAs recruited by our Reps. The average payout went down as compared to 2006. This is due to a reduction in the percentage of marketing sales that were attributable to Reps achieving a Dream Bonus plus Leadership Bonus as compared to 2006, thereby reducing our average commission payouts to our Reps.

Travel commissions for the year ended December 31, 2007 increased $8,533,528 or 174.4% to $13,426,540 from $4,893,012 reported in the comparable prior year period. The increase was attributable to an increase in the number of customers utilizing the Company as their travel provider in 2007 due to the significant growth in the number of RTAs.

Depreciation and amortization was $1,151,548 for the year ended 2007 compared to $408,025 in 2006. This increase was due to the acquisition of $7.3 million of depreciable assets in 2007. The additions included the purchase of the old corporate headquarters, work on the new headquarters and IT equipment.

Marketing and selling expenses increased by $3,075,274 or 97.8% from $3,144,211 in the year 2006 to $6,219,485 in 2007. This increase was primarily due to "Success From Home" magazine expense of $4,002,230. Other increases resulted from the increase in CRTA events held, regional meetings, and the increase in number and size of open houses at our headquarters office called "Red Carpet" Days.

General and administrative expenses increased $18,319,066 or 98.5% to $36,915,025 for the year ended 2007 from $18,595,959 in 2006. As a percentage of total net revenues, these expenses were 26.1% in 2007 and 36.5% in 2006. The increase in general and administrative expense in 2007 was attributable to the significant growth in the number of active RTAs, resulting in increased costs associated with the growth in our infrastructure to support the increased volume.

Variability of Results

Our travel products and services gross bookings have increased from 2006 to 2007 due to an increase in the number of hosted websites and an increase in products and services sold to travel stores utilizing our unique private label agent-only web-based booking site. Cost of travel revenues have similarly increased from 2006 to 2007.

As a result of our operating history in online commerce we are unable to accurately forecast our revenues. Our current and future expense levels are based predominantly on our operating plans. We 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 our business, operating results and financial condition. Further, we currently intend to substantially increase our operating expenses to develop and offer new and expanded travel services, to fund increased sales and marketing and customer service operations and to further develop our technology and transaction processing systems. To the extent such expenses precede or are not subsequently followed by increased revenues, our operating results will fluctuate and net losses may be experienced in a given period.

We expect to experience fluctuations in our future operating results due to a variety of other factors, many of which are outside our control. Factors that may adversely affect our quarterly operating results include, but are not limited to (i) our ability to retain existing travel customers, attract new customers at a steady rate and maintain customer satisfaction, (ii) changes in travel product inventory availability from third party suppliers and commission rates paid by travel suppliers, (iii) the announcement or introduction of new or enhanced sites, services and products by us or by our 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 travel products and services such as those offered by us, (vi) our ability to upgrade and develop our systems and infrastructure and to attract new personnel in a timely and effective manner, (vii) the level of traffic on our 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 our business, operations and infrastructure, (x) governmental regulation and (xiii) unforeseen events affecting the travel industry, including terrorist activities similar to September 11 and the conflict in the Middle East.

Another factor that may also impact whether there are periodic or long-term declines in our revenues is our ability to maintain our relationships both with contractual counter-parties whose travel services are sold by our RTAs and with other trade organizations. In 2007, one contractual counter-party, a provider of cruises, terminated its relationship with us, thereby preventing our RTAs from booking cruises or other services through that provider. While the commissions generated by travel sales through that cruise line provider were not material to our financial results, if a large number of travel service providers were to follow suit in a finite period of time, that would have an adverse impact on our revenues and overall financial condition during such period of time. In addition, in 2007, due to action taken by a large global trade organization, our RTAs lost the associated certification benefits. While such action does not impact our RTAs' ability to book travel at all, similar actions that could be taken by other trade organizations could negatively impact our reputation and thereby cause a decline in our revenues.

In addition to fluctuations triggered by specific events, we expect that we will experience seasonal fluctuations in the travel industry, Internet and commercial online and travel product purchases. We anticipate 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 a travel sales medium, seasonality in the level of customer travel expenditures could become . . .

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