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EX-31.2 - UNIVERSAL TRAVEL GROUPv215988_ex31-2.htm
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EX-32.2 - UNIVERSAL TRAVEL GROUPv215988_ex32-2.htm
EX-10.8 - UNIVERSAL TRAVEL GROUPv215988_ex10-8.htm
EX-32.1 - UNIVERSAL TRAVEL GROUPv215988_ex32-1.htm
EX-23.1 - UNIVERSAL TRAVEL GROUPv215988_ex23-1.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

(Mark One)

FORM 10-K

x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2010
 
or

¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____________to ______________

Commission file number 001-34284

UNIVERSAL TRAVEL GROUP
(Exact name of registrant as specified in its charter)

Nevada
90-0296536
State or other jurisdiction of
Incorporation or organization
(I.R.S. Employer
Identification No.)

5th Floor, South Block, Building 11, Shenzhen Software Park, Zhongke 2nd Road, Nanshan District,
Shenzhen, PRC 518000
(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code 011-86- 755-836-68489
 
Securities registered pursuant to Section 12(b) of the Act:

Title of each class
Name of each exchange on which registered
Common Stock, par value $0.001 par value per share
New York Stock Exchange, LLC

Securities registered pursuant to section 12(g) of the Act:

Preferred Stock, $0.001 par value per share
(Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
¨ Yes           x No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. x Yes   ¨ No

Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those Sections.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
x Yes     o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
¨ Yes      o No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer ¨
 
Accelerated filer ¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company)
   
Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
¨ Yes           x  No

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter.

Note.—If a determination as to whether a particular person or entity is an affiliate cannot be made without involving unreasonable effort and expense, the aggregate market value of the common stock held by non-affiliates may be calculated on the basis of assumptions reasonable under the circumstances, provided that the assumptions are set forth in this Form.

The aggregate market value of the voting and non-voting common stock of the issuer held by non-affiliates as of  June 30, 2010 was approximately $ 69,812,746.08 (9,919,522 shares of common stock)  based upon the closing price of the common stock as quoted by NYSE on such date.

APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.¨  Yes    ¨ No

(APPLICABLE ONLY TO CORPORATE REGISTRANTS)

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

As of June 7, 2011, there are presently 19,898,235 shares of common stock, par value $0.001 issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

List hereunder the following documents if incorporated by reference and the Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is incorporated: (1) Any annual report to security holders; (2) Any proxy or information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act of 1933. The listed documents should be clearly described for identification purposes (e.g., annual report to security holders for fiscal year ended December 24, 1980).

 
 

 

Table of Contents
 
  
   
 
Page
 
PART I
   
Item 1.
Business
  3
Item 1A.
Risk Factors
  18
Item 1B.
Unresolved Staff Comments
  24
Item 2.
Properties
  24
Item 3.
Legal Proceedings
  25
Item 4.
 (Removed and Reserved)
   
 
PART II
   
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
  26
Item 6.
Selected Financial Data
  29
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
  29
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
  42
Item 8
Financial Statements and Supplementary Data
  42
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
  43
Item 9A.
Controls and Procedures
  44
Item 9B.
Other Information
  45
 
PART III
   
Item 10.
Directors, Executive Officers and Corporate Governance
  46
Item 11.
Executive Compensation
  51
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
  53
Item 13.
Certain Relationships and Related Transactions and Director Independence
  56
Item 14.
Principal Accountant Fees and Services
  56
 
PART IV
   
Item 15.
Exhibits, Financial Statement Schedules
  58

 
2

 

PART I
 
Item 1.   Business.
 
History and Organization

Universal Travel Group (the “Company”) was incorporated on January 28, 2004, pursuant to the laws of the state of Nevada.

On March 15, 2006, we entered into an Acquisition Agreement and Plan of Merger (the "Acquisition Agreement") with TAM of Henderson, Inc. ("TAM"), whereby TAM acquired all of our outstanding shares of Common Stock from our then sole stockholder and simultaneously merged with and into the Company, with the Company as the surviving corporation.

On June 20, 2006, Mr. Xiao Jun ("Jun"), our former officer and director, acquired from the then-majority-shareholder of our Company 2,666,667 shares of our Common Stock, for an aggregate purchase price of $435,000 (the "Stock Transaction"). After giving effect to such acquisition, Jun held 2,666,667 of the 3,483,333 shares of our Common Stock then issued and outstanding, constituting, in the aggregate, 77% of the then issued and outstanding shares of Common Stock of the Company. In connection with his acquisition of shares in the Company, Jun was appointed as our Chief Executive Officer.

On July 12, 2006, we consummated the transaction contemplated by the Agreement and Plan of Merger, dated as of June 26, 2006 (the "Merger Agreement"), by and among the Company, Merger Sub of Tam, Inc. ("Merger Subsidiary"), a wholly owned subsidiary of us, Full Power Enterprise Global Limited (“Full Power”), and the shareholders of Full Power. In accordance with the Merger Agreement, Merger Subsidiary merged with and into Full Power, Merger Subsidiary ceased to exist and Full Power was the surviving entity (the "Merger Transaction").

The Full Power Shareholders received 6,666,667 shares of Common Stock in exchange for all of the issued and outstanding shares of Full Power. As a result of the Merger Transaction, Full Power became the Company's wholly owned subsidiary. Full Power owns all of the issued and outstanding capital stock of Shenzhen Yu Zhi Lu Aviation Service Company Limited (“YZL”).

In connection with the Merger Transaction, Jiangping Jiang (who, prior to the Merger Transaction was a shareholder of Full Power), Xin Zhang and Hoi-Yui Lee were appointed to our Board of Directors and Jun resigned from all positions with us.

Business Overview

With the acquisition of Full Power and hence YZL, we shifted our business to the online travel service industry in the People’s Republic of China (“PRC”). YZL, a company organized under the laws of the PRC, is primarily engaged in the business of providing domestic and international airline ticketing services. Additionally, YZL provides hotel reservations, packaged tours, and air delivery services both online and through customer representative offices. YZL also owns an aviation network (www.cnutg.com) that provides a complete air ticket sales network.

2007 Acquisitions

During 2007, we made several acquisitions, which expanded our scope of business.

On April 10, 2007, we acquired Shenzhen Speedy Dragon Enterprise Limited ("SSD") in exchange for 238,095 shares of our shares of Common Stock and an interest-free promissory note in the principal amount of $3,000,000, payable no later than April 10, 2008.  The note has been repaid in full. SSD is mainly a cargo logistics company providing commercial, point-to-point parcel and container transportation services within the PRC.

 
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On June 12, 2009, the Company entered into a termination agreement with Xiangsheng Song, the legal representative of SSD to return all its equity interest in SSD to him, the original sole shareholder of SSD before our acquisition in 2007. As a result of the termination agreement, SSD was spun off from our business.

Current PRC laws and regulations impose substantial restrictions on foreign ownership of the air-ticketing, travel agency, advertising and value-added telecommunications businesses in the PRC. According to the Rules on Cognizance of Qualification for Civil Aviation Transporting Marketing Agencies (2006) and relevant foreign investment regulations regarding civil aviation business, a foreign investor currently cannot own 100% of an air- ticketing agency in the PRC, except for Hong Kong and Macau aviation marketing agencies. In addition, foreign-invested air-ticketing agencies are not permitted to sell airline tickets for domestic flights in the PRC.

We, through YZL, entered into share escrow agreements with Shenzhen Yuzhixing Aviation Service Co., Ltd. (“YZX”), a PRC domestic company funded by YZL and two PRC individuals (collectively, the “XGN Nominees”) to hold 100% of the equity interest in Xi'an Golden Net Travel Serve Service Company Limited ("XGN"), a PRC travel company which we acquired on August 6, 2007 in exchange for 50,588 shares of our Common Stock and interest-free promissory notes in the aggregate principal amount of $1,542,000, payable no later than August 6, 2008. The note has been repaid in full.

The significant details of the share escrow agreements are outlined below:
 
·
YZL and Universal Travel Group funded the start-up activities and incorporation of XGN and related subsidiaries, through cash or common stock issuance;
 
·
YZL entrusted the XGN Nominees as the name holders only of YZL equity interest in  XGN;
 
·
The XGN Nominees shall neither participate in the management of operation nor shareholder meeting decisions of XGN;
 
·
YZL, as the actual fund provider of XGN, will enjoy all shareholder rights and profit sharing;
 
·
YZL, is entitled to all profits and is required to absorb all losses of XGN and its subsidiaries;
 
·
The XGN Nominees are not responsible for losses nor to benefit from any income of   XGN;
 
·
YZL will cover any capital infusion requirements of XGN and related subsidiaries; and
 
·
If XGN were to dissolve, YZL will enjoy the right to allocate and divide assets.

XGN was established in 2001 and focuses on the domestic tourism market. It provides air tickets, train tickets and other travel-related services including servicing individuals and groups attending conferences and exhibitions, making travel arrangements for business studies, academic exchanges, travel adventures, cultural education, sports competition, and theatrical performances. XGN also specializes in central plains tours of Xi'an. Since 2005, XGN has formed joint ventures with other travel agencies in Tibet, Xinjiang, Shanxi and Inner Mongolia that focus on western plains routes.

In August 8, 2007, we acquired Shanghai Lanbao Travel Service Company Limited ("SLB") in exchange for 200,000 shares of our Common Stock and interest-free promissory notes in the aggregate principal amount of $2,828,000, payable no later than August 8, 2008. The note has been repaid in full.

SLB was established in 2002 and its core business focus is a centralized real-time booking system providing consumers and travel related businesses with hotel bookings, air ticket and tourism information via the internet and mobile phone text-messaging technology. It owns and manages the award winning China Booking Association website, http://www.cba-hotel.com/, which receives approximately 200,000 visitors daily.

In October 29, 2007, we acquired Foshan Overseas International Travel Service Co., Ltd. ("FOI") in exchange for 374,329 shares of our Common Stock and interest-free promissory notes in the aggregate principal amount of $3,153,500, payable no later than October 29, 2008.   This note has been repaid in full.

 
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FOI was established in 1990. Its core business focuses on both domestic and international tourism, as well as packaged airfare, hotel and conference reservations with ground transportation within the PRC. For three consecutive years, FOI has been recognized as one of the 100 outstanding enterprises by the China Tourism Bureau and in 2004 was voted one of the most credible enterprises in the country. It served more than 120,000 people with packaged tours and conferences in 2009.

2008 Expansion

On December 16, 2008, we established Shenzhen Universal Travel Agency Co. Ltd., a PRC company (“STA”), to meet the increasing packaged-tour demand in Shenzhen City. However, operations of STA did not start until June 6, 2009.
 
As in the case of the acquisition of XGN described above and for the same legal reasons, YZL entered into share escrow agreements with three domestic residents, including Jing Xie, our present Chief Financial Officer to hold 100% of the equity interest of STA as nominees of YZL.  The terms of the share escrow agreements relating to the STA Nominees are similar to those as described above for the YZL Nominees.
 
2009 Expansion
 
On March 23, 2009, in order to seize upon opportunities arising from the economic promotion by the Chinese government of the middle and western regions of the PRC, we strategically set up Chongqing Universal Travel E-Commerce Co., Ltd, a PRC company (“CTE”), to strengthen our presence in that region. However, operations of CTE did not start until June 16, 2009.

On December 10, 2009, we entered into Subscription Agreements with certain investors to sell to them an aggregate of 2,222,222  shares of common stock of the Company, for a purchase price of $9.00 per share and an aggregate gross purchase consideration of $19,999,998. The offer and sale of the shares were made pursuant to an effective Registration Statement on Form S-3 (Registration No. 333- 161139)  initially filed with the Securities and Exchange Commission on August 7, 2009 and amended on November 2, 2009. The Registration Statement was declared   effective on November 5, 2009.  The sale and  purchase of the shares closed on December 15, 2009.

On June 15, 2010, we entered into an underwriting agreement (the "Underwriting Agreement") with Brean Murray, Carret & Co., LLC, as representative of the underwriters (the "Representative"), related to a public offering of 2,857,143 shares of the Company's common stock at a price of $7.00 per share less a 5% underwriting commission. Under the terms of the Underwriting Agreement, we granted the Representative an option, exercisable for 30 days, to purchase up to an additional 428,572 shares of common stock to cover over-allotments, if any. The offering was made pursuant to an effective registration statements on Form S-3, as amended and supplemented (Registration Statement No. 333-161139) filed with the Securities and Exchange Commission. On June 21, 2010, we closed the common stock offering announced on June 16, 2010. In the transaction, we issued 2,857,143 shares of common stock at $7.00 per share for an aggregate amount of $20 million.
 
With the completion of the raise, we then sought to seek out acquisition targets that would both complement our strategic growth and service products.

Acquisitions in 2010

On March 26, 2010, the Company through its VIE structure and strategy executed an acquisition agreement to acquire all the equity interest of Huangshan Holiday Travel Service Company (“Huangshan Holiday”) with shareholders of Huangshan Holiday. Pursuant to the acquisition agreement, the purchase consideration was RMB 20 million, which was payable as follows: (i) 20% of the purchase consideration was to be paid in shares of restricted common stock of the Company with a per stock price of $ 9.47, being the average closing price of the Company’s shares for the 15 days prior to the date of execution of the Agreement and amounting to 61,847 shares of restricted common stock; (ii) 40% or RMB 8 million (approximately $1.17 million) to be paid within 10 days of the announcement of the acquisition; (iii) 20% or RMB 4 million (approximately, $588,235) within 10 days of completion of the share exchange formalities with the local business authorities and (iv) the remaining  20% of the purchase consideration within 10 days of the formal close of the acquisition transaction. The shareholders of Huangshan Holiday agreed to continue their service at Huangshan Holiday for the next five fiscal years and to accomplish certain projected financial goals.  In the event that they or Huangshan Holiday breach the acquisition agreement, Shenzhen Universal Travel Agency Co. Ltd shall be entitled to terminate the acquisition agreement and receive a full refund of the purchase consideration and up to $1 million in damages.
 
 
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Founded in 1999, Huangshan Holiday provides comprehensive travel services in the Huangshan district in the Anhui Province of China. Huangshan, a national geological park and UNESCO World Heritage Site, is one of China’s most popular travel destinations, with over eight million tourists annually. Huangshan Holiday provides guided and self-guided package tours and airline and hotel reservation services for both leisure and business travelers. Huangshan Holiday serves as the exclusive hotel reservation agency for several major online travel service providers in China, including eLong and 12580, and has over 70% share of the mid to high end hotel reservation market in the Huangshan Tourism District.
 
On March 29, 2010, our subsidiary, the Company through its VIE structure and strategy executed an acquisition agreement (the “Tianyuan Agreement”) to acquire all the equity interest of Hebei Tianyuan International Travel Agency Co., Ltd  (“Tianyuan”) with shareholders of Tianyuan and another acquisition agreement  (the “Yulongkang Agreement”) to acquire all the equity interest in Zhengzhou Yulongkang Travel Agency Co., Ltd with shareholders of Yulongkang.

Founded in 1999, Tianyuan was the first authorized travel agency in the Hebei Province in China.  In addition, Tianyuan is the exclusive provider of travel agency services to Mount Lu and Lushan National Park, both domestic tourist attractions listed on the UNESCO World Heritage Site.  Tianyuan was the organizer of the International Economy & Culture Communication Forum sponsored by the local government and the exclusive organizer of the Young Journalist Summer Camp sponsored by the Yanzhao Evening Paper. We believe that Taiyuan’s exclusive service with these regional sites and unique partnership with the government provides Tianyuan with an advantage to be a market leader in travel services in the region.

Zhengzhou Yulongkang Travel Service Company was established in 2000 in Zhengzhou, Henan Province of China. The company currently has a management team of 25 people and over 60 tour organizers and guides. The Company provides comprehensive travel services and maintains long-term cooperation relations with transportation agents, travel destinations, hotels, and air ticket agencies. Its regional tour routes include “Charming Tibet”, “Winter Hot Spring”, “Passion Ski Trip”, etc. Zhengzhou Yulongkang Travel Service Company has received a series of industry and corporate awards from 2003 to 2006.

Pursuant to the Tianyuan Agreement, the purchase consideration was RMB 30 million (approximately $4.4 million), which was payable as follows: (i) 20% of the purchase consideration was to be paid in shares of restricted common stock of the Company with a per stock price of $ 9.42, being the average closing price of the Company’s shares for the 15 days prior to the date of execution of the Agreement and amounting to 93,282 shares of restricted common stock; (ii) 40% or RMB 12 million (approximately $1.76 million) within 10 days of the announcement of the acquisition; (iii) 20% or RMB 6 million (approximately, $882,353) within 10 days of completion of the share exchange formalities with the local business authorities and (iv) the remaining  20% of the purchase consideration within 10 days of the formal close of the acquisition transaction.

The shareholders of Tianyuan agreed to continue their service at Tianyuan for the next five fiscal years and to accomplish certain projected financial goals.  In the event that they or Tianyuan breach the Agreement, Shenzhen Universal Travel Agency Co. Ltd shall be entitled to terminate the Tianyuan Agreement and receive a full refund of the purchase consideration and up to $1 million in damages.

 
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Pursuant to the Yulongkang Agreement, the purchase consideration was RMB 39 million as previously stipulated in our letter of intent, which was payable as follows: (i) 10% of the purchase consideration was to be paid in shares of restricted common stock of the Company with a per stock price of $ 9.42, being the average closing price of the Company’s shares for the 15 days prior to the date of execution of the Agreement and amounting to 60,633 shares of restricted common stock; (ii) 45% or RMB 17.55 million (approximately $2.58  million) within 10 days of the announcement of the acquisition; (iii) 25% or RMB 9.75 million (approximately, $1.4 million) within 10 days of completion of the share exchange formalities with the local business authorities and (iv) the remaining  20% of the purchase consideration within 10 days of the formal close of the acquisition transaction.

The shareholders of Yulongkang also agreed to continue their service at Yulongkang for the next five fiscal years and to accomplish certain projected financial goals.  In the event that they or Yulongkang breach the Agreement, Shenzhen Universal Travel Agency Co. Ltd shall be entitled to terminate the Agreement and receive a full refund of the purchase consideration and up to $1 million in damages.

On June 28, 2010, our subsidiary, the Company through its VIE structure and strategy executed an acquisition agreement (the “Kunming Agreement”) to acquire all the equity interest of Kunming Business Travel Agency Co., Ltd. ("Kunming Business Travel") with shareholders of Kunming Business Travel Tianyuan and another acquisition agreement (the “Shanxi Agreement”) to acquire all the equity interest in Shanxi Jinyang Travel Agency Co., Ltd. ("Shanxi Jinyang") with shareholders of Shanxi Jinyang..

Kunming Business Travel was founded in 1993 in Kunming, Yunnan Province and is the premier golf travel service agency in its region. Kunming Business Travel has partnerships with seven golf clubs and provides services, including reservations, event planning, hosting business trips and golf competitions. Kunming Business Travel is the only professional golf travel service provider in the Yunnan Province.

Shanxi Jinyang was founded in 1988 in Taiyuan, Shanxi Province and is one of the largest travel agencies in Shanxi Province in terms of tourist volume and revenues. Shanxi Jinyang provides comprehensive travel services and has good business relationships with travel destinations, hotels, and air ticketing agencies.
 
Pursuant to the Kunming Agreement, the purchase consideration was payable as follows:  (i) 10% of the purchase consideration was to be paid in shares of restricted common stock of the Company with a per stock price of $7.20, being the average closing price of the Company’s shares for the 15 days prior to the date of execution of the Agreement and amounting to 79,487 shares of restricted common stock within 90 days after the announcement of acquisition and to be circulated five years later ; (ii) 45 % or RMB 17.55  million (approximately $2.58  million) within 10 days of the signing of the agreement; (iii) 45% or RMB 17.55 million (approximately, $2.58  million) within 10 days of completion of the share exchange formalities with the local business authorities.

The shareholders of Kunming Business Travel agreed to continue their service at Kunming Business Travel for the next five fiscal years and to accomplish certain projected financial goals.  In the event that they or Kunming Business Travel breach the Agreement, Shenzhen Universal Travel Agency Co. Ltd shall be entitled to terminate the Agreement and receive a full refund of the purchase consideration and up to $1 million in damages.

Pursuant to the Shanxi Agreement, the purchase consideration was payable as follows: (i) 10% of the purchase consideration was to be paid in shares of restricted common stock of the Company with a per stock price of $ 7.20, being the average closing price of the Company’s shares for the 15 days prior to the date of execution of the Agreement and amounting to 31,387 shares of restricted common stock within 90 days after the announcement of acquisition and to be circulated five years later ; (ii) 45% or RMB 6.93  million (approximately $1.02 million) within 10 days of the signing of the agreement; (iii) 45% or RMB 6.93 million (approximately, $1.02 million) within 10 days of completion of the share exchange formalities with the local business authorities.

The shareholders of Shanxi Jinyang agreed to continue their service at Shanxi Jinyang for the next five fiscal years and to accomplish certain projected financial goals.  In the event that they or Shanxi Jinyang breach the Agreement, Shenzhen Universal Travel Agency Co. Ltd shall be entitled to terminate the Agreement and receive a full refund of the purchase consideration and up to $1 million in damages.

The Company refers to collectively here within and throughout this annual report, all wholly owned subsidiaries and variable interest entities as subsidiaries.

 
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The issuance of shares of common stock pursuant to the abovementioned agreements was exempt from registration in reliance upon Regulation S and Section 4(2) of the Securities Act of 1933, as amended.  Shareholders of Huangshan Holiday, Tianyuan, Yulongkang, Kunming Business Travel and Shanxi Jinyang are non-U.S. persons, as defined in Rule 902(k) of Regulation S, In addition, our shares were issued without registration under Section 5 of the Securities Act in reliance on the exemption from registration contained in Section 4(2) of the Securities Act. Specifically, (1) we had determined that the they were knowledgeable and experienced in finance and business matters and thus they are able to evaluate the risks and merits of acquiring our securities; (2) they had advised us that they were able to bear the economic risk of purchasing our common stock; (3) we had provided them with access to the type of information normally provided in a prospectus; and (4) we did not use any form of public solicitation or general advertising in connection with the issuance of the shares.

Corporate Structure
 
The following diagram illustrates our corporate structure.

 

 
Disposition of TRIPEASY Kiosks

On September 9, 2010, our subsidiary, Shenzhen Yuzhilu Aviation Service Co. Ltd. executed a purchase and sale agreement to sell all of our 1,523 TRIPEASY kiosks to Shenzhen Xunbao E-Commerce Co., Ltd. for a total of RMB 40,301,417.73, or approximately $5.93 million.   Pursuant to the agreement, although we shall no longer operate or retain ownership rights to the kiosks, we will continue to have exclusive air ticketing, hotel reservation and package tour travel product sales rights in all TRIPEASY kiosks for a two-year period from the closing date of the agreement.

 
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Pursuant to the agreement, the purchase price was to be paid in three installments: (i) RMB10,000,000 shall be paid by September 14, 2010, (ii) RMB15,000,000 shall be paid by October 9, 2010, and the remaining portion of the purchase price shall be paid on or prior to the earlier of December 9, 2010, or within 5 days of our completion of making certain developments to the interface and functionality of the kiosks. The first and second installments were paid in full before December 31, 2010 and the third installment was paid in full on February 24, 2011.

International Travel License

On December 24, 2010, we obtained the International Travel License issued by the National Travel Authority, granting us the right to operate and offer global package tours in mainland People’s Republic of China. In the past, we had only been able to offer such packages through agencies which possess this license. There are over 20,000 travel agencies in the PRC, of which only approximately 1,300 travel agencies have this International Travel License.  

Franchises

In order to leverage on our International Travel License, we have decided to franchise our license to local travel agencies.  Recently, we granted our franchise to eight local travel agencies in Shenyang, Dalian and Qingdao. They have converted their business model, adopted our franchise operating scheme, and updated their local business registration to run this franchise officially. As of present date, we have had no revenues from our franchises but expect to generate revenues from them soon.

Sources of Revenue

We have three lines of business and revenue, namely (i) air-ticketing (Shenzhen Yu Zhi Lu Aviation Service Company Limited and Chongqing Universal Travel E-Commerce Co., Ltd), (ii) hotel reservations (Shanghai Lanbao Travel Service Company Limited), and (iii) packaged tours (Xi'an Golden Net Travel Serve Service Co., Ltd., Foshan Overseas International Travel Service Co., Ltd., Universal Travel International Travel Agency Co. Ltd, (formerly Shenzhen Universal Travel Agency Co., Ltd.), Huangshan Holiday Travel Service Co., Ltd., Hebei Tianyuan Travel Agency Co., Ltd., Zhengzhou Yulongkang Travel Agency Co., Kunming Business Travel Service Co., Ltd., and Shanxi Jinyang Travel Agency Co., Ltd.). We previously provided air cargo agency services through Shenzhen Speedy Dragon Enterprise Limited, which we spun off in June 2009. SSD has been accounted for under discontinued operations.

Air-ticketing

We are, through our subsidiary, YZL and CTE, in the air-ticketing business. YZL has contracted with certain Chinese domestic airlines such as Air China, China Southern Airlines and China Eastern Airlines and 34 international airlines such as United Airlines, Cathay Pacific and Virgin Airlines to sell Chinese domestic and international air tickets.  YZL holds the “First Class Air-Ticketing Agency” license from the General Administration of Civil Aviation of China (“CAAC”). YZL has been in operation for more than ten years.

We and our agents utilize a centralized air-ticketing booking system called the “eTerm system” maintained and owned by the PRC government to issue air tickets. We pay a license fee the use of the “eTerm system” and charge our agents a pro-rated portion of that fee for their use of the system through us.

YZL receives commissions (averaging 6%) from travel suppliers for air-ticketing under various services agreements. Commissions from air-ticketing services rendered are recognized at the time when the air tickets are issued. Our customers pay for their tickets online or through TRIPEASY Travel Service Kiosks (the “Kiosks”), self-service terminals owned by Shenzhen Xunbao E-commerce Co. Ltd., with credit cards or bank debit cards and are then issued their tickets. Our revenue from such transactions is on a net basis in the consolidated statements of income as we generally do not assume inventory risks and have no obligations for cancelled air-ticket reservations. We are, typically, paid our aggregated commissions once a month.

Our air-ticketing business is affected by the conditions of the travel industry in China. Travel expenditures are highly sensitive to business and personal discretionary spending levels and thus tend to decline during general economic downturns, such as the slowdown in economic growth arising from the international financial crisis which began in 2008. Adverse trends or events that tend to reduce travel and are likely to reduce our revenues include:

 
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·
declines in economic growth, recessions, and financial or other economic crises;
 
·
increases in prices in the hotel, airline or other travel-related sectors;
 
·
the occurrence of travel-related accidents;
 
·
outbreaks, or the fear of outbreaks, of H1N1 flu (swine flu), severe acute respiratory syndrome, avian flu or other diseases;
 
·
terrorist attacks or threats of terrorist attacks or wars;
 
·
natural disasters or poor weather conditions;
 
·
increase in oil prices;
 
·
a decrease in the number of extended holiday periods like the Spring Festival and long weekend holidays.

As a result of any of these events, over which we have no control, our results could be severely and adversely affected.

Further, because we are agents for the sale of air tickets, we do not have any control over air ticket prices, which directly affect their demand and our profitability. Conversely, we do not bear any risk for unsold tickets and maintain no inventory.  Also, we are affected by the seasonality of travel in general and global events such as the World Expo in Shanghai in 2010 which, as we anticipated, increased the demand for travel.

Hotel reservations

We are, through our subsidiary SLB, are involved in the hotel reservations business.

We have contracted with approximately 9,000 hotels and have established a China Booking Association comprising more than 1,000 travel agencies which share more than 200,000 hotel resources internationally.

Our customers are able to inquire via either our centralized website (www.cnutg.com).  Additionally, SLB maintains a 100 square meters call center in Shanghai with 20 seats to handle hotel reservation enquiries.

We act as agent in substantially all of our hotel-related transactions. Our customers receive confirmed bookings and generally pay the hotels directly upon completion of their stays, and in general, we pay no penalty to the hotels if our customers do not check in. For our hotel suppliers, we earn pre-negotiated fixed commissions on hotel rooms we sell.

We contract with hotels for rooms under two agency models, the “guaranteed allotment” model and the “on-request” model. Under our agreements with our hotel suppliers, hotels are generally required to offer us prices that are equal to or lower than their published prices, and notify us in advance if they have promotional sales, so that we can lower our prices accordingly.

In addition to the agreements that we enter into with all of our hotel suppliers, we enter into a supplemental agreement with each of the hotel suppliers with which we have a guaranteed allotment arrangement. Pursuant to this agreement, a hotel guarantees us a specified number of available rooms every day, allowing us to provide instant confirmations on such rooms to our customers before notifying the hotel. The hotel is required to notify us in advance if it will not be able to make the guaranteed rooms available to our customers due to reasons beyond its control.

We receive commission from travel suppliers for hotel room reservations based on the transaction value of the rooms. Commission from hotel reservation services rendered is recognized after hotel customers have completed their stay at the applicable hotel and upon confirmation of pending payment of the commission by the hotel.  Our revenue from such transactions is on a net basis in the consolidated statements of income.  We, generally, do not assume inventory risks and have no obligations for cancelled hotel reservations.  Our customers reserve hotel rooms through us, our website, or our Kiosks and pay for their rooms directly to the hotel.

Our primary customers in this segment are business and leisure travelers in China who do not travel in groups. These types of travelers, who are referred to in the travel industry as FITs (free individual travelers) and whom we refer to as independent travelers, form a traditionally under-served yet fast-growing segment of the China travel market. We act as agent in substantially all of our transactions and generally do not take inventory risks with respect to the hotel rooms booked through us.

 
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Apart from the same factors affecting our air-ticketing business, other factors affecting our hotel reservations segment include:
 
·
our ability to secure more room supply relationships with hotels;
 
·
the quality and depth of our hotel supplier network  and our ability to provide a diverse range of hotel rooms, locations and price points to appeal to our customers;
 
·
our commission rates which are largely determined by the hotels;
 
·
our ability to offer reservations at highly rated hotels is particularly appealing to our customers.

On July 13, 2010, we announced a partnership with Agoda, a subsidiary of Priceline.com, to strengthen our hotel reservation business segment. Under the partnership, we offer our customers access to Agoda’s international network of hotels. Through the updated cnutg.com website, travelers will be able to enjoy special Agoda promotions and instant confirmation at tens of thousands of hotels worldwide. However, as our business has largely been focused on domestic travel for Chinese residents, this partnership has not been productive during the year.

Packaged Tours

We are, through our subsidiaries, FOI, XGN, STA, HHT, HTY, ZTY, KBT and SJT, in the business of providing domestic and cross border packaged tour travel services.

We contract with traffic service providers, accommodation providers and leisure service providers so that we are able to purchase air tickets, train and coach tickets, accommodation and leisure or entertainment packages in bulk and then resell them to our customers with a mark-up.  We have two sources of revenue: one from payment by individual customers and the other, through group sales. We recognize gross revenue when a tour is completed.

As we are the agent for packaged tours, we do not have any control over the components for air-ticket prices, hotel accommodation, transportation and tourism attraction ticket prices, which directly relates to the demand for packaged tours and their popularity or lack thereof.

We also bear no risk because we maintain no inventory of air tickets, hotel rooms or attraction tickets. We only purchase the various components comprising a packaged tour when an order or request for such a tour is made and paid for by a customer. Our customers may make an order for a packaged tour by booking it directly through us, our website or Kiosks.  However, they may only pay for the packaged tour at our offices.

Because the packaged tour segment is tourism related and a packaged tour typically comprises a bundled travel and accommodation package, the significant factors, trends, demands and uncertainties affecting this segment are the same for air-ticketing and hotel reservations.

On December 24, 2010, we obtained the International Travel License issued by the National Travel Authority, granting us the right to operate and offer global package tours in mainland People’s Republic of China. In the past, we had only been able to offer such packages through agencies which possess this license. There are over 20,000 travel agencies in the PRC, of which only approximately 1,300 travel agencies have this International Travel License.  

Reward Program and Gift Vouchers

We established a reward program for our air-ticketing and hotel reservations customers.

Our individual customers earn one point for each RMB they spend on air tickets or hotel reservations and can redeem gifts or vouchers when they have accumulated sufficient points.

 
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Our corporate customers receive a cashback reward ranging from 0.5%-2% on on sales. This percentage varies according to sales volume and is written in agreements with our corporate customers. We account for these rewards as expenses.

We do not allocate any position of the revenue generating activities to the points earned and accrue for the cost of the point reward when the points are redeemed. We do not sell points separately and may discontinue this program or change the terms without any liability.

In 2010, FOI sold gift vouchers to customers and recorded these as customer advances. Customers can redeem them for package tours in FOI only. As of December 31, 2010, the balance of customer advances for gift vouchers was $28,427. FOI does not plan to issue more vouchers of such kind, and the vouchers will expire by the end of 2011.

Insurance

We presently have directors and officers insurance with Navigators Insurance Company.  The policy is for a term of one year commencing June 23, 2010 to June 23, 2011 for an aggregate liability of $5,000,000.   We have paid a premium of $42,000 for the policy.  We do not have any other insurance.

Intellectual Property

We have applied to register the following trademarks with the Trademark Bureau of the State Administration for Industry & Commerce:

Trademark
 
Class
 
Registrant
UTG
 
16, 39, 42, 43
 
Shenzhen Yu Zhi Lu Aviation Service Company Limited
宇之路*
 
39, 43
 
Shenzhen Yu Zhi Lu Aviation Service Company Limited
旅程天下*
  
18,35,39,42,43
  
Shenzhen Yu Zhi Lu Aviation Service Company Limited

*宇之路 is the Chinese name of Yuzhilu and 旅程天下 is the Chinese name of Universal Travel Group.

We, through our subsidiary, XGN, have the “古都之旅” (the Chinese name of “Tour to Ancient Capital”) trademark registered under Class 39 with the Trademark Bureau of the State Administration for Industry & Commerce.  The term of the registration is valid from January 7, 2005 through to January 6, 2015.
 
Class 16 (Paper goods and printed matter) covers paper, cardboard and goods made from these materials, not included in other classes; printed matter; bookbinding material; photographs; stationery; adhesives for stationery or household purposes; artists' materials; paint brushes; typewriters and office requisites (except furniture); instructional and teaching material (except apparatus); plastic materials for packaging (not included in other classes); playing cards; printers' type; printing blocks.

Class 18 covers leather, bag, backpack, travel accessories (leather), umbrella, climbing tools, harness, home tools (leather) and leather ropes.

Class 35 covers advertisement, advertising planning, business conference organizing, agency for import/export, agency marketing, human resources consulting, business site removal, systematic development for computer and database information, accounting, sales of self-service machines.

Class 39 covers transport, packaging and storage of goods and travel arrangements.
 
Class 42 (Computer, scientific & legal) covers scientific and technological services and research and design relating thereto: industrial analysis and research services; design and development of computer hardware and software; legal services.

 
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Class 43 (Hotels and Restaurants) covers services for providing food and drink; temporary accommodations.

We have also registered the following domain names:

Domain Name
 
Owner
 
Registration
Date
 
Expiration Date
www.cnutg.com
 
Shenzhen Yuzhilu Aviation Service Company Ltd
 
2006-05-05
 
2011-05-05
www.cnutg.com.cn
 
Shenzhen Yuzhilu Aviation Service Company Ltd
 
2006-07-27
 
2013-07-27
www.cnutg.cn
 
Shenzhen Yuzhilu Aviation Service Company Ltd
 
2006-07-27
 
2012-07-27
www.cnutg.net
 
Shenzhen Yuzhilu Aviation Service Company Ltd
 
2006-07-27
 
2012-07-27
www.cnutg.net.cn
  
Shenzhen Yuzhilu Aviation Service Company Ltd
  
2006-07-27
  
2012-07-27

Customers

Our customer base is very diversified and numerous.  Almost all our customers are individuals and none of our customers comprise more than 1% of our revenue.  The loss of any one of our customer will not have a material adverse effect on any segment of our business or our business, as a whole.

Revenue Breakdown

Packaged Tours

Below is a breakdown the number of sales of our packaged tours for the past two years:

Year
   
Visitors
   
Number of visitors multiplied by
the number of days comprising the tour
2009
 
 
 
212,460
 
 
807,300
2010
     
410,000
   
1,260,000

Air-ticketing

Below is a breakdown of the number of air tickets sold for the past two years:

Year
 
Number of Tickets
     
2009
 
2,360,000
2010
 
2,960,000

Hotel Reservations

Below is a breakdown of the number of hotel room nights booked through us for the past two years:

Year
 
Number of Room Nights
     
2009
 
2,349,000
2010
 
2,966,000

The management of the Company uses these performance metrics to monitor the performance of each of its business segments on a continuing basis and to assess, discern and anticipate any trends or cycles in the industry.  With such tools, the Company is able to make calculated decisions and take any pre-emptive measures to safeguard the Company’s interests.

 
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However, because of a confluence of other pertinent factors affecting the segments, the actual results of each segment may differ materially from what the metrics would suggest and any undue weight on these metrics in isolation is discouraged.  For example, an increase in the number of room nights booked should conceivably mean an increase in revenue and hence an increase on commissions earned.  However, this may be offset by lower room rates and lower commission rates.

Suppliers

For our air-ticketing business, our major suppliers are mainly the PRC domestic airlines.  We contract directly and individually with each hotel and supplier of the various components of our packaged tours.

We do not have long term contracts with any one of our suppliers.  We typically signed one year contracts which renew for successive one-year terms unless earlier terminated by either party.  The main terms of such contracts would typically comprise terms pertaining to authorizations, trade deposits and payment method.

We are not dependent on any one supplier and most of our suppliers are competitors against each other within their own industry.  Accordingly, we are able to choose the supplier with the most favorable terms to contract with and because such terms vary from time to time, our list of suppliers constantly changes too.

Our online reservation database is managed in-house and we are not dependent on a third party service provider to maintain our database and ensure that it is stable and secure.

Sales and Marketing

We advertise our services for the general public through roadside billboards, brochures, internet ads, cell phone message ads, newspapers and magazines ads.

Sales and marketing for the past two years account for very small percentage of our revenue, and as our Kiosks will be serving as an effective media platform in coming years and a marketing tool for us, we believe our sales and marketing expenses will not increase materially.
 
Subsidiary
 
Amount (RMB)/ (US$)
Foshan Overseas International Travel Service Co., Ltd.
 
38,313/$5,652
Shenzhen Yu Zhi Lu Aviation Service Company Limited
 
822,900/ $ 121,394 (Media Advertisement expenses)
240,000 / $35,405  (Internet Advertisement)
316,039/$46,622(Advertisements)
     
Shanghai Lanbao Travel Service Company Limited
 
29,360/ $4,331 (Advertisements)
408,000/ $60,188 (Internet advertisements)
     
Chongqing Universal Travel E-Commerce Co., Ltd
 
2,270/ $335 (Advertisements)
Shenzhen Universal Travel  Agency Co., Ltd
 
374,441/ $55,237 (Advertisements)
     
Huangshan Holiday Travel Service Co., Ltd.
 
74,800/$11,035 (Advertisements)
Zhengzhou Yulongkang Travel Agency Co., Ltd.
 
81,486/$12,021 (Advertisements)
Kunming Business Travel Service Co., Ltd.
 
136,000/$20,063 (Advertisements)
 
We anticipate that our sales and marketing expenses for fiscal year 2011 will increase proportionally with our sales volume.

 
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Competition

Our main competitors in China in the online booking industry for air-tickets and hotel reservations include Ctrip.com International, Ltd. and eLong, Inc.

It is very difficult to assess our competitors in the packaged tour business as there are numerous packaged tour providers in the PRC that operate different routes every year.
 
Many of our competitors, particularly those engaged in the online booking industry, are better established than us, are more widely known to consumers, and have larger infrastructures and greater capital resources.

Our Competitive Advantage

We believe that we have the following advantages over our competitors:

 
·
our business model and sources of revenue are diversified in that we are involved in the air ticketing, hotel reservations, and packaged tours businesses and any negative impact on one line of business may be buffered by our other lines of businesses; and

 
·
our businesses and presence are spread out throughout the PRC, which makes us less susceptible to a total loss or interruption to our business in the event of a natural calamity.

Our Future Goals and Expansion Plans

 
We will integrate our acquisitions made in 2010, which have been largely involved in the packaged tour business, by installing our air-ticketing and hotel reservation systems to their local offices, and providing them with training so that they may establish new sources of revenue on air-ticketing and hotel reservations.

We will further utilize our international travel license and expand our geographic service coverage by establishing more franchise offices, instead of making more acquisitions with cash and/or stock, as our franchise model has been well accepted in the industry and it will not create significant dilution to our existing shareholders. We will set up call centers in some of our franchise offices where we observe have more customer inquiries on air-ticketing and hotel reservations.

We will also further integrate our offline businesses with our online platform, including, but not limited to improving our website surfing speed and layouts, enriching our travel product content, and strengthening our English website development as our website is increasingly accessed by foreign travelers.
 
Employees

           At the current time, including our officers, we have approximately 771 full-time employees, including 60 administrative employees, 75 marketing employees, 320 employees working at our three call centers and approximately 316 employees working at our nine packaged tour office. We did not include the salesperson whose salary based on commissions as our employee. None of our employees is a member of a union and our relationships with our employees are generally satisfactory. In accordance with Chinese Labor Law, we provide social security and medical insurance to all our employees.

Government Regulations
 
General Regulation of Businesses
 
Air-ticketing. The air-ticketing business is subject to the supervision of China National Aviation Transportation Association, or CNATA, and its regional branches. Prior to March 31, 2006, the principal regulation governing air-ticketing in China is the Administration on Civil Aviation Transporting Marketing Agency Business Regulations (1993). The said regulation was abolished by PRC government on January 24, 2008. Currently the principal regulation governing air-ticketing in the PRC is the Rules on Cognizance of Qualification for Civil Aviation Transporting Marketing Agencies (2006) which became effective on March 31, 2006.

 
15

 
 
Under these regulations, prior to May 19, 2005, an air-ticketing agency was required to obtain a permit from CAAC or its regional branch in every city in which the agency propose to conduct its air-ticketing business. On and after May 19, 2005, any entity that wishes to conduct the air-ticketing business in the PRC must apply for an air-ticketing permit from CNATA. The regulations provide for a transitional grace period for air-ticketing agencies that have obtained a valid license from CAAC or its regional branch prior to the promulgation of the new rules. These agencies are permitted to use their original licenses until such licenses expire.
 
Travel Agency. The travel industry is subject to the supervision of the China National Tourism Administration and local tourism administrations. The principal regulations governing travel agencies in the PRC include:

 
Administration of Travel Agencies Regulations (1996), as amended in December 2001; and

 
Administration of Travel Agencies Regulations Implementing Rules (2001).
 
Under these regulations, a travel agency must obtain a license from the China National Tourism Administration to conduct cross-border travel business, and a license from the provincial-level tourism administration to conduct domestic travel agency business.

Advertising. The State General Administration of Industry and Commerce is responsible for regulating advertising activities in the PRC. The principal regulations governing advertising (including online advertising) in China include:
 
 
Advertising Law (1994);

 
Administration of Advertising Regulations (1987); and

 
Implementing rules of the Administration of Advertising Regulations (2004).
 
Under these regulations, any entity conducting advertising activities must obtain an advertising permit from the local Administration of Industry and Commerce.
 
Value-added Telecommunications Business and Online Commerce. Our provision of travel-related content on our websites is subject to PRC laws and regulations relating to the telecommunications industry and Internet, and regulated by various government authorities, including the Ministry of Information Industry and the State General Administration of Industry and Commerce. The principal regulations governing the telecommunications industry and Internet include:
 
 
Telecommunications Regulations (2000);

 
The Administrative Measures for Telecommunications Business Operating Licenses (2001); and

 
The Internet Information Services Administrative Measures (2000).

Under these regulations, Internet content provision services are classified as value-added telecommunications businesses, and a commercial operator of such services must obtain a value-added telecommunications business license from the appropriate telecommunications authorities to conduct any commercial value-added telecommunications operations in the PRC.
 
With respect to online commerce, there are no specific PRC laws at the national level governing online commerce or defining online commerce activities, and no government authority has been designated to regulate online commerce. There are existing regulations governing retail business that require companies to obtain licenses to engage in the business. However, it is unclear whether these existing regulations will be applied to online commerce.

 
16

 
 
Regulation of Foreign Currency Exchange and Dividend Distribution
 
Foreign Currency Exchange. The principal regulation governing foreign currency exchange in the PRC is the Foreign Currency Administration Rules (1996), as amended. Under these Rules, RMB is freely convertible for trade and service-related foreign exchange transactions, but not for direct investment, loan or investment in securities outside China unless the prior approval of the State Administration for Foreign Exchange of the People’s Republic of China is obtained.
 
Pursuant to the Foreign Currency Administration Rules, foreign investment enterprises in the PRC may purchase foreign currency without the approval of the State Administration for Foreign Exchange of the PRC for trade and service-related foreign exchange transactions by providing commercial documents evidencing these transactions. They may also retain foreign exchange (subject to a cap approved by the State Administration for Foreign Exchange of the PRC) to satisfy foreign exchange liabilities or to pay dividends. In addition, if a foreign company acquires a company in the PRC, the acquired company will also become a foreign investment enterprise. However, the relevant PRC government authorities may limit or eliminate the ability of foreign investment enterprises to purchase and retain foreign currencies in the future. In addition, foreign exchange transactions for direct investment, loan and investment in securities outside the PRC are still subject to limitations and require approvals from the State Administration for Foreign Exchange of the PRC.
 
Dividend Distribution. The principal regulations governing distribution of dividends of wholly foreign-owned companies include:

 
The Foreign Investment Enterprise Law (1986), as amended in October 2000;

 
Administrative Rules under the Foreign Investment Enterprise Law (2001);

 
Company Law of the PRC (2005); and

 
Enterprise Income Tax Law and its Implementation Rules (2007).
 
Under these regulations, foreign investment enterprises in the PRC may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, wholly foreign-owned enterprises in the PRC are required to set aside at least 10% of their respective accumulated profits each year, if any, to fund certain reserve funds, unless such reserve funds have reached 50% of their respective registered capital. These reserves are not distributable as cash dividends.
 
Under the new EIT Law, dividends, interests, rent, royalties and gains on transfers of property payable by a foreign-invested enterprise in the PRC to its foreign investor who is a non-resident enterprise will be subject to a 10% withholding tax, unless such non-resident enterprise’s jurisdiction of incorporation has a tax treaty with the PRC that provides for a reduced rate of withholding tax.
 
           Under the new EIT Law, an enterprise established outside the PRC with its “de facto management body” within the PRC is considered a resident enterprise and will be subject to the enterprise income tax at the rate of 25% on its worldwide income. The “de facto management body” is defined as the organizational body that effectively exercises overall management and control over production and business operations, personnel, finance and accounting, and properties of the enterprise. It remains unclear how the PRC tax authorities will interpret such a board definition.
 
According to the new EIT law, enterprises that currently enjoy a preferential tax rate will transition to the statutory enterprise income tax rate of 25% over five years.  The applicable tax rate would increase to 18% for 2008, 20% in 2009, 22% in 2010, 24% in 2011 and 25% in 2012.  Enterprises that were currently subject to an enterprise income tax rate of 24% had their rates increased to 25% in 2008.

 
17

 
 
The tax rates of our various subsidiaries in 2010 were all 25% except for YZL, the tax rate of which was 22%. For 2011, these rates will remain 25% except for YZL, the tax rate of which will become 24%.
 
Notwithstanding the foregoing provision, the new EIT Law also provides that, if a resident enterprise directly invests in another resident enterprise, the dividends received by the investing resident enterprise from the invested enterprise are exempted from income tax, subject to certain conditions.
 
Moreover, under the new EIT Law, foreign ADS holders may be subject to a 10% withholding tax upon dividends payable by a Chinese entity and gains realized on the sale or other disposition of ADSs or ordinary shares, if such income is sourced from within the PRC and we are classified as a PRC resident enterprise.
 
Approvals, licenses and certificates

We have received the following licenses and approvals:

 
·
“First Class Air-Ticketing Agency” awarded by the CAAC and IATA to YZL;
 
·
“International Travel Agency” awarded by the China Travel Bureau to FOI;
 
·
“Domestic Travel Agency” awarded by the China Travel Bureau to XGN; and
 
·
International Travel License issued by the National Travel Authority.

Item 1A.               Risk Factors.

The reader should carefully consider each of the risks described below. If any of the following risks described below should occur, our business, financial condition or results of operations could be materially adversely affected and the trading price of our common stock could decline significantly.

An investment in our common stock involves a high degree of risk. You should carefully consider the risks described below and the other information contained in this prospectus before deciding to invest in our common stock.

Risks Related to the Company

Risks associated with business declines or disruptions in the travel industry generally could reduce our revenue.

A large part of our revenue is driven by the trends that occur in the travel industry in the PRC, including the hotel, airline and packaged-tour industries. As the travel industry is highly sensitive to business and personal discretionary spending levels, it tends to decline during general economic downturns. Other adverse trends or events that tend to reduce travel and are likely to reduce our revenue include the following:

 
·
an outbreak of political or economic unrest in China;

 
·
a recurrence of SARS or any other serious contagious diseases;

 
·
increased prices in the hotel, airline, or other  travel-related industries;

 
·
increased occurrence of travel-related accidents;

 
·
outbreak of war or conflict in the Asia-Pacific region;

 
·
increases in terrorism or the occurrence of a terrorist attack  in the Asia-Pacific region;

 
·
poor weather conditions; and

 
·
natural disasters.

 
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We could be severely affected by changes in the travel industry and will, in many cases, have little or no control over those changes. As a result of any of these events, our operating results and financial conditions could be materially and adversely affected.

Loss of key personnel could affect our ability to successfully grow our business.

We are highly dependent upon the services of our senior management team. The permanent loss for any of the key executives could have a material adverse effect upon our operating results.

Our management is comprised almost entirely of individuals residing in the PRC with very limited English skills.

Our management is comprised almost entirely of individuals born and raised in the PRC. As a result of differences in culture, educational background and business experiences, our management may analyze, evaluate and present business opportunities and results of operations differently from the way they are analyzed, evaluated and presented by management teams of public companies in Europe and the United States. In addition, our management has very limited skills in English. Consequently, it is possible that our management team will emphasize or fail to emphasize aspects of our business that might customarily be emphasized in a different manner by comparable public companies from different geographical and political areas.

Our management is not familiar with the United States securities laws.

Our management and the former owners of the businesses we acquire are generally unfamiliar with the requirements of the United States securities laws and may not appreciate the need to devote the resources necessary to comply with such laws. A failure to adequately respond to applicable securities laws could lead to investigations by the Securities and Exchange Commission and other regulatory authorities that could be costly, divert management's attention and disrupt our business.

Our operating history is not an adequate basis to judge our future prospects.

We have encountered and will continue to encounter risks and difficulties frequently experienced by companies in evolving industries such as the travel service industry in the PRC. Some of the risks relate to our ability to:

 
·
attract and retain customers and encourage our customers to engage in repeat transactions;

 
·
retain our existing agreements with travel suppliers such as hotels and airlines and to expand our service offerings on satisfactory terms with our travel suppliers;

 
·
operate, support, expand and develop our operations, our call center, our website, and our communications and other systems;

 
·
diversify our sources of revenue;

 
·
maintain effective control of our expenses; and

 
·
respond to changes in our regulatory environment.

If we are not successful in addressing any or all of these risks, our business may be materially affected in an adverse manner.

 
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The travel industry in China is seasonal.

Our business travel operations experience seasonal fluctuations, reflecting seasonal variations in demand for travel services. During the first quarter, demand for travel services generally declines in the PRC and the number of bookings flattens or decreases, in part due to a slowdown in business activity during the Chinese New Year holiday. Demand for travel services generally peaks during the second half of the year and there may be seasonal fluctuations in allocations of travel services made available to us by travel suppliers. Consequently, our revenue  may fluctuate from quarter to quarter.

Our business depends on the technology infrastructure of third parties.

We rely on third-party computer systems and other service providers, including the computerized reservation systems of airlines and hotels to make reservations and confirmations. Other third parties provide, for instance, our back-up data center, telecommunications access lines, significant computer systems and software licensing, support and maintenance service and air-ticket delivery. Any interruption in these or other third-party services or deterioration in their performance could impair the quality of our service.

Risks Related to our Common Stock

We have not and do not anticipate paying any dividends on our Common Stock.

We have paid no dividends on our Common Stock to date and it is not anticipated that any dividends will be paid to holders of our Common Stock in the foreseeable future. While our future dividend policy will be based on the operating results and capital needs of the business, it is currently anticipated that any earnings will be retained to finance our future expansion and for the implementation of our business plan. As an investor, you should take note of the fact that a lack of a dividend can further affect the market value of our stock, and could significantly affect the value of any investment in our Company.

We will incur significant costs as a result of operating as a public company and our management will be required to devote substantial time to compliance requirements.

As a public company we incur significant legal, accounting and other expenses under the Sarbanes-Oxley Act of 2002, together with rules implemented by the Securities and Exchange Commission and applicable market regulators. These rules impose various requirements on public companies, including requiring certain corporate governance practices. Our management and other personnel will need to devote a substantial amount of time to these compliance requirements.

In addition, the Sarbanes-Oxley Act requires, among other things, that we maintain effective internal controls for financial reporting and disclosure controls and procedures. In particular, commencing in 2007, we must perform system and process evaluations and testing of our internal controls over financial reporting to allow management to report on the effectiveness of our internal controls over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. Our testing may reveal deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses. Compliance with Section 404 may require that we incur substantial accounting expenses and expend significant management efforts. If we are not able to comply with the requirements of Section 404 in a timely manner, or if our accountants later identify deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses, the market price of our stock could decline and we could be subject to sanctions or investigations by the SEC or other applicable regulatory authorities.

Our Board of Directors has the authority, without stockholder approval, to issue preferred stock with terms that may not be beneficial to common stock holders.

Our Amended and Restated Articles of incorporation authorizes the issuance of preferred shares which may be issued with dividend, liquidation, voting and redemption rights senior to our Common Stock without prior approval by the stockholders. The Preferred Stock may be issued for such consideration as may be fixed from time to time by the Board of Directors. The Board of Directors may issue such shares of Preferred Stock in one or more series, with such designations, preferences and rights or qualifications, limitations or restrictions thereof as shall be stated in the resolution of resolutions.

 
20

 

The issuance of preferred stock could adversely affect the voting power and other rights of the holders of common stock. Preferred stock may be issued quickly with terms calculated to discourage, make more difficult, delay or prevent a change in control of our Company or make removal of management more difficult. As a result, the Board of Directors' ability to issue preferred stock may discourage the potential hostile acquirer, possibly resulting in beneficial negotiations. Negotiating with an unfriendly acquirer may result in, among other things, terms more favorable to us and our stockholders. Conversely, the issuance of preferred stock may adversely affect any market price of, and the voting and other rights of the holders of the Common Stock. We presently have no
plans to issue any preferred stock.
 
The issuance of shares through our stock compensation plans may dilute the value of existing stockholders and may affect the market price of our stock.
 
We may use stock options, stock grants and other equity-based incentives, to provide motivation and compensation to our officers, employees and key independent consultants. The award of any such incentives will result in an immediate and potentially substantial dilution to our existing stockholders and could result in a decline in the value of our stock price. The exercise of these options and the sale of the underlying shares of common stock and the sale of stock issued pursuant to stock grants may have an adverse effect upon the price of our stock.

Risks Related to Doing Business in the People’s Republic of China

It may be difficult for our stockholders to enforce their rights against the Company or its officers or directors.

Because our principal assets are located outside of the United States and some of our directors and all of our executive officers reside outside of the United States, it may be difficult for you to enforce your rights based on the United States Federal securities laws against us and our officers and directors in the United States or to enforce judgments of United States courts against us or them in the People's Republic of China.

In addition, our operating subsidiaries and substantially all of our assets are located outside of the United States. You will find it difficult to enforce your legal rights based on the civil liability provisions of the United States Federal securities laws against us in the courts of either the United States or the People's Republic of China and, even if civil judgments are obtained in courts of the United States, to enforce such judgments in the courts of the People's Republic of China. In addition, it is unclear if extradition treaties in effect between the United States and the People's Republic of China would permit effective enforcement against us or our officers and directors of criminal penalties, under the United States Federal securities laws or otherwise.

Our business operations take place primarily in the PRC. Because Chinese laws, regulations and policies are continually changing, our operations will face numerous risks.

Because our operations primarily take place outside of the United States and are subject to Chinese laws, regulations and policies affecting any change of Chinese laws may adversely affect our business, such as exchange controls and currency restrictions, currency fluctuations and devaluations, changes in local economic conditions, changes in Chinese laws and regulations, exposure to possible expropriation or other Chinese government actions, and unsettled political conditions. These factors may have a material adverse effect on our operations or on our business, results of operations and financial condition.

China's economy differs from the economies of most developed countries in many respects, including substantial governmental regulation, development, growth rate, control of foreign exchange, significant restrictions on property rights, taxation levels, and permitted allocation of resources. While the People's Republic of China economy has experienced significant growth in the past 20 years, growth has been uneven across different regions and among various economic sectors of China. The government of the People's Republic of China has implemented various measures to encourage economic development and guide the allocation of resources, which may or may not achieve the desired results or stated goals. Some of these measures may benefit the overall economy of People's Republic of China, but may also have a negative effect on us or on the economy in general. For example, our financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax regulations that are applicable to us. Since early 2004, the government of the People's Republic of China has implemented certain measures to control the pace of economic growth. Such measures may cause a decrease in the level of economic activity in the People’s Republic of China, which could adversely affect our results of operations and financial condition.

 
21

 

Limitations on Chinese economic market reforms may discourage foreign investment in Chinese businesses.

The value of investments in Chinese businesses could be adversely affected by political, economic and social uncertainties in China. The economic reforms in China in recent years are regarded by China's central government as a way to introduce economic market forces into China. Given the overriding desire of the central government leadership to maintain stability in China amid rapid social and economic changes in the country, the economic market reforms of recent years could be slowed, or even reversed.

We face economic risks in doing business in the PRC.

As a developing nation, the PRC's economy is more volatile than that of developed Western industrial economies. It differs significantly from that of the U.S. or a Western European country in such respects as structure, level of development, capital reinvestment, resource allocation and self-sufficiency. Only in recent years has the Chinese economy moved from what had been a command economy through the 1970s to one that during the 1990s encouraged substantial private economic activity. In 1993, the Constitution of China was amended to reinforce such economic reforms. The trends of the 1990s indicate that future policies of the Chinese government will emphasize greater utilization of market forces. For example, in 1999 the Government announced plans to amend the Chinese Constitution to recognize private property, although private business will officially remain subordinated to the state-owned companies, which are the mainstay of the Chinese economy. However, there can be no assurance that, under some circumstances, the government's pursuit of economic reforms will not be restrained or curtailed. Actions by the central government of the PRC could have a significant adverse effect on economic conditions in the country as a whole and on the economic prospects for our Chinese operations.

Any slowdown of economic growth in the PRC could have a negative effect on our business. There can be no assurance that the growth of the economy in the PRC will continue or that any slowdown will not have a negative effect on our business.

Our online business relies on the existence of an adequate telecommunications infrastructure for continued growth of China's internet market.

Although private sector Internet service providers currently exist in the PRC, almost all access to the Internet is maintained through a network owned by China Netcom under the regulatory supervision of China's Ministry of Information Industry. In addition, the national networks in the PRC connect to the Internet through a government-controlled international gateway. This international gateway is the only channel through which a domestic Chinese user can connect to the international Internet network. We rely on this infrastructure and China Netcom to provide data communications capacity, primarily through local telecommunications lines. We cannot assure you that this infrastructure will be further developed. In addition, we will have no access to alternative networks and services, on a timely basis if at all, in the event of any infrastructure disruption or failure. The Internet infrastructure in the PRC may not support the demands associated with continued growth in Internet usage.

We may suffer currency exchange losses if the Renminbi depreciates relative to the U.S. Dollar.

 Our reporting currency is the U.S. dollar. However, a substantial portion of our assets and revenues are denominated in the Chinese currency, Renminbi, commonly referred to as RMB. Our assets and revenues expressed in our U.S. dollar financial statements will decline in value of the Renminbi depreciates relative to the U.S. dollar. Any such depreciation could adversely affect the market price of our Common Stock. Very limited hedging transactions are available in the PRC to reduce our exposure to exchange rate fluctuations and we do not intend to engage in any such transactions. In addition, our currency exchange losses may be magnified by Chinese exchange control regulations that restrict our ability to convert Renminbi into U.S. Dollars.

 
22

 

We may not be able to freely convert Renminbi into foreign currency.

A portion of our revenues and operating expenses will be denominated in Renminbi while a portion of our capital expenditures are denominated in U.S. dollars.

Under current Chinese regulations, the payment of dividends, trade and service-related foreign transactions to a foreign investor of a foreign-invested enterprise is treated as a "current account" payment for which the approval of the State Administration of Foreign Exchange is not required. However, in order to distribute dividends we may be required to file documentation to a designated foreign exchange bank. The Bank must certify that all requirements have been met, such as payment of taxes, directors' approval and a capital verification report issued by an accounting firm. If a foreign-invested enterprise dissolves, a return of capital, which includes foreign direct investment, is treated as a "capital account" payment. This typically requires approval of the State Administration of Foreign Exchanges' in addition to the filing of documentation.

We may currently convert Renminbi for transactions under the "current account" without the approval of the State Administration of Foreign Exchange for settlement of "current account" transactions, including payment of dividends, by providing commercial documents evidencing these transactions. They may also retain foreign exchange in their current accounts (subject to a ceiling approved by the State Administration of Foreign Exchange) to satisfy foreign exchange liabilities or to pay dividends. However, the relevant Chinese governmental authorities may limit or eliminate the ability to purchase and retain foreign currencies in the future. Such change of policy would materially and adversely affect our business, financial condition and results of operations.

The Chinese legal and judicial system may negatively impact foreign investors.

In 1982, the National People’s Congress amended the Constitution of China to authorize foreign investment and guarantee the "lawful rights and interests" of foreign investors in the PRC. However, the PRC's system of laws is not yet comprehensive. The legal and judicial systems in the PRC are still rudimentary, and enforcement of existing laws is inconsistent. Many judges in the PRC lack the depth of legal training and experience that would be expected of a judge in a more developed country. Because the Chinese judiciary is relatively inexperienced in enforcing the laws that do exist, anticipation of judicial decision-making is more uncertain than would be expected in a more developed country. It may be impossible to obtain swift and equitable enforcement of laws  that do exist, or to obtain enforcement of the judgment of one court by a court of another jurisdiction. The PRC's legal system is based on written statutes; a decision by one judge does not set a legal precedent that is required to be followed by judges in other cases. In addition, the interpretation of Chinese laws may be varied to reflect domestic political changes.

The promulgation of new laws, changes to existing laws and the pre-emption of local regulations by national laws may adversely affect foreign investors. However, the trend of legislation over the last 20 years has significantly enhanced the protection of foreign investment and allowed for more control by foreign parties of their investments in Chinese enterprises. There can be no assurance that a change in leadership, social or political disruption, or unforeseen circumstances affecting the PRC’s political, economic or social life, will not affect the Chinese government's ability to continue to support and pursue these reforms. Such a shift could have a material adverse effect on our business and prospects.

The practical effect of the People’s Republic of China legal system on our business operations in the PRC can be viewed from two separate but intertwined considerations. First, as a matter of substantive law, the Foreign Invested Enterprise laws provide significant protection from government interference. In addition, these laws guarantee the full enjoyment of the benefits of corporate Articles and contracts to Foreign Invested Enterprise participants. These laws, however, do impose standards concerning corporate formation and governance, which are not qualitatively different from the general corporation laws of the several states. Similarly, the People’s Republic of China accounting laws mandate accounting practices, which are not consistent with U.S. Generally Accepted Accounting Principles. The PRC's accounting laws require that an annual "statutory audit" be performed in accordance with the PRC accounting standards and that the books of account of Foreign Invested Enterprises are maintained in accordance with Chinese accounting laws. Article 14 of the People’s Republic of China Wholly Foreign-Owned Enterprise Law requires a Wholly Foreign-Owned Enterprise to submit certain periodic fiscal reports and statements to designate financial and tax authorities, at the risk of business license revocation. Second, while the enforcement of substantive rights may appear less clear than United States procedures, the Foreign Invested Enterprises and Wholly Foreign-Owned Enterprises are Chinese registered companies, which enjoy the same status as other Chinese registered companies in business-to-business dispute resolution. Generally, the Articles of Association provide that all business disputes pertaining to Foreign Invested Enterprises are to be resolved by the Arbitration Institute of the Stockholm Chamber of Commerce in Stockholm, Sweden, applying Chinese substantive law. Any award rendered by this arbitration tribunal is, by the express terms of the respective Articles of Association, enforceable in accordance with the "United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958)." Therefore, as a practical matter, although no assurances can be given, the Chinese legal infrastructure, while different in operation from its United States counterpart, should not present any significant impediment to the operation of Foreign Invested Enterprises.

 
23

 

Risks Related to the Company's Corporate Structure

The People's Republic of China ("PRC") laws and regulations governing our business and the validity of certain contractual arrangements are uncertain. If we are found to be in violation, we could be subject to sanctions which could result in significant disruptions to our opertions and/or our ability to generate revenues.

There are substantial uncertainties regarding the interpretation and application of Chinese laws and regulations, including, but not limited to, the laws and regulations governing our business, or the enforcement and performance of our contractual arrangements with our vendors and customers. We are considered a foreign person or foreign enterprise under Chinese law.  These laws and regulations are relatively new and may be subject to change, and their official interpretation and enforcement may involve substantial uncertainty.  The effectiveness of newly enacted laws, regulations or amendments may be delayed, resulting in detrimental reliance by foreign investors. New laws and regulations that affect existing and proposed future businesses may also be applied retroactively.

The Chinese government has broad discretion in dealing with violations of laws and regulations, including levying fines, revoking business and other licenses and requiring actions necessary for compliance.  In particular, licenses and permits issued or granted to us by relevant governmental bodies may be revoked at a later time by higher regulatory bodies.  We cannot predict the effect of the interpretation of existing or new Chinese laws or regulations on our business.  We cannot assure our shareholders that our current ownership and operating structure would not be found in violation of any current or future Chinese laws or regulations.  As a result, we may be subject to sanctions, including fines, and could be required to restructure our operations or cease to provide certain services.  Any of these or similar actions could significantly disrupt our business operations or restrict us from conducting a substantial portion of our business operations, which could materially and adversely affect our business, financial condition and results of operations.

Item 1B.          Unresolved Staff Comments.

Not Applicable.

Item 2.    Properties.

All land in the PRC is owned by the government and cannot be sold to any individual or entity. Instead, the government grants landholders a "land use right" after a purchase price for such "land use right" is paid to the government. The "land use right" allows the holder the right to use the land for a specified long-term period of time and enjoys all the incidents of ownership of the land. The following are the details regarding Universal travel Group’s land use rights with regard to the land that it uses  in its business.

Our principal executive offices are located at 5/F South Tower, Building No. 11, High-Tech Industrial Park, Second Zhongke Road, Nanshan, Shenzhen, People's Republic of China. The offices contain approximately 1,425 square feet of usable space and are subject to a lease which expires August 2014. The monthly rent payable for these offices is $12,931.

In addition to the above principal offices, we also have a call center located at Shennan Road, Hualian Center Room –305-308, Shenzhen, People's Republic of China. The offices contain approximately 356 square meters of usable space and are subject to a month by month lease. The monthly rent payable for these offices is $4,115.

 
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In addition to our headquarters, YZL and STA maintain offices at the locations in Shenzhen which require aggregate monthly payments of $21,760.
 
FOI maintains 6 offices around the Guangzhou area which require aggregate monthly payments of $2,066;
 
XGN maintains 3 offices in Xi’an which require aggregate monthly payments of $1,217;
 
SLB maintains its main office in Shanghai and makes aggregate monthly payments of $6,020;

CTE maintains offices of approximately 1,194 square meters, and makes aggregate monthly payments of $4,615.

HHT maintains its main office of approximately 264 square meters in Huangshan and makes aggregate monthly payment of $439.

HTY maintains its main office of approximately 299 square meters in Shijiazhuang and makes aggregate monthly payment of $1,572.

ZYT  maintains its main office of approximately 136 square meters in Zhengzhou and makes aggregate monthly payment of $1,534.

KBT maintains its main office of approximately 135 square meters in Kunming and makes aggregate monthly payment of $1,513.

SJT maintains its main office of approximately 150 square meters in Taiyuan and makes aggregate monthly payment of $1,815.
 
We plan to expand our operations and lease more office space in the near future, based on our increased office spaces.

Item 3.    Legal Proceedings.
 
On May 20, 2011, the plaintiff Alex Lob commenced this derivative action in the First Judicial District Court of the State of Nevada in and for Carson City against Universal Travel Group (the “Company”), and  Jiangping Jiang, Jing Xie, Huijie Gao, Jiduan Yuan, Lizong Wang, Wenbin An, Lawrence Lee, Yizhao Zhang and Liquan Wang, officers and directors of the Company.  In the complaint, plaintiff purports to assert derivative claims against the individual defendants for alleged breaches of fiduciary duties, waste of corporate assets and unjust enrichment based upon alleged conduct of the individual defendants which damaged  the Company’s reputation, goodwill and standing in the business community.  The complaint also alleges that such conduct may result in liability for violations of federal law. The complaint seeks, among other relief, the amount of damages sustained by the Company as a result of the Defendants’ breach of fiduciary duties, waste of corporate assets and unjust enrichment and plaintiff’s counsel’s, accountant’s and experts’ fees.  The Company’s time to answer or move with respect to the complaint has not yet expired.  The Company believes that the complaint has no merit and intends to vigorously defend the lawsuit.
 
 
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PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market Information

Since October 27, 2009, our common stock has been listed and traded on the NYSE under the symbol “UTA”. From May 28, 2009 until October 27, 2009, our common stock was listed and traded on the NYSE Amex under the same symbol “UTA”. Previously from August 21, 2006 until May 28, 2009, our common stock was traded on the Over-the-Counter Bulletin Board under the symbol “UTVG.OB”. Prior to August 21, 2006, the date we changed our name from TAM of Henderson, Inc. to Universal Travel Group, our Common Stock was quoted under the symbol "TMHN.OB".

               On March 31, 2009, we effected an one-for-three reverse stock split of our common stock.  The one-for-three reverse stock split automatically converts three shares of the Company's common stock into one share of common stock. The reverse stock split affected all issued and outstanding shares of the Company's common stock, and shares of common stock underlying stock options and warrants that were outstanding immediately prior to the effective date of the reverse stock split. Any fractional shares resulting from the exchange would be rounded up to the nearest whole share of new common stock. All share information presented within this annual report and related consolidated financial statements are presented taking into effect the one-for-three reverse stock split.

The prices set forth below reflect the quarterly high and low bid price information for shares of our Common Stock for the periods indicated, based on reports of transactions from the NYSE, NYSE Amex and the OTC Bulletin Board. Those quotations taken from the OTC Bulletin Board reflect inter-dealer prices, without retail markup, markdown or commission, and may not represent actual transactions.

Calendar Quarter
 
Low Bid
   
High Bid
 
             
2009 First Quarter
  $ 0.59     $ 2.95  
2009 Second Quarter
  $ 2.01     $ 12.60  
2009 Third Quarter
  $ 8.62     $ 17.20  
2009 Fourth Quarter
  $ 8.91     $ 16.50  
                 
2010 First Quarter
  $ 8.42     $ 11.30  
2010 Second Quarter
  $ 5.82     $ 10.15  
2010 Third Quarter
  $ 3.25     $ 6.99  
2010 Fourth Quarter
  $ 4.05     $ 7.20  

Holders of Securities

As of June 7, 2011, there were approximately 94 holders of record of our common stock, including shares held in street name by brokerage firms.  The holders of common stock are entitled to one vote for each share held of record on all matters submitted to a vote of stockholders.  Holders of the common stock have no preemptive rights and no right to convert their common stock into any other securities.  There are no redemption or sinking fund provisions applicable to the common stock.

 
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Our common stock is covered by a Commission rule that imposes additional sales practice requirements on broker-dealers who sell such securities to persons other than established customers and accredited investors, which are generally institutions with assets in excess of $5,000,000 or individuals with net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouse. For transactions covered by the rule, the broker-dealer must make a special suitability determination for the purchaser and transaction prior to the sale. Consequently, the rule may affect the ability of broker-dealers to sell our securities and also may affect the ability of purchasers of our common stock to sell their shares in the secondary market. It may also cause fewer broker-dealers to be willing to make a market in our common stock, and it may affect the level of news coverage we receive.

Dividends

We have not declared or paid any cash dividends on our common stock since our inception, and our board of directors currently intends to retain all earnings for use in the business for the foreseeable future. Any future payment of dividends will depend upon our results of operations, financial condition, cash requirements and other factors deemed relevant by our board of directors. There are currently no restrictions that limit our ability to declare cash dividends on its common stock and we do not believe that there are any that are likely to do so in the future.

Securities Authorized for Issuance under Equity Compensation Plans

In January 2007, we adopted the Universal Travel Group 2007 Equity Incentive Plan. In the first quarter of 2007, we issued 1,256,667 shares of our Common Stock pursuant to the Plan for services rendered from October 2, 2006, through February 28, 2007.  At the time of issuance the 1,256,667 shares were valued at $1,583,400, of which $950,040 was charged against earnings in 2006 and $633,360 was charged against earnings for 2007.

There are no longer any shares available for issuance pursuant to the Universal Travel Group 2007 Equity Incentive Plan.

During 2007 we issued options to purchase 33,333 shares to each of three newly appointed directors. The options are exercisable for a period of approximately 10 years from the date of issuance and are exercisable at prices of $5.85; $8.55 and $11.25, respectively. All three directors have to date ceased to be directors of the Company.  Accordingly, only an aggregate of options to purchase 22,222 shares of our Common Stock has vested amongst these three ex-directors. As of December 31, 2010, there are outstanding options to purchase 22,222 shares of common stock pursuant to this grant.

Additionally, on June 24, 2008, we granted an option to purchase 33,333 shares of our Common Stock to our newly appointed director, Yizhao Zhang.  His options were exercisable for a period of approximately 10 years from the date of issuance and are exercisable at $4.56 per share. The option holder has no voting or dividend rights. We record the expense of the stock options over the related vesting period. The options were valued using the Black-Scholes option-pricing model at the model at the date of grant stock option pricing. All options to purchase 33,333 shares of common stock has been exercised in cashless in 2009.

In January 2009, we adopted the Universal Travel Group 2009 Incentive Stock Plan.  On January 20, 2009, we issued options to purchase 2,000,000 shares of common stock to our Chief Executive Officer, Ms. Jiangping Jiang at an exercise price of $3.84.  The remaining options to purchase 200,000 shares of common stock were issued on the same date to various employees and directors at an exercise price of $2.70.  The term of each option was for 10 years.  The options vest in six annual equal installments.  However, in the event (i) the Company reports an after tax Net Income of $14,000,000  in its Annual Report on Form 10-K filed with the SEC for its fiscal year 2008, then options to purchase one-third of the shares granted shall vest and become immediately exercisable and each grantee of such options shall be entitled to exercise his/her options ratably, (ii)  the Company reports an after tax Net Income of $18,000,000  in its Annual Report on Form 10-K filed with the SEC for its fiscal year 2009, then options to purchase another one-third of the shares  granted shall vest and become immediately exercisable and each grantee of such options shall be entitled to exercise his/her options ratably and (iii) the Company reports an after tax Net Income of $22,000,000  in its Annual Report on Form 10-K filed with the SEC for its fiscal year 2010, then options to purchase another one-third of the shares granted shall vest and become immediately exercisable and each grantee of such options shall be entitled to exercise his/her options ratably.   As of the date of this Annual Report, all the 2,200,000 options to purchase our common stock under the Universal Travel Group 2009 Incentive Stock Plan have been issued and there are no longer any shares available for issuance under the said Plan.

 
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As we had met the acceleration provision (i) and (ii), in prior years therefore 1,466,666 options were vested, and 733,334 options vested in 2010 as we have met provision (iii). At December 31, 2010 1,466,666 options from the Plan were outstanding.

On September 1, 2009, the Company issued, to the newly appointed CFO and Board member an option grant to purchase 105,000 shares of common stock at the closing price of $8.82 per share. The options are exercisable until August 2019. On August 17, 2010, upon resignation, 70,000 options were forfeited.

On September 1, 2009, the Company issued, to the newly appointed director an option grant to purchase 10,000 shares of common stock at the closing price of $8.82 per share. The options are exercisable until August 2019.
 
As of December 31, 2010, the outstanding options for the 2009 Incentive Stock Plan are 1,466,666.
 
In December 2010, we adopted the Universal Travel Group 2010 Incentive Stock Plan. On December 2, 2010, we issued options to purchase 50,000 shares of common stock to our Chief Executive Officer, Ms. Jiangping Jiang at an exercise price of $6.67.  We also issued options to purchase an additional 950,000 shares of common stock on the same date to various employees and directors at an exercise price of $6.06.  The term of each option is for 10 years.  The options vest in two equal installments, the first being on the date of grant and the second on the first anniversary of grant.

The following table provides information as of the date hereof our outstanding equity compensation
plans and arrangements .

Equity Compensation Plan Information

Plan Category
 
Number of securities
(post-split) to be issued
upon exercise of
outstanding options,
warrants and rights
(a)
   
Weighted average exercise
price of outstanding
options, warrants and
rights
(b)
   
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a))
(c)
 
Equity compensation plans approved by security holders
    2,466,666     $ 4.69       0  
Equity compensation plans not approved by security holders
    67,222     $ 9.18       0  
Total
    2,533,888     $ 4.81       0  

Purchases of Equity Securities by the Company and Affiliated Purchasers

During the fourth quarter of our fiscal year ended December 31, 2010, neither we nor any "affiliated purchaser" (as defined in Rule 10b-18(a)(3) under the Exchange Act) purchased any shares of our Common Stock, the only class of our outstanding equity securities registered pursuant to section 12 of the Exchange Act.

Recent Sales of Unregistered Securities

There were no sales of unregistered securities during the fiscal year ended December 31, 2010 other than those transactions previously reported to the SEC on the Company’s current reports on Form 8-K.

 
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Item 6. Selected Financial Data.
 
Not applicable.
 
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
Forward-Looking Statements: No Assurances Intended

In addition to historical information, this Annual Report contains forward-looking statements, which are generally identifiable by use of the words “believes,” “expects,” “intends,” “anticipates,” “plans to,” “estimates,” “projects,” or similar expressions. These forward-looking statements represent Management’s belief as to the future of Universal Travel Group.  Whether those beliefs become reality will depend on many factors that are not under management’s control.  Many risks and uncertainties exist that could cause actual results to differ materially from those reflected in these forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements.

Business Overview

We are a travel services provider in the People’s Republic of China engaged in providing air ticketing and hotel booking services as well as domestic and international packaged tourism services throughout the People’s Republic of China via the internet, the customer representatives and the kiosks.

Name of Entities
 
Place of Incorporation
 
Expiration date
   
Ownership
Percentage
 
Universal Travel Group
 
Nevada, USA
    -       100 %
Full Power Enterprise Global Limited – BVI
 
British Virginia Islands
    -       100 %
Shenzhen Yuzhilu Aviation Service Co., Ltd.
 
China
    1998.3.9-2018.3.9       100 %
Xian Golden Net Travel Serve Services
 
China
    2001.8.1-2016.9.4    
100
% VIE 
Shanghai Lanbao Travel Service Co., Ltd.
 
China
    2002.5.29-2015.4.28       100 %
Foshan Overseas International Travel Service Co., Ltd.
 
China
 
Infinite Term
      100 %
Chongqing Universal Travel E-Commerce Co., Ltd.
 
China
 
Infinite Term
      100 %
Universal Travel International Travel Agency Co., Ltd. (former named:Shenzhen Universal Travel Agency Co., Ltd.)
 
China
 
Infinite Term
   
100
% VIE 
Hebei Tianyuan Travel Agency Co., Ltd.
 
China
    1999.10.8-2019.10.7       100 %
Huangshan Holiday Travel Service Co., Ltd.
 
China
 
Infinite Term
      100 %
Zhengzhou Yulongkang Travel Agency Co., Ltd.
 
China
    2000.11.1-2020.11.1       100 %
Kunming Business Travel Service Co., Ltd.
 
China
    2001.10.8-2011.10.8       100 %
Shanxi Jinyang Travel Agency Co., Ltd.
 
China
    2005.5.19-2015.5.18       100 %

In 2007 and 2009, YZL entered into certain shareholding agreements with various related PRC residents and Shenzhen Yuzhixing Aviation Service, Co. Limited (“YZX”) (“Party B”) to hold YZL shares of ownership of Xian Golden Net Travel Serve Services ("XGN") and Shenzhen Universal Travel Agency Co., Ltd. ("STA").The significant details of the agreements and other important information, among others, are outlined below:

Universal Travel Group funded the startup activities and incorporation of XGN and STA and related subsidiaries, through cash or common stock issuance;
YZL entrusted Party B as the name holder only of YZL equity interest in XGN and STA;
Party B shall neither participate in the management of operation nor shareholder meeting decisions of YZX, XGN or STA;
YZL, as the actual fund provider of XGN and STA, will enjoy all shareholder rights and profit sharing;
YZL, is entitled to all profits and is required to absorb all losses of XGN and STA and its subsidiaries;
Party B is not responsible for losses nor to benefit from any income of XGN and/or STA;
YZL will cover any capital infusion requirements of XGN and STA and related subsidiaries; and
If XGN and/or STA were to dissolve, YZL will enjoy the right to allocate and divide assets.

 
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Based on these contractual arrangements, management believes that XGN and STA and related subsidiaries should be considered “Variable Interest Entities” (“VIE”) under ASC 810 “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51”, because the equity holders in XGN and STA no longer have the characteristics of a controlling financial interest, and the Company, through YZL, is the primary beneficiary of  XGN and STA and its operations. Accordingly, management believes that XGN and STA should be consolidated under ASC 810.

Universal Travel Group and YZL are responsible to fund any capital share shortfalls for XGN and STA and its subsidiaries. In addition, Universal Travel Group funded through cash and common stock the acquisitions as discussed in Note 2.

In 2007, we completed the acquisitions of Xi'an Golden Net Travel Serve Service Company Limited, which specializes in domestic packaged tour services, and Shanghai Lanbao Travel Service Company Limited, which specializes in hotel reservations and Foshan Overseas International Travel Service Co., Ltd, which handles both domestic and international travel inquiries.

In early 2008, we successfully integrated our packaged tours, air-ticketing and hotel reservation businesses onto our newly developed on-line platform, which provides rich and comprehensive travel information to primarily leisure travelers.

In October 2008, we successfully rolled out our Kiosks, the type of innovate self-service terminals capable of handling a full ranging of booking services including packaged tours through a secured built in payment function that  accepts all major Chinese bank cards.  On September 9, 2010, we sold all of 1,523 Kiosks to Shenzhen Xunbao E-commerce Co. Ltd. with a slight gain. The strategy of sales of Kiosks was to minimize our capital expenditures and related expenses. We still have the full right to use these kiosks after the sales for two years according to the agreement.

Under the theme, "Wings towards a more colorful life", we currently have three discrete lines of business and revenue, and each is carried out by one or two subsidiaries of the Company:  (i) air-ticketing (Shenzhen Yu Zhi Lu Aviation Service Company Limited and Chongqing Universal Travel E-Commerce Co., Ltd), (ii) hotel reservations (Shenzhen Yu Zhi Lu Aviation Service Company Limited and Shanghai Lanbao Travel Service Company Limited), and (iii) packaged tours (Xi'an Golden Net Travel Serve Service Company Limited, Foshan Overseas International Travel Service Co., Ltd, and Shenzhen Universal Travel Agency Co. Ltd ). Operations of each segment are exclusive to the operations of the associated subsidiary company.

Previously in 2007, we also acquired Speedy Dragon Enterprise Limited, which specialized in air cargo agency. In the second calendar quarter of 2009, based on the past performance of our air cargo business, as well as the market perspective of this business, we decided to spin off our Speedy Dragon Enterprise Limited subsidiary, and as a result, exited the air cargo business. The air cargo industry had been suffering from the contraction in manufacturing in the Pearl River Delta, and we were not competitive enough in this segment of business. We believe the spin-off was beneficial to us as it allowed us to concentrate on our core business of selling air tickets, hotel accommodations and packaged tours. For the year ended December 31, 2009, Speedy Dragon Enterprise Limited was accounted for as discontinued operation and was not included in our segment report and MD&A analysis.

In December 2008, we established Shenzhen Universal Travel Agency Co. Ltd, a PRC company, to meet the increasing packaged-tour demand in Shenzhen City.

In March 2009, in order to seize the opportunities arising from the economic promotion by the Chinese government of the mid and western regions of the PRC, we strategically set up Chongqing Universal Travel E-Commerce Co., Ltd, a PRC company, to strengthen our presence in that region. It began generating revenues in the third quarter of 2009.

In 2010, we acquired a total of five companies for stock and cash through our VIE structure and strategy, namely Huangshan Holiday Travel Service Company (“Huangshan Holiday”),  Hebei Tianyuan International Travel Agency Co., Ltd  (“Tianyuan”), Zhengzhou Yulongkang Travel Agency Co., Ltd (“Zhengzhou Yulongkang”), Kunming Business Travel Agency Co., Ltd. ("Kunming Business Travel") and Shanxi Jinyang Travel Agency Co., Ltd. ("Shanxi Jinyang").

 
30

 

In order to finance the abovementioned acquisitions and our working capital, on December 10, 2009, we entered into a definitive subscription agreement to sell to institutional investors an aggregate of 2,222,222 shares of its common stock at a price of $9.00 per share for net proceeds of approximately $19.0 million. The sale of the common stock closed on December 15, 2009.  The offer and sale of the shares were made pursuant to an effective Registration Statement on Form S-3 (Registration No. 333- 161139) initially filed with the Securities and Exchange Commission on August 7, 2009 and amended on November 2, 2009. The Registration Statement was declared effective on November 5, 2009.

On June 15, 2010, we entered into an underwriting agreement (the "Underwriting Agreement") with Brean Murray, Carret & Co., LLC, as representative of the underwriters (the "Representative"), related to a public offering of 2,857,143 shares of the Company's common stock at a price of $7.00 per share less a 5% underwriting commission. Under the terms of the Underwriting Agreement, we granted the Representative an option, exercisable for 30 days, to purchase up to an additional 428,572 shares of common stock to cover over-allotments, if any. The offering was made pursuant to an effective registration statement on Form S-3, as amended and supplemented (Registration Statement No. 333-161139) filed with the Securities and Exchange Commission. On June 21, 2010, we closed the common stock offering announced on June 16, 2010. In the transaction, we issued 2,857,143 shares of common stock at $7.00 per share for an aggregate amount of $20 million. In 2009, we were selected one of the Top Ten Brands of Travel Services in the People’s Republic of China. We believe our quality of services will distinguish us in our long term competitiveness.

On September 9, 2010, our subsidiary, Shenzhen Yuzhilu Aviation Service Co. Ltd. executed a purchase and sale agreement to sell all of our 1,523 TRIPEASY kiosks to Shenzhen Xunbao E-Commerce Co., Ltd. for a total of RMB 40,301,417.73, or approximately $5.93 million.   Pursuant to the agreement, although we shall no longer operate or retain ownership rights to the kiosks, we will continue to have exclusive air ticketing, hotel reservation and package tour travel product sales rights in all TRIPEASY kiosks for a two-year period from the closing date of the agreement.

On December 24, 2010, we, through our subsidiary, Shenzhen Universal Travel Agency Co., Ltd., obtained the International Travel License issued by the National Travel Authority, granting us the right to operate and offer global package tours in mainland People’s Republic of China and our subsidiary changed name to Universal Travel International Travel Agency Co., Ltd. to reflect the upgrade. In the past, we had only been able to offer such packages through agencies which possess this license. There are over 20,000 travel agencies in the PRC, of which only approximately 1,300 travel agencies have this International Travel License.

Our strategy is to further utilize our international travel license, and expand our geographic service coverage by establishing more franchise offices and set up call centers in some of these franchisee offices where there is customer demand for air-ticketing and hotel reservation services. We also plan to integrate our offline businesses with our online platform.

We aim to be the foremost leading online travel services provider in the People’s Republic of China, especially in the air ticketing, hotel reservation and packaged tour service sectors.

RESULTS OF OPERATIONS

FISCAL YEAR ENDED DECEMBER 31, 2010 AND 2009
 
The following table presents certain consolidated statement of operations information derived from the consolidated statements of income for the fiscal year ended December 31, 2010 and 2009 respectively.
 
Because the Company had spun off its Speedy Dragon Enterprise Limited subsidiary and exited the air cargo business in the second quarter of 2009, all numbers attributable to continuing operations in the following discussion do not include the operating results of Speedy Dragon Enterprise Limited for the first and second quarters of 2009 and its historical results.  Such had been reclassified as discontinued operations.

 
31

 
 
    
For The Year Ended
             
   
December 31,
   
Increase/
       
   
2010
   
2009
   
(Decrease)
    Percentage  
Revenues
  $ 153,318,946     $ 95,802,474     $ 57,516,472       60.04 %
Cost of services
    112,222,421       66,632,818       45,589,603       68.42 %
Gross profit
    41,096,525       29,169,656       11,926,869       40.89 %
Selling, general and administrative expenses
    (11,790,250 )     (5,001,109 )     (6,789,141 )     135.75 %
Gain/(Loss) on disposal of fixed assets
    65,853       (1,594 )     67,447       -4231.30 %
Income from operations
    29,372,128       24,166,953       5,205,175       21.54 %
Other expenses
    (28,183 )     (76,422 )     48,239       -63.12 %
Gain/(Loss) on change in fair value of derivative liabilities
    1,004,390       (6,832,186 )     7,836,576       -114.70 %
Interest income
    143,102       58,124       84,978       146.20 %
Income before income taxes –continuing operations
    30,491,437       17,316,469       13,174,968       76.08 %
Provision for income taxes
    8,452,043       5,978,948       2,473,095       41.36 %
Income from continuing operations
  $ 22,039,394     $ 11,337,521     $ 10,701,873       94.39 %
Income from discontinued operations
  $ -     $ 177,975     $ (177,975 )     -100.00 %
Loss on disposition of discontinued operations
    -       (770,595 )     770,595       -100.00 %
Loss from discontinued operation
  $ -     $ (592,620 )   $ 592,620       -100.00 %
Net Income
  $ 22,039,394     $ 10,744,901     $ 11,294,493       105.11 %
 
For the year ended December 31, 2010:
 
Revenue  
Air
   
(%) of
   
Hotel
   
(%) of
   
Packaged
   
(%) of
       
Segment
 
Ticketing
   
sector
   
Reservation
   
sector
   
Tours
   
sector
   
Total
 
   
(YZL &
CTE)
         
(SLB)
         
(All others)
             
Revenue
  $ 24,189,452       15.78 %   $ 14,303,080       9.33 %   $ 114,826,414       74.89 %   $ 153,318,946  
Cost of services
  $ 8,838,496       7.88 %   $ 4,659,667       4.15 %   $ 98,724,258       87.97 %   $ 112,222,421  
Gross profit
  $ 15,350,956       37.35 %   $ 9,643,413       23.47 %   $ 16,102,156       39.18 %   $ 41,096,525  
Gross margin
    63.46 %             67.42 %             14.02 %             26.80 %
Segment effect in gross margin (*)
    10.01 %             6.29 %             10.50 %             26.80 %
 
 
32

 
 
For the year ended December 31, 2009:
 
Revenue  
Air
   
(%) of
   
Hotel
   
(%) of
   
Packaged
   
(%) of
       
Segment
 
Ticketing
   
sector
   
Reservation
   
sector
   
Tours
   
sector
   
Total
 
   
(YZL &
CTE)
         
(SLB)
         
(All others)
             
Revenue
  $ 16,634,872       17.36 %   $ 12,340,395       12.88 %   $ 66,827,207       69.76 %   $ 95,802,474  
Cost of services
  $ 4,561,236       6.85 %   $ 3,638,908       5.46 %   $ 58,432,674       87.69 %   $ 66,632,818  
Gross profit
  $ 12,073,636       41.39 %   $ 8,701,487       29.83 %   $ 8,394,533       28.78 %   $ 29,169,656  
Gross margin
    72.58 %             70.51 %             12.56 %             30.45 %
Segment effect in gross margin (*)
    12.60 %             9.08 %             8.76 %             30.45 %
 
(*) "Segment effect in Gross Margin" was calculated by multiplying "the percentage of the segment revenue over the total revenue" with "gross margin of the related sector". This outlines how each segment contributes to the total gross margin.
 
Revenue
 
Our air-ticketing segment relates to the segment reporting of Shenzhen Yuzhilu Aviation Service Co., Ltd. and Chongqing Travel World E-Business Co., Ltd. Our hotel reservation segment relates to Shanghai Lanbao Travel Service Co., Ltd. Our packaged tours segment relates to the remaining eight operating subsidiaries: Foshan International Travel Service Co., Ltd, Xi’an Golden Net Travel Serve Service Company Limited, Shenzhen Universal Travel Agency Co. Ltd, Huangshan Holiday Travel Service Co., Ltd., Hebei Tianyuan International Travel Agency Co., Ltd, Zhengzhou Yulongkang Travel Agency Co., Ltd, Shanxi Jinyang Travel Agency Co., Ltd and Kunming Business Travel Agency Co., Ltd. Operations of each segment are exclusive to the operations of the associated subsidiary company.
 
Revenues for the year ended December 31, 2010 were $153,318,946, compared to $95,802,474 for the same period 2009, an increase of $57,516,472, or approximately 60.0497%. The contributions from the five newly acquired subsidiaries were $31,806,319, or 20.75% of our total revenues for the fiscal year. We expect the revenue contributions from the five newly acquired subsidiaries will grow at 20% or higher as they are required by acquisition agreements, and they are likely to benefit from larger foundation and integration with Air-ticketing and Hotel reservation segments. Excluding the contributions from the five newly acquired subsidiaries, revenues for the year ended December 31, 2010 were $121,512,627, compared to $95,802,474 for the same period 2009, an increase of $25,710,153 or approximately 26.84%.
 
The acquisition of the five subsidiaries this year was primarily due to our efforts to expand our businesses, especially the packaged tour business, along with the strong demand for travel demand as a result of the recovery of Chinese economy, and the continuing effect of the Chinese government’s stimulus package, benefiting the whole industry.  The high growth rate is also helped by the comparatively lower numbers in the last year, when the tourism industry was adversely affected by H1N1, and increased value of RMB. We continue to see success in cross marketing and selling our travel related products across our business segments and increased brand awareness from online and offline sales.   
 
Revenues from air-ticketing segment were $24,189,452 for the year ended December 31, 2010 compared to $16,634,872 for the same period last year, an increase of $7,554,580, or approximately 45.41%. This increase is generally driven by increase in air-ticket sales volume, approximately 25% more tickets were sold compared to the same fiscal period last year, air-ticket prices were approximately 20% higher than the same fiscal period last year, and increased revenue from Chongqing Travel World E-Business Co., Ltd. as it gained more local market share over a year’s establishment. We attribute the higher air ticket sales to booming tourism, general inflation in Chinese economy, as well as the downgraded competition among airlines. As China’s economy continues to grow, we believe that our growth in air-ticketing is sustainable in the foreseeable future.
 
 
33

 

Revenues from the hotel reservations segment were $14,303,080 for the year ended December 31, 2010 compared to $12,340,395 for the same period in 2009, an increase of $1,962,685, or approximately 15.90%. We did not buy any hotel inventory during the period of the Shanghai World Expo in the third quarter, and therefore the growth in this segment is not as high as our other segments. Our hotel reservation revenue started to catch up with air-ticketing growth in the 4th quarter as the Shanghai World Expo ended and hotel supply and demand resume normal trends. Moreover, as more and more hotels are being built or renovated over the year, the general occupancy rate remains low, and therefore, we enjoyed constant favorable commission rate as the competitions among hotels increased. As China’s economy continues to grow, we believe that our hotel segment will continue to grow in the foreseeable future.
 
Revenues from our packaged tour segment were $114,826,414for the year ended December 31, 2010, compared to $66,827,207 for the same period in 2009, an increase of $47,999,207, or approximately 71.83%. Excluding the effect on revenue from the five newly acquired subsidiaries, which was $31,806,319, our revenues from this segment were $83,020,095 for the year ended December 31, 2010, compared to $66,827,207, for the same period in 2009, an increase of $16,192,888, or approximately 24.23%. We serviced approximately 452,700 more customer days organically compared to the same period last year. This increase is a result of the growth of Chinese economy, increased revenue from Universal Travel International Travel Agency Co., Ltd (formerly, Shenzhen Universal Travel Agency Co., Ltd), as it gains more local market share over a year’s establishment and our efforts in attracting more corporate clients as a result of an increase in our brand awareness, increases and more customer referrals as our satisfaction rate remains high, and no customer complaint since establishment.
 
Cost of Services
 
Costs of services for air tickets cover mainly business and revenue related taxes.  Costs of services for hotel reservations cover mainly business and revenue related taxes, as well as commissions paid to the sales agents for selling hotel rooms in the Company’s system.   Commission rates vary and are paid to these sales agents after we are paid our commissions by the hotels. Costs of services for packaged tours include meals, transportation (airline tickets, train tickets and car rental), lodging, airport transfers, tickets to local attractions and tours.
 
Other direct costs such as systems and related technologies used by each segment operations, and costs associated with payment processing are also included in the Company’s Costs of Services. In addition, the Company allocates costs of labor and facilities, depreciation, communications, and utility expenses incurred by each segment between costs of services and general administrative expenses.  The percentage, ranging from 50% to 80%, allocated to costs of sales is based on management estimate, and the percentage allocated is estimated to be directly associated with the generation of revenues. We do not offer any volume rebates but enjoy volume rebates from our vendors, calculated based on the vendors’ own internal rebate policy. We do not record receivables for these rebates, and we only record them as a reduction of cost when received.
 
Costs of services for the year ended December 31, 2010 were $112,222,421compared to $66,632,818 for the same period in 2009, an increase of $45,589,603, or approximately 68.42%. The comparatively higher costs of services resulted from packaged tours making up a greater percentage of our total revenue and their corresponding higher cost of services. Excluding the effect of the costs of services of the five newly acquired subsidiaries, which is $27,087,986, costs of services for the year ended December 31, 2010 were $85,134,435, compared to $66,632,818, for the same period 2009, an increase of $18,501,617, or approximately 27.77%. Although the air ticket price, as a component of cost of services, increased 18% in general, it did not affect our air ticketing segment cost, as we booked our air ticketing revenue in a commission net basis, and we were able to integrate with wider geographic covered local subsidiaries as a result of acquisitions to create synergy to tightly control our packaged tour segment cost. The increase is in tandem with the increase of revenue. 
 
 
34

 

Costs of services from air-ticketing were $8,838,496 for the year ended December 31, 2010, compared to $4,561,236 for the same period last year, an increase of $4,277,260, or approximately 93.77%. This increase is associated with the higher booking volumes, higher salaries expenses along with increased numbers of employees and increased cost of depreciation of Tripeasy kiosks in this segment.
 
Costs of services from hotel-reservation were $4,659,667 for the year ended December 31, 2010, compared to $3,638,908 for the same period last year, an increase of $1,020,759, or approximately 28.05%. The increase is associated with the increase in commission split to retail agencies for promoting our business and reclassification of cost of salary and rent.  We do not anticipate increases in commission splits.
 
Costs of services from packaged-tour were $98,724,258for the year ended December 31, 2010, compared to $58,432,674 for the same period last year, an increase of $40,291,584 or approximately 68.95%. The increase is in tandem with the increase of revenue. Excluding the effect of the costs of services for the five newly acquired subsidiaries, which was $27,087,986, our costs of services from this segment were $71,636,272 for the year ended December 31, 2010 compared to $58,432,674  for the same period in 2009, an increase of $13,203,598, or approximately 22.60%. The increase is also in tandem with the increase of revenue. 
 
A detailed breakdown of cost of services by subsidiary is set forth below:
 
 
35

 
 
Shenzhen Yuzhilu Aviation Service Co., Ltd. (YZL)
 
2010
   
2009
 
Franchise system cost sharing
  $ 22,473     $ 17,901  
Commission
    5,545,382       2,709,135  
Staff salaries
    602,648       536,076  
Telecommunication expenses
    216,524       158,744  
Rental expenses & Utilities
    496,700       427,771  
Depreciation and amortization
    118,311       490,510  
Subtotal
  $ 7,002,038     $ 4,340,137  
                 
Shanghai Lanbao Travel Service Co., Ltd. (SLB)
               
Staff salaries and Staff welfare
  $ 131,847     $ 75,799  
Rental expenses & Utilities
    53,107       50,490  
Telecommunication  expenses
    23,410       9,029  
Depreciation and amortization
    1,563       3,698  
Franchise commission paid
    4,449,740       3,499,892  
Subtotal
  $ 4,659,667     $ 3,638,908  
                 
Chongqing Universal Travel E-Commerce Co., Ltd. (CTE)
               
Opening fee
  $ -     $ 69,813  
Depreciation
    123,404       96,868  
Rental
    -       24,261  
Utilities
    -       1,549  
Website
    -       3,001  
Maintenance
    -       559  
Payroll
    -       25,048  
Package Tours
    1,713,054       -  
Subtotal
  $ 1,836,458     $ 221,099  
                 
Foshan International Travel Service Co., Ltd. (FOI)
               
Depreciation and amortization
  $ -     $ 11,949  
Cost of Services (Package Tours)
    38,844,280       36,634,916  
Subtotal
  $ 38,844,280     $ 36,646,865  
                 
Xian Golden Net Travel Serve Services  (XGN)
               
Depreciation and amortization
  $ -     $ 830  
Cost of Services (Package Tours)
    24,643,428       19,097,510  
Subtotal
  $ 24,643,428     $ 19,098,340  
                 
Shenzhen Universal Travel Agency Co. Ltd. (STA)
               
Depreciation and amortization
  $ -     $ 79  
Cost of Services (Package Tours)
    8,148,564       2,687,390  
Subtotal
  $ 8,148,564     $ 2,687,469  
                 
Huangshan Holiday Travel Agency Co., Ltd. (HHT)
               
Staff salaries and Staff welfare
    60,483          
Franchise system cost sharing
    291,193          
Depreciation and amortization
    6,697          
Cost of Services (Package Tours)
    2,211,889          
Subtotal
  $ 2,570,262          
                 
Hebei Tianyuan International Travel Agency Co., Ltd. (HTT)
               
Cost of Services (Package Tours)
    6,407,283          
Subtotal
  $ 6,407,283          
                 
Zhengzhou Yulongkang Travel Agency Co., Ltd. (ZYT)
               
Cost of Services (Package Tours)
    8,896,346          
Subtotal
  $ 8,896,346          
                 
Kunming Business Travel Agency Co., Ltd. (KBT)
               
Cost of Services (Package Tours)
    5,614,688          
Subtotal
  $ 5,614,688          
                 
Shanxi Jinyang Travel Agency Co., Ltd. (SJT)
               
Cost of Services (Package Tours)
    3,599,407          
Subtotal
  $ 3,599,407          
                 
Total
  $ 112,222,421     $ 66,632,818  
 
 
36

 

Gross Profit
 
Gross profit for the year ended December 31, 2010 was $41,096,525 compared to $29,169,656, for the same period 2009, an increase of $11,926,869, or approximately 40.90%. The increase in gross profit is due to the growth in revenue and control of cost as explained above. The growth in both our domestic air-ticketing business and hotel reservations business is a result of synergies from our packaged tour operations.
 
Gross profit in our air-ticketing segment was $15,350,956 for the year ended December 31, 2010, compared to $12,073,636 for the same period last year, an increase of $3,277,320, or approximately 27.14%. Gross profit margin for the year ended December 31, 2010 was 63.46%, slightly lower than 72.58% for the same period 2009. This decrease is a result of increased depreciation costs of our tripeasy kiosks, but as we sold all our kiosks in September 2010, we anticipate that our margin in the air-ticketing segment will improve in the foreseeable future.
 
Gross profit in our hotel reservation segment was $9,643,413 for the year ended December 31, 2010 compared to $8,701,487 for the same period last year, an increase of $941,926, or approximately 10.82%. Gross profit margin in this segment for the year ended December 31, 2010 was 64.85%, compared to 66.70% for the same period 2009, a slight decrease of 1.85%. The decreased gross profit margin is mostly due to the  reclassification of the costs associated. Our hotel reservation segment gross margin has been stable after the reclassification between cost and expense in 2009, and we expect our margin to improve after the one-time event, namely the Shanghai World Expo and as our sales volume increases.
 
Gross profit in our packaged tour segment was $16,102,156 for the year ended December 31, 2010 compared to $8,394,533 for the same period last year, an increase of $7,707,623, or approximately 91.82%. Gross profit margin in this segment for the year ended December 30, 2010 was 14.02% compared to 12.56% for the same period in 2009, an increase of 1.46%.  The stability in gross margin for this segment was mainly attributable to improved profit margins from our five newly acquired subsidiaries into this segment. We believe that our strong local networks contacts and network established through are subsidiaries are critical in our nationwide expansion strategy.
 
Our air-ticketing and hotel reservations have much higher gross margin than our packaged tour business primarily as our revenues from air-ticketing and hotel reservation are the commission we generated. Our costs of service are mainly business taxes, systems and related technologies used in operations, costs associated with payment processing, and allocation of costs of labor and facilities, communications, and utility expenses, which all together are not substantial, while costs of services for the packaged tours include meals, transportation (airline tickets, train tickets and car rental), lodging, airport transfers, tickets to local attractions and tours, that all together are much substantial variable and fixed overheads.
 
Consolidated gross margin for the year ended December 31, 2010 came in at 26.80%, a 3.64% decrease from the 30.45% in the same period last year. The lower gross margin is mainly due to our increased weight of our lower margin packaged tours segment in our revenue mix. Due to the difference in revenues recognition, our packaged tour segment has lower gross margin. During the year ended December 31, 2010, revenues generated from packaged tours grew at a much higher rate than revenues generated from air ticketing and hotel reservation segments as a result of acquisitions of five packaged tour travel agencies, leading to lower overall gross margin. However, management believes the packaged tour segment is critical to the substantial growth of air ticketing and hotel reservation segments in the long run, and overall gross margin is expected to improve as integration among segments and as our strategy increases focus on online development.
 
 
37

 

Selling, General and Administrative Expenses
 
Major selling, general, and administrative expenses for the fiscal year ended December 31, 2010 and 2009 are as follows:
 
    
For the year ended
             
   
December 31,
   
Increase/
       
   
2010
   
2009
    (Decrease)     Percentage  
                         
Salary and commission
    1,653,184       564,077       1,089,107       193.08 %
Marketing
    356,021       191,230       164,791       86.17 %
Rent
    351,992       289,320       62,672       21.66 %
Depreciation and amortization
    1,101,755       185,870       915,885       492.76 %
Professional fees
    1,174,053       472,900       701,153       148.27 %
Stock-based compensation
    4,901,222       1,154,408       3,746,814       324.57 %
Other general and administrative expenses
    2,252,023       2,143,304       108,719       5.07 %
Total
  $ 11,790,250     $ 5,001,109       6,789,141       135.75 %
 
Selling, general and administrative expenses totaled $11,790,250 for year ended December 31, 2010 compared to $5,001,109 for the same period last year, an increase of $6,784,141, or approximately 135.75%.
 
Selling, general and administrative expenses were approximately 7.69% of revenue for the year ended December 31, 2010 as compared to 5.22% for the same period last year. General increase in selling, general and administrative expenses are in connection with the growth in business operations during the year ended December 31, 2010, as compared to the same period of last year. During the fiscal year of 2010, we incurred extra professional fees, amortization expenses of identified intangible assets, stock based compensation for all 2009 incentive stock option plan,  and consolidation expenses for the aforesaid mergers and acquisitions. To promote our businesses, especially the packaged tour programs, we spent $376,496 on advertisements in the fiscal year of 2010, while we did not incur so much for the same period last year. In the second half of 2009, we established two subsidiaries, Chongqing Universal Travel E-Business Co., Ltd and Shenzhen Universal Travel Agency Co. Ltd., which changed to Universal Travel International Travel Agency Co., Ltd. after granted international travel license. Depreciation and amortization expenses of these two newly established companies have been taken into account since the third quarter of 2009. The doubling of salary expense and commission is due to the increased split on commissions to large retail agencies and an increase in the number of new hires including employees from our five new acquisitions. Average salary is approximately 2,000 RMB/month for first-line employees, and commission paid per marketing employee is approximately 2,500 RMB/month base on their performance.
 
Other Income (Expenses) 
 
Gain on change in fair value of derivative liability for the year ended December 31, 2010 was $1,004,390 compared to a loss of $6,832,186 for the same period last year. The Company adopted Derivative and Hedging, ASC 815-40 effective January 1, 2009. The warrants issued in connection with the “Securities Purchase Agreement” dated August 28, 2008 were reclassified from equity to derivative liability and marked to market.  Therefore, the Company recorded a gain on change in fair value of derivative liability of $1,004,390 on December 31, 2010 to mark to market for the decrease in fair value of the warrants from January 1, 2010 to December 31, 2010.
 
 
38

 

Net Income
 
Net income was $22,039,394, or 14.37% of revenues for the year ended December 31, 2010, compared to $10,744,901, or 11.22% of revenues for the same period last year, an increase of $11,294,493, or 105.11%. The increase in net income is mostly due to our efforts to expand our business, our merger and acquisition strategy, as well as the non-cash gain on change in fair value of derivative liability and the effect of the discontinued operation.
 
LIQUIDITY AND CAPITAL RESOURCES
 
The variation of exchange rate from RMB to USD will impact our net income, the analysis from the table below presented the impact in our net income.
 
   
Exchange rate
   
Exchange
rate
   
Exchange
rate
 
   
December 31, 2010
   
increase 1%
   
decrease 1%
 
Average rate
    6.7788       6.8465       6.7110  
Net income
  $ 22,039,394     $ 21,771,417     $ 22,313,524  
Increase/(Decrease)
          $ (267,977 )   $ 274,130  
Percentage
            -1.22 %     1.24 %
 
Cash for operations and liquidity needs are funded primarily through cash flows from operations and equity raise. Cash and cash equivalents were $39,618,988 as of December 31, 2010. Current assets and current liabilities as of December 31, 2010 were $110,750,276 and $10,439,126, respectively, yielding working capital of $100,311,150. We believe that the funds available to us from operations and equity raise are adequate to meet our operating needs for the next twelve months. For the year ended December 31, 2010, net cash provided by operating activities was approximately $13,025,930, which resulted primarily from our operations and effective management of cash flow.
 
Capital expenditure
 
Total capital expenditure for year ended December 31, 2010 was $3,125,147 to purchase fixed assets, primarily machinery and equipment, such as TRIPEASY kiosks. On September 9, 2010, all of our 1,523 TRIPEASY kiosks were sold for a total of $5,698,488.  Management may consider substantial increase in decoration and equipment or other supporting machinery expenditures as we start our franchise model and to support the fast development and expansion of our business.
 
Working Capital Requirements
 
Historically, operations and short term financing have been sufficient to meet our cash needs. We believe that we will be able to generate revenue from operations to provide the necessary cash flow to meet anticipated working capital requirements. However, our actual working capital needs for the long and short term will depend upon numerous factors, including operating results, competition, the opportunity to acquire or start-up new businesses, and the availability of credit facilities, none of which can be predicted with certainty. Due to our rapid growth and expansion, our need for additional capital may arise, and management will seek to raise capital for the maintenance and expansion of our operations through the issuance of debt or equity if necessary. To satisfy these capital needs due to our broad expansion in PRC, we may incur additional capital expenditures.
 
We filed a Registration Statement on Form S-3 to register $50,000,000 worth of securities on August 7, 2009, which became effective on November 5, 2009. In December 15, 2009, we closed Subscription Agreements with certain investors to sell to them an aggregate of 2,222,222 shares of common stocks for net proceeds of $18.9 million. We also closed another common stock public offering transaction on June 16, 2010. In this transaction we issued 2,857,143 shares of common stocks for net proceeds of $18.8 million.
 
 
39

 

Unless otherwise indicated in a prospectus supplement, we intend to use the net proceeds from the sale of the securities under the S-3 registration for general corporate purposes, including expanding our products, and for general working capital purposes.  We may also use a portion of the net proceeds to acquire or invest in businesses and products that are complementary to our own, although we have no current plans, commitments or agreements with respect to any acquisitions as of the date of the S-3 registration.
 
Off Balance Sheet Arrangements
 
We have never entered into any off-balance sheet financing arrangements except leases and have never established any special purpose entities. We have not guaranteed any debt or commitments of other entities or entered into any options on non-financial assets.
 
Critical Accounting Policies, Estimates and Judgments
 
This discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles.  The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures.  On an on-going basis, we evaluate our estimates, including those related to inventories, revenue recognition, and accounts receivable, asset impairment and warrant derivative liability.  We base our estimates on historical experience and on various other market-specific assumptions 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.  Actual results, however, may differ significantly from these estimates.
 
We believe the following critical accounting policies reflect the more significant judgments and estimates used in the preparation of our consolidated financial statements:
 
Revenue Recognition and Accounts Receivable

The Company follows the provisions of SAB 104, “Revenue Recognition in Financial Statements”, for revenue recognition. Under SAB 104, four conditions must be met before revenue can be recognized: (i) there is persuasive evidence that an arrangement exists, (ii) delivery has occurred or service has been rendered, (iii) the price is fixed or determinable, and (iv) collection is reasonably assured.  The Company provides for an allowance for doubtful account based history and experience considering economic and industry trends. At December 31, 2010 and 2009, allowance for doubtful accounts was approximately $944,134 and $414,927, respectively.  The Company does not have any off-Balance Sheet exposure related to its customers.
 
Warrant Derivative Liability

The Company issued warrants in connection with the sale of common stock in 2008.  The Company analyzed the accounting treatment and classification of the warrants and summarized the effects and conclusions. The Company accounts for the warrants pursuant to FASB ASC Topic 815. The Company originally accounted for the warrants as equity; however, as noted in the footnote 2 to the consolidated financial statements, management subsequently determined such warrants should have been classified as a liability. As a result, the previously issued consolidated financial statements have been restated.
 
 
40

 

Impairment analysis for long-lived assets and intangible assets

The Company’s long-lived assets and other assets (consisting of property and equipment and purchased intangible assets) are reviewed for impairment in accordance with the guidance of the FASB Topic ASC 360, “Property, Plant, and Equipment”, and FASB ASC Topic 205 “Presentation of Financial Statements”.  The Company tests for impairment losses on long-lived assets used in operations whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable.  Recoverability of an asset to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated by the asset.  If such asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value.  Impairment evaluations involve management’s estimates on asset useful lives and future cash flows.  Actual useful lives and cash flows could be different from those estimated by management which could have a material effect on our reporting results and financial positions.  Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary. Through December 31, 2010, the Company had not experienced impairment losses on its long-lived assets. 
 
Management has discussed the development and selection of these critical accounting policies with the Board of Directors and the Board has reviewed the disclosures presented above relating to them.

 
41

 
 
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
 
Not Applicable.
 
Item 8. Financial Statements and Supplementary Data.
 
 
42

 

UNIVERSAL TRAVEL GROUP

CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2010
 
 
 

 
 
Certified Public Accountants & Business Consultants | 280 Kenneth Drive, Suite 100 | Rochester, NY 14623 | 585.427.8900 | EFPRotenberg.com
 


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and
Stockholders of Universal Travel Group

We have audited the accompanying consolidated balance sheets of Universal Travel Group as of December 31, 2010, and the consolidated statements of income and comprehensive income, changes in stockholders’ equity, and cash flows for the year ended December 31, 2010. Universal Travel Group’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal  control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Universal Travel Group as of December 31, 2010, and the results of its operations and its cash flows for the year ended December 31, 2010 in conformity with accounting principles generally accepted in the United States of America.

/s/ EFP Rotenberg, LLP

EFP Rotenberg, LLP
Rochester, New York
June 6, 2011
 
 
F-1

 
 
TABLE OF CONTENTS

Reports of Independent Registered Public Accounting Firms
F-1
   
Consolidated Balance Sheets
F-3
   
Consolidated Statements of Income
F-4
   
Consolidated Statements of Changes in Stockholders' Equity
F-5
   
Consolidated Statements of Cash Flows
F-6
   
Notes to the Consolidated Financial Statements
F-7-F-38
 
 
F-2

 

UNIVERSAL TRAVEL GROUP
CONSOLIDATED BALANCE SHEETS

       
December 31,
   
December 31,
 
       
2010
   
2009
 
ASSETS
               
Cash and cash equivalents
      $ 39,618,988     $ 36,574,741  
Restricted Cash
 
Note 2
    307,027       102,681  
Accounts receivable, net
 
Note 2
    38,658,011       17,321,174  
Other receivables and deposits, net
        780,400       257,907  
Trade deposit
 
Note 3
    8,173,426       9,775,735  
Advances
 
Note 3
    -       440,063  
Prepayments
        1,216,857       216,727  
Short term investments, at cost
 
Note 5
    19,681,308       -  
Note receivable
 
Note 6
    2,314,259       1,711,392  
Acquisition Deposits
        -       4,077,921  
Total Current Assets
        110,750,276       70,478,341  
                     
Property & equipment, net
        1,692,595       4,992,677  
Intangible assets, net
        3,110,882       339,240  
Goodwill
 
Note 2
    24,508,909       9,896,270  
Total Noncurrent Assets 
        29,312,386       15,228,187  
Total Assets
      $ 140,062,662     $ 85,706,528  
                     
 LIABILITIES AND STOCKHOLDERS' EQUITY
                   
Current Liabilities
                   
Accounts payable and accrued expenses
      $ 5,045,674     $ 2,615,730  
Customer deposits
        2,203,487       2,000,117  
Income tax payable
        3,189,965       1,654,475  
Total Current Liabilities
        10,439,126       6,270,322  
                     
Warrants - derivative liability
 
Note 10
    810,929       1,815,319  
Deferred tax liability
 
Note 7
    477,397       -  
Long-term income tax payable
 
Note 7
    30,804       -  
Total  Liabilities
        11,758,256       8,085,641  
                     
Stockholders' Equity
                   
Common stock, $.001 par value, 70,000,000 shares authorized, 19,898,235 and 16,714,457 issued and outstanding at December 31,  2010 and 2009, respectively
 
Note 9
    19,898       16,714  
Preferred stock, $0.001 par value, 5,000,000 shares authorized, no shares issued and outstanding at December 31, 2010 and 2009, respectively.
 
Note 9
    -       -  
Additional paid in capital
        64,171,555       37,671,645  
Statutory reserve
        1,062,741       372,144  
Retained earnings
        59,624,186       37,915,251  
Accumulated other comprehensive income
 
Note 11
    3,426,026       1,645,133  
Total Stockholders' Equity
        128,304,406       77,620,887  
Total Liabilities and Stockholders' Equity
      $ 140,062,662     $ 85,706,528  

The accompanying notes are an integral part of these consolidated financial statements.

 
F-3

 

UNIVERSAL TRAVEL GROUP
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31,
 
   
2010
   
2009
 
Revenues
           
Air ticketing, net
  $ 24,189,452     $ 16,634,872  
Hotel reservation, net
    14,303,080       12,340,395  
Packaged tours, gross
    114,826,414       66,827,207  
      153,318,946       95,802,474  
Cost of services
               
Air ticketing, net
    8,838,496       4,561,236  
Hotel reservation, net
    4,659,667       3,638,908  
Packaged tours, gross
    98,724,258       58,432,674  
      112,222,421       66,632,818  
                 
Gross Profit
    41,096,525       29,169,656  
                 
Selling, general and administrative expenses
    (11,790,250 )     (5,001,109 )
Gain/(Loss) on disposal of fixed assets
    65,853       (1,594 )
Income from operations
    29,372,128       24,166,953  
                 
Other income (expense)
               
Other expense
    (28,183 )     (76,422 )
Gain/(Loss) on change of fair value of derivative liabilities
    1,004,390       (6,832,186 )
Interest income
    143,102       58,124  
Total other income (expense)
    1,119,309       (6,850,484 )
                 
Income before income taxes–continuing operations
    30,491,437       17,316,469  
                 
Provision for income taxes
    8,452,043       5,978,948  
Income from continuing operations
  $ 22,039,394     $ 11,337,521  
                 
Income from discontinued operations
  $ -     $ 177,975  
Loss on disposition of discontinued operations
    -       (770,595 )
Loss from discontinued operation
  $ -     $ (592,620 )
                 
Net Income
  $ 22,039,394     $ 10,744,901  
                 
Comprehensive Income
               
Net income
  $ 22,039,394     $ 10,744,901  
Foreign currency translation adjustments
    1,780,893       124,967  
Total Comprehensive income
  $ 23,820,287     $ 10,869,868  
                 
Income per common share from continuing operations
               
Basic
  $ 1.19     $ 0 .80  
Diluted
  $ 1.14     $ 0 .74  
Loss per common share from discontinued operations
               
Basic
  $ -     $ (0.04 )
Diluted
  $ -     $ (0.04 )
Net income per common share
               
Basic
  $ 1.19     $ 0.76  
Diluted
  $ 1.14     $ 0.70  
Weighted average common shares outstanding
               
Basic
    18,493,832       14,121,542  
Diluted
    19,387,818       15,318,460  

The accompanying notes are an integral part of these consolidated financial statements.

 
F-4

 

UNIVERSAL TRAVEL GROUP
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009

                            
Accumulated
       
         
Additional
               
Other
   
Total
 
   
Common Stock
   
Paid In
   
Statutory
   
Retained
   
Comprehensive
   
Stockholders’
 
   
Shares
   
Amount
   
Capital
   
Reserve
   
Earnings
   
Income
   
Equity
 
                                           
Balance December 31, 2008
    13,873,969       13,873       15,861,116       372,144       26,633,573       1,520,166       44,400,872  
Cumulative effect of a change in accounting principle-adoption of EITF 07-05 effective January 1, 2009
    -       -       (2,091,738 )     -       536,777       -       (1,554,961 )
Stock based compensation – Net of warrants exercise
    41,120       42       1,154,367       -       -       -       1,154,409  
Fair market value Of treasury stock received and retired
    (238,095 )     (239 )     (2,780,711 )     -       -       -       (2,780,950 )
Warrants exercised
    235,569       236       6,571,594       -       -       -       6,571,830  
Options cashless exercised
    576,372       577       (577 )                             -  
Options cash exercised
    3,300       3       9,567       -       -       -       9,570  
Stock issued for cash net of offering costs
    2,222,222       2,222       18,948,027       -       -       -       18,950,249  
Income for the year ended December 31, 2009
    -       -       -       -       10,744,901       -       10,744,901  
Foreign currency translation adjustments
    -       -       -       -       -       124,967       124,967  
Balance December 31, 2009
    16,714,457       16,714       37,671,645       372,144       37,915,251       1,645,133       77,620,887  
Stock based compensation
    -       -       4,901,222       -       -       -       4,901,222  
Stock issued for acquisitions
    326,635       327       2,833,491       360,138       -       -       3,193,956  
Transfer to statutory reserves
                            330,459       (330,459 )             -  
Stock issued for cash net of offering costs
    2,857,143       2,857       18,765,197       -       -       -       18,768,054  
Income for the year ended December 31, 2010
    -       -       -       -       22,039,394       -       22,039,394  
Foreign currency translation adjustments
    -       -       -       -       -       1,780,893       1,780,893  
Balance December 31, 2010
    19,898,235     $ 19,898     $ 64,171,555     $ 1,062,741     $ 59,624,186     $ 3,426,026     $ 128,304,406  

The accompanying notes are an integral part of these consolidated financial statements.

 
F-5

 

UNIVERSAL TRAVEL GROUP
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,

   
2010
   
2009
 
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net income
  $ 22,039,394     $ 10,744,901  
Add:
               
Net loss from discontinued operations
    -       592,620  
Income from operations
    22,039,394       11,337,521  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    1,557,483       813,272  
Provision for doubtful accounts
    474,443       204,788  
Stock based compensation
    4,901,222       1,154,409  
(Gain)/Loss on change in fair value of derivative liabilities
    (1,004,390 )     6,832,186  
(Gain)Loss on sales of fixed assets
    (65,853 )     1,594  
(Increase) / decrease in assets:
               
Restricted cash