UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2005
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 - None
NEW TAOHUAYUAN CULTURE TOURISM CO., LTD.
Nevada 98-0440893
State or other jurisdiction of incorporation (I.R.S.) Employer Identification
No.
1# Dongfeng Road
Xi'an Weiyang Tourism Development District
Xi'an, China
---------------------------------------
Address of principal executive offices
0086-29-86671555
----------------------------------------------
Registrant's telephone number, including area code
N/A
Former address of principal executive offices
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) had been subject to such filing
requirements for the past 90 days.
Yes No X
--------------- ---------
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act):
Yes No __X___
--------------- -
As of November 15, 2005 the Company had 17,027,328 outstanding shares of
common stock.
New Taohuayuan Culture Tourism Company Limited
Condensed Consolidated Statements of Operations
- --------------------------------------------------------------------------------
(Unaudited) (Unaudited)
Three months ended Nine months ended
September 30, September 30,
---------------------- ----------------------
2005 2004 2005 2004
---- ---- ---- ----
Note US$ US$ US$ US$
--- --- --- ---
Operating revenues
Catering services income 714,318 729,142 1,771,458 1,793,484
Hotel and related services
income 352,835 300,832 1,114,386 1,124,033
Management fee income 5(c) 314,709 351,894 1,040,512 1,050,843
---------- ----------- ---------- ----------
1,381,862 1,381,868 3,926,356 3,968,360
---------- ----------- ---------- ----------
Operating expenses
Depreciation 132,178 124,200 380,194 376,357
Raw materials and
consumables used 247,178 246,206 656,979 670,213
Salaries, wages and
allowances 85,099 68,728 245,991 215,464
General and administrative
expenses 126,178 161,856 358,596 329,825
Other taxes 136,576 81,857 282,900 289,478
---------- ----------- ---------- ----------
Total operating expenses 727,209 682,847 1,924,660 1,881,337
---------- ----------- ---------- ----------
Income from operations 654,653 699,021 2,001,696 2,087,023
- ---------------------- ---------- ----------- ---------- ----------
Non-operating income (expense)
Interest income 607 239 815 875
Sundry income (expense) 7,958 (37,254) 17,504 18,866
Surcharge on taxes 7(b) (342,249) (362,706) (884,570) (767,472)
---------- ----------- ---------- ----------
(333,684) (399,991) (866,251) (747,731)
---------- ----------- ---------- ----------
Income before income tax 320,969 299,030 1,135,445 1,339,292
Income tax 4 (268,030) (281,779) (673,223) (690,899)
---------- ----------- ---------- ----------
Net income 52,939 17,251 462,222 648,393
Other comprehensive income
Foreign currency
translation adjustments 338,553 - 338,553 -
---------- ----------- ---------- ----------
391,492 17,251 800,775 648,393
========== =========== ========== ==========
Earnings per share
- - Basic 0.02 0.00 0.05 0.04
- - Diluted 0.02 0.00 0.05 0.04
========== =========== ========== ==========
The financial statements should be read in conjunction with the accompanying
notes.
1
New Taohuayuan Culture Tourism Company Limited
- --------------------------------------------------------------------------------
Condensed Consolidated Balance Sheets
(Unaudited) (Audited)
As of As of
September 30, December 31,
2005 2004
ASSETS Note US$ US$
Current assets
Bank balances and cash 37,189 93,294
Trade receivables 38,560 31,027
Prepayments and other debtors 47,447 12,416
Inventories 49,624 44,861
------ ------
Due from related parties 5(b) 575,221 305,123
---- ------------- --------------
Total current assets 748,041 486,721
Property, plant and equipment, net 9,039,776 9,205,203
Prepayments 6 14,150,067 11,612,856
Deferred tax assets 634,951 492,758
------------- --------------
Total assets 24,572,835 21,797,538
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Trade payables 150,197 174,251
Accrued charges and other creditors 564,853 616,955
Deposits 63,327 66,932
Income tax payable 4,530,475 3,630,035
Other taxes payable 1,559,142 1,322,617
Surcharge on taxes payable 7(b) 2,775,460 1,832,741
Dividend payable 91 25,492
------------- --------------
Total current liabilities 9,643,545 7,669,023
------------- --------------
Commitments and contingencies 7
Stockholders' equity
Preferred stock, par value of US$0.001
10,000,000 shares of stock
authorized,
none issued and outstanding
Common stock, par value of US$0.001 50,000,000 shares of stock authorized,
17,027,328 shares of stock issued and
outstanding 17,027 17,027
Additional paid-in capital 14,922,428 14,922,428
Statutory reserves 1,271,817 1,271,817
Cumulative translation adjustments 338,553 -
Accumulated losses (1,620,535) (2,082,757)
------------- --------------
Total stockholders' equity 14,929,290 14,128,515
------------- --------------
Total liabilities and stockholders'
equity 24,572,835 21,797,538
============= ==============
The financial statements should be read in conjunction with the accompanying
notes.
2
New Taohuayuan Culture Tourism Company Limited
Condensed Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
(Unaudited)
Nine months ended
September 30,
--------------------------
2005 2004
US$ US$
Cash flows from operating activities:
Net income 462,222 648,393
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 380,194 376,357
Loss on disposal of property, plant and equipment - 48,219
Exchange differences 14,438 -
Changes in working capital:
Trade receivables (6,807) (10,231)
Prepayments and other debtors (34,740) (524,359)
Inventories (3,714) 13,132
Due from related parties (262,959) 991,971
Trade payables (28,132) 8,593
Accrued charges and other creditors (66,537) (17,924)
Deposits (5,170) 24,983
Income tax payable 815,505 820,924
Other taxes payable 205,579 577,977
Surcharge on taxes 899,837 767,472
Deferred tax assets (130,664) (130,025)
----------- ------------
Net cash provided by operating activities 2,239,052 3,595,482
----------- ------------
Cash flows from investing activities:
Purchase of property, plant and equipment (5,846) (12,011)
Prepayments (2,265,496) (1,935,476)
Net cash used in investing activities (2,271,342) (1,947,487)
----------- ------------
Cash flows from financing activities:
Dividend paid (25,998) (1,688,801)
----------- ------------
Net decrease in cash and cash equivalents (58,288) (40,806)
Cash and cash equivalents at beginning of period 93,294 407,611
Effect on exchange rate changes 2,183 -
----------- ------------
Cash and cash equivalents at end of period,
represented by bank balances and cash 37,189 366,805
=========== ============
The financial statements should be read in conjunction with the accompanying
notes.
3
New Taohuayuan Culture Tourism Company Limited
Notes to the Condensed Consolidated Financial Statements
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the nine month period ended September 30, 2005 are
not necessarily indicative of the results that may be expected for the
year ending December 31, 2005.
The balance sheet at December 31, 2004 have been derived from the audited
financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. These financial statements
should be read in conjunction with the consolidated financial statements
for the year ended December 31, 2004 included in the Company's Form SB-2
filed on November 14, 2005.
2. ORGANIZATION AND PRINCIPAL ACTIVITIES
New Taohuayuan Culture Tourism Company Limited ("New Tao") was
incorporated under the laws of the state of Nevada on November 3, 2004.
New Tao has had no operations since incorporation.
Shaanxi New Taohuayuan Culture Tourism Company Limited ("Shaanxi THY")
was incorporated in the People's Republic of China (the "PRC") on August
3, 1997 with limited liability. It principally operates a resort in Xian,
the PRC, providing catering, hotel and related services.
Pursuant to an agreement and plan of migratory merger entered into between
New Tao and Shaanxi THY (on behalf of the original stockholders of Shaanxi
THY) on November 5, 2004, New Tao consummated an acquisition of Shaanxi
THY by issuing 17,027,328 shares of common stock of New Tao, par value of
US$0.001, to the original stockholders of Shaanxi THY in exchange for
their interests in Shaanxi THY (the "Transaction"). As a result, the
controlling stockholder of Shaanxi THY has actual or effective operating
control of New Tao and Shaanxi THY (collectively referred to as the
"Company") after the Transaction. The Transaction was approved by the
Shaanxi Ministry of Commerce on November 24, 2004. Since then, Shaanxi THY
has become a wholly owned subsidiary of New Tao and its status has changed
to a wholly foreign owned enterprise with the company name changed to NTHY
4
New Taohuayuan Culture Tourism Company Limited
Notes to the Condensed Consolidated Financial Statements
- --------------------------------------------------------------------------------
2. ORGANIZATION AND PRINCIPAL ACTIVITIES (CONTINUED)
Since New Tao has had no operations or net assets, the Transaction was
considered to be a capital transaction in substance, rather than a
business combination and no goodwill was recognized. For financial
reporting purposes, the Transaction has been treated as a reverse
acquisition whereby Shaanxi THY is considered to be the accounting
survivor and the operating entity while New Tao is considered to be the
legal survivor. On that basis, the historical financial information
presented in these financial statements, although labeled as those of New
Tao, represent those of Shaanxi THY. The historical stockholders' equity
accounts of the Company have been retroactively restated to reflect the
issuance of the 17,027,328 shares of common stock for the Transaction
since the beginning of the periods presented, i.e. as of January 1, 2004.
The difference between the par value of shares of New Tao issued for the
Transaction and the par value of shares of Shaanxi THY is recorded as
additional paid-in capital.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of accounting
The financial statements have been prepared in accordance with generally
accepted accounting principles in the United States of America.
Preparation of financial statements
The Company had negative working capital of US$8,568,113 and US$7,182,302
as of September 30, 2005 and December 31, 2004 respectively. This raised
substantial doubt about the Company's ability to continue as a going
concern. The negative working capital mainly arises from the provision for
income and other taxes and related surcharge as discussed in note 7(b) to
the financial statements. Management believes that the Company will be
able to negotiate a settlement in installments with the PRC tax authority
if the PRC tax authority demands payment. In addition, since the Company
has generated profits and positive operating cash flows, management is
confident that the Company will be able to settle other liabilities by
internally generated funds from operations. Therefore, the Company will
have sufficient funds to settle its liabilities when they become due. As a
result, the financial statements have been prepared in conformity with the
principles applicable to a going concern.
Revenue recognition
The Company generally recognizes catering, hotel and related service
revenues when persuasive evidence of an arrangement exists, services are
rendered, the fee is fixed or determinable, and collectibility is
probable. Such service revenues are recognized net of discounts.
Management fee income is recognised when services are rendered in
accordance with the agreements (see note 5(c)(i)).
5
New Taohuayuan Culture Tourism Company Limited
Notes to the Condensed Consolidated Financial Statements
- --------------------------------------------------------------------------------
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income and other taxes
Provision for income and other taxes has been made in accordance with the
tax rates and laws in effect in the PRC.
Deferred taxes are provided using the liability method for all significant
temporary differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and net
operating loss carry forwards. The tax consequences of those differences
are classified as current or non-current based on the classification of
the related assets or liabilities in the financial statements.
Foreign currency translation
The Company considers Renminbi its functional currency as a substantial
portion of the Company's business activities are based in Renminbi
("RMB"). However, the Company has chosen the United States dollar as its
reporting currency.
Transactions in currencies other than the functional currency during the
period are translated into the functional currency at the applicable rates
of exchange prevailing at the time of the transactions. Monetary assets
and liabilities denominated in currencies other than the functional
currency are translated into the functional currency at the applicable
rates of exchange in effect at the balance sheet date. Exchange gains and
losses are recorded in the statements of operations.
For translation of financial statements into the reporting currency,
assets and liabilities are translated at the exchange rate at the balance
sheet date, equity accounts are translated at historical exchange rates,
and revenues, expenses, gains and losses are translated at the weighted
average rates of exchange prevailing during the period. Translation
adjustments resulting from this process are recorded in accumulated other
comprehensive income (loss) within stockholders' equity.
4. INCOME TAX
The Company is subject to the PRC enterprise income tax at the rate of
33%. The income tax expense comprised:
6
New Taohuayuan Culture Tourism Company Limited
Notes to the Condensed Consolidated Financial Statements
- --------------------------------------------------------------------------------
4. INCOME TAX (Continued)
(Unaudited) (Unaudited)
Three months ended Nine months ended
September 30, September 30,
---------------------- ---------------------
2005 2004 2005 2004
US$ US$ US$ US$
Current tax expense 322,680 335,774 801,670 820,924
Deferred tax benefit (54,650) (53,995) (128,447) (130,025)
---------- ---------- --------- ---------
268,030 281,779 673,223 690,899
========== ========== ========= =========
5. RELATED PARTY TRANSACTIONS
In addition to the transactions / information disclosed elsewhere in these
financial statements, the Company had the following transactions with
related parties.
(a) Name and relationship of related parties:
Name Relationships with the Company
Chen Jingmin A director and stockholder of the Company
Shaanxi New Taohuayuan The principal stockholder of the Company
Economy Trade Company in which Chen Jingmin has control and a
Limited ("Trading beneficial interest
Company") *
Shaanxi Wenhao Zaliang A stockholder and a fellow subsidiary of
Shifu, Limited ("Wenhao") * the Company in which Chen Jingmin has
control and a beneficial interest
* The official names are in Chinese and the English names are a straight
translation for reference only.
(b) Due from related parties
(Unaudited) as of (Audited) as of
September 30, 2005 December 31, 2004
Note US$ US$
Due from Trading Company (i) 390,042 112,739
Due from Wenhao (i) 185,179 192,384
------- -------
575,221 305,123
======= =======
7
New Taohuayuan Culture Tourism Company Limited
Notes to the Condensed Consolidated Financial Statements
- --------------------------------------------------------------------------------
5. RELATED PARTY TRANSACTIONS (CONTINUED)
(i) The amounts due from Trading Company and Wenhao are unsecured,
interest-free and have no fixed repayment terms.
(c) Summary of related party transactions
(Unaudited) (Unaudited)
Three months ended Nine Months Ended
September 30, September 30,
Note 2005 2004 2005 2004
US$ US$ US$ US$
Management fee income earned from:
Trading Company (i) 107,764 102,701 319,456 307,378
Wenhao (i) 206,945 249,193 721,056 743,465
Laundry income earned from:
Trading company (ii) 5,542 -- 16,429 --
Wenhao (ii) 5,564 -- 20,080 3,629
Rental and other services income
earned from Trading Company (iii) 40,415 -- 332,463 --
========== ========= ======= ========
(i) The Company entered into management agreements with Trading
Company and Wenhao on January 15, 2004 for a period of five years
commencing from January 15, 2004. The annual management fees from
Trading Company and Wenhao are fixed at US$425,941 and
US$1,034,427 respectively, plus a bonus calculated at 15% on the
excess of the actual revenue over targeted revenue. There was no
bonus management fee income earned by the Company for the nine
months ended September 30, 2005 and 2004.
(ii)Pursuant to the agreements entered into between the Company and
the related parties effective from January 1, 2004, the Company
provides laundry services to Trading Company and Wenhao at annual
fees of US$21,906 and US$29,207, respectively.
(iii) The Company entered into a rental agreement with Trading
Company on January 15, 2004. The rental income was charged at a
50% discount of the standard daily rate.
6. PREPAYMENTS
The balances as of September 30, 2005 and December 31, 2004 included
prepayments of US$12,788,293 and US$10,282,217 respectively made to the
local government for acquisition of a piece of land in the PRC. Pursuant
to an agreement signed on May 26, 2002
8
New Taohuayuan Culture Tourism Company Limited
Notes to the Condensed Consolidated Financial Statements
- --------------------------------------------------------------------------------
6. PREPAYMENTS (CONTINUED)
(the "Agreement"), total estimated consideration for the land is
approximately US$15 million. There is no specific due date for payment of
the balance of the consideration in the Agreement.
The Company proposes to use the land for property development. The
Agreement stipulates that the planning and preparation works should be
completed by the end of 2002 while the construction work should have
commenced by March 2003. During the year ended December 31, 2004 and up to
September 30, 2005, the Company paid design and planning fees of
US$1,330,639 and US$1,361,774 respectively. Although the project has been
delayed, management believes that the Agreement still remains effective
and there will be no penalty for the delay pursuant to the Agreement.
Although it is the present intention of the management to develop the
land, the Company shall have a right to dispose of the land through the
local government. The land was valued by international professional
valuation specialists on a depreciated replacement cost basis and its
value as of September 1, 2004 was approximately US$17.5 million.
7. COMMITMENTS AND CONTINGENCIES
(a) Capital commitment
As of September 30, 2005 and December 31, 2004, the Company had
capital expenditure commitments contracted but not provided for net
of deposits paid for the acquisition of land as mentioned in note 6
to the financial statements amounting to US$2,067,421 and
US$4,233,853 respectively.
(b) Contingencies
Prior to the conversion into a wholly foreign owned enterprise as
mentioned in note 1 above, Shaanxi THY had certain arrangements with
the local government that the total taxes payable, including mainly
the PRC enterprise income tax and business tax, was subject to a
maximum amount of US$123,798 per annum and Shaanxi THY was not liable
to pay any tax above the maximum amount. However, this arrangement is
not in compliance with national laws and regulations in the PRC. For
this reason, the Company has made full tax provision in accordance
with relevant national and local laws and regulations in the PRC,
together with a default interest that may be levied on the Company at
a daily rate of 0.05% of the unpaid taxes. Other taxes include mainly
business tax, which have been provided at a certain percentage on the
revenues derived by the Company during the periods.
9
New Taohuayuan Culture Tourism Company Limited
Notes to the Condensed Consolidated Financial Statements
- --------------------------------------------------------------------------------
7. COMMITMENTS AND CONTINGENCIES (Continued)
(b) Contingencies
Despite the fact that the Company has made full provision of the
taxes and related default interest in the financial statements, the
Company may be subject to penalties ranging from 50% to 500% of the
underpaid tax amounts. The exact amount of penalty cannot be
estimated with any reasonable degree of certainty.
10
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND PLAN OF
OPERATION
You should read the following discussion and analysis of our financial
condition and results of operations in conjunction with our financial statements
and the related notes included elsewhere in this report. Our financial
statements have been prepared in accordance with U.S. GAAP. The following
discussion and analysis contains forward-looking statements that involve risks
and uncertainties. Actual results could differ materially from those projected
in the forward-looking statements.
Overview
We own and operate the Taohuayuan Inn hotel and resort located in the city
of Xi'an, province of Shaanxi, in the PRC. The Taohuayuan Inn has 23 courtyards
with 146 rooms and 292 beds.
We manage the DongJin Taoyuan Villas, a hotel and resort property
approximately 10 miles from downtown Xi'an. DongJin Taoyuan Villas has 84 rooms
and 168 beds.
We also manage a chain of three traditional Chinese restaurants. Two of
the restaurants are in Xi'an, one is in Beijing, and one is in Harbin.
We receive fees for managing the DongJin Taoyuan Villas and the four
restaurants. The agreements relating to the management of these properties are
discussed in more detail in the "Business" section of this prospectus.
Room rates in the Shaanxi province are established by the Shaanxi Price
Bureau. Room rates are established for each hotel or resort in the Shaanxi
Province and are based upon a number of factors, including the quality of the
property and amenities offered. Room rates may be changed at any time by the
Shaanxi Price Bureau based upon economic conditions in China.
Our business is not seasonal in nature.
Results of Operation for the nine months ended September 30, 2005 compared to
September 30, 2004
Key performance indicators which we use to manage our business and to
assess future operating results are shown below:
Category Decrease or Increase Percentage
Operating Revenue Decrease $ 42,004 (1.06%)
Operating Expense Increase $ 43,323 2.30%
Non-Operating Expense Increase $118,520 15.85%
Income Tax Decrease $ 17,676 (2.56%)
Net Income Decrease $186,171 (28.71%)
2
Operating Revenues
Nine months ended
September 30,
----------------------- Increase or
Category 2005 US$ 2004 US$ Decrease US$ Percentage
- -------- -------- --------- ------------ ----------
Catering Services
Revenue 1,771,458 1,793,484 Decrease $22,026 (1.23%)
Hotel and Related
Services Revenue 1,114,386 1,124,033 Decrease $ 9,647 (0.86%)
Management Revenue 1,040,512 1,050,843 Decrease $10,331 (0.98%)
--------- ---------
Total 3,926,356 3,968,360 Decrease $42,004 (1.06%)
========= =========
The decrease in Hotel and Related Services Income was the primary factor
in the decline in operating revenues. Three heavy snows and cold weather
resulted in less leisure travel in 2005. Second, in 2005 all levels of
governments and state-owned companies reduced unnecessary conferences to improve
efficiency. As a result, our occupancy rate for the first nine months of 2005
was 64% compared to 72% during the first nine months of 2004. Third, one of the
restaurants we manage was closed for two months in 2005 for renovations.
o Operating Expenses
Nine months ended
September 30,
----------------------- Increase or
Category 2005 US$ 2004 US$ Decrease US$ Percentage
- -------- -------- --------- ------------ ----------
Depreciation 380,194 376,357 Increase $ 3,837 1.02%
Raw material and
consumables used 656,979 670,213 Decrease $13,234 (1.97%)
Salaries, Wages and
Allowances 245,991 215,464 Increase $30,527 14.17%
General and
Administrative 358,596 329,825 Increase $28,771 8.72%
Other taxes 282,900 289,478 Decrease $ 6,578 (2.27%)
---------- ----------
Total Operating
Expenses 1,924,660 1,881,337 Increase $43,323 2.30%
========== ==========
The cost of our raw materials and consumables for the nine-months ended
September 30, 2005 declined from that for the nine-month period ended September
30, 2004 due to better inventory controls which we implemented in 2005.
Salaries, Wages and Allowances increased due to hiring new management
personnel and increased wages of power station engineers.
General and Administrative expenses increased due to a substantial
increase in the price of fuel and electricity. A coal-mine in the Shaanxi
province closed for several months in 2005 leading to a significant drop in
supplies of coal and an increase in the price of fuel and electricity. Secondly,
the consumption of coal and the cost of fuel increased due to the cold winter in
2005. We also hosted more events during the 2005 spring festival resulting in
the increased use of electricity.
3
Other taxes decreased since we became a foreign owned enterprise in
December 2004 and were no longer required to pay urban construction, maintenance
and education taxes.
o Non-operating Income (Expense)
Nine months ended
September 30,
----------------------- Increase or
Category 2005 US$ 2004 US$ Decrease US$ Percentage
- -------- -------- --------- ------------ ----------
Interest Revenue 815 875 Decrease $ 60 (6.86%)
Sundry Revenue 17,504 18,866 Decrease $ 1,362 (7.22%)
Surcharge on taxes (884,570) (767,472) Increase $117,098 15.26%
--------- --------
Total Non-operating
Expense (866,251) (747,731) Increase $118,520 15.85%
======== ========
We had arrangements with the local government which provided that our
total taxes payable, including the PRC enterprise income and business tax, would
be subject to a maximum of US$120,967 per year. Since this arrangement was not
in compliance with the national laws and regulations in the PRC we made accruals
for all taxes which may be due in accordance with PRC laws and regulations,
together with interest on the unpaid taxes at a rate of 0.05% per day,
compounded daily.
o Income tax
Income tax decreased due to the decrease in our revenues. Our effective
tax rates were 59% and 52% respectively for the nine-month periods ended
September 30, 2005 and 2004. The difference between the effective tax rate and
the PRC enterprise income tax rate is mainly due to the surcharge on taxes which
we are accruing and which is not deductible for PRC enterprise income tax
purposes.
Liquidity and Capital Resources
Our material sources (uses) of cash during the following periods were:
Nine Months Nine Months
Ended Ended
September 30, 2005 September 30, 2004
Cash provided by operations $2,239,052 $3,595,482
Purchase of property, plant and equipment (5,846) (12,011)
Payment for land use rights (2,265,496) (1,935,476)
Other 2,183 --
Dividends 25,998 (1,688,801)
Cash on hand at beginning of period (58,288) (40,806)
4
We intend to develop an 848 acre commercial and residential development in
Lantian, a city located approximately 23 miles from Xi'an and a 150 room hotel
and resort in Xi'an. We have not started actual construction work on these
projects.
As of September 30, 2005 project expenditures for the mixed-use
development in Lantian were $12,496,000 for the land use rights and $1,331,000
for preliminary planning and design. We anticipate that the remaining costs to
develop the project, excluding the remaining $4,085,000 payment for the land use
rights, will be approximately $44,000,000 over five years. We expect to begin
construction on the property in 2007.
As of September 30, 2005 project expenditures for the hotel and resort in
Xian were $11,734,000 for the land use rights. We expect to complete the New
Hainan hotel and resort project in 2007 and commence operations at the end of
2007. The remaining costs to develop the project are expected to be
approximately $4,840,000.
We had a written arrangement with the local government which provides that
the total taxes payable by us, including the PRC enterprise income tax and
business tax, would be subject to a maximum amount of US$120,967 per year.
However, this arrangement was not in compliance with the national tax laws and
regulations in the PRC which require that taxes are based upon a percentage of
taxable income and are not limited to a specific amount. Accordingly, we have
accrued all taxes which may be due in accordance with relevant national and
local laws and regulations in the PRC, together with a surcharge for interest
that may be levied on the unpaid taxes at a rate of 0.05% per day, compounded
daily. By March 31, 2006 we plan to resolve this issue with the national PRC
taxing authorities. If the PRC taxing authority demands payment of all taxes and
interest which they claim are due we believe that we will be able to pay the
amounts owed in installments with cash from our operations. We do not have any
legal opinion concerning the validity of our tax agreement with the local
government.
Based upon the foregoing, our future capital requirements are:
Projected
Activity Time Frame Estimated Cost
Pay remaining amount for land use rights
for Lantian project 12/05 $ 4,085,000
Construction and development costs -
Lantian project 2007-2012 $44,000,000
Construction and development costs -
New Hanian project 2006-2007 $ 4,840,000
Accrued taxes Unknown $ 7,889,000
We have financed our operations to date through the sale of our common
stock and cash generated by our operations. As of November 15, 2005 expenditures
for the Lantian and New Hainan projects have been funded with cash from our
operations and proceeds from the sale of our common stock. We expect to finance
the remaining costs for the Lantian and New Hainan projects through cash from
our operations and loans. Loans would be collateralized by the property and
issued in conjunction with the government. However, required financing may not
be available to us, in which case the development of the projects may take
additional time or we may be unable to develop the projects. At present, we do
not have any lines of credit or other bank financing arrangements.
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We do not know of any trends, events or uncertainties that have, or are
reasonably likely to have, a material impact on our short-term or long-term
liquidity other than our need to pay the taxes and surcharges which we have
accrued as liabilities on our September 30, 2005 balance sheet.
Restrictions on currency exchange
Substantially all of our projected revenues and operating expenses are
denominated in Renminbi. The Renminbi is currently freely convertible under the
"current account", which includes dividends, trade and service-related foreign
exchange transactions, but not under the "capital account", which includes
foreign direct investment and loans.
We may purchase foreign exchange for settlement of "current account
transactions", including payment of dividends to our shareholders, without the
approval of the State Administration for Foreign Exchange. We may also retain
foreign exchange in our current account, subject to a ceiling approved by the
State Administration for Foreign Exchange, to satisfy foreign exchange
liabilities or to pay dividends. However, the Chinese government may change its
laws or regulations and limit or eliminate our ability to purchase and retain
foreign currencies in the future.
Since a significant amount of our future revenues will be denominated
in Renminbi, the existing and any future restrictions on currency exchange may
limit our ability to utilize revenues generated in Renminbi to fund any business
activities outside China or fund expenditures denominated in foreign currencies.
Reserves
In accordance with current Chinese laws, regulations and accounting
standards, we are required to set aside as a general reserve at least 10% of our
respective after-tax profits. Appropriations to the reserve account are not
required after these reserves have reached 50% of our registered capital. These
reserves are created to fund potential operating losses and are not
distributable as cash dividends. We are also required to set aside between 5% to
10% of our after-tax profits to the statutory public welfare reserve. In
addition and at the discretion of our directors, we may set aside a portion of
our after-tax profits for enterprise expansion funds, staff welfare and bonus
funds and a surplus reserve. These statutory reserves and funds can only be used
for specific purposes and may not be used for dividends.
Critical Accounting Policies and Estimates
We prepare financial statements in conformity with U.S. GAAP, which
requires us to make estimates and assumptions that affect the reported amounts
of assets and liabilities, disclosure of contingent assets and liabilities on
the date of the financial statements, and the reported amounts of revenue and
expenses during the financial reporting period. We continually evaluate these
estimates and assumptions based on the most recently available information, our
own historical experience and various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Since the use of estimates is an
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integral component of the financial reporting process, actual results could
differ from those estimates. Some of our accounting policies require higher
degrees of judgment than others in their application. We consider the policies
discussed below to be critical to an understanding of our financial statements
as their application assists management in making their business decisions
Revenue recognition
We generally recognize service revenues when persuasive evidence of an
arrangement exists, services are rendered, the fee is fixed or determinable, and
collectibility is probable. Service revenues are recognized net of discounts.
Foreign currency translation
We consider Renminbi as our functional currency as a substantial portion
of our business activities are based in Renminbi ("RMB"). However, we have
chosen the United States dollar as our reporting currency.
Transactions in currencies other than the functional currency during the
year are translated into the functional currency at the applicable rates of
exchange prevailing at the time of the transactions. Monetary assets and
liabilities denominated in currencies other than the functional currency are
translated into the functional currency at the applicable rates of exchange in
effect at the balance sheet date. Exchange gains and losses are recorded in the
statements of operations.
For translation of financial statements into the reporting currency,
assets and liabilities are translated at the exchange rate at the balance sheet
date, equity accounts are translated at historical exchange rates, and revenues,
expenses, gains and losses are translated at the weighted average rates of
exchange prevailing during the period. Translation adjustments resulting from
this process are recorded in accumulated other comprehensive income (loss)
within stockholders' equity.
Property, plant and equipment and depreciation
Property, plant and equipment are stated at cost less accumulated
depreciation.
The cost of an asset consists of its purchase price and any directly
attributable costs of bringing the asset to its present working condition and
location for its intended use. Expenditures incurred after the assets have been
put into operation, such as repairs and maintenance, are normally recognized as
an expense in the period in which they are incurred. In situations where it can
be clearly demonstrated that expenditure has resulted in an increase in the
future economic benefits expected to be obtained from the use of the assets, the
expenditure is capitalized.
When assets are sold or retired, their costs and accumulated depreciation
are eliminated from the accounts and any gain or loss resulting from their
disposal is included in the statement of operations.
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Depreciation is calculated to write off the cost of property, plant and
equipment over their estimated useful lives as set out below, from the date on
which they become fully operational and after taking into account their
estimated residual values, using the straight-line method.
Taxes
Although we had a written arrangement with the local government which
provides that the total taxes payable by us, including the PRC enterprise income
tax and business tax, would be subject to a maximum amount of US$120,967 per
year, we do not believe that this arrangement is in compliance with the national
tax laws and regulations in the PRC which require that taxes are based upon a
percentage of taxable income and are not limited to a specific amount.
Accordingly, we have accrued all taxes which may be due in accordance with
relevant national and local laws and regulations in the PRC, together with a
surcharge for interest that may be levied on the unpaid taxes at a rate of 0.05%
per day, compounded daily. If the taxes and interest we ultimately are required
to pay are less than the amounts we have accrued, we will reduce our recorded
liability for unpaid taxes.
ITEM 3. CONTROLS AND PROCEDURES
Based on the evaluation of our disclosure controls and procedures by Cai
Danmei, our Chief Executive and Financial Officer as of September 30, 2005 such
officer has concluded that our disclosure controls and procedures were effective
in ensuring that information required to be disclosed by us in the reports that
we file or submit under the Securities and Exchange Act of 1934, as amended, is
recorded, processed, summarized and reported, within the time period specified
by the Securities and Exchange Commission's rules and forms.
There were no significant changes in our internal controls or in other factors
during the three months ended September 30, 2005 that could significantly affect
these controls subsequent to the date of their evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
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PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Number Exhibit
31 Rule 13a-14(a) Certifications
32 Section 1350 Certifications
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the three
months ended September 30, 2005.
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SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized on November 24, 2005.
NEW TAOHUAYUAN CULTURE TOURISM CO., LTD.
By: /s/ Cai Danmei
---------------------------------
Cai Danmei, Chief Executive Officer,
Principal Financial Officer and
Principal Accounting Officer
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