Thursday, September 23, 2010

Further down the rabbit hole with Universal Travel Group: related party transactions edition

I don’t spend nearly enough time reading SEC Proxy Statements.  Proxies are the bread-and-butter of serious readers of SEC Statements (such as Michelle Leder’s excellent Footnoted).  But in the Universal Travel case I have had some fun with proxies.

The proxy is supposed to detail all the ways in which executives are remunerated and all the related party transactions.  Here is a link to the latest proxy from UTA.  This was filed on the 3rd of September and contained the following statement per related party transactions:

TRANSACTIONS WITH RELATED PERSONS, PROMOTERS AND CERTAIN CONTROL PERSONS

Related parties can include any of our directors or executive officers, certain of our stockholders and their immediate family members. A conflict of interest occurs when an individual’s private interest interferes, or appears to interfere, in any way with the interests of the company as a whole. Our code of ethics establishes requirements of our officers regarding conflicts of interest. Any violation of our code of ethics must be reported to the Company’s chief operating officer or any member of the Company’s Board.

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 or proposed transaction, since the beginning of 2009, in which the Company was or is to be a participant and the amount involved exceeds $120,000.

That is as you would expect to see it.  There are no related party transactions of any size which is kind of important because the company recently raised $20 million in cold-hard-cash (in a secondary offering) to do acquisitions. 

Alas the latest quarterly filing (10Q) which was filed  on the 24th of August (that is 10 days earlier) lists in the balance sheet as an asset $6,986,717 which is “due from a related party”.  Obviously I wanted to know which related party owed the company nearly $7 million and for what purpose.  This is the main disclosure in the 10Q as to what that related transaction is for:

Note 5 – RELATED PARTY TRANSACTIONS

As of June 30, 2010, Due from related party account has balance of $6.99 million, which was an advance for cash payment of two acquisitions in June. The payments were paid by corporate account on June 28, 2010 and the related party returned the same amount on August 10, 2010.

This leaves lots unanswered and I do not feel happy to speculate as to why these transactions exist.  However here are a bunch of questions for management.  I have forwarded these questions and have received no reply. 

1.  What acquisition is this balance for?

2.  Was this one of the acquisitions for which capital was raised by a secondary offer earlier this year?

3.  Why did a related party receive a cash advance for this acquisition?  Was this acquisition made from a related party?

4.  Why was this relationship not disclosed in either the proxy or the documents for raising the above-mentioned $20 million?

5.  Was there any consideration of charging interest on the cash owed by the related party?

6.  Was any collateral taken from the related party?

7.  Were there also shares paid to a related party?

8.  If so have those shares been registered?  Are they being sold into the market?

If they answer I promise to report on the blog.

 

 

John

4 comments:

Ted K said...

John, I swear to God you're cracking me up with this stuff. I mean I'm not saying you're wrong in general on this, but you are AWARE this company is in China right??? You think they will send a nice English answer back to an American who seems to be shorting their stock about what the situation is??? This will happen about the same time they accept their 15th apology from Japan for the atrocities of WWII. Don't worry, they'll also send you a Christmas card from the Communist Party Secretary of the province. It will start something like this:

"Dear American imperialist, in China truth is funny thing.... "

John Hempton said...

It is funny I know. But hey - I am enjoying myself. Boys just wanna have fun!

John

Michelle Leder said...

Thanks, John, for saying such nice things about footnoted. I enjoy your site a lot, too!

Alex said...

Hi, John. I agree with you with the whole UTA being shady thing. However, aren't you worried that you will be sued for defamation? I'm sure UTA have enough to press legal actions....

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