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, 2009
 
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
(I.R.S. Employer
Incorporation or organization
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. xYes ¨ 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     ¨ 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      ¨ 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, 2009 was approximately $60,539,791 (5,410,169 shares of common stock)  based upon the closing price of the common stock as quoted by NYSE Amex 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 March 2, 2010, there are presently 16,714,457 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.
Description of Business
3
     
Item 1A.
Risk Factors
13
     
Item 1B.
Unresolved Staff Comments
19
     
Item 2.
Description of Property
19
     
Item 3.
Legal Proceedings
20
     
Item 4.
Submission of Matters to a Vote of Security Holders (Removed and Reserved)
 
     
 
PART II
  
     
Item 5.
Market for Common Equity and Related Stockholder Matters
21
     
Item 6.
Selected Financial Data
24
     
Item 7.
Management’s Discussion and Analysis of Financial Condition orPlan of Operation
24
     
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
38
     
Item 8
Financial Statements
38
     
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
38
     
Item 9A.
Controls and Procedures
38
     
Item 9B.
Other Information
39
     
 
PART III
48
     
Item 10.
Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act
40
     
Item 11.
Executive Compensation
  
     
Item 12.
Security Ownership of Certain Beneficial Owners and Management
  
     
Item 13.
Certain Relationships and Related Transactions
50
     
Item 14.
Principal Accountant Fees and Services
51
     
 
PART IV
  
     
Item 15.
Exhibits and Financial Statement Schedules
52
 
 
2
 

PART I
 
Item 1. 
Business.
 
History and Organization

 
We were 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 and cargo transportation agency 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.

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.

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 Mr. Song. As a result of the termination agreement, SSD is spun off from our business.

 
3
 

On August 6, 2007, we acquired Xi'an Golden Net Travel Serve Service Company Limited ("XGN") 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.

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.

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. Last year it served more than 120,000 people with packaged tours and conferences.

Also 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.
 
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.

With the completion of the raise, we then sought to seek out acquisition targets that would both complement our strategic growth and service products.

On December 17, 2009, we entered into a letter of intent to acquire Huangshan Holiday Travel Service Company (“Huangshan Holiday”) for RMB 20 million (approximately $2.9 million), 80% of which shall be paid cash and 20% in shares of common stock of the Company. The purchase consideration may be subject to adjustment after completion of due diligence on Huangshan Holiday by the Company. 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. Estimated full year 2009 revenues and net income for Huangshan Holiday are approximately $4.4 million and $0.6 million, respectively.

 
4
 

On January 26, 2010, we entered  into a letter of intent to acquire Zhengzhou Yulongkang Travel Service Company (“Zhengzhou Yulongkang”) for RMB 39 million (approximately $5.7 million), 90% of which to be paid in cash and 10% of the purchase consideration in shares of the Company’s common stock. The purchase consideration may be subject to adjustment after the completion of acquisition audit on Zhengzhou Yulongkang by the Company. 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.

On January 19, 2010, we entered into a letter of intent to acquire Hebei Tianyuan Travel Agency (“Tianyuan”) for RMB 29 million (approximately $4.2 million), 80% of which shall be paid in cash and 20% of the consideration in shares of the Company’s common stock. The purchase consideration may be subject to adjustment after completion of acquisition audit on Tianyuan by the Company. 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. 

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 (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). We previously provided air cargo agency services through Shenzhen Speedy Dragon Enterprise Limited, which we spun off in June 2009.

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 our TRIPEASY Travel Service Kiosks  (the “Kiosks”) 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.

 
5
 

Our air-ticketing business is affected by the condition 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:

 
·
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, we anticipate, will increase the demand for travel.

Hotel reservations

We are, through our subsidiaries, YZL and 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) or SLB's website (www.cba-hotel.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.

 
6
 

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.

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.
Packaged Tours

We are, through our subsidiaries, FOI, XGN and STA, 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 tha 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.

Insurance

We presently have directors and officers insurance with Navigators Insurance Company.  The policy is for a term of one year commencing June 23, 2009 to June 23, 2010 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

 
7
 

 
Trademark
  
Class
  
Registrant
UTG
  
16, 39, 43
  
Shenzhen Yu Zhi Lu Aviation Service Company Limited
TRIPEASY
  
39, 42
  
Shenzhen Yu Zhi Lu Aviation Service Company Limited

We, through our subsidiary, XGN, have the “古都之旅” 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 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.
 
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 three years:
Year
  
Visitors
  
Number of visitors multiplied by
the number of days comprising the tour
         
2007
    
93,984
  
364,676
2008
    
139,242
  
521,270
2009
    
212,460
  
807,300

Air-ticketing
Below is a breakdown of the number of air tickets sold for the past three years:

 
8
 

 
Year
  
Number of Tickets
  
       
2007
     1,084,000  
2008
     1,720,000  
2009
     2,360,000  

Hotel Reservations
Below is a breakdown of the number of hotel room nights booked through us for the past three years:
Year
  
Number of Room Nights
  
       
2007
     680,000  
2008
     1,466,000  
2009
     2,349,000  

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.

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 three 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.

 
9
 

 
Subsidiary
  
Amount (RMB)/ (US$)
Foshan Overseas International Travel Service Co., Ltd.
  
152,774/$22,369
Shenzhen Yu Zhi Lu Aviation Service Company Limited
  
1,063,459/ $ 155,713(Media Advertisement expenses)
862,000 / $126,024  (Airport Marketing expenses)
Shanghai Lanbao Travel Service Company Limited
  
 38,000/ $5,564 (Advertisements)
 2,000/ $293 (Website)
     
Chongqing Universal Travel E-Commerce Co., Ltd
  
 4,500/ $659 (Advertisements)
Shenzhen Universal Travel  Agency Co., Ltd
  
 45,296/ $6,632 (Advertisements)

We anticipate that our sales and marketing expenses for fiscal year 2010 will increase proportionally with our sales volume.

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 buffered by our other lines of businesses;

 
•
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; and

 
•
As of December 31, 2009, we have 623 Kiosks in place to serve our customers. We plan to roll out an additional 1,400 Kiosks in 2010 in selected cities in the PRC.  The Kiosks would enable our customer to make travel related inquiries and book their travel when they do not have access to a computer or an internet connection.

Our Future Goals and Expansion Plans

We introduced the Kiosksin selected major cities in the PRC, with 623 Kiosks rolled out in 2009. We plan to further introduce the Kiosks to other cities in the PRC. Locations of our Kiosks will include hotels, office buildings, banks, shopping malls and MTR stations. The Company will promote the Kiosks via local media such as newspapers, billboards and internet ads, including its own award-winning website, www.cnutg.com, as well as other related websites, which will in turn further the Company’s brand recognition. The Kiosks themselves will provide a strong media platform to strengthen Universal Travel Group’s franchise. Additionally, the Kiosks’ interface will feature the same look, feel and functionality as Universal Travel Group’s new website, www.cnutg.com.cn, which integrates the Company’s diversified services into a new platform with selected value- added features and functionality.

 
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The Kiosks are interactive terminals placed in strategically targeted public areas. They enable convenient, fast and easy to use, real-time air ticketing inquiries, reservations and purchases, as well as hotel and tour reservations. The Kiosks provide full 360° views of hotels and travel destinations and accept payment via bank cards, debit cards and VISA. According to Credit Suisse Research, the number of domestic travelers in the PRC that use online travel services continues to rise, accounting for 16% of users in 2007, up from 12% in 2005. Major cities such as Shanghai and Shenzhen have a higher proportion of people using online travel services as compared to the rest of the PRC, representing 23% and 20% of the users in 2007, respectively. According to the China Internet Network Information Center, the PRC is the world’s largest market for internet users. Despite this, 95% of internet users still do not make purchases over the internet. The Kiosks eliminate the need for a personal computer or online access in order to make travel arrangements and are specifically targeted at this demographic of users. We expect to roll out 1,400 additional Kiosks in 2010.

The Kiosks, together with our website and call center, will serve to integrate our air ticket sales, hotel room sales, and packaged tours businesses. We are working on a cost-effective way for a potential rollout by bundling it with Byte Power (CQ) Info Tech Limited's (a subsidiary of Byte Power Group Limited - ASE: BPG.AX) E-Kiosks. This will allow us to enter a new market in Chongqing quickly and efficiently.

Employees

At the current time, including our officers, we have approximately 780 full-time employees, including 80 administrative employees, 200 marketing employees and approximately 500 employees working at our three call centers. 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.
 
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);

 
11
 

 
•
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.
 
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;

 
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•
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.
 
The tax rates of our various subsidiaries in 2009 were all 25% except for YZL, the tax rate of which was 20%. For 2010, these rates will remain 25% except for YZL, the tax rate of which will become 22%.
 
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; and
 
•
“Domestic Travel Agency” awarded by the China Travel Bureau to XGN.

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.
 
 
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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.
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.

 
14
 
 
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.

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.

 
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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.

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.

 
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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.

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.

 
17
 

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.

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.

 
18
 
  
 
The Chinese legal and judicial system may negatively impact foreign investors.
 
In 1982, the National Peoples 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 Peoples 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 Peoples 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 Peoples 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.

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.

 
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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 October 2010. The monthly rent payable for these offices is $12,517.60.

In addition to the above principal offices, we also have a call center located at Shennan Road, Hualian Center Room 301 - 304, Shenzhen, People's Republic of China. The offices contain approximately 356 square meters of usable space and are subject to a lease which expires October 2010. The monthly rent payable for these offices is $3,718.

In addition to our headquarters, YZL and STA maintain offices at the locations listed below which require aggregate monthly payments of $14,760.

1. 
Baoan Airport Branch: BT61-62, Area B, Shenzhen Baoan Airport.
2. 
Fuyong Branch: No. 129. Bai Shi Sha Blvd, Fuyong Zhen, Shenzhen City.
3. 
Longhua Zhuojing Branch: No.11 Sheng Di Long Quan, Ban Ren Min Bei Road, Longhua Blvd, Shenzhen City.
4. 
Xinzhou Branch: 1st Floor Business Center, Chu Tian Hotel, Hubei Building, Bin He Road, Shenzhen City.
 
FOI maintains 9 offices around the Guangzhou area which require aggregate monthly payments of $5,241.80;
 
XGN maintains 3 offices in Xi’an which require aggregate monthly payments of $732.60;
 
SLB maintains its main office in Shanghai and makes aggregate monthly payments of $5,827.33;

CTE maintains offices of approximately 1,194 square meters, and makes aggregate monthly payments of $3,496.
 
We plan to expand our operations and lease more office space in the near future, based on our increased office spaces and the rentals for our Kiosks.

Item 3.    Legal Proceedings.

We know of no material, active, pending or threatened proceeding against us or our subsidiaries, nor are we, or any subsidiary, involved as a plaintiff or defendant in any material proceeding or pending litigation.

 
20
 

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.

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
  
2008 First Quarter
   $ 1.45     $ 3.82  
2008 Second Quarter
   $ 1.12     $ 2.86  
2008 Third Quarter
   $ 0.87     $ 1.65  
2008 Fourth Quarter
   $ 0.45     $ 1.10  
                 
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  

Holders of Securities
 
As of March 4, 2010, there were approximately 82 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.

           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.
 
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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.

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.

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 rateably, (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 rateably 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 rateably.   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.

The following table provides information as of the date hereof our outstanding equity compensation
plans and arrangements .
 
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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
     2,200,000     $ 3.72       0  
Equity compensation plans not approved by security holders
     55,555     $ 6.70       0  
Total
     55,555     $ 6.70       0  
 
Purchases of Equity Securities by the Company and Affiliated Purchasers

During the fourth quarter of our fiscal year ended December 31, 2009, 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
 
The following sets forth recent sales by the Company of unregistered securities during the fiscal year ended December 31, 2009:

None.

The following sets forth recent sales by the Company of unregistered securities during the fiscal year ended December 31, 2008:

On February 4, 2008, we received a commitment for $3.5 million in financing from three Chinese financial institutions, namely Total Shine Group Limited, Victory High Investments Limited and Think Big Trading Limited, in exchange for 433,827 shares of our Common Stock, a price of $8.10 per share. The proceeds were to be used exclusively to reduce debt from past acquisitions. The funds were to be paid in three installments: $600,000 was paid upon execution of the equity financing agreement, $1,400,000 is to be paid no later than February 28, 2008 and the balance of $1,514,000 is to be paid no later than ten days after the filing of our Annual report. The first round of financing closed on February 7, 2008.  Proceeds from the first closing amounting to $599,994 were paid directly to the shareholders of  Foshan Overseas International Travel Service Co., Ltd. (FOI) to satisfy an amount due to them under a note and we issued 74,074 shares of our Common Stock to Total Shine Group Limited, Victory High Investments Limited and Think Big Trading Limited.  On May 7, 2008 we terminated the equity financing agreement with the financial institutions due to their failure to provide the remaining amounts according to the agreement.

On August 28, 2008, we entered into a Securities Purchase Agreement with Access America Fund, LP, Chinamerica Fund LP, Pope Investments II LLC, Heller Capital Investments, LLC, CGM as C/F Ronald I. Heller IRA, Investment Hunter, LLC, MARed Investments, High Capital Funding, LLC, and Merrill Lynch, Pierce, Fenner & Smith, FBO Beau L. Johnson (collectively, the “Buyers”) to sell to the Buyers 1,529,569 shares of common stock, of the Company and warrants to purchase 764,785 shares of common stock for an aggregate purchase price of $7,112,500. Each warrant has an exercise price of $8.13 and a term of 5 years from the date of issuance.

The private placements were exempt from registration under the Securities Act under Section 4(2) of the Securities Act and Rule 506 promulgated thereunder because the securities were offered only to nine purchasers, all of which were accredited investors, no general advertisement of the sale of securities was made, and all other requirements of the exemption were satisfied.
 
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The following sets forth recent sales by the Company of unregistered securities during the fiscal year ending December 31, 2007:

On April 10, 2007, we, Full Power Enterprise Global Limited ("Full Power"), Shenzhen Yu Zhi Lu Aviation Service Company Limited (“YZL”), Shenzhen Speedy Dragon Enterprise Limited (“SSD”) and Xiangsheng Song, entered into a share exchange agreement pursuant to which YZL acquired 100% of SSD in a stock and cash transaction valued at approximately US $4,000,000. Under the share exchange agreement, in exchange for his shares in SSD, Xiangsheng Song received both stock consideration and cash consideration. The stock consideration consisted of 238,095 newly issued shares of our Common Stock.

On August 6, 2007, pursuant to a share exchange agreement, in exchange for the shares of Xi'an Golden Net Travel Serve Service Company Limited (“XGN”), we issued to the shareholders of XGN an aggregate of 50,588 shares of our Common Stock, which were divided proportionally among the shareholders in accordance with their respective ownership interests in XGN immediately before the closing of the share exchange agreement.

On August 8, 2007, pursuant to a share exchange agreement, in exchange for the shares of Shanghai Lanbao Travel Service Company Limited (“SLB”), we issued to the shareholders of SLB an aggregate of 200,000 shares of our Common Stock, which were divided proportionally among the shareholders in accordance with their respective ownership interests in SLB immediately before the closing of the share exchange agreement.

On October 29, 2007, pursuant to a share exchange agreement, in exchange for the shares of Foshan Overseas International Travel Service Co., Ltd. (“FOI”), we issued to the shareholders of FOI an aggregate of 374,329 shares of our Common Stock, which were divided proportionally among the shareholders in accordance with their respective ownership interests in FOI immediately before the closing of the share exchange agreement.

The shares of the our Common Stock were issued to Xiangsheng Song and the shareholders 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 Xiangsheng Song and the shareholders are knowledgeable and experienced in finance and business matters and thus they are able to evaluate the risks and merits of acquiring our securities; (2) Xiangsheng Song and the shareholders have advised us that they are able to bear the economic risk of purchasing our common stock; (3) we have provided Xiangsheng Song the shareholders 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.

In addition, the shares of our Common Stock were issued to Xiangsheng Song and the shareholders without registration under Section 5 of the Securities Act, in reliance on the exemption from registration contained in Regulation S under the Securities Act. We believe that the issuance of our Common Stock to Xiangsheng Song and the shareholders (the "Offshore Shareholders") constituted an offshore transaction. Each of the Offshore Shareholders is a resident of China. At the time the Registrant offered to issue its shares to the Offshore Shareholders, each of the Offshore Shareholders was located in China. Furthermore, at the time we issued our Common Stock to the Offshore Shareholders, we reasonably believed that each of the Offshore Shareholders was outside the United States. As a result, we believed that these facts enable us to also rely on Regulation S for an exemption from the registration requirements of Section 5 of the Securities Act with respect to the issuances to the Offshore Shareholders.
 
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.

 
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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.

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. We believe that the Kiosks are 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.  As of the end of fiscal year 2009, we had 623 Kiosks manufactured and operating.  511 of them were placed in Guangdong Province, where our company is located, and another 112 were placed outside this province. We plan to roll additional 1,400 Kiosks in 2010.

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.

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.

On December 17, 2009, we entered into a Letter of Intent to acquire Huangshan Holiday Travel Service Company (“Huangshan Holiday”) for RMB 20 million (approximately $2.9 million), 80% of which shall be paid cash and 20% in shares of common stock of the Company. The purchase consideration may be subject to adjustment after completion of due diligence on Huangshan Holiday by the Company. 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. Estimated full year 2009 revenues and net income for Huangshan Holiday are approximately $4.4 million and $0.6 million, respectively.

 
25
 

On January 19, 2010, we entered into a Letter of Intent to acquire Hebei Tianyuan Travel Agency (“Tianyuan”) for RMB 29 million (approximately $4.2 million), 80% of which shall be paid in cash and 20% of the consideration in shares of the Company’s common stock. The purchase consideration may be subject to adjustment after completion of acquisition audit on Tianyuan by the Company. 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 Tianyuan’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. 

On January 26, 2010, we entered  into a Letter of Intent to acquire Zhengzhou Yulongkang Travel Service Company (“Zhengzhou Yulongkang”) for RMB 39 million (approximately $5.7 million), 90% of which is to be paid in cash and 10% of which is to be paid in shares of the Company’s common stock. The purchase consideration may be subject to adjustment after the completion of acquisition audit on Zhengzhou Yulongkang by the Company. Zhengzhou Yulongkang 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. Zhengzhou Yulongkang 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 has received a series of industry and corporate awards from 2003 – 2006.

In order to finance the abovementioned acquisitions and our working capital, on December 10, 2009, we entered into a definitive subscription agreement with 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.
 
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.

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

RESULTS OF OPERATIONS

THREE MONTHS ENDED DECEMBER 31, 2009 AND 2008

The following table presents certain consolidated statement of operations information derived from the consolidated statements of income for the three months ended December 31, 2009 and 2008.
 
26
 
Revenue Segment Analysis:

  
  
Three months
ended December
31, 2009
    
Three months
ended December
31, 2008
    
Increase / Decrease
    
Percentage
  
Gross Revenues
   $ 34,174,482     $ 27,107,173     $ 7,157,3097       26.5 %
Cost of Services
     (24,109,170 )     (17,498,796 )     (6,610,374 )     37.8 %
Gross Profit
     10,065,312       9,518,377       546,935       5.7 %
SG&A
     (2,533,885 )     (1,489,052 )     (1,044,833       70.2 %
Income from Operations
     7,531,427       8,029,325       (497,898 )     (6.2 )%
                                 
Other income
     11,431       (1,461 )     12,892       (882.4 )%
Other expenses
     (87,853 )     0       (87,853 )     N/A  
Loss on Disposal of Assets
     (10,473 )     0       (10,473 )     N/A  
Loss on change in fair value of derivative liabilities
     (278,215 )     ,0       (278,215 )     N/A  
Interest income
     18,918       15,626       3,292       21.1 %
Interest expenses
     0       (27,638 )     27,638       (100 )%
Income before Income Taxes
     7,185,235       8,015,852       (830,617 )     (10.4 )%
Provision for income taxes
     (1,949,754 )     (1,823,500 )     (126,254 )     6.9 %
Net income-Continuing operations
     5,235,481       6,192,352       (956,871 )     (15.0 )%
Income from discontinuing operations
     0       133,941       (133,941 )     (100 )%
Net income
     5,235,481       6,326,293       (1,090,813 )     (17.2 )%

For the three months ended December 31, 2009:

Revenue Segment
Analysis
  
Air tickets
(YZL and
CTE)
    
(%) of
sector
    
Hotel
(SLB)
    
(%) of
sector
    
Tours
(XGN,FOI
and STA**)
    
(%) of
sector
    
Total
  
Revenue
     6,586,888       19.27 %     3,981,586       11.65 %     23,606,008       69.07 %     34,174,482  
Cost of Services
     1,290,678       5.35 %     1,963,748       8.15 %     20,854,744       86.50 %     24,109,170  
Gross Profit
     5,296,210       52.62 %     2,017,838       20.05 %     2,751,264       27.33 %     10,065,312  
Gross Margin
     80.41 %             50.68 %             11.65 %             29.45 %
Segment effect in Gross Margin (*)
     15.50 %             5.90 %             8.05 %             29.45 %

For the three months ended December 31, 2008 (**):
 
Revenue Segment
  
Air tickets
(YZL)
    
(%) of
sector
    
Hotel
(SLB)
    
(%) of
sector
    
Tours
(XGN&FOI)
    
(%) of
sector
    
Total
  
Revenue
     5,082,404       18.81 %     3,775,754       13.98 %     18,159,015       67.21 %     27,017,173  
Cost of Services
     473,953       2.71 %     1,280,450       7.32 %     15,744,393       89.97 %     17,498,796  
Gross Profit
     4,608,451       48.42 %     2,495,304       26.22 %     2,414,622       25.37 %     9,518,377  
Gross Margin
     90.67 %             66.09 %             13.30 %             35.23 %
Segment effect in Gross Margin (*)
     17.06 %             9.24 %             8.94 %             35.23 %

(*) "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.
(**)Shenzhen Universal Travel Agency Co. Ltd and Chongqing Universal Travel E-Commerce Co., Ltd both began operations in June2009. Therefore they do not appear in the 2008 financial year figures.
 
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Revenue

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 (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. For the three months ended December 31, 2008, we also had air cargo agency services, which were operated by Shenzhen Speedy Dragon Enterprise Limited.
 
Revenue for the three months ended December 31, 2009 was $34,174,482 compared to $27,017,173 for the same period in 2008, an increase of approximately 26.5%.This increase in revenue was primarily due to the successful integration and cross selling among our newly diversified business segments that increased the group’s competitiveness. Other factors attributable to this increase include the change of public holiday period pattern, the easing of foreign travel restrictions on October 29, 2008, as well as the reduction of air fuel surcharges due to the lower global fuel prices in 2009, compared to 2008.

The impact on the Company’s business by the abovementioned factors are derived from management’s good faith beliefs and experience.  The exact extent of the impact of each factor is impossible to quantify as a myriad of other factors also influence the outcome.  Also, these factors are by their nature unquantifiable.  For example, it is impossible to calculate how many more people in China would be travelling because of the Lunar New Year and what this would translate in terms of increased ticket sales or hotel room bookings.

Revenue from air-ticketing was $6,586,888 for the three months ended December 31, 2009, compared to $5,082,405 for the same period last year, an increase of approximately 29.6%. This increase is generally driven by the same factors mentioned above, but more specifically to the increased demand for air passenger transportation.

Revenue generated by hotel reservations and bookings for the three month period ended December 31, 2009 totaled $3,981,586 versus $3,775,754, a year over increase of approximately 5.5%. This increase is generally driven by the factors mentioned above for our increase in revenue, but more specifically, due to the successful integration of the various business segments of the Company.

Revenue generated through packaged travel services for the three months ended December 31, 2009 was $23,606,008 compared to $18,159,015, for the same period in 2008, an increase of approximately 30.0%. This increase is generally driven by the factors mentioned above for our increase in revenue, but more specifically due to the increase in tourism demand and successful integration of the Company’s various business segments and marketing channels.
 
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.   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.

Costs of services for the three months ended December 31, 2009 was $24,109,170 compared to $17,489,496 for the same period in 2008, an increase of $6,610,374, or approximately 37.8%. The comparatively higher costs of services result from higher percentage of packaged tours in our revenues.
 
Costs of services from air-ticketing was $1,290, 678 for the three months ended December 31, 2009, compared to $473,953 for the same period last year,  an increase of $816,725, or approximately 172.3%. The increase is mostly due to our reclassification of costs. Previously we had mistakenly allocated some direct costs to selling, general and administrative expenses.

 
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Costs of services from hotel-reservation was $1,963,748 for the three months ended December 31, 2009, compared to $1,280,450 for the same period last year,  an increase of $683,298, or approximately 53.4%. The increase is mostly due to our reclassification of costs. Previously we had mistakenly allocated some direct costs to selling, general and administrative expenses.

Costs of services from packaged-tour was $20,854,744 for the three months ended December 31, 2009, compared to $15,744,393 for the same period last year,  an increase of $5,110,351, or approximately 32.5%. The increase is in tandem with the increase of revenue.
 
Gross Profit 
 
Gross profit for the three months ended December 31, 2009 was $10,065,312 compared to $9,518,377 for the three months ended December 31, 2008, an increase of approximately 5.7 %. The increase in gross profit partially reflects the Company’s success in implementing its online strategy, an increase in packaged tour services as a percentage of overall revenue and to a lesser degree, the rollout of our TRIPEASY Kiosks, which have relatively lower variable costs associated with it.
 
Gross profit in air-ticketing was $5,296,210 for the three months ended December 31, 2009 compared to $4,608,451 for the same period last year, an increase of approximately 14.9%.  Gross profit margin in this segment for the three months ended December 31, 2009 was 80.4% compared to 90.7% for the same period 2008. The decrease of gross profit margin in this segment is mostly due to the reclassification of our costs of services. 
 
Gross profit in hotel reservations was $2,017,838 for the three month ended December 31, 2009 compared to $2,495,304 for the same period last year, a decrease of $477,466, or approximately 19.1%. Gross profit margin in this segment for the three months ended December 31, 2009 was 50.7% compared to 66.1% for the same period in 2008, a decrease of approximately 15.4%.  The decrease of gross profit margin in this segment is mostly due to the reclassification of our costs of services. 
 
Gross profit in packaged travel was $2,751,264 for the three months ended December 31, 2009 compared to $2,414,622 for the same period in 2008, an increase of $336,642, or approximately 13.9%. Gross profit margin in this segment for the three months ended December 31, 2009 was 11.7% compared to 13.3% for the same period in 2008 . The decrease in gross profit margin was due to more discounts in certain packaged tour programs in order to attract new clients.
 
Consolidated gross margin for three months ended December 31, 2009 came in at 29.5%, compared to 35.2% for the same period last year. The major reason for this decline is that packaged tours generally have lower profit margins and they constituted a higher portion of our total revenue.

               Our air-ticketing and hotel reservation have much higher gross margins than our packaged tour business primarily as our revenue from air-ticketing and hotel reservation are the commissions we generate and 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.

In comparison, 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, which all together are much substantial fixed overheads. The Company receives fees from providing domestic and cross-border travel tour services.  The Company contracts with traffic service providers, accommodation providers and leisure service providers to purchase air tickets, train and coach tickets, accommodation and leisure or entertainment packages in bulk and then resell them to its customers with a mark-up.  Fees generated from packaged-tour are recognized on a gross basis in the statements of income, when the tour is completed, as the Company, generally, undertakes the majority of the business risk.  The Company is the primary obligor to pay the service providers upon rendering of those services.  In addition, the Company acts as principal in relation to the packaged-tour services rendered or when tours are completed and collections are reasonably assured.  

 
29
 

Selling, General and Administrative Expenses
 
Major selling, general, and administrative expenses for the three months ended December 31, 2009 and 2008 are as follows:
 
   
For the three months ended December 31,
  
       
   
2009
    
2008
  
             
Business related tax
  
$
212,454
    
$
159,502
  
                 
Salary
    
213,772
      
137,813
  
                 
Commission paid
    
1,022,599
      
851,974 
  
                 
Professional fees
    
239,000
      
190,541
  
                 
Marketing
    
110,721
      
42,416
  
                 
Rent
    
156,899
      
23,186
  
                 
Depreciation and amortization
    
43,006
      
1,803
  
                 
Stock-based compensation
    
355,346
      
51,786
  
                 
Other general and administrative expenses
    
180,089
      
30,031
  
                 
Total
  
$
2,533,885
    
$
1,489,052
  

Selling, general and administrative expenses for three months ended December 31, 2009 totaled $2,533,885 compared to $1,489,052 for three months ended December 31, 2008, an increase of $1,044,833 approximately 70.2%. Selling, general and administrative expenses were 7.4% of revenue versus 5.5% last year. The increase is mostly due to the higher amortization of employee stock incentive plan. We also needed to increase marketing and renting expenses to support our increased sales volume. In addition, we incurred extra professional fees, including but not limited to, application for listing in New York Stock Exchange, engagement of a third party consultant in addressing SEC comments, etc.

Net Income

Net income for the three months ended December 31, 2009 was $5,235,481, representing 15.3% of revenue, compared to $6,326,293, or 23.4% of revenue for the three months ended December 31, 2008.

During the fourth quarter of 2009, to promote our packaged tour business in Shenzhen and Chongqing area, we initiated some marketing campaigns, including offering some discounts in certain packaged tour programs.  Some of the programs were less profitable or even not profitable. The decrease in net income reflects the overall lower profit margins of these programs. Management believes that the surrender of some profits to gain market share is in line with our long term strategy, and believes the effect of this decline is short termed.

 
30
 

The lower net margin compared to the same period last year, mainly comes from the higher percentage of packaged-tour and the marketing campaigns in Shenzhen Universal Travel Agency Co. Ltd. To a lesser extent, the non-cash charge of loss on change in fair value of derivative liabilities, as well as the non-cash expenditure from the 2009 Incentive Stock Option Plan, are also the factors to lower the net profit margin.

FISCAL YEARS ENDED DECEMBER 31, 2009 AND 2008
 
The following table presents certain consolidated statement of operations information derived from the consolidated statements of income for the fiscal years ended December 31, 2009 and same period 2008.

Revenue Segment Analysis:
 
   
Fiscal year 2009
    
Fiscal year 2008
    
Increase / Decrease
    
Percentage
 
Gross Revenues
   $ 97,875,552     $ 65,821,838     $ 32,053,714       48.7 %
Cost of Services
     (65,502,426 )     (43,312,826 ),      (21,683,702 )     51.2 %
Gross Profit
     32,373,126       22,509,012       10,307,012       43.8 %
SG&A
     (8,204,579 )     (4,591,903 )     (3,612,676 )     78.7 %
Income from Operations
     24,168,547       17,917,109       6,254,832       34.9 %
                                 
Other income
     11,431       8,402       3,029       36.1 % 
Other Expenses
     (87,853 )     0       (87,853 )     N/A  
Loss on disposal of assets
     (1,594 )     (1,105 )     (489 )     44.3 %
Loss on change in fair value of derivative liabilities
     (6,832,186 )     0       (6,832,186 )     N/A %
Interest income
   $ 58,124       37,099       21,025       56.7 %
Interest expense
     0       (106,163 )     (106,163 )     (100 )%  
Income before Income Taxes
     17,316,469       17,855,342       (538,873 )     (3.0 )%
Provision for income taxes
     (5,978,948 )     (4,073,614 )     (1,905,334 )     46.8 %
Net Income-Continuing Operation
     11,337,521       13,781,728       (2,444,207 )     (17.7 )%
Income from Discontinued Operation
     177,975       750,449       (572,474 )     (76.3 )%
Loss on disposition of discounted operations
     (770,595 )     0       (770,595 )     N/A %
Net income
     10,744,901       14,532,177       3,787,276       (26.1 )%
 
For the fiscal year ended December 31, 2009:
  
Revenue Segment
  
Air tickets
(YZL and
CTE)
    
(%) of
sector
    
Hotel
(SLB)
    
(%) of
sector
    
Tours
(XGN,FOI
& STA**)
    
(%) of
sector
    
Total
  
Revenue
     17,509,195       17.89 %     13,044,815       13.33 %     67,321,542       68.78 %     97,875,552  
Cost of Services
     2,726,424       4.16 %     4,343,328       6.63 %     58,432,674       89.21 %     65,502,426  
Gross Profit
     14,782,771       45.66 %     8,701,487       26.88 %     8,888,868       27.46 %     32,373,126  
Gross Margin
     84.43 %             66.70 %             13.20 %             33.08 %
Segment effect in Gross Margin (*)
     15.10 %             8.89 %             9.08 %             33.08 %

For the fiscal year ended December 31, 2008(**):
 
Revenue Segment
  
Air tickets
(YZL)
    
(%) of
sector
    
Hotel
(SLB)
    
(%) of
sector
    
Tours
(XGN&FOI)
    
(%) of
sector
    
Total
  
Revenue
     12,333,527       18.74 %     8,340,519       12.67 %     45,147,792       68.59 %     65,821,838  
Cost of Services
     1,166,155       2.69 %     3,209,777       7.41 %     38,936,894       89.90 %     43,312,826  
Gross Profit
     11,167,372       49.61 %     5,130,742       22.79 %     6,210,898       27.59 %     22,509,012  
Gross Margin
     90.54 %             61.52 %             13.76 %             34.20 %
Segment effect in Gross Margin (*)
     16.97 %             7.79 %             9.44 %             34.20 %
 
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(*) "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.
(**)Shenzhen Universal Travel Agency Co. Ltd and Chongqing Universal Travel E-Commerce Co., Ltd both began operations in June2009. Therefore they do not appear in the 2008 financial year figures
 
Revenue

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 (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. For the year ended December 31, 2008, we also had air cargo agency services, which were operated by Shenzhen Speedy Dragon Enterprise Limited.

Revenue for fiscal year 2009 totaled $97,875,552 compared to $65,821,838 in the same period last year, reflecting a year over year increase of approximately 48.7%. The increase was attributable to both organic growth, as well as our expansion into, successful integration and cross selling of the Company’s diversified business segments related to packaged tours and hotel booking services through the acquisitions of Xi’an Golden Net Travel Service Company Limited, Shanghai Lanbao Travel Service Company Limited and Foshan Overseas International Travel Service Co., Ltd.

More specifically, revenue from air-ticketing was $17,509,195 for fiscal year 2009 compared to $12,333,527 for the fiscal year 2008, an increase of approximately 42.0%. This increase in revenue was primarily due to the successful integration and cross selling among our newly diversified business segments that increased the group’s competitiveness. It is also a result of successful integration of the Company’s acquisitions of various complementary business segments, the synergies among these segments and the consolidation of marketing channels among the subsidiaries in major domestic cities. Other factors attributable to this increase include the change of public holiday period pattern, the easing of foreign travel restrictions on October 29, 2008, as well as the reduction of air fuel surcharges due to lower global fuel prices in 2009, compared to 2008.

Revenue from hotel reservations was $13,044,815 for the fiscal year 2009 compared to $8,340,519 for the fiscal year 2008, an increase of approximately 56.4%. The revenue increase is attributable to SLB’s own organic growth during the fiscal 2009.  Our organic growth was driven by the successful integration and the synergies among our various business segments and also the consolidation of marketing channels among the subsidiaries in major domestic cities.
 
Revenue from packaged travel was $67,321,542 for the fiscal year 2009 compared to $45,147,792 for the fiscal year 2008, an increase of approximately 49.1%. The revenue increase is mostly attributable to the organic growth of XGN and FOI during the fiscal 2009. The growth in these two subsidiaries was driven by the successful integration, the synergies among segments and also the consolidation of marketing channels among the subsidiaries in major domestic cities.
 
Organic revenue growth played an important role in fiscal year2009. Since the average price of our travel products and commission rates were stable (and some of them were even slightly decreased during fiscal year 2009), we believe the greatest impact to our financial performance is from the growth of our business volume. Our increase in revenues in the past year reflects the development of the PRC domestic tourism market, and dynamics of our overall operating platform and synergies in our different business segments. Our innovative marketing mix and marketing strategies, our cost synergies of combining online services with traditional services, as well as the good integration of acquired businesses are all important factors contributing to our performance thus far. Management believes that these competitive advantages are sustainable in the long term.

 
32
 
 
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.  Costs of services for the cargo agency business mainly include the costs of warehousing and delivery charges.  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.
 
Consolidated expenses such as stock-based compensation and corporate professional fees are not allocated to any segment as costs of sales. Instead, the Company disclosed these two numbers in Others (Corporate Expense) of its Segment Information footnote and these expenses were included in the selling, general, and administrative expenses.

               Our air-ticketing and hotel reservation have much higher gross margin than our packaged tour business primarily as our revenue from air-ticketing and hotel reservation are the commission we generated and 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.

In comparison, 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, which all together are much substantial fixed overheads. The Company receives fees from providing domestic and cross-border travel tour our services.  The Company contracts with traffic service providers, accommodation providers and leisure service providers to purchase air tickets, train and coach tickets, accommodation and leisure or entertainment packages in bulk and then resell them to its customers with a mark-up.  Fees generated from packaged-tour are recognized on a gross basis in the statements of income, when the tour is completed, as the Company, generally, undertakes the majority of the business risk.  In addition, the Company acts as principal in relation to the packaged-tour services rendered or when tours are completed and collections are reasonably assured.  

Costs of services for the year ended December 31, 2009 was $65,502,426 compared to $43,312,826 for the same period in 2008, an increase of 22,189,600, or approximately 51.2%. Consolidated gross margin for the year ended December 31, 2009 came in at 33.1%, compared to 34.2% for the same period last year. The major reason for this decline is that packaged tours, which have a lower profit margin , constituted to a higher proportion  of our total revenue.
 
Costs of services from air-ticketing was $2,726,424 for the year ended December 31, 2009, compared to $1,166,155 for the same period last year,  an increase of $1,560,269, or approximately 133.8%. The increase is mostly due to our reclassification of costs. Previously we had mistakenly allocated some direct costs to selling, general and administrative expenses.

Costs of services from hotel-reservation was $4,343,328 for the year ended December 31, 2009, compared to $3,209,777 for the same period last year,  an increase of $1,133,551, or approximately 35.3%. The increase is mostly due to our reclassification of costs. Previously we had mistakenly allocated some direct costs to selling, general and administrative expenses.

 
33
 

Costs of services from packaged-tour was $58,432,674 for the year ended December 31, 2009, compared to $38,936,894 for the same period last year,  an increase of $19,495,780, or approximately 50.1%. The increase is in tandem with the increase of revenues.

A detailed breakdown of cost of services by subsidiary is set forth below:

Shenzhen Yuzhilu Aviation Service Co., Ltd. (YZL)
  
2009
    
2008
  
Franchise system cost sharing
   $ 17,901     $ 4,264  
Staff salaries
     436,076       345,519  
Telecommunication expenses
     64,609       29,866  
Rental expenses
     311,016       95,317  
Utilities
     16,755       12,875  
Website maintenance
     44,135       21,457  
Depreciation and amortization
     390,985       39,052  
Business tax
     888,639       617,805  
Subtotal
   $ 2,170,116       1,166,155  
                 
Shanghai Lanbao Travel Service Co., Ltd. (SLB)
                
Business Tax
   $ 704,420     $ 448,973  
Staff salaries and Staff welfare
     75,799       43,165  
Rental expenses
     43,967       51,660  
Telecommunication  expenses
     9,029       6,713  
Utilities
     6,523       5,585  
Depreciation and amortization
     3,698       3,965  
Franchise commission paid
     3,499,851       2,649,716  
Subtotal
   $ 4,343,287     $ 3,209,777  
                 
Foshan International Travel Service Co., Ltd. (FOI)
                
Depreciation and amortization
   $ 11,949     $ 12,072  
Cost of Services (Package Tours)
     36,834,916       23,930,685  
Subtotal
   $ 36,846,865     $ 23,942,757  
                 
Xian Golden Net Travel Serve Services  (XGN)
                
Depreciation and amortization
   $ 830     $ 475  
Cost of Services (Package Tours)
     19,197,510       14,993,662  
Subtotal
   $ 19,198,340     $ 14,994,137  
                 
Chongqing Universal Travel E-Commerce Co., Ltd (CTE)
                
Opening fee
   $ 69,813          
Depreciation
     96,868          
Rental
     24,261          
Utilities
     1,549          
Website
     3,001          
Maintenance
     559          
Payroll
     25,048          
Business Tax
     16,025          
Subtotal
   $ 237,124          
                 
Shenzhen Universal Travel Agency Co. Ltd (STA)
                
Depreciation and amortization
   $ 79          
Cost of Services (Package Tours)
     2,706,615          
Subtotal
   $ 2,706,694          
                 
Total
   $ 65,502,426       43,312,826  
 
34
 
Gross Profit

Gross profit for the fiscal year 2009 was $32,373,126 compared to $22,509,012 for the fiscal year 2008, an increase of $9,864,114, or approximately 43.8%. The increase in gross profit partially reflects the Company’s success in implementing its online strategy, an increase in packaged tour services as a percentage of overall revenue and to a lesser degree, the rollout of our TRIPEASY Kiosks, which have relatively lower variable costs associated with it.
 
Gross profit in air-ticketing was $14,782,771 for the twelve months ended December 31, 2009, compared to $11,167,372 for the same period last year, an increase of approximately32.4%. Gross profit margin in this segment for the year ended December 31, 2009 was 84.4% compared to 90.5% for the same period 2008. The decrease in gross profit margin is mostly due to the reclassification of our costs. Some of the costs, which were directly associated with the generation of revenues and were mistakenly recognized in selling, general and administrative expenses, are now reclassified in the costs of services.
 
Gross profit in hotel reservations was $8,701,487 for the twelve month ended December 31, 2009 compared to $5,130,742 for the same period last year, an increase of $3,570,745, or approximately 69.6%. Gross profit margin in this segment for the year ended December 31, 2009 was 66.7% compared to 61.5% for the same period 2008, an increase of approximately 5.2%. The gross profit margin increase was mainly due to the increase in commission revenue as a result of increased reservation volume while our associated cost of services was increased to a lesser extent.  These factors together resulted in the significant increase in the gross profit of our hotel reservation business operated by SLB.
 
Gross profit in packaged travel was $8,888,868 for the twelve months ended December 31, 2009 compared to $6,210,898 for the same period 2008, an increase of $2,677,970, or approximately 43.1%. Gross profit margin in this segment for the year ended December 31, 2009 was 13.2%, compared to 13.8% for the same period 2008. This decline of gross profit margin is mostly due to the lower margin of some of our discounted packaged tour programs in the second half of 2009.  To promote our packaged tour business in the newly established Shenzhen Universal Travel Agency Co. Ltd., we initiated some marketing campaigns, including offering some discounts in certain packaged tour programs.  Some of the programs were less profitable or even not profitable. The decrease in net income reflects the overall lower profit margins of these programs. Management believes that the surrender of some profits to gain market share is line with our long term strategy, and believes the effect of this decline is short termed.

 
35
 

Consolidated gross margin for year ended December 31, 2009 came in at 33.1%, a 1.1% decrease from the 34.2% the Company posted in the same period last year. As discussed above, the slight decrease of gross profit is mostly due to the gross profit margin for packaged tour services.

Selling, General and Administrative Expenses

Major selling, general, and administrative expenses for the twelve months ended December 31, 2009 and 2008 are as follows:
 
   
For the twelve months ended December
31,
  
       
   
2009
    
2008
  
             
Business related tax
  
$
494,335
    
$
246,250
  
                 
Salary and commission paid
    
3,273,212
      
2,626,906,
  
                 
Professional fees
    
472,900
      
250,751
  
                 
Marketing
    
191,230
      
148,903
  
                 
Rent
    
289,320
      
190,212
  
                 
Depreciation and amortization
    
185,870
      
7,212
  
                 
Stock-based compensation
    
1,154,408
      
207,588
  
                 
Other general and administrative expenses
    
2.143,304
      
914,081
  
                 
Total
  
$
8,204,579
    
$
4,591,903
  

Selling, general and administrative expenses for fiscal year 2009 totaled $8,204,579 compared to $4,591,903 for fiscal year 2008, reflecting approximately 8.4% and 7.0% of total revenue, respectively. The increase is mostly due to the higher amortization of employee stock incentive plan. For the years ended December 31, 2009 and 2008, the Company recorded $1,154,408 and $207,588 as stock-based compensation expense and corporate professional fees, respectively. We also need to increase marketing and renting expenses to support our increased sales volume. In addition, we incurred extra professional fees, including but not limited to, application for listing in New York Stock Exchange and Amex, engagement of a third party consultant in addressing SEC comments, etc.
 
Interest Expenses
 
There was no interest expense for year 2009, compared to $106,163 for the fiscal year 2008.  This decrease was due to our repayment of a short term bank loan in August 2008.

Loss on change in fair value of derivative liabilities

          We incurred a loss on change in fair value of derivative liabilities of $6,832,168, which we were not required to recognize in fiscal year 2008, to mark to market for the increase in fair value of the 764,785 warrants we issued in August 28, 2008 . Since most of these warrants were exercised in the past quarters, we expect the loss would be immaterial in the future.
 
36
 
Net Income

Net income was $10,744,901 or 11.0% of revenue for the fiscal year 2009, compared to $14,532,177 or 22.1% of revenue for the fiscal year 2008.  The decrease in net income was mainly due to $6.8 million increase of non-cash loss on change in fair value of derivative liability, an increase of non-cash stock-based compensation expenses amounting to near ly$1.2 million, and loss of approximately $0.77 million from the disposition of discontinued operations, namely our cargo business.

LIQUIDITY AND CAPITAL RESOURCES
 
Cash and Cash Equivalent
 
Cash and liquidity needs have been funded primarily through cash flows from operations, short-term borrowings, and a private investment of equity securities. At the end of December 31, 2009, cash and cash equivalents totaled $36,677,422, while working capital, current assets of $70,478,341 less current liabilities of $6,270,322 came in at $ $64,208,019. We believe that the funds available to us from operations are adequate to meet our operating needs in 2010. For the year ended December 31, 2009, net cash provided by operating activities was approximately $11,520,423, which resulted primarily from our organic operations and effective management of cash flow.
 
Capital expenditure
 
Total capital expenditure for the year 2009 was $5,705,910, which was mainly used to purchase fixed assets, primarily office equipments and leasehold improvement. Management may, from time to time, increase such expenditure to support new initiatives and developments such as the rollout of our  Kiosks.
 
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. We are strategically expanding our business operations in Chongqing, the largest metropolis in Southwest China, and Xi’an, the largest metropolis in Northwest of China. Recently we also entered into Letters of Intent to acquire Huangshan Holiday Travel Service Company, Hebei Tianyuan Travel Agency and Zhengzhou Yulongkang Travel Service Company. To satisfy these capital needs, as well as to set up more TRIPEASY kiosks, we may incur additional capital expenditure.

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. We then entered into a definitive subscription agreement with 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 net proceeds of the financing would be used for identified acquisitions and for working capital. Brean Murray, Carret & Co., LLC acted as exclusive placement agent in connection with the offering. The sale of the common stock was closed on December 15, 2009.
 
Inflation

In the opinion of management, inflation will not have an impact on our financial condition and results of its operations.
 
37
 
Off Balance Sheet Arrangements

We have never entered into any off-balance sheet financing arrangements, have never established any special purpose entities to fulfill such obligations and have not made any debt or related commitments to other entities.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
 
Not Applicable.
 
Item 8. Financial Statements and Supplementary Data.
 
UNIVERSAL TRAVEL GROUP
 
CONSOLIDATED FINANCIAL STATEMENTS
 
DECEMBER 31, 2009

 
38
 
 
ACSB Acquavella, Chiarelli, Shuster, Berkower & Co., LLP
517 Route one
1 Penn Plaza
Iselin, New Jersey, 08830
36the Floor
732.855.9600
New York, NY 10119

Report of Independent Registered Public Accounting Firm

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, 2009 and 2008, and the related consolidated statements of income, stockholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2009.  We have also audited Universal Travel Group’s internal control over financial reporting as of December 31, 2009, based on criteria established in the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Universal Travel Group’s management is responsible for these financial statements, for maintaining effective control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards required that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included 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, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding on internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our audit.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis. The following material weaknesses were identified:

 
 

 
·
The Company’s policy documentation of all controls identified during their assessment and remediation process was incomplete.
 
 
·
Lack of technical accounting expertise among financial staff regarding US GAAP and the requirements of the PCAOB, and regarding preparation of financial statements.
 
These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2009 consolidated financial statements of the Company as of and for the year ended December 31, 2009.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Universal Travel Group as of December 31, 2009 and 2008, and the results of its operations and its cash flows for the three years ended December 31, 2009, in conformity with accounting principles generally accepted in the United States of America.
 
Also in our opinion, because of the effect of the aforementioned material weaknesses on the achievement of the objectives of the internal control criteria, Universal Travel Group did not maintain effective internal control over financial reporting as of December 31, 2009 based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Our opinion on the effectiveness of internal control over financial reporting does not affect our opinion on the consolidated financial statements.

/s/Acquavella, Chiarelli, Shuster, Berkower & Co., LLP

Certified Public Accountants

New York, N.Y.
February 22, 2010

 
 

TABLE OF CONTENTS
 
Consolidated Balance Sheets
1
   
Consolidated Statements of Income
2
   
Consolidated Statements of Cash Flows
3
   
Consolidated Statements of Stockholders’ Equity
4
   
Notes to Consolidated Financial Statements
5-32

 
 

UNIVERSAL TRAVEL GROUP
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,  2009 AND 2008
       
12/31/2009
    
12/31/2008
  
   
Note
        
Restatde
  
Assets
                    
Cash and cash equivalents
       $ 36,677,422     $ 15,720,182  
Accounts receivable, net
         17,321,174       8,991,849  
Other receivables and deposits, net
         257,907       62,547  
Trade deposits
  
3
     9,775,735       6,571,164  
Advances
  
3
     440,063       438,468  
Escrow deposits
  
12
     -       762,800  
Prepaid expenses
         216,727       312,409  
Note receivable
         1,711,392       -  
Acquisition Deposits
         4,077,921       -  
Current assets held of discontinued operations
         -       2,459,777  
Total Current Assets
         70,478,341       35,319,196  
                     
Property, plant & equipment, net
         4,992,677       242,648  
Intangible assets
         339,240       307,335  
Goodwill
         9,896,270       9,896,270  
Non-current assets held of discontinued operations
         -       3,661,231  
          15,228,187       14,107,484  
                     
Total Assets
       $ 85,706,528     $ 49,426,680  
                     
LIABILITIES AND STOCKHOLDERS' EQUITY
                    
Current Liabilities
                    
Accounts payable and accrued expenses
       $ 2,615,730     $ 1,691,689  
Customer deposits
         2,000,117       1,039,942  
Income tax payable
         1,654,475       1,731,246  
Current liabilities held of discontinued operations
         -       562,931  
Total Current Liabilities
         6,270,322       5,025,808  
                     
Derivative liability
  
8
     1,815,319       -  
                     
Total  liabilities
         8,085,641       5,025,808  
                     
Stockholders' Equity
                    
Common stock, $.001 par value, 70,000,000 shares authorized, 16,714,457 and 13,873,969 issued and outstanding at December 31, 2009  2008, respectively
         16,714       13,873  
Additional paid in capital
         37,671,645       15,861,116  
Other comprehensive income
  
9
     1,645,133       1,520,166  
Statutory reserve
         372,144       372,144  
Retained earnings
         37,915,251       26,633,573  
Total Stockholders' Equity
         77,620,887       44,400,872  
Total Liabilities and Stockholders' Equity
       $ 85,706,528     $ 49,426,680  

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

 
1
 

UNIVERSAL TRAVEL GROUP
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE YEARS ENDED DECEMBER 31,
 
   
Note
  
2009
    
2008
    
2007
  
             
(Restated)
    
(Restated)
  
Gross revenues,
       $ 97,875,552     $ 65,821,838     $ 32,555,580  
Cost of services
         65,502,426       43,312,826       20,610,777  
Gross Profit
         32,373,126       22,509,012       11,944,803  
                             
Selling, general and administrative expenses
         8,204,579       4,591,903       2,740,857  
                             
Income from operations
         2,4168,547       17,917,109       9,203,946  
                             
Other income (expense)
                            
Other expense
         (87,853 )     -       -  
Loss on disposal of assets
         (1,594 )     (1,105 )     -  
Other income
         11,431       8,402       25,105  
Loss on change of fair value of derivative liabilities
         (6,832,186 )     -       -  
Interest income
         58,124       37,099       2,385  
Interest expense
         - )     (106,163 )     (80,847 )
Total other income (expense)
         (6,852,078 )     (61,767 )     (53,356 )
Income before income taxes–continuing operations
         17,316,469       17,855,342       9,150,589  
                             
Provision for income taxes
         5,978,948       4,073,614       1,641,950  
Net income – continuing operations
         11,337,521       13,781,728       7,508,639  
                             
Income from discontinued operations
         177,975       750,449       1,187,254  
Loss on disposition of discontinued operations
         (770,595 )                
Net (loss) income from discontinued operation
         (592,620 )     750,449       1,187,254  
                             
Net Income
         10,744,901       14,532,177       8,695,894  
                             
Net income per common share – continuing operations
                            
Basic
       $ 0 .80     $ 1.07     $ 0.67  
Diluted
       $ 0 .74     $ 1.07     $ 0.67  
Net income per common share – discontinued operations
                            
Basic
       $ (0.04 )   $ .06     $ 0.11  
Diluted
       $ (0.04 )   $ .06     $ 0.11  
Weighted average common shares outstanding
                            
Basic
         14,121,542       12,854,051       11,209,839  
Diluted
         15,318,460       12,854,051       11,209,839  
Net income
       $ 10,744,901     $ 14,532,177     $ 8,695,894  
Other comprehensive income-foreign currency Translation
         124,967       975,002       441,353  
Comprehensive income
         10,869,868       15,507,179       9,137,247  
     
The accompanying notes are an integral part of these audited consolidated financial statements.
 
2

UNIVERSAL TRAVEL GROUP
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE YEARS ENDED DECEMBER 31,
 
   
2009
    
2008
    
2007
  
                   
CASH FLOWS FROM OPERATING ACTIVITIES
                  
                         
Net income
   $ 10,744,901     $ 14,532,177     $ 8,695,894  
Add (deduct):
                        
Net loss (income from discontinued operations
     592,620       (750,449 )     (1,187,254 )
Income from continuing operations
     11,337,521       13,781,728       7,508,640  
Adjustments to reconcile net income to net cash
                        
provided by operating activities:
                        
Depreciation and amortization
     813,272       61,737       82,074  
Provision for doubtful accounts
     204,788       137,024       42,900  
Stock based compensation
     1,154,409       207,588       945,903  
Loss on change in fair value of derivative liabilities
     6,832,186       -       -  
Loss on asset disposal
     1,594       1,105       -  
(Increase) / decrease in assets:
                        
Accounts receivable
     (8,523,007 )     (5,242,516 )     (298,560 )
Other receivable
     (195,360 )     1,090,398       (491,788 )
Advances
     (1,595 )     178,393       1,214,697  
Due from shareholder
     -       1,444,818       496,287  
Prepaid expenses
     95,682       (304,111 )     26,829  
Trade deposits
     (3,204,571 )     (3,920,420 )     (1,177,822 )
Escrow deposits
     762,800       (762,800 )     -  
Increase / (decrease) in current liabilities:
                        
Accounts payable and accrued expenses
     924,041       (1,319,797 )     (2,093,977 )
Customer deposits
     960,175       (92,943 )     309,251  
Income tax payable
     (76,771 )     1,139,224       24,685  
Net cash provided by continuing operations
     11,085,164       6,399,428       6,589,119  
Net cash provided by discontinued operations
     435,259       111,418       284,229  
Net cash provided by operating activities
     11,520,423       6,510,846       6,873,348  
                         
CASH FLOWS FROM INVESTING ACTIVITIES
                        
Purchase of property & equipment
     (5,300,678 )     (192,436 )     (57,930 )
Purchase of  intangibles
     (296,264 )     (316,106 )     -  
Proceeds from collection of notes
     1,062,019       -       -  
Proceeds from asset disposals
     -       663       -  
Acquisition deposits
     (4,077,921 )     1,453,050       1,428,773  
Paid for acquisition – net of cash acquired
     -       -       (10,008,642 )
Net cash (used in) provided by continuing operations
     (8,612,844 )     945,171       (8,637,799 )
Net cash (used in) provided by discontinued operations
     (1,035,125 )     -       -  
Net cash (used in) provided by Investing activities
     (9,647,969 )     945,171       (8,637,799 )
                         
CASH FLOWS FROM FINANCING ACTIVITIES
                        
(Repayments)Proceeds of bank loan
     -       (1,288,554 )     1,288,554  
Proceeds of equity financing
     18,950,249       7,712,494       -  
Proceeds of warrant exercise
     9,570       -       -  
Note payable – others
     -       (1,576,750 )     1,576,750  
Net cash provided by financing activities
     18,959,819       4,847,190       2,865,304  
Effect of exchange rate changes on cash and cash equivalents
     124,967       975,002       297,565  
                         
Net change in cash and cash equivalents
     20,957,240       13,278,209       1,398,418  
Cash and cash equivalents, beginning balance
     15,720,182       2,441,973       1,043,555  
Cash and cash equivalents, ending balance
   $ 36,677,422     $ 15,720,182     $ 2,441,973  
                         
SUPPLEMENTAL DISCLOSURES:
                        
Cash paid during the year for:
                        
Interest payments
   $ -     $ 106,163     $ 80,847  
Income taxes
   $ 6,055,719     $ 3,181,245     $ 1,450,924  
Other non-cash transactions
                        
Purchased goodwill
   $ -     $ -     $ (13,526,809 )
Fair value of assets purchased less cash acquired
     -       -       (2,178,333 )
Acquisition financed with stock issuance
     -       -       5,696,500  
Acquisition paid for with cash – net of acquired
   $ -     $ -     $ (10,008,642 )
                         
Net assets sold of discontinued operations
   $ 1,659,292                  
Goodwill attributable to sold discontinued operations
     3,630,539                  
Notes received on disposition
     (2,773,411 )                
                         
Fair value of treasury stock received
     (2,780,950 )                
Loss on pisposition
     (770,595 )                
Net cash of discontinued operations
   $ (1,035,125 )                

The accompanying notes are an integral part of these audited consolidated financial statements.
 
3
 
UNIVERSAL TRAVEL GROUP
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 2009, 2008, and 2007

   
Common Stock
    
Additional 
Paid In
    
Other 
Comprehensive
    
Retained
    
Statutory
    
Total 
Stockholders’
  
   
Shares
    
Amount
    
Capital
    
Income
    
Earnings
    
Reserve
    
Equity
  
                                           
Balance December 31, 2008
     13,873,969     $ 13,873     $ 15,861,116     $ 1,520,166     $ 26,633,573     $ 372,144     $ 44,400,872  
Restated
                                                        
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 )
Foreign currency translation adjustments
                             124,967                       124,967  
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
     811,941       813       6,571,017                               6,571,830  
Options exercised
     3,300       3       9,567                               9,570  
Stock Subscription
     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  
                                                         
Balance December 31, 2009
     16,714,457       16,714       37,671,645       1,645,133       37,915,251       372,144       77,620,887  
                                                         
Balance December 31, 2007
     12,270,326       12,269       8,626,075       545,164       12,101,396       372,144       21,657,048  
Restated
                                                        
Foreign currency translation adjustments
                             975,002                       975,002  
Forfeited options
                     (683,437 )                             (683,437 )
Stock based compensation
                     207,588                               207,588  
Equity financings
     74,074       74       599,920                               599,994  
Equity financings
     1,529,569       1,530       7,110,970                               7,112,500  
Income for the  year ended December 31, 2008
                                     14,532,177               14,532,177  
                                                         
Balance December 31, 2008
     13,873,969       13,873       15,861,116       1,520,166       26,633,573       372,144       44,400,872  
                                                         
Balance December 31, 2006
     10,150,000       10,150       352,313       103,811       3,442,473       -       3,908,747  
Restated
                                                        
Stock paid for acquisition
     863,659       863       5,695,637                               5,696,500  
Foreign currency translation adjustments
                             441,353                       441,353  
Stock based compensation
     1,256,667       1,256       1,582,144                               1,583,400  
Warrants issued
                     995,981                               995,981  
Reflect acquisition
                                             335,173       335,173  
Transfer to statutory reserve
                                     (36,971 )     36,971       -  
Income for the  year ended December 31, 2007
                                     8,695,894               8,695,894  
                                                         
Balance December 31, 2007
     12,270,326     $ 12,269     $ 8,626,075     $ 545,164     $ 12,101,396     $ 372,144     $ 21,657,048  

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

 
4
 

UNIVERSAL TRAVEL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
(AUDITED)
 
Note 1 - ORGANIZATION
 
Universal Travel Group was incorporated on January 28, 2004 under the laws of the State of Nevada. Full Power Enterprise Global Limited – BVI was incorporated under the laws of the British Virginia Islands. Shenzhen Yuzhilu Aviation Service Co., Ltd was incorporated on March 9, 1998 under the laws of the Peoples Republic of China (PRC)., Shenzhen Speedy Dragon Enterprises Limited was incorporated in August of 2002 under the laws of the Peoples Republic of China (PRC), Xian Golden Net Travel Serve Services was incorporated on July 25, 2001 under the laws of the Peoples Republic of China, Xian City, Shanghai Lanbao Travel Service Co., Ltd, was established in 2002 under the laws of Shanghai China. Foshan Overseas International Travel Service Co., Ltd. was incorporated in 1990 under the laws of the Peoples Republic of China, Chongqing Universal Travel E-Commerce Co., Ltd and Shenzhen Universal Travel  Agency Co., Ltd., were both incorporated in 2009 under the laws of the Peoples Republic of China.  Full Power Enterprise Global Limited owns 100% of the Shenzhen Yuzhilu Aviation Service Co., Ltd. Collectively these corporations are referred to herein as the Company.
 
On June 12, 2009, the Company entered into a termination agreement with Shenzhen Speedy Dragon Enterprise Limited. Accordingly, the Company has accounted for Shenzhen Speedy Dragon Enterprise Limited adiscontinued operations. The Company is now engaged in the travel business, including airline ticketing, hotel reservation services and technological solutions to travel reservations, and tour planning and tour guide services.
 
Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Basis of Presentation
 
The accompanying audited consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. The Company's functional currency is the Chinese Renminbi, however the accompanying audited consolidated financial statements have been translated and presented in United States Dollars.
 
Reclassification
 
Certain prior-year amounts have been reclassified to conform to the current-year presentation. These reclassifications had no effect on reported income or losses.
 
Discontinued Operations
 
On June 12, 2009, the Company entered into a termination agreement with Shenzhen Speedy Dragon Enterprise Limited (“Speedy Dragon”). The Company had acquired all the equity interest in Speedy Dragon on or about April 10, 2007 in exchange for 238,095 (post-reverse split) shares of the Company’s common stock and an interest-free promissory note in the principal amount of $3,000,000 payable no later than April 10, 2008 (see Note 7).  Pursuant to the termination agreement, the Company transferred back the equity interest in Speedy Dragon on or before June 30, 2009 and that the 238,095 (post-reverse split) shares of the Company’s common stock were returned to the Company and canceled as of June 30, 2009.  In addition, the sole shareholder of Speedy Dragon was also required to return to the Company an aggregate of $2,773,411, in cash, within one year of the completion of all the formalities of the termination agreement. The cash to be returned to the Company included a declared dividend in the amount of $2,260,981 to be paid to the Company.

 
5
 

UNIVERSAL TRAVEL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
(AUDITED)

Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 
Discontinued Operations (Continued)
 
The loss on disposal of Shenzhen Speedy Dragon Enterprises Ltd was as follows:
 
Consideration
   $ 5,554,361  
Goodwill attributable to sold Shenzhen Speedy Dragon Enterprises Ltd.
     (3,630,539 )
Net equity of Shenzhen Speedy Dragon Ltd.
     (2,694,417 )
Loss on disposition of discontinued operation
     (770,595 )

Accordingly, the Company has accounted for Shenzhen Speedy Dragon Enterprise Limited as discontinued operations. The consolidated financial statements reflect the operating results and balance sheet items of the discontinued operations separately from continuing operations. Prior year’s amounts have been reclassified to confirm with current year’s presentation of the discontinued operations. The following table summarized the operating result of the discontinued operations for the years ended December 31, 2009, 2008, and 2007 respectively:
 
   
December 31,
    
December 31,
    
December 31,
  
   
2009
    
2008
    
2007
  
                   
Sales
   $ 3,631,545     $ 10,937,573     $ 11,739,273  
                         
Cost of sales
     (3,218,140 )     (9,347,312 )     (9,631,553 )
                         
Gross profit
     413,405       1,590,261       2,107,720  
                         
Operating expenses
     (190,989 )     (637,774 )     (710,346 )
Income from discontinued operation before
     222,416       952,487       1,397,374  
Income tax
     (44,441 )     (202,038 )     (210,119 )
Net Income from discontinued operations
   $ 177,975     $ 750,449     $ 1,187,255  

 
6
 

UNIVERSAL TRAVEL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
(AUDITED)
 
Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 
Discontinued Operations (Continued)
 
The following summarized the assets and liabilities of discontinued operations as of December 31, 2008:
 
Cash and cash equivalents
   $ 484,349  
Accounts receivable, net
     1,723,357  
Other receivables and deposits, net
     78,866  
Trade deposit
     6,848  
Prepaid expenses
     166,357  
Current assets held of discontinued operations
   $ 2,459,777  
Non-current assets held of discontinued operations
     3,661,231  
Total assets held of discontinued operations
   $ 6,121,008  
Accounts payable and accrued expenses
   $ 527,467  
Customer deposits
     7,308  
Income tax payable
     28,156  
Current liabilities held of discontinued operations
   $ 562,931  
 
Translation Adjustment
 
As of December 31, 2009 and 2008 the accounts of Universal Travel Group were maintained, and its financial statements were expressed, in Chinese Yuan Renminbi (CNY). Such financial statements were translated into U.S. Dollars (USD) in accordance with the Foreign Currency Matters Topic of the FASB Accounting Standards Codification (“ASC 830”) with the CNY as the functional currency. According to the Statement, all assets and liabilities were translated at the current exchange rate, stockholders equity are translated at the historical rates and income statement items are translated at the average exchange rate for the period. The resulting translation adjustments are reported under other comprehensive income in accordance with the Comprehensive Income Topic of the FASB Accounting Standard Codification (“ASC 220”). Transaction gains and losses are reflected in the income statement.
 
 Use of Estimates
 
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 
7
 
 
UNIVERSAL TRAVEL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
(AUDITED)

Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 
Principles of Consolidation
 
The consolidated financial statements include the accounts of Universal Travel Group and its wholly owned subsidiaries Shenzhen Yuzhilu Aviation Service Co., Ltd., Shenzhen Speedy Dragon Enterprises Limited, Shanghai Lanbao Travel Service Co., Ltd., Xian Golden Net Travel Serve Services, Ltd., Foshan Overseas International Travel Service Co. Ltd., Chongqing Universal Travel E-Commerce Co., Ltd., Shenzhen Universal Travel  Agency Co., Ltd., and Full Power Enterprise Global Limited collectively referred to herein as the Company.  On June 12, 2009 the Company entered into a termination agreement with Shenzhen Speedy Dragon Enterprise Limited. Accordingly, the Company has accounted for Shenzhen Speedy Dragon Enterprise Limited as a discontinued operations. The consolidated financial statements reflect the operating results and balance sheet items of the discontinued operations separately from continuing operations. Prior year’s amounts have been reclassified to confirm with current year’s presentation of the discontinued operations.  All material inter-company accounts, transactions and profits have been eliminated in consolidation.
 
Risks and Uncertainties
 
The Company is subject to substantial risks from, among other things, intense competition associated with the industry in general, other risks associated with financing, liquidity requirements, rapidly changing customer requirements, limited operating history, foreign currency exchange rates and the volatility of public markets.
 
Contingencies
 
Certain conditions may exist as of the date the financial statements are issued. These conditions may result in a future loss to the Company but which will only be resolved when one or more future events occur or fail to occur. The Company’s management and legal counsel assess such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company’s legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought.
 
If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s financial statements. If the assessment indicates that a potential material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material would be disclosed. Loss contingencies considered to be remote by management are generally not disclosed unless they involve guarantees, in which case the guarantee would be disclosed.
 
Cash and Cash Equivalents
 
Cash and cash equivalents include cash on hand and cash in time deposits, certificates of deposit and all highly liquid debt instruments with original maturities of three months or less.

 
8
 
 
UNIVERSAL TRAVEL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
(AUDITED)
 
Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 
Accounts Receivable
 
The Company maintains reserves for potential credit losses on accounts receivable. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. Terms of the sales vary. Reserves are recorded primarily on a specific identification basis. Allowance for doubtful accounts amounted to $414,927 and $210,139 as of December 31, 2009 and 2008, respectively.

Description
  
Balance
at
beginning
of
year
    
Charged to
expenses
    
Deductions
    
Balance at end
of year
  
Allowance for doubtful receivables
   $ 210,139     $ 204,788     $ -     $ 414,927  
 
Reverse Split
 
On March 31, 2009 the Company effected a three-for-one (3:1) reverse split of the Company’s issued and outstanding shares of common stock, decreasing the number of outstanding shares from 41,619,966 to 13,873,969. These statements have been adjusted to reflect this reverse split on a historical pro-forma basis.
 
Property, Plant & Equipment
 
Property and equipment are stated at cost. Expenditures for maintenance and repairs are charged to earnings as incurred; additions, renewals and betterments are capitalized. When property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in operations. Depreciation of property and equipment is provided using the straight-line method for substantially all assets with estimated lives of:
 
Furniture and Fixtures
  
5 years
Transportation equipment
  
5 years
Office equipment
  
5 years
Leasehold Improvements
  
5 – 10 years
 
 
9
 

UNIVERSAL TRAVEL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
(AUDITED)

Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 
Property, Plant & Equipment (Continued)
 
As of December 31, 2009 and  2008 Property, Plant & Equipment of consist of the following:
 
  
  
December 31,
2009
    
December31,
2008Restated
  
Furniture & fixtures
   $ 23,560     $ 18,247  
Transportation equipment
     150,232       143,332  
Office equipment
     4,146,637       360,145  
Leasehold improvements
     1,385,481       31,374  
  
     5,705,910       553,098  
Accumulated depreciation
     (713,233 )     (310,450 )
    $ 4992,677     $ 242,648  
 
Depreciation expense for the years ended December 31, 2009, 2008, and 2007 was $548,913, $34,340, and $50,812, respectively, of which $494,022, $30,906, and $45,731 was included as part of cost of services for the years ended December 31, 2009, 2008, and 2007, respectively.
 
Goodwill
 
Goodwill represents the excess cost of a business acquisition over the fair value of the net assets acquired.  In accordance with the Intangibles, Goodwill and other topic of the FASB Accounting Standard Codification (“ASC 350”), indefinite-life identifiable intangible assets and goodwill are not amortized. Under the provisions of ASC 350, we are required to perform an annual impairment test of our goodwill. Goodwill impairment is determined using a two-step process.  The first step of the goodwill impairment test is used to identify potential impairment by comparing the fair value of a reporting unit, which we define as our business segments, with its net book value or carrying amount including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired and the second step of the impairment test is unnecessary.  If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test compares the implied fair value of the reporting unit's goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit's goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess.  The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination.  The fair value of the reporting unit is allocated to all of the assets and liabilities of that unit including any unrecognized intangible assets as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase  price paid to acquire the reporting unit.  See Note 7, Purchase of Subsidiaries, for additional information regarding goodwill.

 
10
 

UNIVERSAL TRAVEL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
(AUDITED)

Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 
As of December 31, 2009 and 2008, Goodwill consists of the following:
 
  
  
December 31, 2009
    
December 31,2008
  
Shanghai Lanbao Travel Service Co., Ltd.
     3,081,799       3,081,799  
Foshan International Travel Service Co., Ltd.
     6,049,576       6,049,576  
Xian Golden Net Travel Serve Services Co.,Ltd
     764,895       764,895  
    $ 9,896,270     $ 9,896,270  
 
Long-Lived Assets
 
The Company adopted the Property, Plant and Equipment Topic of the FASB Accounting Standard Codification (“ASC 360”), which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations for a Disposal of a Segment of a Business. The Company periodically evaluates the carrying value of long-lived assets to be held and used in accordance with ASC 360. ASC 360 requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets carrying amounts. In that event, a loss is recognized based on the amount by which the carrying amount exceeds the fair market value of the long-lived assets. Loss on long-lived assets to be disposed of is determined in a similar manner, except that fair market values are reduced for the cost of disposal. Based on its review, the Company believes that, as of December 31, 2009 and 2008 there were no significant impairments of its long-lived assets.
 
Derivative Liability
 
The Company issued warrants in connection with the “Securities Purchase Agreement” dated August 28, 2008 with certain reset exercise price provisions.  If the Company issues or sells shares of its common stock after the August 28, 2008 Securities Purchase Agreement or Financing for an amount less than the original exercise price per share, the exercise price of the warrants is reduced to equal the new issuance price of those shares.
 
Upon the Company’s adoption of the Derivative and Hedging Topic of the FASB Accounting Standards Codification (“ASC 815”) on January 1, 2009, the Company determined that the warrants did not qualify for a scope exception under ASC 815 as they were determined to not be indexed to the Company’s stock as prescribed by ASC 815.  On January 1, 2009, the warrants, under ASC 815, were reclassified from equity to derivative liability for the then relative fair market value of $2,091,738 and marked to market.  The value of the warrants decreased by $536,776 from the warrants issuance date to the adoption date of ASC 815, January 1, 2009.  As of January 1, 2009, the cumulative effect in adopting ASC 815 was a reduction to additional paid in capital of $2,091,738 to reclassify the warrants from equity to derivative liability and an increase in retained earnings of $536,776 as a cumulative effect of a change in accounting principle to reflect the change in the value of the warrants between their issuance date and January 1, 2009.  For the year ended December 31, 2009, the Company recorded a loss on change in fair value of derivative liability of $6,832,186 to mark to market for the increase in fair value of the warrants during the year ended December 31, 2009.   Under ASC 815, the warrants will be carried at fair value and adjusted at each reporting period.

 
11
 

UNIVERSAL TRAVEL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
(AUDITED)

Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 
Derivative Liability (Continued)
 
The Company determined the fair value of the reset provisions at January 1, 2009 was $1,554,961 as the initial fair value at the adoption date of EITF No. 07-05.  The fair value was determined using the Black Scholes Option Pricing Model based on the following assumptions:  dividend yield: 0%; volatility: 136%, risk free rate: 1.55%, expected term: 4.66 years.
 
The Company determined the fair value of the reset provisions at December 31, 2009 was $1,815,319. The fair value was determined using the Black Scholes Option Pricing Model based on the following assumptions: dividend yield: -0-%; volatility: 120%, risk free rate: 2.69%, expected term: 3.66 years.
 
Fair Value of Financial Instruments
 
FASB Accounting Standards Codification Topic on Fair Value Measurements and Disclosures (“ASC 820”) requires that the Company disclose estimated fair values of financial instruments. The carrying amounts reported in the statements of financial position for current assets and current liabilities qualifying as financial instruments are a reasonable estimate of fair value.
 
Revenue Recognition
 
The Company’s revenue recognition policies are in compliance with FASB Accounting Standards Codification Topic on Revenue Recognition (“ASC 605”). Revenue is recognized at the date the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist and collectability is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as unearned revenue.
 
The Company had four types of revenue stream from its four lines of businesses, namely (i) air-ticketing (Shenzhen Yuzhilu Aviation Service Co., Ltd. and Chongqing Universal Travel E-Commerce Co., Ltd.), (ii) hotel reservations (Shanghai Lanbao Travel Service Co., Ltd.), (iii) packaged tours (Foshan International Travel Service Co., Ltd., Xian Golden Net Travel Serve Services Co, Ltd. and Shenzhen Universal Travel Agency Co., Ltd.) and (iv) air cargo agency services (Shenzhen Speedy Dragon Enterprises Ltd.).  On June 12, 2009, the Company entered into a termination agreement with Shenzhen Speedy Dragon Enterprise Ltd. Accordingly the Company has accounted for Shenzhen Speedy Dragon Enterprise Ltd, its air cargo agency services as a discontinued operation (see Note 2 Discontinued Operations).  Effective June 12, 2009, the Company has three types of revenue stream from its current three lines of businesses.
 
Air-ticketing services
 
The Company receives commissions from travel suppliers for air-ticketing services through its transaction and service platform under various services agreements. The Company does not charge customers differently from the prices provided by travel suppliers.  The Company has no discretion on the air ticket prices or the applicable commission rates as they are dictated by the travel suppliers. Commissions from air-ticketing services rendered are recognized after air tickets are issued. The Company presents revenues from such transactions on a net basis in the statements of income as the Company, generally, does not assume inventory risks and has no obligations for cancelled airline ticket reservations.

 
12
 

UNIVERSAL TRAVEL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
(AUDITED)

Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 
Revenue Recognition (Continued)
 
Hotel reservation services
 
The Company receives commissions from travel suppliers for hotel room reservations through its transaction and service platform. The Company does not charge customers differently from the prices provided by hotel suppliers.  The Company has no discretion on the hotel room prices or the applicable commission rates as they are dictated by the hotel suppliers.  Commissions from hotel reservation services rendered are recognized after hotel customers have completed their stay at the applicable hotel and upon confirmation of pending payment of the commissions by the hotel. The Company presents revenues from such transactions on a net basis in the statements of income as the Company, generally, does not assume inventory risks and has no obligations for cancelled hotel reservations.
 
Packaged-tour
 
The Company receives fees from providing domestic and cross-boarder travel tour services.  The Company contracts with traffic service providers, accommodation providers and leisure service providers to purchase air tickets, train and coach tickets, accommodation and leisure or entertainment packages in bulk and then resell them to its customers with a mark-up.  Fees generated from packaged-tour are recognized on a gross basis in the statements of income, when the tour is completed, as the Company, generally, undertakes the majority of the business risk.  The Company is the primary obligor to pay the service providers upon rendering of those services.  In addition, the Company acts as principal related to the packaged-tour services rendered or when tour is completed and collections are reasonably assured.  Generally, the Company does not issue refund to its customers unless cancellation is due to its and or the service provider’s non-delivery of services. Historically, refunds and cancellations do not have a material impact on the Company’s consolidated financial statements in any accounting period.
 
Air Cargo Business
 
The Company received fees from its air cargo business. However, this business segment had been accounted for as a discontinued operation upon consummation of a termination agreement with Shenzhen Speedy Dragon Enterprise Ltd dated June 12, 2009.  The Company basically brokered air cargo spaces and resell them to local logistic companies to generate revenue.  The Company had contracted with Chinese domestic airlines as its vendors to carry out its cargo services.  Revenues generated from air cargo business were recognized on a gross basis in the statements of income, when the service was rendered, as the Company, generally, undertook the majority of the business risk.  The Company was the primary obligor to pay the service providers upon rendering of those services.  In addition, the Company acted as principal related to the air cargo services rendered and collections are reasonably assured.  Customers were charged based on the class and weight of goods shipped.
 
Historically, the Company has experienced minimum and or immaterial returns and or cancellation from its four lines of businesses, which amount if any, would have no material impact on its consolidated financial statements.  Accordingly, no allowance has been provided for in the periods presented.

 
13
 

UNIVERSAL TRAVEL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
(AUDITED)

Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 
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.  Costs of services for the cargo agency business mainly include the costs of warehousing and delivery charges.  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.
 
Consolidated costs such as stock-based compensation and corporate professional fees are not allocated to any segment. These costs are reported as general operating expenses in the Company’s Statements of Operations. For the years ended December 31, 2009, 2008, and 2007, such expenses amounted $2,393,958, $464,917 and $945,903.
 
Advertising
 
Advertising expenses consist primarily of costs of promotion for corporate image and product marketing and costs of direct advertising. The Company expenses all advertising costs as incurred.
 
 Income Taxes
 
The Company utilizes FASB Accounting Standards Codification Topic on Income Taxes (“ASC 740”), which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
 
 Statement of Cash Flows
 
In accordance with FASB Accounting Standards Codification Topic on Statement of Cash flows (“ASC 230”), cash flows from the Company’s operations are based upon the local currencies. As a result, amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheet.

 
14
 

UNIVERSAL TRAVEL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
(AUDITED)

Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 
Intangibles
 
Intangible assets are amortized using the straight-line method over their estimated period of benefit. Evaluation of the recoverability of intangible assets is made annually to take into account events or circumstances that warrant revised estimates of useful lives or that indicate that impairment exists. All of our intangible assets are subject to amortization. No impairments of intangible assets have been identified during any of the periods presented. The Company’s intangible assets consist primarily of map of hotels and scenic spots used for marketing purposes, CRM systems software, and Organization cost of new companies. These definitive lived intangible assets are being amortized over their useful lives.  Expenditures of $296,264 and $316,107 were capitalized in 2009 and 2008 and will be amortized over a 3 year life.  The Company recorded amortization expense for definitive lived intangible assets of $264,359, $27,397 and $31,262 for the years ended December 31, 2009, 2008, and 2007, respectively. The Company will record approximately $138,073, $118,756, and $17,337 over the next three years, respectively.
 
Concentration of Credit Risk
 
Financial instruments that potentially subject the Company to concentrations of credit risk are cash, accounts receivable and other receivables arising from its normal business activities. The Company places its cash in what it believes to be credit-worthy financial institutions. The Company has a diversified customer base, most of which are in China. The Company controls credit risk related to accounts receivable through credit approvals, credit limits and monitoring procedures. The Company routinely assesses the financial strength of its customers and, based upon factors surrounding the credit risk, establishes an allowance, if required, for uncollectible accounts and, as a consequence, believes that its accounts receivable credit risk exposure beyond such allowance is limited.
 
Net Income (Loss) Per Share
 
The Company accounts for net income (loss) per share in accordance with FASB Accounting Standards Codification Topic on Earning Per Share (“ASC 260”), which requires presentation of basic and diluted EPS on the face of the statement of income for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS.  Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during each period.  It excludes the dilutive effects of potentially issuable common shares such as those related to the Company’s warrants and stock options (calculated using the treasury stock method).  Diluted net income (loss) per share is calculated by including potentially dilutive share issuances in the denominator.

 
15
 
 
UNIVERSAL TRAVEL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
(AUDITED)
 
Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 
Net Income (Loss) Per Share (Continued)
 
The following table sets forth the computation of basic and diluted earnings per share of common stock:
 
   
Year ended December 31,
  
   
2009
    
2008
    
2007
  
         
Restated
    
Restated
  
Basic earnings from continuing operations per share:
                  
Numerator:
                  
Income from continuing operations used in computing basic earnings per share
   $ 11,337,521     $ 13,781,728     $ 7,508,639  
Income from continuing operations applicable to common shareholders
   $ 11,337,521     $ 13,781,728     $ 7,508,639  
Denominator:
                        
Weighted average common shares outstanding
     14,121,542       12,854,051       11,209,839  
Basic earnings (losses) per share from continuing operations
   $ 0.80     $ 1.07     $ 0.67  
Diluted earnings (losses) per share from continuing operations:
                        
Numerator:
                        
Income (loss) from continuing operations used in computing diluted earnings (losses) per share
   $ 11,337,521     $ 13,781,728     $ 7,508,639  
Income (loss) from continuing operations applicable to common shareholders
   $ 11,337,521     $ 13,781,728     $ 7,508,639  
Denominator:
                        
Weighted average common shares outstanding
     14,121,542       12,854,051       11,209,839  
Weighted average effect of dilutive securities:
                        
Stock options and warrants
     1,196,918       -       -  
Shares used in computing diluted net income per share
     15,318,460       12,854,051       11,209,839  
Diluted earnings per share from continuing operations
     0.74       1.07       0.67  

 
16
 
 
UNIVERSAL TRAVEL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
(AUDITED)
 
   
Year ended December 31,
  
   
2009
    
2008
    
2007
  
         
Restated
    
Restated
  
Basic losses(earnings) from discontinuing operations per share:
        
  
    
  
  
Numerator:
                  
Income (loss) from discontinuing operations used in computing basic earnings per share
   $ (592,620 )   $ 750,449     $ 1,187,255  
Income (loss) from discontinuing operations applicable to common shareholders
   $ (592,620 )   $ 750,449     $ 1,187,255  
Denominator:
                        
Weighted average common shares outstanding
     14,121,542       12,854,051       11,209,839  
Basic losses(earnings) earnings per share from discontinuing operations
   $ (0.04 )   $ 0.06     $ 0.11  
Diluted losses(earnings) per share from discontinuing operations:
                        
Numerator:
                        
Income (loss) from discontinuing operations used in computing diluted earnings (losses) per share
   $ (592,620 )   $ 750,449     $ 1,187,255  
Income (loss) from discontinuing operations applicable to common shareholders
   $ (592,620 )   $ 750,449     $ 1,187,255  
Denominator:
                        
Weighted average common shares outstanding
     14,121,542       12,854,051       11,209,831  
Weighted average effect of dilutive securities:
                        
Stock options and warrants
     -       -       -  
Shares used in computing diluted net income (loss) per share
     14,121,542       12,854,051       11,209,831  
Diluted losses(earnings) earnings per share from discontinuing operations
   $ (0.04 )   $ 0.06     $ 0.11  
Total net income (loss) per common share
                        
Basic
   $ 0.76     $ 0.06     $ 0.11  
Diluted
     0.70       0.06       0.11  

 
17
 

UNIVERSAL TRAVEL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
(AUDITED)
 
Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 
Recent Accounting Pronouncements
 
In February, 2007, FASB issued SFAS 159 ‘The Fair Value Option for Financial Assets and Financial Liabilities’ – Including an Amendment of FABS Statement No. 115.  This statement permits entities to choose to measure many financial instruments and certain other items at fair value. This statement is expected to expand the use of fair value measurement, which is consistent with the Board’s long-term measurement objectives for accounting for financial instruments.  This statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, SFAS No 159 was superseded by the Financial Instruments Topic of FASB Accounting Standards Codification (“ASC 825”), the adoption of this accounting requirement has no effect on the Company’s consolidated financial statements.
 
In December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in Consolidated Financial Statements” (“SFAS 160”).  This Statement amends ARB 51 to establish accounting and reporting standards for the non-controlling (minority) interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a non-controlling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. This Statement is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008 (that is, January 1, 2009, for entities with calendar year-ends). SFAS No 160 was superseded by the Consolidation Topic of FASB Accounting Standards Codification (“ASC 810”) The Company adopted SFAS 160 on January 1, 2009. The adoption of this statement had no effect on the Company’s consolidated financial statements.
 
In March 2008, the FASB issued FASB Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities. The new standard is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance, and cash flows. It is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The new standard also improves transparency about the location and amounts of derivative instruments in an entity’s financial statements; how derivative instruments and related hedged items are accounted for under Statement 133; and how derivative instruments and related hedged items affect its financial position, financial performance, and cash flows. SFAS No 161 was superseded by the Derivative and Hedging Topic of FASB Accounting Standards Codification (“ASC 815”).

 
18
 
 
UNIVERSAL TRAVEL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
(AUDITED)

Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 
On May 8, 2008, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 162, The Hierarchy of Generally Accepted Accounting Principles, which will provide framework for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. generally accepted accounting principles (GAAP) for nongovernmental entities. With the issuance of SFAS No. 162, the GAAP hierarchy for nongovernmental entities will move from auditing literature to accounting literature.  SFAS No 162 was superseded by the General Accounting Principle Topic of FASB Accounting Standards Codification (“ASC 105”).
 
In June 2008, the FASB ratified the consensus reached on Emerging Issues Task Force (“EITF”) Issue No. 07-05, 05”). EITF No. 07-05 clarifies the determination of whether an instrument (or an embedded feature) is indexed to an entity’s own stock, which would qualify as a scope exception under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. EITF No. 07-05 is effective for financial statements issued for fiscal years beginning after December 15, 2008. EITF No. 07-05 was superseded by the Derivative and Hedging Topic of FASB Accounting Standards Codification (“ASC 815”). Based on the Company’s evaluation of this issue, the adoption of this accounting requirement has a material effect on the Company’s consolidated financial statements, please see note above under “Derivative Liability”.
 
In June 2009, the FASB issued amended standards for determining whether to consolidate a variable interest entity. These amended standards eliminate a mandatory quantitative approach to determine whether a variable interest gives the entity a controlling financial interest in a variable interest entity in favor of a qualitatively focused analysis, and require an ongoing reassessment of whether an entity is the primary beneficiary. These amended standards are effective for us beginning in the first quarter of fiscal year 2010 and we are currently evaluating the impact that adoption will have on our consolidated financial statements.
 
In June 2009, the FASB issued ASC 855 (previously SFAS No. 165, Subsequent Events), which establishes general standards of accounting for and disclosures of events that occur after the balance sheet date but before the financial statements are issued or available to be issued. It is effective for interim and annual periods ending after June 15, 2009. There was no material impact upon the adoption of this standard on the Company’s consolidated financial statements.
 
In August 2009, the FASB issued Accounting Standards Update (“ASU”) 2009-05, which amends ASC Topic 820, Measuring Liabilities at Fair Value, which provides additional guidance on the measurement of liabilities at fair value. These amended standards clarify that in circumstances in which a quoted price in an active market for the identical liability is not available, we are required to use the quoted price of the identical liability when traded as an asset, quoted prices for similar liabilities, or quoted prices for similar liabilities when traded as assets. If these quoted prices are not available, we are required to use another valuation technique, such as an income approach or a market approach. These amended standards are effective for us beginning in the fourth quarter of fiscal year 2009. There was no material impact upon the adoption of this standard on the Company’s consolidated financial statements.

 
19
 

UNIVERSAL TRAVEL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
(AUDITED)
 
In January 2010, the FASB issued Accounting Standards Update No. 2010-06 (ASU 2010-06), Fair Value Measurements and Disclosures which amends ASC Topic 820, adding new requirements for disclosures for Levels 1 and 2, separate disclosures of purchases, sales, issuances, and settlements relating to Level 3 measurements and clarification of existing fair value disclosures.  ASU 2010-06 is effective for interim and annual periods beginning after December 15, 2009, except for the requirement to provide Level 3 activity of purchases, sales, issuances, and settlements on a gross basis, which will be effective for fiscal years beginning after December 15, 2010 (the Company’s fiscal year 2012); early adoption is permitted.  The Company is currently evaluating the impact of adopting ASU 2009-14 on its financial statements.
 
Merger and Corporate Restructure
 
On June 26, 2006 the company entered into an agreement and plan of merger with Full Power Enterprises Global Limited, a holding company that owns all of the issued and outstanding shares of Shenzhen Yuzhilu Aviation Service Company Limited, the operating Company. In substance the agreement is a recapitalization of Shenzhen Yuzhilu Aviation Service Company’s capital structure.
 
For accounting purposes, the company accounted for the transaction as a reverse acquisition and with Full Power Enterprises Global Limited being the surviving entity. The Company did not recognize goodwill or any intangible assets in connection with the transaction. Prior to the Agreement, the company was an inactive corporation with no significant assets and liabilities.

Note 3 – TRADE DEPOSITS AND ADVANCES
 
Trade deposits represents amount held by Airlines and deposits. As of December 31, 2009 and 2008 the Company had paid $9,775,735 and $6,571,164 as trade deposits respectively.
 
The following summaries the Company’s deposits outstanding by each of its subsidiaries and the nature and purpose of each deposit as of December 31, 2009 and 2008:
 
   
December 31,
2009
    
December 31,
2008
  
Shenzhen Yuzhilu Aviation Service Co., Ltd:
            
Deposit for tripeasy kiosks.
The Company will record the asset and the related depreciation utilizing the straight-line method over 5 years for the kiosk at the time they are placed in service.
   $ 1,465,592     $ 3,171,851  
CRM System Design Deposit.
The deposit with CRM System Design represents a prepayment for the design of the CRM system. The company will record the intangible asset and the related amortization utilizing the Straight-line method over 5 years at the time the system is operational and placed in service.
     -       41,216  
Deposit on Design fee for kiosks.
Advance payments for design fees related to the kiosks will begin to record the amortization as they are placed in service as a percent of the expected total of 600 units.
     -       103,479  
Airlines Deposit. The deposits with the airlines are required in order to issue air-tickets. The deposits are fully refundable should the company decide to discontinue its air-ticket business.
     2,811,004       674,277  
Financial System Software Deopsit
The deposit on the financial system software will be capitalized and amortized upon the implementation and operations of the system.
     16,898          
Airport Deposit
These deposits are for the ability to market in the airports, and are netted against the monthly rental obligations to the airports.
     8,508       21,631  
Ticket Agency Deposit
The deposits to ticket agencies are required in order for the company to issue other ticket agencies special fare tickets. The deposits are fully refundable should the company decide to discontinue business with other agencies.
     1,100,158       1,096,170  
Subtotal
   $ 5,402,160     $ 5,108,624  

 
20
 

UNIVERSAL TRAVEL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
(UNAUDITED)
 
Note 3 – TRADE DEPOSITS AND ADVANCES (CONTINUED)
 
(Continued)
  
December 31, 2009
    
December 31, 2008
  
Foshan Overseas International Travel Service Co. Ltd.:
            
Deposit with Tour Companies
The deposits with tour companies represent advances to tour companies. These deposits are required for co-operate travel agencies, and is deducted against tour payments. Any remaining deposits will be refunded to the company should the company decide to discontinue business with these agencies.
   $ 969,261     $ 632,726  
Advance payments with Tour Guides
The deposits with tour guides represent advances for expenses while conducting the tour. These advances will be reclassified to cost of services at the conclusion of the tour and the tour guides provide the supporting documentation.
     243,342       230,574  
Subtotal
     1,212,603       863,300  
Xian Golden Net Travel Serve Services, Ltd.:
                
Deposit with Tour companies
The deposits with tour companies, represent advances to co-operate travel agencies, and is deducted against tour payments. Any remaining deposits will be refunded to the company should the company decide to discontinue business with these agencies.
     425,396       511,546  
Deposit with Transportation Suppliers
The deposits with transportation suppliers represent advances to transportation suppliers and are required for co-operate transportation suppliers. The advances are deducted against transportation payments. Any remaining deposits will be refunded to the company should the company decide to discontinue business with these agencies.
     132,019       87,694  
Subtotal
     557,415       599,240  
Chongqing Travel World E-Business Co., Ltd.
                
Ticket Agency Deposit
The deposits to ticket agencies are required in order for the company to issue other ticket agencies special fare tickets. The deposits are fully refundable should the company decide to discontinue business with other agencies.
     2,587,279       -  
Subtotal
     2,587,279       -  
Shenzhen Universal Travel
                
Ticket Agency Deposit
The deposits to ticket agencies are required in order for the company to issue other ticket agencies special fare tickets. The deposits are fully refundable should the company decide to discontinue business with other agencies.
     16,278       -  
Subtotal
     16,278       -  
Total
   $ 9,775,735     $ 6,571,164  
 
The Company has entered into a co-operation agreement with an unrelated company, to assist that company in their business development by participating in that business operations and providing working capital funding. As of December 31, 2009 and December 31, 2008 the Company has advanced this company $440,063 and $438,468 respectively.

 
21
 

UNIVERSAL TRAVEL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
(AUDITED)

Note 4 - COMPENSATED ABSENCES
Regulation 45 of local PRC labor law entitles employees to annual vacation leave after 1 year of service. In general all leave must be utilized annually, with proper notification. Any unutilized leave is cancelled.
 
Note 5 - INCOME TAXES
 
The Company through its subsidiary Shenzhen Yuzhilu Aviation Service Co..Ltd is governed by the Income Tax Laws of the PRC. Operations in the United States of America have incurred net accumulated operating losses for income tax purposes. Pursuant to the PRC Income Tax Laws, the Enterprise Income Tax (EIT) the Company has a statutory rate of 25%. The following is a reconciliation of income tax expense for the three years ended December 31, 2009, 2008, and 2007.
 
   
December 31,
    
December 31,
    
December 31,
  
   
2009
    
2008
    
2007
  
Current
   $ 5,978,948     $ 4,073,614     $ 1,641,950  
Deferred
     -       -       -  
Total
   $ 5,978,948     $ 4,073,614     $ 1,641,950  
 
Note 6 – COMMITMENTS
 
The Company leases various office facilities under month-to-month arrangements. Rental expense for leases consisted of $634,792, $339,032 and $184,552 for years ended December 31, 2000, 2008, and 2007, respectively. The Company has future minimum lease obligations as of December 31, 2009 as follows:
 
2010
   $ 299,368  
2011
     220,551  
2012
     220,551  
2013
     150,493  
2014
     100,329  
Total
   $ 991,292  
 
Pursuant to the Securities Purchase Agreement entered into on August 28, 2008, the Company and the Buyers in this Agreement entered into a Lock up Agreement. Under the Lock-Up Agreement, the Principal Shareholder agreed that she would not sell any of the Lock-Up Shares, 5,000,000 shares of Common Stock and options to purchase 2,000,000 shares of Common Stock, and shall not transfer such shares for twelve (12) months.

 
22
 

UNIVERSAL TRAVEL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
(AUDITED)
 
Note 7 – COMMON STOCK
 
In January 2007 the company adopted the Universal Travel Group 2007 Equity Incentive Plan. Under the terms of this Plan the Company issued 1,256,667 shares of the Company’s stock, valued at $1,583,400, for services rendered during the period from October 2, 2006 through February 28, 2007.
 
Pursuant to a share exchange agreement, the Company issued 238,095 shares of newly issued shares of Common Stock to the former shareholders of Shenzhen Speedy Dragon Enterprises Limited. The shares were valued at $1,000,000, which was the fair value of the shares at the date of the exchange agreement. This amount is included in the cost of net assets and goodwill purchased.
 
On April 10, 2007 the Company consummated the acquisition of a 100% interest in Shenzhen Speedy Dragon Enterprises Limited ("SSD") for a cash and stock transaction valued at approximately US$4 million in aggregate. This amount is included in the cost of net assets and goodwill purchased.
 
The stock consideration consisted of 238,095 newly issued shares of the Registrant’s common stock, which were given to SSD’s sole Shareholder immediately before the completion of the Share Exchange Transaction. The cash consideration consisted of $3,000,000 in cash and payable no later than the first anniversary of the Merger Transaction. The obligation to pay the cash consideration is evidenced by interest-free promissory notes between the Registrant and the SSD Shareholder.
 
SSD is engaged in the business of air freight forwarding. The purchase price was determined based on arms' length negotiations between Universal Travel Group and the shareholder of SSD.
 
The acquisition accounted for as a purchase business combination and the results of operations from the acquisition date have been included in the Company's consolidated financial statements in accordance with ASC810. The allocation of the purchase price is as follows:
 
Cash acquired
   $ 17,800  
Loans receivable
     90,096  
Loans shareholder
     251,184  
Property Plant & Equipment
     22,995  
Goodwill
     3,630,539  
Total assets acquired
     4,012,614  
Liabilities assumed
        
Accounts & Income Taxes payable
     3,588  
Other payable
     9,026  
Total
   $ 4,000,000  
 
The excess of purchase price over tangible assets acquired and liabilities assumed of $3,630,359 was recorded as goodwill. At the time of the acquisition no identifiable intangibles assets existed under the contractual-legal or the separability criterion as required under ASC 805.

 
23
 

UNIVERSAL TRAVEL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
(AUDITED)
 
Note 7 – COMMON STOCK (CONTINUED)
 
Prior to the acquisition, Shenzhen Speedy Dragon Enterprises Limited prepared its financial statements under accounting principles generally accepted in the United States of America. Pursuant to a termination agreement dated June 12, 2009 between the Company and Shenzhen Speedy Dragon Enterprises Limited (see Note 2 Discontinued Operations), the Company transferred back its equity interest in Shenzhen Speedy Dragon Enterprises Limited on or before June 30, 2009 and the 238,095 shares of the Company’s common stock were returned from the sole shareholder of Shenzhen Speedy Dragon Enterprises Limited to the Company. The returned shares were canceled as of June 30, 2009. 
 
Pursuant to a share exchange agreement, the Company issued 50,588 shares of newly issued shares of Common Stock to the former shareholders of Xian Golden Net Travel Serve Services, Inc. The shares were valued at $258,000, which was the fair value of the shares at the date the of the exchange agreement. This amount is included in the cost of net assets and goodwill purchased. 
 
On August 6, 2007 the Company consummated the acquisition of a 100% interest in Xian Golden Net Travel Serve Services, Inc. ("XGN") for a cash and stock transaction valued at approximately US$1.8 million in aggregate. This amount is included in the cost of net assets and goodwill purchased.
 
The stock consideration consisted of 50,588 newly issued shares of the Registrant’s common stock, which were given to XGN’s Shareholders immediately before the completion of the Share Exchange Transaction. The cash consideration consisted of $1,542,000 in cash and payable no later than the first anniversary of the Merger Transaction. The obligation to pay the cash consideration is evidenced by an interest-free promissory note between the Registrant and the XGN’s Shareholders.
 
XGN is engaged in the business of Chinese domestic tourism. The purchase price was determined based on arms' length negotiations between Universal Travel Group and the shareholders of XGN.
 
The acquisition accounted for as a purchase business combination and the results of operations from the acquisition date have been included in the Company's consolidated financial statements in accordance with ASC 810. The allocation of the purchase price is as follows:
 
Cash acquired
   $ 45,356  
Accounts Receivable
     142,462  
Loans to Shareholder
     1,075,504  
Property Plant & Equipment
     773  
Goodwill
     764,895  
Total assets acquired
     2,028,990  
Liabilities assumed
        
Accounts & Income Taxes payable
     131,875  
Other payable
     97,115  
Total
   $ 1,800,000  

 
24
 
 
UNIVERSAL TRAVEL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
(AUDITED)
 
Note 7 – COMMON STOCK (CONTINUED)
 
The excess of purchase price over tangible assets acquired and liabilities assumed of $764,895 was recorded as goodwill. At the time of the acquisition no identifiable intangibles assets existed under the contractual-legal or the separability criterion as required under ASC 805.
 
Prior to the acquisition, Xian Golden Net Travel Serve Services, Inc. prepared its financial statements under accounting principles generally accepted in the United States of America.     
 
Pursuant to a share exchange agreement, the Company issued 200,000 shares of newly issued shares of Common Stock to the former shareholders of Shanghai Lanbao Travel Services Co., Ltd. The shares were valued at $1,092,000, which was the fair value of the shares at the date of the exchange agreement. This amount is included in the cost of net assets and goodwill purchased.
 
On August 8, 2007, the Company consummated the acquisition of a 100% interest in Shanghai Lanbao Travel Services Co., Ltd. ("SLB") for a cash and stock transaction valued at approximately US$3.92 million in aggregate. This amount is included in the cost of net assets and goodwill purchased.
 
The stock consideration consisted of 200,000 newly issued shares of the Registrant’s common stock immediately before the completion of the Share Exchange Transaction. The cash consideration consisted of $2,828,000 in cash and payable no later than the first anniversary of the Merger Transaction. The obligation to pay the cash consideration is evidenced by interest-free promissory notes between the Registrant and each of the SLB Shareholders.
 
SLB is engaged in the business of real time booking of travel related products via the internet. The purchase price was determined based on arms' length negotiations between Universal Travel Group and the shareholders of SLB.
 
The acquisition accounted for as a purchase business combination and the results of operations from the acquisition date have been included in the Company's consolidated financial statements in accordance with SFAS 94. The allocation of the purchase price is as follows:
 
Cash acquired
   $ 28,510  
Accounts Receivable
     1,265,352  
Loans to shareholders
     178,665  
Property Plant & Equipment
     9,376  
Goodwill
     3,081,799  
Total assets acquired
     4,563,702  
Liabilities assumed
        
Accounts & Income Taxes payable
     566,809  
Other payable
     76,893  
Total
   $ 3,920,000  

 
25
 

UNIVERSAL TRAVEL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
(AUDITED)

Note 7 – COMMON STOCK (CONTINUED)
 
The excess of purchase price over tangible assets acquired and liabilities assumed of $3,081,799 was recorded as goodwill. At the time of the acquisition no identifiable intangibles assets existed under the contractual-legal or the separability criterion as required under ASC 825.
 
Prior to the acquisition, Shanghai Lanbao Travel Services Co., Ltd. prepared its financial statements under accounting principles generally accepted in the United States of America.     
 
Pursuant to a share exchange agreement, the Company issued 374,321 shares of newly issued shares of Common Stock and a promissory note to the former shareholders of Foshan Overseas International Travel Service Co., Ltd. The shares were valued at $3,346,500, which was the fair value of the shares at the date of exchange agreement. This amount is included in the cost of net assets and goodwill purchased.
 
On September 20, 2007, the Company consummated the acquisition of a 100% interest in Foshan Overseas International Travel Service Co., Ltd. ("FOI") for a cash and stock transaction valued at approximately US$6.5 million in aggregate. This amount is included in the cost of net assets and goodwill purchased.
 
The stock consideration consisted of 374,329 newly issued shares of the Registrant’s common stock, immediately before the completion of the Share Exchange Transaction. The cash consideration consisted of $3,153,500 due immediately before the completion of the Share Exchange Transaction and payable no later than the first anniversary of the Merger Transaction. The obligation to pay the cash consideration is evidenced by two interest-free promissory notes between the Registrant and each of the FOI Shareholders.
 
FOI is engaged in the business of domestic and international travel inquiries as well as corporate travel, offering specialized packages that include national and international air ticket booking, hotel reservations, conference center reservations and rental cars. The purchase price was determined based on arms' length negotiations between Universal Travel Group and the shareholders of FOI. The acquisition had been accounted for as a purchase business combination and the results of operations from the acquisition date have been included in the Company's consolidated financial statements in accordance with ASC 810. The allocation of the purchase price is as follows:
 
Cash acquired
   $ 423,292  
Accounts Receivable
     2,204,094  
Loans Shareholders
     686,936  
Trade Deposits
     513,317  
Prepaid Expenses
     3,285  
Property Plant & Equipment
     42,244  
Goodwill
     6,049,576  
Total assets acquired
     9,922,744  
Liabilities assumed
        
Accounts & Income Taxes payable
     3,126,718  
Other payable
     296,026  
Total
   $ 6,500,000  

 
26
 

UNIVERSAL TRAVEL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
(AUDITED)

Note 7 – COMMON STOCK (CONTINUED)
 
The excess of purchase price over tangible assets acquired and liabilities assumed of $6,049,576 was recorded as goodwill. At the time of the acquisition no identifiable intangibles assets existed under the contractual-legal or the separability criterion as required under ASC 805.
 
Prior to the acquisition, Foshan Overseas International Travel Service Co., Ltd. prepared its financial statements under accounting principles generally accepted in the United States of America.     
 
On August 28, 2008, Universal Travel Group (the “Company”) entered into a Securities Purchase Agreement with Access America Fund, LP, Chinamerica Fund LP, Pope Investments II LLC, Heller Capital Investments, LLC, CGM as C/F Ronald I. Heller IRA, Investment Hunter, LLC, MARed Investments, High Capital Funding, LLC, and Merrill Lynch, Pierce, Fenner & Smith, FBO Beau L. Johnson (collectively, the “Buyers”) to sell to the Buyers 1,529,569 shares of common stock, par value $0.001 of the Company (“Common Stock”) and warrants to purchase 764,785 shares of Common Stock for an aggregate purchase price of $7,112,500 (the “Financing”). (See footnote 2, derivative liability)
 
On December 15, 2009, the Company closed a Subscription Agreements with certain investors to sell to them an aggregate of 2,222,222 shares of common stock of the Company, par value $0.001 (the “Shares”) for a purchase price of $9.00 per share and an aggregate purchase consideration of $19,999,998. In connection with the subscription the company paid fees and other costs pertaining to the agreement totaling $1,049,749. Net proceeds of the transaction were $18,950,249.  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.
 
Note 8 – STOCK WARRANTS, OPTIONS, AND COMPENSATION
 
On February 4, 2008, under the terms of an equity financing commitment, the company issued 74,074 shares of common stock at the closing price of $ 8.10 per share.  The proceeds of $599,994 were paid directly to the shareholders of Foshan Overseas International Travel Service Co, for amount due them under Note obligation of the company. 
 
On May 7, 2007, the Company issued, to a newly appointed Board member, an option grant to purchase 33,333 shares of common stock at the closing price at $ 5.85 per share. The exercisable period is two years from issuance. On June 23, 2008, upon resignation, Board member has forfeited all options.
 
On September 6, 2007, the Company issued, to a newly appointed Board member, an option grant to purchase 33,333 shares of common stock at the closing price at $ 8.55 per share. The options are exercisable until June 1, 2017. On June 23, 2008, upon resignation, Board member has forfeited 22,222 options.
 
On December 7, 2007, the Company issued, to another newly appointed Board member, an option grant to purchase 33,333 shares of common stock at the closing price of $ 11.25 per share. The options are exercisable until November 1, 2017.
 
Stock options— the option holder has no voting or dividend rights. The company records 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. On May 28, 2008, upon resignation, Board member has forfeited 22,222 options.

 
27
 

UNIVERSAL TRAVEL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
(AUDITED)
 
Note 8 – STOCK WARRANTS, OPTIONS, AND COMPENSATION (CONTINUED)
 
On June 24, 2008, the Company issued, to another newly appointed Board member, an option grant to purchase 33,333 shares of common stock at the closing price of $ 4.56 per share. The options are exercisable until July 1, 2018. Stock options— the option holder has no voting or dividend rights. The company records 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.
 
On January 20, 2009, pursuant to the Securities Purchase agreement entered into on August 28, the Company enacted the Universal Travel Group 2009 Incentive Stock Option Plan entitles the grant of up to 2,200,000 shares of common stock of Universal Travel Group, par value $0.001 to certain employees of the Company either as stock or stock options, and the subsequent exercise of any stock options.  The options are exercisable until January 19, 2019, with a vesting period of six years. Average purchase price for the options is $3.73 per share. The options were valued using the Black-Scholes option-pricing model at the date of grant stock option pricing.  The total fair market value at grant date is $5,483,865. On July 23, 2009 3,300 were exercised at $2.90.
 
On September 1, 2009, the Company issued, to another newly appointed Board member, 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. Stock options— the option holder has no voting or dividend rights. The company records 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.
 
On September 1, 2009, the Company issued, to the newly appointed CFO 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. Stock options— the option holder has no voting or dividend rights. The company records 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.
 
Expected volatility is based on the historical volatility of the Company’s stock price. The expected term represents the estimated average period of time that the options remain outstanding. No dividend payouts were assumed, as the Company has no plans to declare dividends during the expected term of the stock options. The risk-free rate of return reflects the weighted average interest rate offered for zero coupon treasury bonds over the expected term of the options. Based upon this calculation and pursuant to, ASC 718, the Company recorded a service period expense of $11,544,409 for the year ending December 31, 2009. During 2009, 766,667 employee options were exercised, under cashless exercise provision. The company issued 576,372 shares of common stock.
 
                     
Aggregate
  
         
Exercise
    
Remaining
    
Intrinsic
  
   
Total
    
Price
    
Life
    
Value
  
                         
Outstanding, December 31, 2008
     55,555     $ 4.56-11.25    
7.69-8.75yrs
       -  
Granted in 2009
     2,200,000     $ 2.70-3.84    
9.31yrs
       -  
Granted in 2009
     115,000     $ 8.82    
9.92yrs
          
Exercised in 2009
     (3,300 )   $ -     -       -  
Cashless exercise in 2009
     (766,667 )   $                       
Outstanding, December 31, 2009
     1,600,588     $ -     -       -  

 
28
 

UNIVERSAL TRAVEL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
(AUDITED)

Note 8 – STOCK WARRANTS, OPTIONS, AND COMPENSATION (CONTINUED)
 
Pursuant to the Securities Purchase Agreement entered into On August 28, 2008, the Company issued warrants to purchase 764,786 shares of Common Stock. The unit purchase price was $4.65 per Common Share and a related Warrant for the purchase of one-half a Common Share, times the number of Common Shares purchased. Market Value of the Company’s stock on August 28, 2008 was $4.05. Each warrant has an Exercise Price of $8.13 and a term of 5 years from the date of issuance.  The Company measured and recognized an aggregate of $2,091,738 of the proceeds to additional paid in capital upon issuance of these warrants. The terms of the warrants provide for an adjustment to the exercise price of these warrants if the company closes on the sale or issuance of common stock at a price which is less than the exercise price then in effect for these warrants. Upon the Company’s adoption of EITF No. 07-05 on January 1, 2009, the Company determined that the warrants did not qualify for a scope exception under SFAS No. 133 as they were determined to not be indexed to the Company’s stock as prescribed by EITF No. 07-05.  On January 1, 2009, the warrants were reclassified from equity to derivative liability for the  relative fair market value and marked to market (see Note 2 Derivative Liability).  On August 20, 2009 322,580 warrants valued at $3,398,135 as of that date, were exercised under the cashless exercise provisions of the warrants. The Company issued 132,251 shares of common stock. On October 15, 2009, 215,054 warrants valued at $2,888,495 as of that date were exercised under the cashless exercise provision of the warrants. The company issued 103,318 shares of common stock.
 
Note 9 - OTHER COMPREHENSIVE INCOME
 
Balances of related after-tax components comprising accumulated other comprehensive income, included in stockholders equity, as of December 31, 2009 and 2008 are as follows:
 
   
Foreign Currency
Translation
Adjustment
    
Accumulated Other
Comprehensive
Income
  
Balance December 31, 2007
   $ 545,164     $ 545,164  
Changes for year ended December 31, 2008
     975,002       975,002  
Balance December 31, 2008
     1,520,166       1,520,166  
Changes for year ended December 31, 2009
     124,967       124,967  
Balance at December 31, 2009
   $ 1,645,133     $ 1,645,133  
 
Note 10 - CURRENT VULNERABILITY DUE TO CERTAIN RISK FACTORS
 
The Company’s operations are carried out in the PRC. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environments in the PRC, and by the general state of the PRC's economy. The Company’s business may be influenced by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.
 
Note 11 – MAJOR CUSTOMERS AND CREDIT RISK
 
The Company derives a portion of its income from various Airlines. Most revenue is cleared through IATA, a centralized reporting platform.

 
29
 
 
UNIVERSAL TRAVEL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
(AUDITED)

Note 12 – ESCROW DEPOSITS
 
Pursuant to the Securities Purchase Agreement entered into on August 28, 2008, the Company agreed that it will deposit $500,000 of the proceeds in escrow to pay the fees and expenses in connection with a public relations and investor relations campaign. The Company also agreed that it engage a Chief Financial Officer who shall be fluent in English and Mandarin, who understands and has a working knowledge of United States generally accepted accounting principles, who has had significant responsibility for the preparation and filing of quarterly, annual and current reports with the SEC and who has experience working with or in United States capital market participants.
 
As of December 31, 2009 $337,200 has been prepaid out of this escrow account in connection with the public and investor relations campaign for services covering a one year period. This prepayment is being amortized accordingly. Remaining balance was released to the Company during the year  ended December 31, 2009.
 
The Company agreed that it would deposit $600,000 of the proceeds in escrow under the Escrow Agreement, to be released only upon the dual signatures of the Chief Executive Officer of the Company and the representative of the Buyers designated in the Escrow Agreement following the engagement of a Chief Financial Officer. During the year ended December 31. 2009, $600,000 was released from escrow to the Company.
 
Note 13 -   SEGMENT INFORMATION
 
Upon the disposition of Shenzhen Speedy Dragon Enterprises Limited pursuant to a termination agreement dated June 12, 2009, the Company currently operates and prepares accounting and other financial reports separately to management for six major business organizations (Shenzhen Yuzhilu Aviation Service Co., Ltd., Shanghai Lanbao Travel Service Co., Ltd., Foshan International Travel Service Co., Ltd.,  Xian Golden Net Travel Serve Services, Chongqing Travel World E-Business Co., Ltd., and Shenzhen Travel World Travel Agency Co., Ltd.). Pursuant to SFAS 131 they disclose segments on a single entity basis, which in their case is the legal entity. Our air-ticketing segment relates to the segment reporting of Shenzhen Yuzhilu Aviation Service Co., Ltd. and Chongqing Travel World E-Business Co., Ltd., hotel reservation segment relates to Shanghai Lanbao Travel Service Co., Ltd, packaged tours segment relates to Foshan International Travel Service Co., Ltd and Xi’an Golden Net Travel Serve Service Company Limited, and Shenzhen Travel World Travel Agency Co., Ltd. Management monitors these segments regularly to make decisions about resources to be allocated to the segment and assess its performance.
 
30
 
UNIVERSAL TRAVEL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
(AUDITED)
 
Note 13 -   SEGMENT INFORMATION (CONTINUED)
 
The following tables’ present summarized information by segment: 
 
   
Air
Ticketing
    
Hotel
Reservation
    
Package
Tours
    
Other
    
Total
  
   
Year Ended December 31, 2009
  
Sales, net
   $ 17,509,195     $ 13,044,815     $ 67,321,542     $ -     $ 97,875,552  
Cost of sales
   $ 2,726,424     $ 4,343,328     $ 58,432,674     $ -     $ 65,502,426  
Gross profit
   $ 14,782,771     $ 8,701,487     $ 8,888,868     $ -     $ 32,373,126  
Income from operations
   $ 10354,596     $ 8,435,273     $ 7,772,637     $ (2,393,958 )   $ 24,168,547  
Depreciation & Amortization
   $ 793,981     $ 4,156     $ 15,135     $ -     $ 813,272  
Asset Expenditures
   $ 5,384,851     $ -     $ 1,101     $ -     $ 5,385,952  
Total assets
   $ 59,244,855     $ 4,796,028     $ 17,821,561     $ 3,844,084     $ 85,706,528  
   
Year Ended December 31, 2008
  
Sales, net
   $ 12,333,527     $ 8,340,519     $ 45,147,792     $ -     $ 65,821,838  
Cost of sales
   $ 1,166,155     $ 3,209,777     $ 38,936,894     $ -     $ 43,312,826  
Gross profit
   $ 11,167,372     $ 5,130,742     $ 6,210,898     $ -     $ 22,509,012  
Income from operations
   $ 7,839,219     $ 5,032,193     $ 5,510,614     $ (464,917 )   $ 17,917,109  
Depreciation & Amortization
   $ 43,391     $ 4,405     $ 13,941     $ -     $ 61,737  
Asset Expenditures
   $ 184,415     $ -     $ 8,021     $ -     $ 192,436  
Total assets
   $ 24,303,306     $ 7,402,560     $ 10,143,194     $ 7,576,620     $ 49,426,680  
   
Year Ended December 31, 2007
  
Sales, net
   $ 16,760,039     $ 2,383,129     $ 13,412,412     $ -     $ 32,555,580  
Cost of sales
   $ 8,048,074     $ 1,014,577     $ 11,548,126     $ -     $ 20,610,777  
Gross profit
   $ 8,711,965     $ 1,368,552     $ 1,864,286     $ -     $ 11,944,803  
Income from operations
   $ 7,170,695     $ 1,396,557     $ 1,582,597     $ (945,903 )   $ 9,203,946  
Depreciation & Amortization
   $ 65,161     $ 4,363     $ 12,550     $ -     $ 82,074  
Asset Expenditures
   $ 26,376     $ 2,513     $ 4,304     $ -     $ 33,193  
Total assets
   $ 17,797,460     $ 2,597,624     $ 6,549,078     $ 2,980,737     $ 29,924,899  

 
31
 
 
UNIVERSAL TRAVEL GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
(AUDITED)
 
Note 14 -   SUBSEQUENT EVENTS
 
On December 17, 2009, the company announced that it has entered into a Letter of Intent to acquire Huangshan Holiday Travel Service Company (“Huangshan Holiday”) for RMB 20 million (approximately $2.9 million), 80% of which shall be paid in cash and 20% in shares of common stock of the Company. The purchase consideration may be subject to adjustment after completion of due diligence on Huangshan Holiday by the Company. The Company has already deposited $1,173,502 toward the completion of this agreement, which is in acquisition deposits on the balance sheet as of December 31, 2009.
 
On January 19, 2010, the company announced that it has entered into a Letter of Intent to acquire Hebei Tianyuan Travel Agency (“Tianyuan”) for RMB 29 million (approximately $4.2 million), 80% of which shall be paid in cash and 20% of the consideration in shares of the Company’s common stock. The purchase consideration may be subject to adjustment after completion of acquisition audit on Tianyuan by the Company. The Company has already deposited $1,466,878 toward the completion of this agreement, which is in acquisition deposits on the balance sheet as of December 31, 2009.
 
On January 26, 2010, the company announced that it has entered into a Letter of Intent to acquire Zhengzhou Yulongkang Travel Service Company (“Zhengzhou Yulongkang”) for RMB 39 million (approximately $5.7 million), 90% of which to be paid in cash and 10% of the purchase consideration in shares of the Company’s common stock. The purchase consideration may be subject to adjustment after the completion of acquisition audit on Zhengzhou Yulongkang by the Company. The Company has already deposited $1,437,541 toward the completion of this agreement, which is in acquisition deposits on the balance sheet as of December 31, 2009.

 
32
 
 
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
 
None.
 
Item 9A. Controls and Procedures.
 
Evaluation of Disclosure Controls and Procedures

The Company maintains a set of disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in the reports filed under the Securities Exchange Act, is recorded, processed, summarized and reported within the time periods specified by the SEC's rules and forms. Disclosure controls are also designed with the objective of ensuring that this information is accumulated and communicated to the Company's management, including the Company's chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.
 
Pursuant to Rule 13a-15(b) under the Exchange Act, the Company carried out an evaluation with the participation of the Company’s management, including Jiangping Jiang, the Company’s chief executive officer, and Yizhao Zhang, the Company’s chief financial officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of the fiscal year ended December 31, 2009. Based upon that evaluation, the Company’s chief executive officer and chief financial officer concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Our chief executive officer and chief financial officer also concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports required to be filed or submitted under the Exchange Act is accumulated and communicated to the our management, including our chief executive officer and chief financial officer, to allow timely decisions regarding required disclosure.

Management’s Report on Internal Control over Financial Reporting

The Company’s management is responsible for establishing and maintaining adequate internal control over our financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act.   The Company’s management is also required to assess and report on the effectiveness of the Company’s internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”).    Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of the Company’s  financial reporting for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes policies and procedures that: (i) pertain to maintaining records that in reasonable detail accurately and fairly reflect the Company’s transactions; (ii) provide reasonable assurance that transactions are recorded as necessary for preparation of the Company’s financial statements and that receipts and expenditures of company assets are made in accordance with management authorization; and (iii) provide reasonable assurance that unauthorized acquisition, use or disposition of company assets that could have a material effect on our financial statements would be prevented or detected on a timely basis.

 
39
 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.

The Company’s management assessed the effectiveness of our internal control over financial reporting as of December 31, 2009. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework. This evaluation was conducted by Jiangping Jiang, the Company’s chief executive officer, and Yizhao Zhang, the Company’s chief financial officer. Based on its assessment, the Company’s management believes that, as of December 31, 2009, the Company’s internal control over financial reporting is not effective for the following reasons:

 
a. 
1.The Company’s policy documentation of all controls identified during its assessment and remediation process was incomplete.

 
b. 
2. Lack of technical accounting expertise among financial staff regarding US GAAP and the requirements of the PCAOB, and regarding preparation of financial statements.

We plan to take the following steps to remediate the significant deficiencies in internal control over financial reporting that are identified above.

 
a. 
1. Complete internal control documentation of all controls identified during the Company’s assessment and remediation process

 
b. 
2. Provide training to accounting staff on U.S. GAAP.

Our independent registered public accounting firm, Acquavella, Chiarelli, Shuster, Berkower & Co., LLP, who also audited our consolidated financial statements, independently assessed the effectiveness of our internal control over financial reporting as of December 31, 2009, as stated in their report which is included in this Annual Report on Form 10-K.

Changes in Internal Control over Financial Reporting

No changes in the Company's internal control over financial reporting have come to management's attention during the Company's last fiscal quarter that have materially affected, or are likely to materially affect, the Company's internal control over financial reporting.

Limitations on Controls

Management does not expect that the Company's disclosure controls and procedures or the Company's internal control over financial reporting will prevent or detect all error and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.  The Company's disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives and the Company's chief executive officer and chief financial officer have concluded that the Company's disclosure controls and procedures are effective at that reasonable assurance level.
 
Item 9B. Other Information.
 
None.

 
40
 

PART III
 
Item 10. Directors, Executive Officers and Corporate Governance.
 
The following are our officers and directors as of the date of this prospectus. All our officers and directors, except for Lawrence Lee, are residents of the PRC and, therefore, it may be difficult for investors to effect service of process within the U.S. upon them or to enforce judgments against them obtained from the U.S. courts.
 
The following table sets forth certain information concerning our directors and executive officers:
 
Directors and Executive Officers
  
Position/Title
  
Age
         
Jiangping Jiang
  
Chief Executive Officer, Chairman
  
48
         
Yizhao Zhang
  
Chief Financial Officer
  
40
         
Jing Xie
  
Secretary and a director
  
28
         
Hujie Gao
  
Vice President of Corporate Finance and a director
  
29
         
Jiduan Yuan
  
Director
  
65
         
Lizong Wang
  
Director
  
45
         
Liquan Wang
  
Director
  
38
         
Lawrence Lee
  
Director
  
45
 
The following is a summary of the biographical information of our directors and officers:
 
Jiangping Jiang, 48, has been serving as our Chairwoman and Chief Executive Officer since July 12, 2006. Prior to founding the Yu Zhi Lu Aviation Service Company, in 1998, Jiangping Jiang held positions in the airline industry and in government. From 1991 to 1998, she was the manager of Shenzhen International Airlines Agency. From 1982-1991, she served as a member of the Chongqing municipal government planning committee. From 1979 to 1982, she was employed by Chengdu airport.

Yizhao Zhang, 40, was appointed to serve as our chief financial officer on August 17, 2009. He joined us as our independent director and audit chairman on June 24, 2008. Mr. Zhang has over 13 years of experience in accounting and internal control, corporate finance, and portfolio management.  Previously, Mr. Zhang held senior positions in Energoup Holdings Corporation(OTC BB：ENHD), Shengtai Pharmaceutical Inc. (OTC BB:SGTI), Chinawe Asset Management Corporation (OTC BB: CHWE),  and China Natural Resources Incorporation (NASDAQ CM: CHNR). He is also an independent non-executive director of China Green Agriculture Inc. (NYSE: CGA), China Education Alliance, Inc. (NYSE: CEU) and Kaisa Holdings Group (HK: 1638), respectively. Previously Mr. Zhang had experiences in portfolio management and asset trading in Guangdong South Financial Services Corporation from 1993 to 1999.He is a certified public accountant of the state of Delaware, and a member of the American Institute of Certified Public Accountants (AICPA). Mr. Zhang graduated with a bachelor’s degree in economics from Fudan University, Shanghai in 1992 and received an MBA degree with financial analysis and accounting concentrations from the State University of New York at Buffalo in 2003. 

Jing Xie, 28, has been serving as our director and Secretary since December 29, 2006.  From March 2005 to December 29, 2006, he served as a Deputy General Manager of Shenzhen Yu Zhi Lu Aviation Service Company Limited. Mr. Xie has a Doctor of Business Administration from People's University of China; and he graduated from Economics & Business Faculty, University of Sydney, located in Sydney, Australia, with a Bachelor of Commerce degree, major in Accounting and E-Commerce in 2005. Mr.Xie is also a member of Association of Credited Chartered Accountants.

 
41
 

Hujie Gao, 29, has been our Vice President of Corporate Finance since 2005. From 2002 – 2005, he was a Senior General Accountant for Hubei Da Xin Accounting firm.  Mr. Gao is experienced in many different industries, having audited several Chinese public companies, including Shandong Yanfa Industry, Lu Neng Tai Shan Group, and etc.   Mr. Gao has a Bachelor of Economics from Wuhan University.

Jiduan Yuan, 65, is a postgraduate, senior economist and an expert with the China Civil Aviation. From 1965 to 1992 Mr. Yuan worked in the Guangzhou Civil Aviation Management Bureau, holding the positions of Transportation Service Director and Vice Chief Economist. From 1992 to 1999 he worked in the South Center Aviation Management Bureau, where his positions included Enterprise Management Director, Communist Committeeman and Vice President.

Lizong Wang, 45,  is an experienced strategic consultant with over 10 years of experience as an independent director for numerous companies, whose expertise encompasses leadership and advisory services to business and political organizations. Currently, he serves as an independent director of the Rui De Feng Agrochemical Company, Ltd. and 3NOD Co., Ltd., the first KOSDAQ Chinese company. Since 2001, he has also been serving as Secretary General of Guangdong High Tech Industry Chamber of Commerce, Deputy Secretary General of Guangdong Private Enterprise Cultural Association, and Deputy Secretary General of Shenzhen Tax Administration. In these positions, his responsibilities include providing information, financial consulting, fundraising techniques, and investment services to more than 6,000 members.

Liquan Wang, 38, has an MBA, is a Certified Public Accountant and Senior Partner of Shenzhen Hongxin CPA. Mr. Wang is an expert in General Financial Administration and building of complete and cost effective internal control systems. He has extensive executive experience in corporate strategy, budgeting and tax administration. From August 1994 to January 1999 he served as an accountant and vice head of the financial department at Liaoning Industrial Manufacture Projecting Co., Ltd. (Shanghai Stock Exchange: 600758). From February 1999 to April 2004 he served as financial manager of Shenzhen Guisu Enterprise Development Co., Ltd. (Shanghai Stock Exchange: 600722). From May 2004 to date Mr. Wang has been a Partner of Shenzhen Hongxin CPA.

Lawrence Lee, 45, was appointed as our independent director and new audit chair on August 17, 2009. Mr. Lee is currently the managing director of the Boardroom Advisors Company Limited, a financial advisory firm. Mr. Lee served as chief financial officer of Synutra International, Inc. a NASDAQ-listed company, from October 1, 2007 to November 15, 2009. From August 1, 2004 to September 30, 2007, Mr. Lee was vice president and chief financial officer of Kasen International Holdings Limited, a public company listed on the Hong Kong Stock Exchange. Prior to that, Mr. Lee served as chief financial officer at Eagle Brand Holdings Limited, a company listed on the Singapore Stock Exchange. Mr. Lee’s experience also includes serving as a financial controller at the Korean division of Exel Plc, and serving as a senior auditor at Waste Management Inc.’s international department in London. Mr. Lee is an fellow member of the Association of Chartered Certified Accountants (ACCA). Mr. Lee received a bachelor’s degree in management and engineering from Beijing Institute of Technology, a master’s degree in economics from Renmin University of China, and a master’s degree in accounting and finance from the London School of Economics.

The directors will serve until our next annual meeting, or until their successors are duly elected and qualified. The officers serve at the pleasure of the Board.
 
Save as otherwise reported above, none of our directors hold directorships in other reporting companies.
 
There are no family relationships among our directors or officers.

To our knowledge, during the last ten years, none of our directors and executive officers (including those of our subsidiaries) has:

 
42
 

 
●
Had a bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time.

 
●
Been convicted in a criminal proceeding or been subject to a pending criminal proceeding, excluding traffic violations and other minor offenses.

 
●
Been subject to any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities.
 
●
Been found by a court of competent jurisdiction (in a civil action), the SEC, or the Commodities Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended or vacated.

 
●
Been the subject to, or a party to, any sanction or order, not subsequently reverse, suspended or vacated, of any self-regulatory organization, any registered entity, or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.

Audit Committee and Audit Committee Financial Expert

Our board of directors established an audit committee in May 2007. The audit committee is responsible for (i) recommending independent accountants to the Board, (ii) reviewing our financial statements with management and the independent accountants, (iii) making an appraisal of our audit effort and the effectiveness of our financial policies and practices and (iv) consulting with management and our independent accountants with regard to the adequacy of internal accounting controls.    Our audit committee members are Lawrence Lee, Jiduan Yuan and Liquan Wang.

Our board of directors has determined that it has an "audit committee financial expert" as defined by Item 401(h) of Regulation S-K as promulgated by the Securities and Exchange Commission. Our audit committee financial expert is Lawrence Lee. The directors who serve on the audit committee are "independent" directors based on the definition of independence in the listing standards of the National Association of Securities Dealers. Our Board of Directors has adopted a written charter for the Audit Committee. The Charter is available on our website at http://cnutg.ir.stockpr.com/governance-documents.

Compensation Committee

Our board of directors established a compensation committee in June 2008.

The compensation committee of the board of directors is responsible for (i) determining the general compensation policies, (ii) establishing compensation plans, (iii) determining senior management compensation and (iv) administering our stock option plans. The members of the compensation committee currently are Jiduan Yuan, Lizong Wang and Liquan Wang with Liquan Wang as its chairman. The members of our compensation committee or their affiliates did not provide additional service to the Company or its affiliates in an amount in excess of $120,000 during the Company’s fiscal year ended December 31, 2009.

Our board of directors has adopted a written compensation committee charter.  The charter is available on our website at http://cnutg.ir.stockpr.com/governance-documents. The directors who serve on the compensation committee are "independent" directors based on the definition of independence in the listing standards of the National Association of Securities Dealers.

 
43
 

Nominating Committee

Our board of directors established a nominating committee in June 2008.  

The purpose of the nominating committee of the board of directors is to assist the board of directors in identifying and recruiting qualified individuals to become board members and select director nominees to be presented for board and/or stockholder approval. The nominating committee will be involved evaluating the desirability of and recommending to the board any changes in the size and composition of the board, evaluation of and successor planning for the chief executive officer and other executive officers.  The qualifications of any candidate for director will be subject to the same extensive general and specific criteria applicable to director candidates generally. The members of the nominating committee currently are Lizong Wang, Jiduan Yang and Liquan Wang and Lizong Wang is the chairman of the nominating committee.

The directors who serve on the nominating committee are "independent" directors based on the definition of independence in the listing standards of the National Association of Securities Dealers. The nominating committee has a written charter. The charter is available on our website at http://cnutg.ir.stockpr.com/governance-documents. The nominating committee will consider qualified director candidates recommended by stockholders if such recommendations for director are submitted in writing to our Secretary at Universal Travel Group, 5th Floor, South Block, Building 11, Shenzhen Software Park, Zhongke 2nd Road, Nanshan District, Shenzhen, People’s Republic of China 518000, provided such recommendation has been made in accordance with the relevant by-laws.

At this time, no additional specific procedures to propose a candidate for consideration by the nominating committee, nor any minimum criteria for consideration of a proposed nomination to the board, have been adopted.

Code of Ethics
 
We have adopted a code of ethics to apply to our principal executive officer, principal financial officer, principal accounting officer and controller, or persons performing similar functions. The Code of Ethics is currently available on our website.

The board and its committees held the following number of meetings during the fiscal year of 2009:
 
Board of Directors
     2  
Audit Committee
     2  
Compensation Committee
     3  
Nominating Committee
     3  

The meetings include meetings that were held by means of a conference telephone call, but do not include actions taken by unanimous written consent.  

Each director attended at least 75% of the total number of meetings of the board and those committees on which he served during the year.

Our non-management directors did not meet in executive session during 2009.

Board Leadership Structure and Role in Risk Oversight

Jiangping Jiang is our chairwoman and chief executive officer. Lawrence Lee, the chairman of audit committee, is our Lead independent director. The board’s role in the risk oversight of the Company includes, among other things:

 
•
appointing, retaining and overseeing the work of the independent auditors, including resolving disagreements between the management and the independent auditors relating to financial reporting;

 
44
 

 
•
approving all auditing and non-auditing services permitted to be performed by the independent auditors;

 
•
reviewing annually the independence and quality control procedures of the independent auditors;

 
•
reviewing and approving all proposed related party transactions;

 
•
discussing the annual audited financial statements with the management;

 
•
meeting separately with the independent auditors to discuss critical accounting policies, management letters, recommendations on internal controls, the auditor’s engagement letter and independence letter and other material written communications between the independent auditors and the management.

Compliance with Section 16(a) of Exchange Act

Section 16(a) of the Exchange Act requires our executive officers and directors and persons who own more than 10% of a registered class of our equity securities to file with the SEC initial statements of beneficial ownership, reports of changes in ownership and annual reports concerning their ownership of our common stock and other equity securities, on Form 3, 4 and 5 respectively. Executive officers, directors and greater than 10% shareholders are required by the SEC regulations to furnish our company with copies of all Section 16(a) reports they file.

Based solely on our review of the copies of such reports received by us and on written representations by our officers and directors regarding their compliance with the applicable reporting requirements under Section 16(a) of the Exchange Act, we believe that, with respect to the fiscal year ended December 31, 2009, our officers and directors, and all of the persons known to us to own more than 10% of our common stock, filed all required reports on a timely basis except Jiangping Jiang was late in filing a Form 4, Jing Xie was late in filing a Form 3, Liquan Wang was late in filing a Form 3, Jiduan Yuan was late in filing a Form 3, Lizong Wang was late in filing a Form 3, and Lawrence Lee was late in filing a Form 3.

Item 11. Executive Compensation.
 
The following table sets forth information with respect to the compensation of each of the named executive officers for services provided in all capacities to the Company and its subsidiaries in the fiscal years ended
December 31, 2009 and 2008 in their capacity as such officers.  Ms. Jiang who is also the Chairwoman and director of the Company receives  no additional compensation for her services in her capacity as director. No other executive officer or former executive officer received more than $100,000 in compensation in the fiscal years reported below.

Name and    
Principal
Position
  
Fiscal
Year
  
Salary ($)
    
Bonus ($)
    
Stock
Awards
($)
    
Option
Awards
($)
    
Non-equity
Incentive Plan
Compensation
($)
    
Change in
Pension
Value and
Nonqualified
Deferred
Compensation
Earnings ($)
    
All Other
Compensation
($)
    
Total ($)
  
Jiangping Jiang
  
2009
   $ 9,230     $ 1,411       —     $  796,048       —       —       —     $ 806,689  
Chief Executive Officer
  
2008
   $ 9,230     $ 1,411       —       —       —       —       —     $ 10,641  
(principal executive officer)
                                                                    
Hujie Gao
  
2009
   $ 5,384     $ 461       —     $  1,321       —       —       —     $ 7,166  
Vice President of Corporate Finance (1)
  
2008
   $ 5,384     $ 461       —       —       —       —       —     $ 5,845  
Jing Xie
  
2009
   $ 11,034     $ 849       —     $  3,961       —       —       —     $ 15,844  
Secretary and a director (principal financial officer) (1)(2)
  
2008
   $ 11,034     $ 849       —       —       —       —       —     $ 11,883  
Yizhao Zhang
  
2009
   $ 56,000     $ 0             $  172,201                             $ 228,201  
Chief Financial Officer (principal financial officer)(2)
  
2008
   $ 14,000     $ 0             $  38,594                             $ 52,594  

 
45
 

(1)
Mr. Jing Xie assumed the position of Chief Financial Officer with effect from February 17, 2009.
(2)
On August 17, 2009, Jing Xie resigned as our Chief Financial Officer. On the same date, our Board of Director appointed Yizhao Zhang to serve as our Chief Financial Officer with immediate effect.

Outstanding Equity Awards at 2009 Fiscal Year End

In January 2009, we adopted the Universal Travel Group 2009 Incentive Stock Plan.  On January 20, 2009, we issued options to purchases 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 at an exercise price of $2.70.  The term of each option was for 10 years.  The options vest in six annual equal installments. As part of this equity incentive plan, the Company registered with the SEC 2,200,000 shares of its common stock, at a proposed maximum offering price of $2.67 per share. None of these equity awards were outstanding and no other equity awards were issued as of the fiscal year ended December 31, 2009.
 
Employment Agreements
 
Mr. Zhang’s compensation as our Chief Financial Officer is set forth in an employment agreement between Mr. Zhang and us dated August 17, 2009.  Under that agreement, Mr. Zhang  will receive an annual salary of $80,000 and an option to purchase 105,000 shares of common stock of Company at an exercise price equivalent to the closing price per share of common stock on the date of the grant, which option shall vest in one-third installments over three years.  As an additional incentive to Mr. Zhang, we have agreed that all his options to purchase 100,000 pre-reverse split shares of the Company (33,334 post reverse split) granted to him as compensation for being a director of the Company shall become immediately exerciseable provided always that he shall still serve in the position of Chief Financial Officer of the Company at the time of exercise of this option. Either party may terminate the employment by giving no less than 30 days’ notice.  Mr. Zhang shall also be entitled to medical, health and dental insurance.

Our former Chief Financial Officer, Mr. Jing Xie’s appointment as our Chief Financial Officer is set forth in an employment agreement between Mr. Xie and us dated February 17, 2009.  Under that agreement, Mr. Xie was to receive compensation consisting of the following: (i) an annual salary of $30,000, (ii) eligibility to receive bonus compensation and stock options or other equity-based incentives as the discretion of the compensation committee of the Board of Directors, and (iii) medical and dental insurance, (iv)social insurance.

Apart from the abovementioned, there are no current employment agreements between the Company and its executive officers. Our executive officers have agreed to work without remuneration until such time as we receive sufficient revenues necessary to provide proper salaries to the officer and compensate the director for participation.

 
46
 

Compensation Discussion and Analysis

We strive to provide our named executive officers (as defined in Item 402 of Regulation S-K) with a competitive base salary that is in line with their roles and responsibilities when compared to peer companies of comparable size in similar locations.

It is not uncommon for PRC private companies in the PRC to have base salaries as the sole form of compensation. The base salary level is established and reviewed based on the level of responsibilities, the experience and tenure of the individual and the current and potential contributions of the individual. The base salary is compared to the list of similar positions within comparable peer companies and consideration is given to the executive’s relative experience in his or her position.  Base salaries are reviewed periodically and at the time of promotion or other changes in responsibilities.

We plan to implement a more comprehensive compensation program, which takes into account other elements of compensation, including, without limitation, short and long term compensation, cash and non-cash, and other equity-based compensation such as stock options. We expect that this compensation program will be comparable to the programs of our peer companies and aimed to retain and attract talented individuals.

Director Compensation

On January 20, 2009, Mr. Jiduan Yuan and Mr. Lizong Wang were each granted options to purchase 33,333 shares of our common stock and Mr Liquan Wang was granted options to purchase 10,000 shares of our common stock under the Universal Travel Group 2009 Incentive Stock Plan.  The options have an exercise price of $2.70 and a term of 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 rateably, (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 rateably 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 options rateably. 

On August 17, 2009, Mr. Yizhao Zhang resigned as our director. Mr. Yizhao Zhang’s compensation as director of the Company is set forth in an appointment letter with the Company dated June 24, 2008, pursuant to which he was paid a monthly fee of $2,000. He had also been granted options to purchase a total of 33,333 shares of common stock of the Company, par value $0.001 at $4.56 per share. Options to purchase 11,111 shares may be exercised immediately, options to purchase an additional 11,111 shares may be exercised commencing July 1, 2009, and options to purchase the remaining 11,111 shares may be exercised commencing July 1, 2010, provided that in the case of the options to vest in 2009 and 2010 Mr. Zhang was still a director of or otherwise engaged by the Company. The options may be exercised until July 1, 2018.

On August 17, 2009, Mr. Lawrence Lee was appointed as our director. Mr. Lawrence Lee’s compensation as director of the Company is set forth in an appointment letter with the Company dated August 17, 2009. He will be paid a monthly fee of $2,000. He will also be granted an option to purchase 10,000 shares of common stock of Company at an exercise price equivalent to the closing price per share of common stock on the date of the grant. Such option shall be exercisable one year from the date of grant and may be exercised until August 2019, provided that Mr. Lee was still a director of or otherwise engaged by the Company.

The following table sets forth a summary of compensation paid to our directors in their capacity as directors during the fiscal year ended December 31, 2009:

 
47
 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.
 
The following table sets forth certain information with respect to the beneficial ownership of our voting securities by (i) any person or group owning more than 5% of any class of voting securities, (ii) each director, (iii) our chief executive officer  and (iv) all executive officers and directors as a group as of  March 2, 2010.

Title of Class
  
Name and Address of
Beneficial Owner
  
Amount and Nature of
Beneficial Ownership
(1)
    
Percentage of Common
Stock (1)
  
                 
Owner of More than 5% of Class
                
                 
Common Stock
  
FMR LLC
82 Devonshire Street, Boston, Massachusetts 02109
     2,244,117 (2)     13.43 %
                     
Directors and Executive Officers
                    
                     
Common Stock
  
Jiangping Jiang
 
5th Floor, South Block, Building 11, Shenzhen Software Park, Zhongke 2nd Road, Nanshan District, Shenzhen, People’s Republic of China 518000
     4,498,246 (3)     26.91 %
                     
Common Stock
  
Yizhao Zhang
 
5th Floor, South Block, Building 11, Shenzhen Software Park, Zhongke 2nd Road, Nanshan District, Shenzhen, People’s Republic of China 518000
     23,334 (4)     *  
                     
Common Stock
  
Jing Xie
 
5th Floor, South Block, Building 11, Shenzhen Software Park, Zhongke 2nd Road, Nanshan District, Shenzhen, People’s Republic of China 518000
     5,482 (5)     *  
                     
Common Stock
  
Hujie Gao
 
5th Floor, South Block, Building 11, Shenzhen Software Park, Zhongke 2nd Road, Nanshan District, Shenzhen, People’s Republic of China 518000
     1,541 (6)     *  
                     
Common Stock
  
Jiduan Yuan
 
5th Floor, South Block, Building 11, Shenzhen Software Park, Zhongke 2nd Road, Nanshan District, Shenzhen, People’s Republic of China 518000
     9,137 (7)     *  
                     
Common Stock
  
Lizong Wang
 
5th Floor, South Block, Building 11, Shenzhen Software Park, Zhongke 2nd Road, Nanshan District, Shenzhen, People’s Republic of China 518000
     9,137 (8)     *  
                     
Common Stock
  
Liquan Wang
 
5th Floor, South Block, Building 11, Shenzhen Software Park, Zhongke 2nd Road, Nanshan District, Shenzhen, People’s Republic of China 518000
     2,741 (9)     *  
                     
Common Stock
  
Lawrence Lee
9784 Athletic Way
Gaithersburg, MD20878
     0 (10)     *  
                     
   
Officers and Directors as a group
     4,550,818       27.23 %

 
48
 

*Represents less than 1%
 
(1) In determining beneficial ownership of our common stock as of a given date, the number of shares shown includes shares of common stock which may be acquired on exercise of warrants or options or conversion of convertible securities within 60 days of that date. In determining the percent of common stock owned by a person or entity on February 24, 2010, (a) the numerator is the number of shares of the class beneficially owned by such person or entity, including shares which may be acquired within 60 days on exercise of warrants or options and conversion of convertible securities, and (b) the denominator is the sum of (i) the total shares of common stock outstanding on February 24, 2010 (16,714,457), and (ii) the total number of shares that the beneficial owner may acquire upon conversion of the preferred and on exercise of the warrants and options. Unless otherwise stated, each beneficial owner has sole power to vote and dispose of its shares.

(2) With respect to information relating to FMR LLC, the Company has relied on information supplied by such entity and Edward C. Johnson 3d on an amended Schedule 13G filed with the SEC on February 16, 2010. According to such amended Schedule 13G, FMR LLC and Edward C. Johnson 3d may be deemed to beneficially own 2,244,117 shares of the Company’s common stock, each with the sole power to dispose or to direct the disposition of 2,244,117 shares of the Company’s common stock and sole power to vote or to direct the vote of 843,409 shares of the Company’s common stock. FMR LLC may be deemed to beneficially own such shares of the Company’s common stock through FMR LLC’s subsidiaries and affiliated entities that serve as investment advisors and/or investment managers to various investment companies or institutional accounts. Members of the family of Edward C. Johnson 3d, the Chairman of FMR LLC, are the predominant owners of FMR LLC.

(3) The shares reflected as beneficially owned by Jiangping Jiang represents (i) 4,000,000 shares of common stock held by Jiangping Jiang and (ii) 498,246 shares of common stock acquired upon her cashless exercise of certain options. Jiangping Jiang was issued an option to purchase the 2,000,000 shares of the Company’s common stock pursuant to the Company's 2009 Incentive Stock Plan and the Incentive Stock Option Agreement dated as of January 20, 2009. The option shall become exercisable during the term of the Jiangping Jiang's employment in six (6) equal annual installments of 333,333 shares each (save for the last installment of 333,335 Shares), the first installment to be exercisable on the first anniversary of the date of this option, with additional installments becoming exercisable on each of the successive periods following the initial vesting date; provided, however, that this vesting schedule shall be subject to the acceleration provisions described  in footnote 11 below. On October 15, 2009, Jiangping Jiang received 498,246 shares of common stock upon the cashless exercise of her option to purchase 666,666 shares of common stock.

(4) On October 15, 2009, Yizhao Zhang received 23,334 shares of common stock upon cashless exercise of his options to purchase 33,334 shares granted to him as compensation for being a director of the Company. Following the exercise, Yizhao Zhang continues to hold an option to purchase 105,000 shares of common stock granted to him as chief financial officer at an exercise price of $8.82, which option shall vest in one-third installments over three years.

(5)Jing Xie was issued an option to purchase the 20,000 shares of the Company’s common stock pursuant to the Company's 2009 Incentive Stock Plan and the Incentive Stock Option Agreement dated as of January 20, 2009. The option shall become exercisable during the term of the Jing Xie’s employment in six (6) equal annual installments of 3,333 shares each (save for the last installment of 3,335 Shares), the first installment to be exercisable on the first anniversary of the date of this option, with additional installments becoming exercisable on each of the successive periods following the initial vesting date; provided, however, that this vesting schedule shall be subject to the acceleration provisions described  in footnote 11 below. On October 15, 2009, Jing Xie received 5,482 shares of common stock upon the cashless exercise of her option to purchase 6,666 shares of common stock.

(6)Hujie Gao was issued an option to purchase the 10,000 shares of the Company’s common stock pursuant to the Company's 2009 Incentive Stock Plan and the Incentive Stock Option Agreement dated as of January 20, 2009. The option shall become exercisable during the term of the Hujie Gao’s employment in six (6) equal annual installments of 1,666 shares each (save for the last installment of 1,670 Shares), the first installment to be exercisable on the first anniversary of the date of this option, with additional installments becoming exercisable on each of the successive periods following the initial vesting date; provided, however, that this vesting schedule shall be subject to the acceleration provisions described  in footnote 11 below. On October 15, 2009, Hujie Gao received 2,741 shares of common stock upon the cashless exercise of his option to purchase 3,333 shares of common stock.

 
49
 

(7)Jiduan Yuan was issued an option to purchase the 33,333 shares of the Company’s common stock pursuant to the Company's 2009 Incentive Stock Plan and the Incentive Stock Option Agreement dated as of January 20, 2009. The option shall become exercisable during the term of the Jiduan Yuan's employment in six (6) equal annual installments of 5,555 shares each (save for the last installment of 5,558 Shares), the first installment to be exercisable on the first anniversary of the date of this option, with additional installments becoming exercisable on each of the successive periods following the initial vesting date; provided, however, that this vesting schedule shall be subject to the acceleration provisions described  in footnote 11 below. On October 15, 2009, Jiduan Yuan received 9,137 shares of common stock upon the cashless exercise of his option to purchase 11,111 shares of common stock.

(8)Lizong Wang was issued an option to purchase the 33,333 shares of the Company’s common stock pursuant to the Company's 2009 Incentive Stock Plan and the Incentive Stock Option Agreement dated as of January 20, 2009. The option shall become exercisable during the term of the Lizong Wang’s employment in six (6) equal annual installments of 5,555 shares each (save for the last installment of 5,558 Shares), the first installment to be exercisable on the first anniversary of the date of this option, with additional installments becoming exercisable on each of the successive periods following the initial vesting date; provided, however, that this vesting schedule shall be subject to the acceleration provisions described  in footnote 11 below. On October 15, 2009, Lizong Wang received 9,137 shares of common stock upon the cashless exercise of his option to purchase 11,111 shares of common stock.

(9)Liquan Wang was issued an option to purchase the 10,000 shares of the Company’s common stock pursuant to the Company's 2009 Incentive Stock Plan and the Incentive Stock Option Agreement dated as of January 20, 2009. The option shall become exercisable during the term of the Liquan Wang’s employment in six (6) equal annual installments of 1,666 shares each (save for the last installment of 1,670 Shares), the first installment to be exercisable on the first anniversary of the date of this option, with additional installments becoming exercisable on each of the successive periods following the initial vesting date; provided, however, that this vesting schedule shall be subject to the acceleration provisions described  in footnote 11 below. On October 15, 2009, Liquan Wang received 2,741 shares of common stock upon the cashless exercise of his option to purchase 3,333 shares of common stock.

(10)On August 17, 2009, Lawrence Lee was appointed a director of the Company. Pursuant to an appointment letter between the Company and Lawrence Lee, on September 1, 2009, Lawrence Lee was granted an option to purchase 10,000 shares of common stock at an exercise price equivalent to the closing price per share of common stock on the date of the grant, which option shall be exercisable one year from the date of grant.

(11) The terms of exercise for the options issued on January 20, 2009 are subject to the following acceleration provisions: in the event (i) the Company reports an after tax Net Income (as that term is defined in Securities Purchase Agreement dated August 29, 2008, entered into by and among the Company and certain investors, of $14,000,000 in its Annual Report on Form 10-K for its fiscal year 2008, then one third of the shares underlying the option shall vest and become immediately exercisable, (ii) the Company reports an after tax Net Income of $18,000,000 for its fiscal year 2009, then another one third of the shares underlying the option shall vest and become immediately exercisable and (iii) the Company reports an after tax Net Income of $22,000,000 for its fiscal year 2010, then the remainder of the shares underlying the option shall vest and become immediately exercisable.

Item 13. Certain Relationships and Related Transactions, and Director Independence.
 
Except for the ownership of our securities, none of the directors, executive officers, holders of more than five percent of the Company’s outstanding common stock, or any member of the immediate family of any such person have, to our knowledge, had a material interest, direct or indirect, in any transaction occurred in the fiscal year of 2009 or proposed transaction which may materially affect the Company.

 
50
 

Director Independence

Our directors Liquan Wang, Jiduan Yuan, Lizong Wang, and Lawrence Lee qualify as independent directors under the NYSE corporate governance rules.

Item 14. Principal Accounting Fees and Services.
 
On June 30, 2009, our prior independent registered public accounting firm, Morgenstern, Svoboda & Baer CPA (“Morgenstern”) resigned and on the same day, we appointed Acqavella, Chiarelli, Shuster, Berkower & Co., LLP (“ACSB”) as our new independent registered public accounting firm.

Our Audit Committee annually reviews the audit and permissible non-audit services performed by our principal accounting firm and reviews and approves the fees charged by our principal accounting firm. Our Audit Committee has considered the role of Morgenstern, Svoboda, & Baer in providing tax and audit services and other permissible non-audit services to us and has concluded that the provision of such services, if any, was compatible with the maintenance of such firm's independence in the conduct of its auditing functions.

During fiscal years 2008 and 2009, the aggregate fees which we paid to or were billed by Morgenstern and ACSB for professional services were as follows:

   
Fiscal year ended December 31,
        
   
2008
    
2009
    
2009
  
   
Morgenstern
    
Morgenstern
    
ACSB
  
                   
Audit fees
   $ 161,000     $ 0     $ 120,000  
Audit-related fees
   $ 0     $ 56,000     $ 28,000  
Tax fees
   $ 0     $ 0     $ 7,000  
All other fees
   $ 0     $ 0     $ 0  

 
51
 

PART IV
 
Item 15. Exhibits, Financial Statement Schedules.
 
Exhibit 
Footnote
  
Exhibit No. 
  
Description
(1)
  
2.1
  
Agreement and Plan of Merger between TAM of Henderson, Inc. and the Company.
(2)
  
3.1
  
Articles of Incorporation
(3)
  
3.2
  
By-laws
(4)
  
3.3
  
Articles of Merger between TAM of Henderson, Inc. and Company
(5)
  
3.4
  
Amended and Restated Articles of Incorporation, changing our name from Tam of Henderson, Inc. to Universal Travel Group
(6)
  
4.1
  
Universal Travel Group 2009 Incentive Stock Plan
(7)
  
10.1
  
Termination Agreement between Xiangsheng Song, Shenzhen Speedy Dragon Enterprise Limited and Universal Travel Group dated June 12, 2009.
(8)
  
10.2
  
Waiver Agreement dated July 20, 2009 between Company and its investors under that certain Securities Purchase Agreement dated August 28, 2008.
(9)
  
10.3
  
Make Good Securities Escrow Supplement Agreement dated August 10, 2009 between Company and its investors under that certain Securities Purchase Agreement dated August 28, 2008.
(10)
  
10.4
  
Agreement to Amend Warrants dated August 10, 2009 between Company and its investors under that certain Securities Purchase Agreement dated August 28, 2008.
(11)
  
10.5
  
Form of Subscription Agreement between Company and its investors dated December 10, 2009.
(12)
  
10.6
  
Form of Subscription Agreement between Company and its investors dated December 10, 2009.
(13)
  
10.7
  
Placement Agent Agreement between Company and Brean Murray, Carret & Co., LLC dated December 10, 2009.
 
  
21.1
  
List of Subsidiaries
   
31.1
  
Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
31.2
  
Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
32.1
  
Certification of the Principal Executive Officer pursuant to U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   
32.2
  
Certification of the Principal Financial Officer pursuant to U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(1)
Incorporated herein by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on March 20, 2006.

(2)
Incorporated herein by reference to Exhibit 3.1 to the Company’s Registration Statement on Form 10SB12G filed on September 6, 2005.

(3)
Incorporated herein by reference to Exhibit 3.2 to the Company’s Registration Statement on Form 10SB12G filed on September 6, 2005.

(4)
Incorporated herein by reference to Exhibit 3.3 to the Company’s Current Report on Form 8-K filed on March 27, 2006.

(5)
Incorporated herein by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on August 23, 2006.

 
52
 

(6)
Incorporated herein by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-8 (No. 333-156804) declared effective on January 20, 2009.

(7)
Incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on June 17, 2009.

(8)
Incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on July 21, 2009.

(9)
Incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on August 10, 2009.

(10)
Incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on August 10, 2009.

(11)
Incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on December 16, 2009.

(12)
Incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on December 16, 2009.

(13)
Incorporated herein by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on December 16, 2009.

 
53
 

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

   
UNIVERSAL TRAVEL GROUP
     
 
By:
/s/Jiangping Jiang
  
   
Jiangping Jiang
 
Chief Executive Officer (principal executive officer)
 
Date:
   
 
By:
/s/Yizhao Zhang
  
   
Yizhao Zhang
 
Chief Financial Officer (principal accounting and financial officer)
 
Date:

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Name and Title
  
Date
     
/s/Jiangping Jiang
  
March 5, 2010
By: Jiangping Jiang
    
Chief Executive Officer and Director
    
(principal executive officer)
    
     
/s/Yizhao Zhang
  
March 5, 2010
By:  Yizhao Zhang
    
Chief Financial Officer (principal accounting and
financial officer)
    
     
/s/Jing Xie
  
March 5, 2010
By: Jing Xie
    
Secretary and a director
    
     
/s/Hujie Gao
  
March 5, 2010
By: Hujie Gao
    
Vice President of Corporate Finance and a director
    
     
/s/Liquan Wang
  
March 5, 2010
By: Liquan Wang
    
Director
    
     
/s/Jiduan Yuan
  
March 5, 2010
By: Jiduan Yuan
    
Director
    

 
54
 

/s/Lizong Wang
  
March 5, 2010
By: Lizong Wang
    
Director
    
     
/s/Lawrence Lee
  
March 5, 2010
By: Lawrence Lee
    
Director
    

 
55