John already stole the thunder with a few tidbits, but this will give a more complete analysis of the contents of the YTB 10-K (annual report) for 2008.
Obviously the big headline is,
"There is a substantial doubt about our ability to continue as a going concern."
There were hints of this in the 3rd quarter 10-Q, but it is now official. Even the company auditor won't hide it anymore. On page 9 it notes,
"We conduct marketing activities, book travel and sell related products exclusively through 8,337 independent contractors known as Reps and 92,383 RTAs".
As I recall, when I attended the Founder's Day last year, the number of Reps was listed at something over 300,000. At the time, this was explained that everyone that was ever an RTA was also a Rep, and they never purged the inactive Reps from the rolls, since there is no cost to be a Rep. Well, apparently, there are lots of RTAs that are not Reps, and they have now purged the rolls. On page 10, we see,
"Our financial success and business reputation depend, in large part, on our Reps and RTAs, who are not employees and operate as independent contractors" and "Since we cannot exert the same level of influence or control over our Reps and RTAs as we could were they our own employees, our Reps and RTAs could fail to comply with our Rep and RTA Policies and Procedures and Terms and Conditions, which could result in claims against us that could harm our financial condition and operating results."
What a stellar business reputation those independent contractors have provided. One not need look any further than this blog for many examples of unprofessional behavior.
"We experienced a 44.3% decrease in active Reps and a 29.2% decrease in RTAs during 2008."
The vast majority of the decrease came during the 2nd half of 2008, with a decrease of 22231 RTAs in the 4th quarter alone. Page 11 notes,
"Our revenues are highly dependent on IBC hosting fees received from Affiliates, RTAs, travel agents and agencies."
Note that as has been said here many times, YTB is not in the business of selling travel, they are in the business of selling travel sites. Now, they have finally admitted that. Further, the report says,
"Fees from hosting and sales of IBCs that we offer to home-based representatives make-up over 75% of our revenues as of December 31, 2008."
If the number of RTAs continues to fall, revenues will continue to fall as well.
"For the 2008 fiscal year, our revenues from IBC sales and monthly web-hosting fees paid by RTAs, along with revenues from training programs held and marketing materials sold to Reps and RTAs, exceeded the marketing commissions and travel commissions that we expended in payments to our Reps and RTAs. If, and to the extent that, this excess reflected in our operating results actually reflects a deficit in the operating results of our Reps and RTAs in their marketing and travel-related activities within the YTB organization, such a deficit, if continued indefinitely, would reflect a negation of the financial incentive for Reps and RTAs to continue in their YTB-related activities on our behalf. Any such negative financial results for our Reps and RTAs would adversely impact our ability to retain them within our organization, which, in turn, would call into question the sustainability of our business model and thereby harm our financial condition and operating results."
In other words, we are making our gross profits off of what we charge to our Reps and RTAs for monthly fees and training. That means they, as a group, are losing money. If this continues, they will eventually wake up and realize that they are stupid to continue losing money month after month and will quit. Thus our business will fail.
"Our business strategy is dependent upon the growth of our business. For us to achieve significant growth, potential Reps and RTAs, consumers and travel suppliers must accept our IBCs as a valuable commercial tool. Travel suppliers will also need to accept or expand their use of our IBCs and to view our IBCs as an efficient and profitable channel of distribution for their travel products."
Travel Suppliers have been increasingly rejecting the use of YTBs IBCs and not viewing them as efficient and profitable channels of distribution. In fact they have been viewing them as consumers that have been trying to save a buck on travel by selling to themselves and saving the cost of commissions. Thus a number of suppliers, notably Royal Caribbean and their three brands, NCL, Perillo Tours, and others have cut YTB off completely.
Listed under risks,
"Our business and financial results depend on the continued service of our key personnel, in particular J. Lloyd Tomer (Chairman of the Board), J. Scott Tomer (Chief Executive Officer) and J. Kim Sorensen (Vice Chairman of the Board). "
Is this a hint that they are ready to bail? All told, the Risks section of the 10-K runs 11 and one-half pages.
"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 million from approximately $225 million in 2006. Comparable data for 2008 sales (retail value) has not yet been reported to us by our travel vendors."
Apparently, YTB is one of the few travel agencies (using that term very loosely) that does not keep track of the value of the travel they sell. If they don't, how do they know that they are being paid the proper amount of commission?
On the plus side for YTB, travel commissions increased by over $7 million and represented 17.2% of revenue versus only 14.6% in 2007. However, they also included overrides in this figure which are paid 100% to Lloyd "Coach" Tomer in accordance with his employment agreement.
"General and administrative expenses increased $18.3 million, or 53.3%, in 2008"
Which is attributed most due to increased numbers of employees. However, it has been noted that YTB actually laid off a number of employees during the late 3rd quarter or early 4th quarter of 2008. That doesn't seem to be consistent.
"As of December 31, 2008, we had $1.2 million in cash and cash equivalents." "our Company has incurred a loss from operations for the year December 31, 2008 of $4.1 million."
At this rate of cash burning, either asset sales will have to continue, or bankruptcy is imminent.
The company auditor reported,
"The Company’s tone at the top was not sufficient to assure the directives of the Company’s Board of Directors were followed. Management did not obtain approval of the Board prior to entering into certain contracts and agreements as required by the Company’s control structure. In addition, controls were not sufficient to prevent management override of controls over approval of disbursements. These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2008 consolidated financial statements, and this report does not affect our report dated March 16, 2009, on those consolidated financial statements.
In our opinion, because of the effect of the material weaknesses described above on the achievement of the objectives of the control criteria, YTB International, Inc. has not maintained effective internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). "
Basically, this says that the management (i.e. the Tomers and Mr. Sorensen), do what they want, despite what the overall Board of Directors or shareholders want, or without even bothering to ask them. What is interesting is that YTB was cited for a similar failure last year, and supposedly adopted remedial measures to bring them into regulatory compliance. Apparently, those measures weren't followed.
"On January 26, 2009, the Company’s Board of Directors approved the issuance of 3,821,451 shares of restricted stock to certain Sales Directors. These awards were in replacement of previously issued restricted stock and option awards."
Gee, I wonder if they will offer replacement of value lost by stockholders over the last year, or just keep the profits to themselves.
"On March 11, 2009, the Company incorporated a new subsidiary, YTB Franchise Services, Inc., which was formed to service and offer future franchise efforts of the Company. "
I wonder when we will see details of these plans, and how it affects current Reps and RTAs.
There is probably a whole lot more to be found, but this post is already way too long. It is pretty clear though that the end is near.
