Filed Pursuant to Rule 424(b)(3)
Registration No. 333-121187
NEW TAOHUAYUAN CULTURE TOURISM CO., LTD.
This prospectus covers the resale of 500,000 shares of our common stock
held by seven stockholders. The shares will be offered by our selling
stockholders at then prevailing market prices or privately negotiated prices.
The offering will terminate on the earlier of the date all of the shares are
sold or one year from the date of this prospectus. We will not receive any
proceeds from the sale of shares offered by the selling stockholders. See
"Selling Stockholders and Plan of Distribution."
Our shares are listed on the OTC Bulletin Board under the symbol "NTYN".
Investing in our common stock involves substantial risks. See "Risk
Factors" beginning on page 4.
The Securities and Exchange Commission and state securities regulators have
not approved or disapproved these securities or passed upon the adequacy or
accuracy of this prospectus. Any representation to the contrary is a criminal
offense.
The date of this prospectus is February 10, 2005.
TABLE OF CONTENTS
About this Prospectus
Summary
Summary Financial Data
Risk Factors
Forward-Looking Statements
Use of Proceeds
Selected Financial Data
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Business
Management
Principal Shareholders
Selling Stockholders and Plan of Distribution
Related Party and Other Material Transactions
Description of Capital Stock
Shares Eligible for Future Sale
Experts
Where You Can Find More Information
2
ABOUT THIS PROSPECTUS
You should rely only on the information contained in this prospectus as
we have not authorized any other person to provide you with different
information. If anyone provides you with different or inconsistent information,
you should not rely on it. We are not making an offer to sell these securities
in any jurisdiction where such an offer or sale is not permitted.
SUMMARY
This summary highlights material information regarding our company and
the offering contained in this prospectus. However, you should read the entire
prospectus carefully, including the financial information and related notes,
before making an investment decision.
History
New Taohuayuan Culture Tourism Co., Ltd. was organized as a Nevada
corporation on November 3, 2004. On December 6, 2004 we issued 17,027,328 shares
of our common stock to acquire all outstanding shares of Shaanxi New Taohuayuan
Culture Tourism Co., Ltd., which we refer to as "Shaanxi," a PRC company
organized and registered in September 1997 in the city of Xi'an, province of
Shaanxi. We were the survivor of the merger and, unless otherwise indicated,
references to us throughout this prospectus includes the operations of Shaanxi.
The purpose of the merger was to redomicile us as a U.S. corporation.
Our principal executive offices are located at 1# Dongfeng Road, Xi'an
Weiyang Tourism Development District, Xi'an, China. Our telephone number is
0086-29-86671555.
Business
Since 1997 we have owned and operated a 146 room hotel and resort in
Xi'an, People's Republic of China. Since 1997 we have also managed a second 84
room hotel and resort in Xi'an. We have also managed a chain of four restaurants
in the PRC, seating over 2,500 customers, since 1997. 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.
The Offering
Securities 500,000 shares of common stock.
offered by our
selling
stockholders:
Securities 17,027,328 shares of common stock.
outstanding prior
to and after the
offering:
3
Use of proceeds: We will not receive any proceeds from the sale
of the common stock.
On February 1, 2005 our shares became eligible for trading on the OTC
Bulletin Board under the symbol "NTYN".
Through this prospectus, we are registering the resale of 500,000 shares
of our common stock which are held by seven shareholders, all of whom exchanged
their shares of Shaanxi for the 500,000 shares we issued to them. The seven
shareholders include two of our executive officers, Chen Jingmin and Cai Danmei
and five corporations which are controlled by Mr. Chen. All selling shareholders
are residents and citizens of China
Conventions Which Apply to This Prospectus
- ------------------------------------------
Except as otherwise indicated and for purposes of this prospectus only:
o "we", "us" and "our" refer to:
Our company - New Taohuayuan Culture Tourism Co., Ltd., as well as
Shaanxi, a PRC company that was merged into us in December 2004,
o "China" or "PRC" refers to the People's Republic of China, excluding
Taiwan, Hong Kong and Macau; and
o all references to "RMB" or "Renminbi" are to the legal currency of
China and all references to "$", "U.S. dollars," "dollars" and "US$"
are to the legal currency of the United States.
o all financial information in this prospectus is in U.S. dollars.
RISK FACTORS
The shares of common stock offered by this prospectus involve a high
degree of risk and represent a highly speculative investment. You should not
purchase these shares if you cannot afford the loss of your entire investment.
In addition to the other information contained in this prospectus, you should
carefully consider the following risk factors in evaluating an investment in our
common stock. The value of our common stock could decline if any of the risks
discussed below should occur.
We Have Negative Working Capital Which Could Limit Our Ability to Grow Our
Operations and Our Auditors Have Expressed Doubt as to Our Ability to Continue
in Business.
At June 30, 2005 we had negative working capital of $(8,056,217). As of
August 31, 2005 we had cash on hand and on deposit of approximately $54,000. If
we are unable to obtain additional financing we may be required to reduce
expenditures on future development or otherwise reduce our operations. Our
auditors, in their report on our financial statements for the year ended
4
December 31, 2004, expressed substantial doubt as to our ability to continue in
business.
Land and Franchise Agreements May Constrain Us from Being Able to Sell Our
Property at a Time When it Would Be in the Best Interest of Shareholders to Do
So.
As is the case throughout the PRC, we do not own the land upon which our
properties are located. Rather, the land is subject to various land use permits
granted by the PRC government. Any sale of our property would require prior
consent of the government which may make it difficult or impossible to sell our
property at the time we want to do so.
Our Properties Face Significant Competition Which Could Reduce Our Revenues.
We face significant competition from owners, operators and developers of
other hotel properties most of which all have recognized trade names,
international reservation systems, greater resources and longer operating
histories than we have, and accordingly, we are at a competitive disadvantage in
these areas Competition may limit our ability to attract and retain guests and
may reduce the room rates we are able to charge. These competing properties may
have vacancy rates higher than our properties, which may result in their owners
being willing to lower room rates below our room rates. These circumstances
could reduce our revenues.
Operating Risks Common to the Hotel Industry in China Could Reduce Our Revenues.
Risks associated with operating hotels include the following, any of
which could reduce our revenues:
o competition for guests and meetings from other hotels including as
a result of competition from internet wholesalers and distributors;
o increases in operating costs, including wages, benefits, insurance,
property taxes and energy, due to inflation and other factors, which
may not be offset in the future by increased room rates;
o dependence on demand from business and leisure travelers including
substantial weakness at this time in business travel, which may
fluctuate and be seasonal;
o increases in energy costs, airline fares, and other expenses
related to travel, which may deter traveling;
o adverse affects of weak general and local economic conditions; and
o the PRC Government, which controls the rate we charge for
rooms, could arbitrarily change the rates and place us at a
competitive disadvantage with other hotels and resorts.
Our bank accounts are not insured or protected against loss.
We maintain our cash with various banks and trust companies located in
China. Our cash accounts are not insured or otherwise protected. Should any bank
or trust company holding our cash deposits become insolvent, or if we are
otherwise unable to withdraw funds, we would lose the cash on deposit with that
particular bank or trust company.
5
We have limited business insurance coverage in China, any loss which we suffer
may not be insured or may be insured to only a limited extent.
The insurance industry is China is still in an early state of development
and PRC insurance companies offer limited business insurance products. In the
event of damage or loss to our properties, our insurance may not provide as much
coverage as if we were insured by insurance companies in the United States.
The Chairman of our Board of Directors is also our principal shareholder and has
the ability to control the direction of our Company, possibly to the detriment
of our other shareholders.
Cheng Jingmin is the Chairman of our Board of Directors and, as the
beneficial owner of 3,365,016 shares of common stock, is our largest
shareholder. We also earn revenues from managing a hotel and three restaurants
which are owned by companies controlled by Cheng Jingmin. As a result of Chen
Jingmin's control relationship, future transactions between us and Chen Jingmin
may not be as favorable to us as transactions with unrelated third parties.
We would not have any revenues from the management of a hotel and restaurants
were it not for agreements, which may be difficult to enforce, we have with the
Chairman of our Board of Directors.
All of our management fee income is derived from agreements we have with
companies which are controlled by Chen Jingmin, the Chairman of our Board of
Directors and the largest beneficial owner of our common stock. These agreements
should not be considered as having been negotiated at arms length. Since these
agreements are with companies controlled by Chen Jingmin, in the event of a
dispute with either or both of these companies, we may not enforce our rights in
as stringent a fashion as if the agreements were with unrelated third parties.
We do not have sufficient funds to pay all taxes which we might owe.
As of June 30, 2005 we had accrued taxes and interest payable of
approximately $7,889,000. While we believe we may not owe this entire amount,
due to arrangements with the local government in the Shaanxi Province, we have
nevertheless accrued the entire amount we would owe, plus interest of 0.05% per
day, compounded daily, on the PRC Enterprise Income and Business Tax
($2,375,062) at June 30, 2005). In contrast, as of June 30, 2005 our current
assets were only $677,159. If we had to pay all accrued taxes and interest
within the next three months we would need to borrow sufficient funds from third
parties or cease operations.
We Are Subject to International Economic and Political Risks over Which We Have
Little or No Control and May Be Unable to Alter Our Business Practice in Time to
Avoid the Possibility of Reduced Revenues.
All of our business is conducted in the PRC. Doing business outside the
United States, particularly in the PRC, subjects us to various risks, including
changing economic and political conditions, major work stoppages, exchange
controls, currency fluctuations, armed conflicts and unexpected changes in U.S.
and foreign laws relating to tariffs, trade restrictions, transportation
6
regulations, foreign investments and taxation. We have no control over most of
these risks and may be unable to anticipate changes in international economic
and political conditions and, therefore, unable to alter out business practice
in time to avoid the possibility of reduced revenues.
If Relations between the United States and the PRC Worsen, Investors May Be
Unwilling to Hold or Buy Our Stock and if Our Securities Become Qualified for
Quotation on an Exchange, Our Stock Price May Decrease.
At various times during recent years, the U.S. and the PRC have had
significant disagreements over political and economic issues. Controversies may
arise in the future between these two countries. Any political or trade
controversies between the United States and the PRC, whether or not directly
related to our business, could reduce the price of our common stock if our stock
becomes qualified for quotation on the American Stock Exchange or the
over-the-counter Electronic Bulletin Board.
The PRC Government Could Change its Policies Toward Private Enterprise or Even
Nationalize or Expropriate Private Enterprises, Which Could Result in the Total
Loss of Our and Your Investment.
Our business is subject to significant political and economic
uncertainties and may be affected by political, economic and social developments
in the PRC. Over the past several years, the PRC government has pursued economic
reform policies including the encouragement of private economic activity and
greater economic decentralization. The PRC government may not continue to pursue
these policies or may significantly alter them to our detriment from time to
time with little, if any, prior notice.
Changes in policies, laws and regulations or in their interpretation or
the imposition of confiscatory taxation, restrictions on currency conversion,
restrictions or prohibitions on dividend payments to stockholders, devaluations
of currency or the nationalization or other expropriation of private enterprises
could have a material adverse effect on our business. Nationalization or
expropriation could even result in the total loss of our investment in the PRC
and in the total loss of your investment.
A Lack of Adequate Remedies and Impartiality under the PRC Legal System May Make
it Impossible to Enforce the Agreements to Which We Are a Party and thus Reduce
Our Revenues.
We periodically enter into agreements governed by PRC law. Our revenues
could be reduced if these agreements are not respected. In the event of a
dispute, enforcement of these agreements in the PRC could be extremely
difficult. Unlike the United States, the PRC has a civil law system based on
written statutes in which judicial decisions have little precedential value. The
PRC government has enacted laws and regulations dealing with matters such as
corporate organization and governance, foreign investment, commerce, taxation
and trade. However, the government's experience in implementing, interpreting
and enforcing these recently enacted laws and regulations is limited, and our
ability to enforce commercial claims or to resolve commercial disputes is
7
uncertain. Furthermore, enforcement of the laws and regulations may be subject
to the exercise of considerable discretion by agencies of the PRC government,
and forces unrelated to the legal merits of a particular matter or dispute may
influence their determination. These uncertainties could limit the protections
that are available to us and reduce our revenues.
Fluctuations in Exchange Rates Could Reduce Our Revenues.
Although we use the United States dollar for financial reporting
purposes, all of the transactions effected by our operating subsidiary are
denominated in the PRC's RMB. The exchange rate of the RMB may fluctuate wildly
against the U.S. dollar. We do not currently engage in hedging activities to
protect against foreign currency risks. Even if we chose to engage in such
hedging activates, we may not be able to do so effectively. Future movements in
the exchange rate of the RMB could reduce our revenues.
You May Experience Difficulties in Attempting to Enforce Liabilities Based upon
U.S. Federal Securities Laws Against Our Non-U.S. Operating Subsidiary and its
Non-U.S. Resident Directors and Officers.
Our operating subsidiary and its assets are located in the PRC. Our
directors and executive officers are foreign citizens and do not reside in the
U.S. It may be difficult for courts in the U.S. to obtain jurisdiction over
these foreign assets or persons and as a result, it may be difficult or
impossible for you to enforce judgments rendered against us or our directors or
executive officers in U.S. courts. In addition, the courts in the countries in
which we and our subsidiary are organized or where we and our subsidiary's
assets are located may not permit lawsuits of the enforcement of judgments
arising out of the U.S. and state securities or similar laws.
Sales of Our Common Stock Could Reduce the Price of Our Stock.
There are 17,027,328 shares of our common stock outstanding. All of
these shares are freely tradable without restrictions under the Securities Act
of 1933, except for any shares held by our officers, directors and 5% or greater
stockholders, which may be sold in accordance with Rule 144 of the Securities
and Exchange Commission.
The availability for sale of substantial amounts of common stock could
reduce the price of our common stock.
Certain Nevada Corporation Law Provisions Could Prevent a Potential Takeover of
Us that Could Adversely Affect the Price of Our Common Stock or Deprive You of a
Premium over the Price.
We are incorporated in the State of Nevada. Certain provisions of Nevada
corporation law could adversely affect the price of our common stock. Because
Nevada law governing control-share acquisitions requires board approval of a
transaction involving a change in our control, it would be more difficult for
someone to acquire control of us. Neither our Articles nor our Bylaws contain
any similar provisions.
8
The Limited Market for Our Securities May Make it Difficult for Investors to
Sell Our Common Stock.
Although our common stock is listed on the OTC Bulletin Board, as of
February 10, 2006 trading in our common stock had not begun. There can be no
assurance that an active public market will develop for our common stock, or, if
developed, will be sustained. Accordingly, investors purchasing the shares
offered by this prospectus may not be able to sell the shares should they desire
to do so.
Our common stock is subject to rules that regulate broker-dealer
practices in connection with transactions in "penny stocks." The Securities and
Exchange Commission has adopted regulations that define a "penny stock" to be
any equity security that has a market price (as defined) of less than $5.00 per
share, subject to certain exceptions. For any transaction involving a penny
stock, unless exempt, the rules require the delivery by the broker-dealer, prior
to the transaction, of a disclosure schedule prepared by the SEC relating to the
penny stock market. In addition, the broker-dealer, subject to certain
exceptions, must make an individualized written suitability determination for
the purchase of a penny stock and receive the purchaser's written consent prior
to the transaction. The broker-dealer also must disclose the commissions payable
to both the broker-dealer and the registered representative, current quotations
for the securities and, if the broker-dealer is the sole market-maker, the
broker-dealer must disclose this fact and the broker-dealer's presumed control
over the market. Finally, monthly statements must be sent disclosing recent
price information for the penny stock held in the account and information on the
limited market in penny stocks. These requirements may severely limit the market
liquidity of our common stock and the ability of our stockholders to sell their
shares should a market develop.
We Do Not Intend to Pay Dividends in the Future, So Investors Will Not Receive
Income from Their Investment in Our Common Stock.
Although we have paid dividends in the past, we currently intend to
retain any future earnings for use in our business and do not expect to pay any
cash dividends on any shares of common stock for the foreseeable future.
Accordingly, investors will not receive income from their investment in our
common stock.
There is a Reduced Probability of a Change of Control or Acquisition of Us Due
to the Possible Issuance of Preferred Stock. This Reduced Probability Could
Deprive Our Investors of the Opportunity to Otherwise Sell Our Stock in an
Acquisition of Us by Others.
Our Articles of Incorporation authorize our Board of Directors to issue
up to 10,000,000 shares of preferred stock in one or more series and to fix the
rights, preferences, privileges and restrictions thereof, including dividend
rights, dividend rates, conversion rights, voting rights, terms of redemption,
liquidation preferences and the number of shares constituting any series or
designation of such series, without further vote or action by stockholders. As a
result of the existence of "blank check" preferred stock, potential acquirers of
our company may find it more difficult to, or be discouraged from, attempting to
effect an acquisition transaction with, or a change of control of, our company,
9
thereby possibly depriving holders of our securities of certain opportunities to
sell or otherwise dispose of such securities at above-market prices pursuant to
such transactions.
There Are Limitations on Our Officers' and Directors' Liabilities to Us Which
Will Make it More Difficult for Our Stockholders to Sue Our Officers and
Directors.
Under our Articles of Incorporation, our directors are not liable for
monetary damages for breach of fiduciary duty, except in connection with:
o a breach of the director's duty of loyalty to us or our stockholders;
o acts or omissions not in good faith or which involve intentional
misconduct, fraud or a knowing violation of law;
o a transaction from which our director received an improper benefit; or
o an act or omission for which the liability of a director is expressly
provided under Nevada law.
In addition, our Articles of Incorporation provide that we must
indemnify our officers and directors to the fullest extent permitted by Nevada
law for all expenses incurred in the settlement of any actions against such
persons in connection with their having served as officers or directors.
FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements. We have based these
forward-looking statements on our current expectations about future events.
These forward-looking statements are subject to risks, uncertainties and
assumptions about us which are discussed in the Risk Factors section above as
well as throughout this prospectus. In light of these risks, uncertainties and
assumptions, any forward-looking events discussed in this prospectus might not
occur.
USE OF PROCEEDS
We will not receive any proceeds from the sale of shares of our common
stock being offered by the selling stockholders.
SELECTED FINANCIAL DATA
The following financial data with respect to the years ended December
31, 2003 and 2004 has been derived from our audited consolidated financial
statements. The data with respect to the six-month periods ended June 30, 2004
and 2005 has been derived from our unaudited consolidated financial statements.
The following selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our financial statements and related notes included elsewhere in
this prospectus.
10
Statement of Operations Data
Years Ended December 31, Six months ended June 30,
------------------------ -------------------------
2004 2003 2005 2004
Total Revenue $5,671,269 $4,399,777 $2,544,494 $2,586,492
Net income $ 612,521 $1,134,429 $ 409,283 $ 631,142
Net income
per share(1) $ 0.04 $ 0.07 $ 0.02 $ 0.03
(1) Based upon our 17,027,328 shares of common stock issued in exchange for
Shaanxi's 100,000,000 shares of common stock in accordance with our merger
with Shaanxi. Although we were not incorporated in Nevada until November 3,
2004, the merger has been treated as a reverse acquisition for financial
reporting purpose and the historical stockholders' equity accounts have
been retroactively restated to reflect the issuance of the 17,027,328
shares since the periods presented, i.e. as of January 1, 2003. See Note 1
to our financial statements for more information.
Balance Sheet Data
December 31, June 30,
2004 2003 2005
---- ---- ----
Working capital $ (7,182,302) $ (3,469,374) $(8,056,217)
Total assets $ 21,797,538 $20,242,296 $23,271,174
Total liabilities $ 7,699,023 $ 5,274,695 $ 8,733,376
Stockholders' equity $ 14,128,515 $14,967,601 $14,537,798
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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 prospectus. Our financial
statements have been prepared in accordance with U.S. GAAP. In addition, our
financial statements and the financial data included in this prospectus reflect
our reorganization and have been prepared as if our current corporate structure
had been in place throughout the relevant periods. 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.
11
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 six months ended June 30, 2005 compared to June 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 Revenues Decrease $41,998 (2%)
Operating Expenses Decrease $1,039 (0%)
Non-Operating Expense Increase $184,827 53%
Income Tax Decrease $3,927 (1%)
Net Income Decrease $221,859 (35%)
o Operating Revenues
Six months Six months
ended June 30, ended June 30, Increase or
Category 2005 US$ 2004 US$ Decrease US$ Percentage
- --------------------------------------------------------------------------------
Catering Services 1,057,140 1,064,342 Decrease $7,202 (1%)
Hotel and Related Services 761,551 823,201 Decrease $61,650 (7%)
Management Fees 725,803 698,949 Increase $26,854 4%
--------- ---------
Total 2,544,494 2,586,492 Decrease $41,998 (2%)
========= =========
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The decrease in Hotel and Related Services Income was the primary factor in
the decline in operating revenues. Three heavy snows and cold weather resulted
in less leisure travel in 2005. Second, in 2005 all levels of governments and
state-owned companies reduced unnecessary conferences to improve efficiency. As
a result, our occupancy rate for the first six months of 2005 was 63% compared
to 76% during the first six months of 2004.
o Operating Expenses
Six months Six months
ended June 30, ended June 30, Increase or
Category 2005 US$ 2004 US$ Decrease US$ Percentage
- --------------------------------------------------------------------------------
Depreciation 248,016 252,157 Decrease 4,141 (2%)
Raw material and
consumables used 409,801 424,007 Decrease 14,206 (3%)
Salaries, Wages and
Allowances 160,892 146,736 Increase 14,156 10%
General and Administrative
expenses 232,418 167,969 Increase 64,449 38%
Other taxes 146,324 207,621 Decrease 61,297 (30%)
------- -------
Total 1,197,451 1,198,490 Decrease 1,039 (0%)
========= =========
The cost of our raw materials and consumables for the six-months ended
June 30, 2005 declined from that for the six-month period ended June 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.
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)
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Six months Six months
ended June 30, ended June 30, Increase or
Category 2005 US$ 2004 US$ Decrease US$ Percentage
- ------------------------------------------------------------------------------
Interest income 208 636 Decrease 428 (67%)
Sundry income 9,546 56,390 Decrease 46,844 (83%)
Surcharge on taxes (542,321) (404,766) Increase 137,555 34%
--------- ---------
Total ( 532,567) (347,740) Increase 184,827 53%
========= =========
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 50% and 39% respectively for the six-month periods ended June 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.
Results of operations for the year ended December 31, 2004 compared to December
31, 2003
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 Revenues Increase $1,271,492 29%
Operating Expenses Increase $1,234,755 54%
Non-Operating Expense Increase $613,794 377%
Income Tax Decrease $55,149 7%
Net Income Decrease $521,908 46%
|X| Operating Revenues
2004 2003 Increase
Category US$ US$ US$ Percentage
- -------- ---- ---- --------- ----------
Catering Services Income 2,607,094 1,842,118 764,976 42%
Hotel and Related Service Income 1,658,536 1,491,938 166,598 12%
Management Fee Income 1,405,639 1,065,721 339,918 32%
--------- --------- ---------
Total 5,671,269 4,399,777 1,271,492 29%
========= ========= =========
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Our Catering Services Income and Hotel and Related Services Income
increased due to the recovery of the economy from the SARS epidemic and a
resulting increase in tourism in China, enhanced marketing and promotional
activities, improved service and new menu items. In addition, a construction
site opened close to our hotel in Xi'an in 2004 and workers frequented our
restaurant.
Management fee income increased due to the recovery of the economy from
the SARS epidemic and the change in the basis of calculating management fees,
which was revised from 10% of the operating revenue of the Dongjin Taoyuan
Villas and the Wenhao restaurants in 2003 to a fixed amount in 2004.
|X| Operating expenses
Increase or
Category 2004 2003 Decrease Percentage
- -------- ---- ---- -------- ----------
Depreciation 498,624 503,661 (5,037) (1%)
Raw materials and consumables used 992,954 754,352 238,602 32%
Salaries, wages and allowances 285,910 308,019 (22,109) (8%)
General and administrative expenses 1,316,660 467,737 848,923 182%
Other taxes 427,325 252,949 174,376 69%
--------- --------- ---------
Total 3,521,473 2,286,718 1,234,755 54%
========= ========= =========
Depreciation remained relatively constant since there were no major
additions during the year.
The cost of raw materials and consumables increased in line with the
increase in catering, hotel and related services income.
Following improved efficiency in our operations, salaries, wages and
allowances decreased as we were able to reduce the number of our employees from
318 in 2003 to 293 in 2004.
General and administrative expenses increased due to higher financial
consulting, legal, and auditing expenses associated with filing our registration
statement with the Securities and Exchange Commission.
Other taxes increased as a result of an increase in revenues and a special
tax reduction during the SARS period which was only effective from May to
September of 2003.
o Non-Operating Income (Expense)
15
- --------------------------------------------------------------------------------
Increase or
Category 2004 2003 Decrease US$ Percentage
- --------------------------------------------------------------------------------
US$ US$
Interest income 1,862 296,805 Decrease 294,943 94%
Sundry income 31,017 62,170 Decrease 31,153 50%
Surcharge on taxes (809,532) (521,834) Increase 287,698 55%
--------- ---------
Total (776,653) (162,859)
======== ========
Interest income in 2003 ($296,745) was earned from Shaanxi New Taohuayuan
Economy Trade Co., Ltd., our largest stockholder. Shaanxi New Taohuayuan owed us
money for management fees ($115,816) and a loan from us ($855,998). Interest was
charged on the outstanding balance due from Shaanxi New Taohuayuan at an average
rate of 7.9% for the year ended December 31, 2003. No interest was charged for
the year ended December 31, 2004 or the six months ended June 30, 2005.
Sundry income decreased as less sales of scrap materials were made during
the year ended December 31, 2004.
The Surcharge on taxes represents interest, computed at the rate of 0.05%
per day compounded daily, which we are accruing on taxes that we may have to
pay. The increase was due to the accumulation of additional unpaid taxes in
2004.
o Income tax
The effective tax rates were 55% and 42% for the year ended December 31,
2004 and 2003 respectively. The difference between the effective tax rate and
the PRC enterprise income tax rate mainly represented the accrued surcharge on
taxes which is not deductible in computing PRC enterprise income tax.
Liquidity and Capital Resources
Our material sources (uses) of cash during the following periods were:
Six Months
Year Ended Ended
December 31, 2004 June 30, 2005
----------------- --------------
Cash provided by operations $4,673,003 $1,439,775
Purchase of property, plant
and equipment (194,026) (5,811)
Payment for land use rights (3,084,665) (1,451,607)
Other (8,505) --
Dividends (1,717,134) (23,163)
As discussed in the "Business" section of this Prospectus, we intend to
develop an 848 acre commercial and residential development in Lantian, a city
16
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 June 30, 2005 project expenditures for the mixed use development in
Lantian were $11,734,000 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 June 30, 2005 project expenditures for the hotel and resort in Xian
were $1,228,000 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 October 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
17
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.
Material changes in our assets and liabilities during the two years ended
December 31, 2004 and the six months ended June 30, 2005 were:
o Due From Related Parties - This receivable represents amounts
primarily owed to us by Shaanxi New Taohuayuan Economy Trade Co., Ltd.
for management fees ($115,816) and a loan ($855,998) we made to
Shaanxi New Taohuayuan and by Shaanxi Wen Hao Zaliang Shifu, Ltd. for
management fees. The receivable was $1,282,551 as of December 31,
2003, but declined to $499,244 at June 30, 2005 due to payments made
by these two companies. See Note 4(b) to the financial statements
which are part of this Prospectus.
o Prepayments - Represents amounts we have paid since 2003 for the right
to use land for the Lantian project.
o Income Tax Payable, Other Tax Payable and Surcharge on Tax Payable -
Represents amounts we have accrued over the years in the event our
agreements with local PRC government agencies limiting our liability
for certain taxes are found to be invalid.
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 June 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.
18
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
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.
19
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.
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.
BUSINESS
Current Operations
Taohuayuan Inn
20
We own and operate the Taohuayuan Inn hotel and resort located in
the northern suburbs of the city of Xi'an, province of Shaanxi in the PRC. The
hotel is approximately 10 miles from downtown Xi'an and is readily accessible to
downtown Xi'an by freeway. The Taohuayuan Inn is designed in the traditional
Chinese village compound style in which six to eight rooms and one suite are
located around individual courtyards. There are a total of 23 courtyards in the
hotel representing 146 rooms and approximately 292 beds.
The population of Shaanxi province is approximately 36,000,000
people and the population of the city of Xi'an is approximately 6,000,000
people. Xi'an is the capital of Shaanxi province and is located approximately
800 miles southwest of Beijing. Xi'an is a well-known tourist destination and is
a center of higher education in the PRC with 46 public universities and 35
special purpose colleges located within Shaanxi province. Xi'an is also a
well-known historical city considered to be one of four major tourist
destinations in the PRC. Tourists are drawn to the city because 13 Chinese
dynasties built their capital there and tourist attractions include the tombs of
71 emperors and the well-known terra cotta soldiers attraction.
The Inn is a full-service hotel with automated air conditioning and
heating systems, television, telephone, fully-equipped bathrooms, a gym and
health club, swimming pool, fishing gardens, beauty and hair salons,
restaurants, steam baths, tea services, karaoke services, mini bars and related
guest services.
The hotel employs 300 persons organized into four departments. A
production department which includes food and beverage, housekeeping and
entertainment divisions, a sales department, an administration department which
includes hotel managers, a human resource division, security division, finance
division and a general hotel management department. The hotel employees are
unionized and we believe our relations with our employees are satisfactory.
The Taohuayuan Inn property consists of 163,611 square feet of
buildings located on approximately 10 acres of land. The buildings are owned by
us but the underlying real estate (as it is throughout the PRC) is owned by the
government and provided to us under land use rights through the year 2065. We
paid a one-time fee of $1,531,000 for the land use rights covering the real
estate underlying the Taohuayuan Inn. The land use rights permit us to operate a
hotel or resort on the property. There is no restriction on our ability to
transfer our land use rights.
The Taohuayuan Inn attracts both business and leisure travelers
seeking upscale amenities and quality designed and decorated rooms at
competitive prices, all under the design of a traditional Chinese inn. The
average room occupancy rate in 2004 was 79% and the average daily room rate for
2004 was $35.60.
Our room rates are set by the PRC government and are priced at rates
which are approximately 20% below that of competitive hotels in the Xi'an
metropolitan area. Our room rates are less than those of our primary competitors
because we offer traditional Chinese-style accommodations rather than the more
expensive western accommodations which are offered by our competitors.
21
We market the Taohuayuan Inn by emphasizing our traditional Chinese
design and through organizing and offering to our customers free entertainment
and music shows in the theme of traditional Chinese festivals and folk art.
Advertising includes magazine and other print media and communications with
travel agencies.
DongJin Taoyuan Villas
In January 2004 we entered into a five year management agreement to
manage DongJin Taoyuan Villas, a hotel and resort property in the outskirts of
Xi'an approximately 10 miles from downtown. We have managed the property, under
similar management agreements, since 1997. . Vacations villas, also known as
vacation villages, would generally be considered in the U.S. as destination
resort and convention hotels. DongJin Taoyuan Villas, which is owned by Shaanxi
New Taohuayuan Economy Trade Co., Ltd., our largest stockholder, is a
self-contained hotel property covering 75 acres and providing most of the
recreational amenities required for a family staying on the property for a week
or longer. The hotel covers 15 acres and is comprised of 17 buildings with 84
rooms and 168 beds. Room rates range from $43 to $120 per night. The hotel
provides the same facilities, services and amenities as the Taohuayuan Inn and
also offers traditional Chinese opera shows.
Under the terms of the management agreement with Shaanxi New
Taohuayuan Economy Trade Co., Ltd. we receive a fixed fee of $423,216 annually
plus a bonus of 15% of the excess of actual revenue over targeted revenue in
exchange for providing all services relating to the operation of the property.
Targeted revenue was $319,354 in 2003, $423,385 in 2004 and is $423,385 for the
twelve months ending December 31, 2005. We did not achieve targeted revenues in
2003 or 2004 and did not earn a bonus for managing this property. As of August
31, 2005, revenue from this property was approximately $187,499. Refer to Note
4(c) to our financial statements for information concerning the amount we have
received for managing this hotel and resort.
Our agreement for the management of this property does not contain any
termination provisions, other than those which are typically found in contracts
and which are based upon a breach of contract. The management agreement may be
renewed or amended with our consent and that of Shaanxi New Taohuayuan Economy
Trade Co., Ltd.
Wenhao Restaurant Management
In January 2004 we entered into a five year management agreement
with Shaanxi Wenhao Zaliang Shifu, Ltd., an affiliate, to manage a chain of
three traditional Chinese restaurants in the PRC. We have managed restaurants
for this company since 1997. Two of the restaurants are in Xi'an, and one is in
Beijing, and one is in Haerbin. The Wenhao restaurants serve a traditional
Chinese village cuisine with emphasis on fresh and healthful foods and
ingredients such as fresh fruits and vegetables and grains.
Under the terms of the management agreement, we receive a management
fee of $1,027,811 plus a bonus of 15% of the excess of actual revenue over
targeted revenue in exchange for providing all services relating to the
operation of the restaurants. We are fully responsible for the operation of the
22
restaurants. Targeted revenue was $866,851 in 2003, $1,028,222 in 2004 and is
$1,028,222 for the twelve months ending December 31, 2005. We did not achieve
targeted revenues in 2003 or 2004 and did not earn a bonus for managing this
property. As of August 31, 2005, revenue from this property was approximately
$404,998. Refer to Note 4(c) to our financial statements for information
concerning the amount we have received for managing these restaurants.
Information regarding the managed restaurants is as follows:
Gross Revenues
-----------------------
Year Six Months
Name of Restaurant Seating Size Ended Ended
and Location Capacity (Square Feet) 12-31-04 6-30-05
- ---------------- -------- ------------- -------- --------
US$ US$
Wenhao Restaurant, Xi'an 900 43,056 3,976,276 2,091,482
Wenhao Restaurant, Xi'an 1,000 45,208 4,264,121 2,167,517
Wenhao Restaurant, Beijing 350 11,840 1,698,382 841,678
Our agreement for the management of this property does not contain any
termination provisions, other than those which are typically found in contracts
and which are based upon a breach of contract. The management agreement may be
renewed or amended with our consent and that of Shaanxi Wenhao Zaliang Shifu,
Ltd.
Future Developments and Strategy
We purchased land use rights covering approximately 848 undeveloped acres
in the city of Lantian for a one-time cost of $15,819,000. Lantian is located
approximately 23 miles from Xi'an. The land use rights, which expire in 2045,
permit us to use the land to build a mixed-use development that will include
condominium units, hotel rooms, single family residences, educational facilities
and commercial developments. As of June 30, 2005 project expenditures were
$11,734,000 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. We will supervise the design, construction and development of this
project. We will operate the project once it is complete.
We have also obtained land use rights covering approximately 7.5
undeveloped acres in Xi'an for a one time cost of $1,228,000. The land use
rights, which expire in 2037, permit us to build a new 150 room, 270 bed, hotel
and resort on the property. The new development, named the New Hainan hotel and
resort, will be water oriented with the hotel surrounding a one-acre pool.
Smaller pools and beaches will compliment the main pool. As of June 30, 2005
project expenditures were $1,228,000 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 will supervise the design, construction and
23
development of this project. We will operate the project once it is complete.
As of June 30, 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. As
of October 15, 2005 we did not have any firm commitments from any third party
with respect to financing either project. If required financing is not be
available the development of the projects may take additional time or we may be
unable to develop the projects.
Competition
There are numerous upscale hotels in the Xi'an metropolitan area.
Competition among hotels primarily involves the age and location of the hotel
and the quality of services provided, since amenities tend to be consistent
among all upscale properties. Our competitors all have recognized trade names,
international reservation systems, greater resources and longer operating
histories than we, and accordingly, we are at a competitive disadvantage in
these areas. However, we offer the only traditional upscale Chinese hotels,
offer similar amenities at slightly lower prices and believe that we can
continue to compete successfully in the hotel industry.
The DongJin Taoyuan Vacation Villas which we manage competes with three
other vacation village or convention-style hotels in the Shaanxi area. Each of
these properties is independently owned, not part of a franchise or reservation
system, and is located outside the market area of our hotel.
The three Wenhao restaurants compete with numerous mid-priced restaurants
in their respective markets. We believe the Wenhao restaurants successfully
compete due to their emphasis on menu items from China's Yellow River Valley.
PRC Laws and Regulations Affecting Our Business
We are regulated in accordance with the PRC's Foreign Invested Enterprise
Law and Wholly Foreign-Owned Enterprise Law, or WFOE Law. Article 8 of the WFOE
Law provides that an enterprise with foreign capital meets the conditions for
being considered a legal person under PRC law and shall acquire the status of a
PRC legal person, in accordance with the law.
Further, the WFOE Law provides in Article 4 that the investments of a
foreign investor in the PRC, the profits it earns and its other lawful rights
and interests are protected by PRC law. Article 5 of the WFOE Law also states
that the PRC cannot nationalize or requisition any enterprise with foreign
capital. Under special circumstances, when public interest requires, enterprises
with foreign capital may be requisitioned by legal procedures and appropriate
compensation must be made.
24
The first two provisions set forth above reflect the principle that the
PRC must protect the interests of the foreign investor. The third provision
reflects the power of all national governments, including the United States, to
nationalize private property under certain circumstances. Those Articles,
combined with the Foreign Invested Enterprise laws, provide that the PRC
government cannot have an intrusive role in the affairs of a Foreign Invested
Enterprise company. To the contrary, those laws place a continuing duty on the
government to ensure that the rights of foreign investors in Foreign Invested
Enterprise companies, as expressed in the approved provisions of Articles of
Association, are protected and preserved.
Based upon the foregoing, and subject to limitations on converting
currency and statutory reserve requirements, we do not believe there are any
limitations concerning our ability to access the assets held by Shaanxi, a PRC
corporation which is our wholly owned subsidiary.
The PRC Legal System
The practical effect of the PRC's legal system on our business operations
in the PRC can be viewed under 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 contracts to Foreign
Invested Enterprise participants. These laws, however, do impose standards
concerning corporate formation and governance, which are not qualitatively
different from the corporation laws of U.S. states.
Similarly, the PRC's accounting laws mandate accounting practices, which
are not consistent with U.S. Generally Accepted Accounting Principles. The PRC
accounting laws require that an annual "statutory audit" be performed in
accordance with PRC's accounting standards and that the books of account of
Foreign Invested Enterprises are maintained in accordance with PRC accounting
laws. Article 14 of the PRC's Wholly Foreign-Owned Enterprise Law requires a
Wholly Foreign-Owned Enterprise to submit certain periodic fiscal reports and
statements to designated financial and tax authorities, at the risk of business
license revocation. As a practical matter, a Foreign Invested Enterprise must
retain a local PRC accounting firm that has experience with both the PRC
standards and U.S. Generally Accepted Accounting Principles. This type of
accounting firm can serve the dual function of performing the annual PRC
statutory audit and preparing the Foreign Invested Enterprise's financial
statements in a form acceptable for an independent U.S. certified public
accountant to issue an audit report in accordance with U.S. Generally Accepted
Accounting Standards.
Second, while the enforcement of substantive rights may appear less clear
than U.S. procedures, the Foreign Invested Enterprises and Wholly Foreign-Owned
Enterprises are PRC registered companies which enjoy the same status as other
PRC registered companies in business-to-business dispute resolution. Therefore,
as a practical matter, although no assurances can be given, the PRC's legal
infrastructure, while different in operation from its U.S. counterpart, should
not present any significant impediment to the operation of Foreign Invested
Enterprises.
25
Earnings and Distributions of the FIE's
The Wholly-Foreign Owned Enterprise laws provide for and guarantee the
distribution of profits to foreign investors in PRC Foreign Invested
Enterprises.
Article 19 of the PRC's Wholly Foreign Owned-Enterprise Law provides that
a foreign investor may remit abroad profits that are earned by a Foreign
Invested Enterprise, as well as other funds remaining after the enterprise is
liquidated.
Taxes
All of our income is generated in the PRC and is subject to a corporate
income tax rate of 33% (30% state income tax and 3% local income tax).
Because PRC business is a controlled foreign corporation, for U.S. federal
income tax purposes, we may be required to include it in our gross income for
U.S. tax purposes:
o Those companies' "Subpart F" income, which includes certain passive
income and income from certain transactions with related persons,
whether or not this income is distributed to it; and
o Increases in those companies' earnings invested in certain U.S.
property.
Based on our current and expected income, assets and operations, we
believe that we will not experience significant U.S. federal income tax
consequences under the controlled foreign corporation rules.
Regulation of Hotel Room Rates
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.
Required Statutory Reserve Funds
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.
26
Although we do not intend to pay dividends, the requirements pertaining to
funding statutory reserves may limit our ability to pay dividends in the future.
Political and Trade Relations with the United States
Political and trade relations between the U.S. and the PRC
government within the past five years have been volatile and may continue to be
in the future. Major causes of this volatility include the U.S.'s considered
revocation of the PRC's Most Favored Nation trade status, illegal transshipments
of textiles from the PRC to the U.S., issues surrounding the sovereignty of
Taiwan, and the U.S.'s bombing of the PRC's embassy in Yugoslavia. While these
factors have had no direct connection to our operations, other on-going causes
of volatility, including the protection of intellectual property rights within
the PRC and sensitive technology transfer from the U.S. to the PRC have closer
potential connection to our operations. There can be no assurance that the
political and trade ramifications of these causes of volatility or the emergence
of new causes of volatility will not cause difficulties in our operations in the
PRC marketplace.
Economic Reform Issues
Although the majority of productive assets in the PRC are owned by
the PRC government, in the past several years the government has implemented
economic reform measures that emphasize decentralization and encourage private
economic activity. Because these economic reform measures may be inconsistent or
ineffectual, there are no assurances that:
o We will be able to capitalize on economic reforms;
o The PRC government will continue its pursuit of economic reform
policies;
o The economic policies, even if pursued, will be successful;
o Economic policies will not be significantly altered from time to time;
and
o Business operations in the PRC will not become subject to the risk of
nationalization.
Since 1978, the PRC government has reformed its economic systems.
Because many reforms are unprecedented or experimental, they are expected to be
refined and improved. Other political, economic and social factors, such as
political changes, changes in the rates of economic growth, unemployment or
inflation, or in the disparities in per capita wealth between regions within the
PRC, could lead to further readjustment of the reform measures. This refining
and readjustment process may negatively affect our operations.
Recently, there have been indications that rates of in the PRC
inflation have increased. In response, the PRC government recently has taken
measures to curb this excessively expansive economy. These measures have
included devaluations of the PRC currency, the Renminbi, restrictions on the
availability of domestic credit, reducing the purchasing capability of certain
of its customers and limited re-centralization of the approval process for
purchases of some foreign products. These austerity measures alone may not
succeed in slowing down the economy's excessive expansion or control inflation,
and may result in severe dislocations in the PRC economy. The PRC may adopt
additional measures to further combat inflation, including the establishment of
freezes or restraints on certain projects or markets.
27
There can be no assurance that the reforms to the PRC's economic
system will continue or that we will not be adversely affected by changes in the
PRC's political, economic, and social conditions and by changes in policies of
the government, such as changes in laws and regulations, measures which may be
introduced to control inflation, changes in the rate or method of taxation,
imposition of additional restrictions on currency conversion and remittance
abroad, and reduction in tariff protection and other import restrictions.
Currency Conversion and Exchange
The currency in the PRC is designated as the Renminbi ("RMB").
Although the RMB/U.S. dollar exchange rate has been relatively stable in the
past five years there can be no assurance that the exchange rate will not become
volatile or that the RMB will not be officially devalued against the U.S. dollar
by direction of the PRC government.
Exchange rate fluctuations may adversely affect our financial
performance because of our foreign currency denominated assets and liabilities,
and may reduce the value, translated or converted, as applicable into U.S.
dollars, of our net fixed assets, our earnings and our declared dividends. We do
not engage in any hedging activities in order to minimize the effect of exchange
rate risks. As of October 25, 2005 the currency exchange rate was 8.08 RMB for
each U.S. dollar.
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.
General Information
We have a total of 325 employees including our executive officers.
Our employees are unionized and we believe that our relations with our employees
are good.
We believe our properties are adequately insured.
28
The cost of compliance with environmental laws in China has been, and is
not expected to be, material.
Our website is www.xintaohuayuan.com.
---------------------
MANAGEMENT
Directors and Executive Officers
The names, ages and positions held by our executive officers and
directors are set forth below.
Name Age Position Officer/Director Since
- ---- --- -------- ----------------------
Chen Jingmin 52 Chairman of the Board of Directors 1997
Cai Danmei 44 Chief Executive Officer, Chief Financial
Officer and a Director 1997
Liu Bo 28 Secretary and a Director 2004
Hu Yangxiong 43 Director 2002
Yang Erping 50 Director 2004
Zhao Jianwen 46 Director 2004
Wang Changzhu 49 Director 2004
Our Audit Committee is composed of Messrs. Hu (Chairman), Yang and
Zhao. Our Compensation Committee is comprised of Messrs. Yang (Chairman), Zhao
and Wang. All of these directors are independent directors as defined in
Commission and American Stock Exchange rules.
Directors serve in such capacity until the next annual meeting of
our stockholders and until their successors have been elected and qualified. Our
officers serve at the discretion of our Board of Directors, until their death,
or until they resign or have been removed from office.
Chen Jingmin founded us in 1997 and has been our Chairman of the
Board since that date. From 1993 to 1997 he was the General Manager of Shaanxi
Wenhao Zaliang Shifu, Ltd. with which we currently have a management agreement.
Cai Danmei has been our Chief Executive Officer and Chief Financial
Officer since our inception in 1997. Since 1993 she has also been an executive
officer of Shaanxi Wenhao Zaliang Shifu, Ltd. with which we have a management
agreement.
Liu Bo graduated from Shaanxi Finance and Economics College in 1999.
Ms. Liu Bo was the Corporate Secretary and a Director of Jinhua Group, Ltd.
between 2000 and 2004. Since 2004 she has been our Corporate Secretary and a
Director.
Hu Yangxiong was employed by Shaanxi Aviation Industry Bureau, a
government agency, as a Senior Accountant and previously as Vice President of
29
the accounting office from 1991 to 2002. He is a Certified Public Accountant and
since 2002 has acted as an accounting consultant.
Yang Erping was Secretary to the Governor of Shaanxi Province from
1995 to 2000. From 2000 to 2003 he was the Chief Information Officer for the
Shaanxi Province Government and from 2003 to the present he has been a Vice
Professor of the Xi'an Finance Institute Management School.
Zhao Jianwen has been the Chief Secretary of the Shaanxi Folk Artist
Association since 1981.
Wang Changzhu has been the Senior Editor and a Director of Shaanxi
Television station since 1983.
Summary Compensation Table
Long Term Compensation
Annual Compensation Awards Payouts
---------------------------------- --------------------- ------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other Securities All
Name and Annual Restricted Underlying Other
Principal Compen- Stock Options/ LTIP Compen-
Position Year Salary($) Bonus sation($) Award(s) SARs(#) Payouts($) sation($)
- ---------------------------------------------------------------------------------------
Chen 2004 0 0 0 0 0 0 0
Jingmin 2003 0 0 0 0 0 0 0
2002 0 0 0 0 0 0 0
- ---------------------------------------------------------------------------------------
Cai 2004 2,250
Danmei 2003 0 0 0 0 0 0 0
2002 0 0 0 0 0 0 0
- ---------------------------------------------------------------------------------------
Liu Bo 2004 1,300
2003 0 0 0 0 0 0 0
2002 0 0 0 0 0 0 0
- ---------------------------------------------------------------------------------------
In May 2004 we entered into three-year employment agreements with Mr. Chen,
Ms. Cai and Ms. Liu which provide for annual salaries of $0, $4,500 and $2,900,
respectively. Each employment contract provides that we will pay for the
employee's medical and accident insurance and that the employee will have two
weeks of paid vacation per year. The employment agreements do not revert the
employees from competing with us during or after their employment with us.
30
PRINCIPAL SHAREHOLDERS
The following table shows, as of the date of this prospectus, the
common stock ownership of (i) each person known by us to be the beneficial owner
of five percent or more of our common stock, (ii) each director individually and
(iii) all officers and directors as a group. Each person has sole voting and
investment power with respect to the shares of common stock shown, and all
ownership is of record and beneficial. The address of each owner is in care of
us at 1# Dongfeng Road, Xi'an Weiyang Tourism Development District, Xi'an,
China.
Number Percent
Name of Shares of Class
---- --------- --------
Chen Jingmin 3,365,016 (1) 19.8%
Cai Danmei 52,632 .3%
Liu Bo -- --%
Hu Yangxiong -- --%
Yang Erping -- --%
Zhao Jianwen -- --%
Wang Changzhu -- --%
All officers and directors
as a group (7 persons) 3,417,648 20.1%
(1) Includes shares owned by Shaanxi New Taohuyuan Economy Trade Co., Ltd.
(2,204,025) Shaanxi Kangze Economic Trade Ltd. (541,796), Shaanxi Wenhao
Restaurant Ltd. (309,598), Shaanxi Taohuayuan Real Estate Development Ltd.
(77,399) and Shaanxi Traditional Decoration Ltd. (77,399) Chen Jingmin
controls these companies and may be considered the beneficial owner of their
shares.
SELLING SHAREHOLDERS AND PLAN OF DISTRIBUTION
The persons listed in the following table plan to offer the shares shown
opposite their respective names by means of this prospectus. The owners of the
common stock to be sold by means of this prospectus are referred to as the
"selling shareholders". The selling shareholders acquired their shares in
exchange for all outstanding shares of Shaanxi New Taohuayuan Culture Tourism
Co., Ltd., a PRC corporation which was merged into us in December 2004.
The selling shareholders include two of our executive officers, Chen
Jingmin and Cai Danmei and five corporations controlled by Mr. Chen.
We will not receive any proceeds from the sale of the shares by the
selling shareholders. Although we will pay all costs of registering the shares
offered by the selling shareholders the selling shareholders will pay all sales
commissions and other costs of the sale of the shares offered by them.
31
Shares to Shares ownership
be sold after this Offering
Shares in this -------------------
Name Owned Offering Number %
- ---- ----- -------- ------ --------
Chen Jingmin 154,799 50,000 104,799 *
Cai Danmei 52,632 30,000 22,632 *
Shaanxi New Taohuayuan Economy
Trade Co. Ltd. 2,204,025 200,000 2,004,025 11.8%
Shaanxi Kangze Economic and
Trade Ltd. 541,796 70,000 471,796 2.8%
Shaanxi Wenhao Restaurant Ltd. 309,598 50,000 259,598 1.5%
Shaanxi Taohuayuan Real Estate 77,399 50,000 27,399 *
Shaanxi Traditional Decoration Ltd. 77,399 50,000 27,399 *
* Less than 1%.
Plan of Distribution
The shares of our common stock which the selling stockholders or their
pledgees, donees, transferees or other successors in interest may offer for
resale will be sold at then prevailing market prices or privately negotiated
prices in one or more of the following transactions:
o Block transactions;
o Transactions on the American Stock Exchange, Electronic Bulletin Board
or on such other market on which our common stock may from time to
time be trading;
o Privately negotiated transactions;
o Through the writing of options on the shares;
o Short sales; or
o Any combination of these transactions.
The sale price to the public in these transactions may be:
o The market price prevailing at the time of sale;
o A price related to the prevailing market price;
o Negotiated prices; or
o Such other price as the selling stockholders determine from time to
time.
The selling stockholders or their pledges, donees, transferees or other
successors in interest, may sell their shares of our common stock directly to
market makers and/or broker-dealers acting as agents for their customers. These
broker-dealers may receive compensation in the form of discounts, concessions or
commissions from the selling stockholders and/or the purchasers of these shares
of our common stock for whom such broker-dealers may act as agents. As to a
particular broker-dealer, this compensation might be in excess of customary
commissions. Neither we nor the selling stockholders can presently estimate the
32
amount of such compensation. Notwithstanding the above, no NASD member will
charge commissions that exceed 8% of the total proceeds of the offering.
Market makers and block purchasers purchasing these shares of our common
stock may do so for their own account and at their own risk. It is possible that
a selling stockholder will attempt to sell shares of our common stock in block
transactions to market makers or other purchasers at a price per share which may
be below the prevailing market price of our common stock. There can be no
assurance that all or any of these shares of our common stock offered hereby
will be issued to, or sold by, the selling stockholders. Upon selling any of
these shares of our common stock offered under this prospectus, the selling
stockholders and any brokers, dealers or agents, hereby, may be deemed
"underwriters" as that term is defined under the Securities Act of 1933 or the
Securities Exchange Act of 1934, or the rules and regulations thereunder.
Alternatively, the selling stockholders may sell all or any part of
their shares through an underwriter. No selling stockholder has entered into any
agreement with a prospective underwriter and there is no assurance that any such
agreement will be entered into. If a selling stockholder enters into an
agreement or agreements with an underwriter, then the relevant details will be
set forth in a supplement or revision to this prospectus.
The selling stockholders may also sell their shares of our common
stock pursuant to Rule 144 under the Securities Act of 1933.
The selling stockholders will have the sole and absolute discretion not to
accept any purchase offer or make any sale of these shares of our common stock
if they deem the purchase price to be unsatisfactory at any particular time.
The selling stockholders and any other persons participating in the
sale or distribution of these shares of our common stock will be subject to
applicable provisions of the Securities Exchange Act of 1934 and the rules and
regulations thereunder including, without limitation, Regulation M. These
provisions may restrict activities of, and limit the timing of purchases and
sales of any of these shares of our common stock by, the selling stockholders.
Furthermore, pursuant to Regulation M, a person engaged in a distribution of
securities is prohibited from bidding for, purchasing or attempting to induce
any person to bid for or purchase our securities for a period beginning five
business days prior to the date of this prospectus until such person is no
longer a selling stockholder. These regulations may affect the marketability of
these shares of our common stock.
None of the selling shareholders are broker/dealers or are affiliated with
broker/dealers.
RELATED PARTY AND OTHER MATERIAL TRANSACTIONS
During 2002 we owed Shaanxi New Taohuayuan Economy Trade Co., Ltd., a
company controlled by our chairman Chen Jingman, $423,385 for money loaned to us
to obtain rights to additional power from the utilities which provide us power.
During 2002 Shaanxi New Taohuayuan Economy Trade Co., Ltd. forgave this debt to
improve our capital structure. The terms of the loan and its forgiveness were
33
determined by Chen Jingmin in his capacity as the Chairman of our Company and as
the controlling shareholder of Shaanxi New Taohuayuan Economy Trade Co., Ltd.
There were no ongoing contractual or other commitments which arose as a result
of this transaction.
As of December 31, 2002 Shaanxi Taohuayuan Real Estate Development Limited
owed us $1,209,673 for amounts we loaned to that company. Shaanxi Taohuayuan
Real Estate Development Limited, which is controlled by Chen Jingmin, repaid
this loan in 2003.
On December 6, 2004 we merged Shaanxi New Taohuayuan Culture Tourism Co.,
Ltd., a PRC company organized in September 1997, into us. In connection with
this merger we issued 17,027,328 shares of our common stock to the shareholders
of Shaanxi New Taohuayuan Culture Tourism Co., Ltd. The purpose of the merger
was to redomicile us as a Nevada corporation. In correction with the merger, the
following members of our management and affiliates received shares of our common
stock:
o Chen Jingmin, 154,799 shares;
o Cai Danmei, 52,632 shares; and
o The following companies which are controlled by Chen Jingmin:
Shaanxi New Taohuayuan Economy Trade Co., Ltd., 2,204,025 shares.
Shaanxi Kangze Economic and Trade Ltd.; 541,796 shares
Shanaxi Wenhao Restaurant Ltd.; 309,598 shares
Shaanxi Taohuayuan Real Estate Development Ltd.; 77,399 shares, and
Shaanxi Traditional Decoration Ltd.; 77,399 shares
We currently receive management fees from Shaanxi New Taohuayuan Economy
Trade Co., Ltd., our largest stockholder, for managing its DongJin Taoyuan
Villas and from Shaanxi Wenhao Zaliang Shifu, Ltd., for managing its three
restaurants. Shaanxi New Taohuayuan Economy Trade Co., Ltd. and Shaanxi Wenhao
Zaliang Shifu, Ltd. are controlled by Chen Jingmin, our chairman. Details
regarding our management agreements, which were not negotiated at arms length,
with respect to these properties can be found in the "Business" section of this
prospectus.
DESCRIPTION OF CAPITAL STOCK
General
We are authorized to issue 50,000,000 shares of our common stock,
$.001 par value per share, and 10,000,000 shares of preferred stock, $.001 par
value per share. See "Business-PRC Laws and Regulations Affecting our Business"
for information concerning PRC laws and regulations which could impact the
rights of our shareholders or limit our ability to pay dividends.
34
Common Stock
Currently, there are 17,027,328 shares of common stock outstanding held by
934 stockholders. The holders of common stock are entitled to one vote per share
on all matters submitted to a vote of stockholders, including the election of
directors. There is no right to cumulate votes in the election of directors. The
holders of common stock are entitled to any dividends that may be declared by
the Board of Directors out of funds legally available therefor subject to the
prior rights of holders of preferred stock and any contractual restrictions we
have against the payment of dividends on common stock. In the event of our
liquidation or dissolution, holders of common stock are entitled to share
ratably in all assets remaining after payment of liabilities and the liquidation
preferences of any outstanding shares of preferred stock.
Holders of common stock have no preemptive rights and have no right to
convert their common stock into any other securities.
Preferred Stock
We are authorized to issue 10,000,000 shares of $.001 par value preferred
stock in one or more series with such designations, voting powers, if any,
preferences and relative, participating, optional or other special rights, and
such qualifications, limitations and restrictions, as are determined by
resolution of our Board of Directors. The issuance of preferred stock may have
the effect of delaying, deferring or preventing a change in control of our
company without further action by stockholders and could adversely affect the
rights and powers, including voting rights, of the holders of common stock. In
certain circumstances, the issuance of preferred stock could depress the market
price of the common stock. There are no shares of Preferred Stock outstanding.
Limitation on Liability
Under our Articles of Incorporation, our directors are not liable for
monetary damages for breach of fiduciary duty, except in connection with:
o a breach of the director's duty of loyalty to us or our stockholders;
o acts or omissions not in good faith or which involve intentional
misconduct, fraud or a knowing violation of law;
o a transaction from which our director received an improper benefit; or
o an act or omission for which the liability of a director is expressly
provided under Nevada law.
In addition, our Articles of Incorporation provide that we must indemnify
our officers and directors to the fullest extent permitted by Nevada law for all
expenses incurred in the settlement of any actions against such persons in
connection with their having served as officers or directors.
35
Insofar as the limitation of, or indemnification for, liabilities arising
under the Securities Act of 1933 may be permitted to directors, officers, or
persons controlling us pursuant to the foregoing, or otherwise, we have been
advised that, in the opinion of the Securities and Exchange Commission, such
limitation or indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable.
Dividends
We do not intend to pay dividends on our capital stock in the foreseeable
future.
Transfer Agent
Corporate Stock Transfer, Inc., Denver, Colorado, is our transfer agent.
SHARES ELIGIBLE FOR FUTURE SALE
We have 17,027,328 shares of common stock outstanding, all of which may be
sold pursuant to Rule 144.
In general, under Rule 144 as currently in effect, a person, or persons
whose shares are aggregated, who owns shares that were purchased from us, or any
affiliate, at least one year previously, including a person who may be deemed
our affiliate, is entitled to sell within any three month period, a number of
shares that does not exceed the greater of:
o 1% of the then outstanding shares of our common stock; or
o The average weekly trading volume of our common stock during the four
calendar weeks preceding the date on which notice of the sale is
filed with the Securities and Exchange Commission.
Sales under Rule 144 are also subject to manner of sale provisions, notice
requirements and the availability of current public information about us. Any
person who is not deemed to have been our affiliate at any time during the 90
days preceding a sale, and who owns shares within the definition of "restricted
securities" under Rule 144 under the Securities Act that were purchased from us,
or any affiliate, at least two years previously, is entitled to sell such shares
under Rule 144(k) without regard to the volume limitations, manner of sale
provisions, public information requirements or notice requirements.
Future sales of restricted common stock under Rule 144 or otherwise or of
the shares which we are registering under this prospectus could negatively
impact the market price of our common stock. We are unable to estimate the
number of shares that may be sold in the future by our existing stockholders or
the effect, if any, that sales of shares by such stockholders will have on the
market price of our common stock prevailing from time to time. Sales of
substantial amounts of our common stock by existing stockholders could adversely
affect prevailing market prices.
36
EXPERTS
Our audited financial statements included in this prospectus as of and for
the years ended December 31, 2003 and 2004 have been included in reliance on the
reports of Moores Rowland Mazars, independent registered certified public
accountants, given on the authority of this firm as experts in accounting and
auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission, Washington, D.C.
20549, a registration statement on Form SB-2 under the Securities Act of 1933
with respect to the common stock offered by this prospectus. This prospectus
does not contain all of the information set forth in the registration statement
and the exhibits to the registration statement. For further information with
respect to New Taohuayuan Culture Tourism Co., Ltd. and our common stock offered
hereby, reference is made to the registration statement and the exhibits filed
as part of the registration statement. Following the effective date of the
prospectus, we will be required to file periodic reports with the Securities and
Exchange Commission, including quarterly reports, annual reports which include
our audited financial statements and proxy statements. The registration
statement, including exhibits thereto, and all of our periodic reports may be
inspected without charge at the Securities and Exchange Commission's principal
office in Washington, D.C., and copies of all or any part thereof may be
obtained from the Public Reference Section of the Securities and Exchange
Commission, 100 F Street N.E., Washington, D.C. 20549. You may obtain additional
information regarding the operation of the Public Reference Section by calling
the Securities and Exchange Commission at 1-800-SEC-0330. The Securities and
Exchange Commission also maintains a web site which provides online access to
reports, proxy and information statements and other information regarding
registrants that file electronically with the Securities and Exchange Commission
at the address: http://www.sec.gov.
37
Financial Statements
New Taohuayuan Culture Tourism Company Limited
Six months ended June 30, 2005 and 2004 and
Years ended December 31, 2004 and 2003
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
New Taohuayuan Culture Tourism Company Limited
We have audited the accompanying consolidated balance sheets of New Taohuayuan
Culture Tourism Company Limited and its subsidiary (the "Company") as of
December 31, 2004 and 2003 and the related consolidated statements of
operations, stockholders' equity and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the auditing standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of December 31,
2004 and 2003 and the results of its operations and its cash flows for the years
then ended, in conformity with accounting principles generally accepted in the
United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in note 2 to the
financial statements, the Company has a negative working capital that raises
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 2. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
MOORES ROWLAND MAZARS
Chartered Accountants
Certified Public Accountants
Hong Kong, May 19, 2005
New Taohuayuan Culture Tourism Company Limited
Consolidated Statements of Operations
- --------------------------------------------------------------------------------
The financial statements should be read in conjunction with the accompanying
notes.
- --------------------------------------------------------------------------------
(Unaudited) (Audited)
Six months ended Year ended
June 30, December 31,
---------------- -----------------
2005 2004 2004 2003
Note US$ US$ US$ US$
Operating revenues
Catering services income 1,057,140 1,064,342 2,607,094 1,842,118
Hotel and related services
income 761,551 823,201 1,658,536 1,491,938
Management fee income 4(c) 725,803 698,949 1,405,639 1,065,721
---------- --------- --------- ---------
2,544,494 2,586,492 5,671,269 4,399,777
---------- --------- --------- ---------
Operating expenses
Depreciation 248,016 252,157 498,624 503,661
Raw materials and
consumables used 409,801 424,007 992,954 754,352
Salaries, wages and
allowances 160,892 146,736 285,910 308,019
General and administrative
expenses 232,418 167,969 1,316,660 467,737
Other taxes 146,324 207,621 427,325 252,949
---------- --------- --------- ---------
Total operating expenses 1,197,451 1,198,490 3,521,473 2,286,718
---------- --------- --------- ---------
Income from operations 1,347,043 1,388,002 2,149,796 2,113,059
---------- --------- --------- ---------
Non-operating income
(expense)
Interest income 208 636 1,862 296,805
Sundry income 9,546 56,390 31,017 62,170
Surcharge on taxes 8(b) (542,321) (404,766) (809,532) (521,834)
---------- --------- --------- ---------
(532,567) (347,740) (776,653) (162,859)
---------- --------- --------- ---------
Income before income tax 814,476 1,040,262 1,373,143 1,950,200
Income tax 3 (405,193) (409,120) (760,622) (815,771)
---------- --------- --------- ---------
Net income 409,283 631,142 612,521 1,134,429
========== =========== ========== ==========
Earnings per share
- - Basic 0.02 0.03 0.04 0.07
- - Diluted 0.02 0.03 0.04 0.07
========== =========== ========== ==========
The financial statements should be read in conjunction with the accompanying
notes.
New Taohuayuan Culture Tourism Company Limited
- --------------------------------------------------------------------------------
Consolidated Balance Sheets
(Unaudited) (Audited)
As of As of
June 30, December 31,
------------ ---------------------
2005 2004 2003
ASSETS Note US$ US$ US$
Current assets
Bank balances and cash 52,488 93,294 407,611
Trade receivables 32,481 31,027 21,988
Prepayments and other debtors 44,681 12,416 39,115
Inventories 48,265 44,861 54,056
Due from related parties 4(b) 499,244 305,123 1,282,551
----------- ---------- ----------
Total current assets 677,159 486,721 1,805,321
Property, plant and equipment,
net 5 8,962,998 9,205,203 9,560,454
Prepayments 6 13,064,463 11,612,856 8,528,191
Deferred tax assets 566,554 492,758 348,330
----------- ---------- ----------
Total assets 23,271,174 21,797,538 20,242,296
============ ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Trade payables 208,105 174,251 156,456
Accrued charges and other creditors 571,530 616,955 54,683
Deposits 62,668 66,932 78,975
Income tax payable 4,109,025 3,630,035 2,724,985
Other taxes payable 1,404,657 1,322,617 945,368
Surcharge on taxes payable 8(b) 2,375,062 1,832,741 1,023,209
Dividend payable 2,329 25,492 291,019
----------- ---------- ----------
Total current liabilities 8,733,376 7,669,023 5,274,695
----------- ---------- ----------
Commitments and contingencies 8
Stockholders' equity 7
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$0.001 50,000,000 shares
of stock authorized, 17,027,328
shares of stock issued and outstanding 17,027 17,027 17,027
Additional paid-in capital 14,922,428 14,922,428 14,922,428
Statutory reserves 1,271,817 1,271,817 1,016,558
Accumulated losses (1,673,474) (2,082,757) (988,412)
----------- ---------- ----------
Total stockholders' equity 14,537,798 14,128,515 14,967,601
----------- ---------- ----------
Total liabilities and
stockholders' equity 23,271,174 21,797,538 20,242,296
=========== ========== ==========
The financial statements should be read in conjunction with the accompanying
notes.
New Taohuayuan Culture Tourism Company Limited
- --------------------------------------------------------------------------------
Consolidated Statements of Stockholders' Equity
Share capital
-----------------
No. of Paid-in Statutory Accumulated
Shares Amount Capital Reserves Losses Total
US$ US$ US$ US$ US$
(Audited)
Balance as of
January 1, 2003 17,027,328 17,027 14,922,427 60,375 (415,051) 15,284,779
Net income for the year - - - - 1,134,429 1,134,429
Dividend declared - - - - (1,451,607) (1,451,607)
Transfer to statutory
reserves - - - 256,183 (256,183) -
Balances as of December
31, 2003 17,027,328 17,027 14,922,428 1,016,558 (988,412) 14,967,601
Net income for the year - - - - 612,521 612,521
Dividend declared - - - - (1,451,607) (1,451,607)
Transfer to statutory
reserves - - - 255,259 (255,259) -
---------- -------- ---------- --------- ----------- ----------
Balances as of
December 31, 2004 17,027,328 17,027 14,922,428 1,271,817 (2,082,757) 14,128,515
========== ======== ========== ========= =========== ==========
(Unaudited)
Balances as of
January 1, 2005 17,027,328 17,027 14,922,428 1,271,817 (2,082,757) 14,128,515
Net income for the period - - - - 409,283 409,283
Balances as of
June 30, 2005 17,027,328 17,027 14,922,428 1,271,817 (1,673,474) 14,537,798
========== ======== ========== ========= =========== ==========
The financial statements should be read in conjunction with the accompanying
notes.
New Taohuayuan Culture Tourism Company Limited
- --------------------------------------------------------------------------------
Consolidated Statements of Cash Flows
(Unaudited) (Audited)
Six months ended Year ended
June 30, December 31,
---------------- ------------------
2005 2004 2004 2003
US$ US$ US$ US$
Cash flows from operating
activities:
Net income 409,283 631,142 612,521 1,134,429
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation 248,016 252,157 498,624 503,661
Loss on disposal of property,
plant and equipment - 40,358 42,148 -
Changes in working capital:
Trade receivables (1,454) (20,767) (9,039) 6,530
Prepayments and other debtors (32,265) (69,842) 26,699 (6,480)
Inventories (3,404) 8,801 9,195 4,688
Due from related parties (194,121) 835,080 977,428 3,908,848
Trade payables 33,854 125,069 17,795 (138,537)
Accrued charges and other creditors (45,425) 22,306 562,272 (149,515)
Deposits (4,264) 2,280 (12,043) 11,576
Income tax payable 478,990 485,151 905,050 841,198
Other taxes payable 82,040 165,333 377,249 260,896
Surcharge on taxes 542,321 404,766 809,532 521,834
Deferred tax assets (73,796) (76,030) (144,428) (25,427)
---------- --------- --------- ----------
Net cash provided by operating
activities 1,439,775 2,805,804 4,673,003 6,873,701
---------- --------- --------- ----------
Cash flows from investing
activities:
Purchase of property, plant and
equipment (5,811) (107,828) (194,026) (31,302)
Prepayments (1,451,607)(1,330,640)(3,084,665)(8,528,191)
Sale proceeds from disposal of
property, plant and equipment - 7,863 8,505 -
---------- --------- --------- ----------
Net cash used in investing
activities (1,457,418)(1,430,605)(3,270,186) (8,559,493)
----------- --------- --------- ----------
Cash flows from financing activities:
Dividend paid (23,163) (1,716,679) (1,717,134)(1,366,840)
---------- --------- --------- ----------
Net decrease in cash and cash
equivalents (40,806) (341,480) (314,317)(3,052,632)
Cash and cash equivalents at
beginning of period/year 93,294 407,611 407,611 3,460,243
---------- --------- --------- ----------
Cash and cash equivalents at end
of period/year, represented
by bank balances and cash 52,488 66,131 93,294 407,611
========== ========== ========== ==========
The financial statements should be read in conjunction with the accompanying
notes.
New Taohuayuan Culture Tourism Company Limited
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Notes to the Financial Statements
- --------------------------------------------------------------------------------
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
New Taohuayuan Culture Tourism Company Limited ("New Tao" or the
"Company") 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
(New Taohuayuan Culture Tourism Company Limited).
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, 2003.
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.
2. 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 ("USGAAP").
New Taohuayuan Culture Tourism Company Limited
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Notes to the Financial Statements
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Preparation of financial statements
The Company had negative working capital of US$8,056,217 and US$7,182,302
as of June 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 8(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 4(c)(i)).
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.
There was no significant fluctuation in the exchange rate of United States
dollar to RMB and the exchange rate adopted was US$1 = RMB8.2667.
Comprehensive income and accumulated other comprehensive income are not
material to the financial statements.
New Taohuayuan Culture Tourism Company Limited
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Notes to the Financial Statements
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Earnings per share
Basic earnings per share are computed by dividing net income available to
common stockholders by the weighted average number of common stocks
outstanding for the periods.
The calculation of diluted earnings per share is based on net income
available to common shareholders and on the weighted average number of
common stocks outstanding adjusted to reflect potentially dilutive
securities. There were no potentially dilutive securities outstanding
during any of the periods and accordingly, basic and diluted earnings per
share are the same.
Trade receivables
Trade receivables are recorded at original invoice amount, less an
estimated allowance for uncollectible accounts. Trade credit is generally
granted on a short-term basis, thus trade receivables do not bear
interest. Trade receivables are periodically evaluated for collectibility
based on past credit history with customers and their current financial
condition. Changes in the estimated collectibility of trade receivables
are recorded in the results of operations for the period in which the
estimate is revised. Trade receivables deemed uncollectible are offset
against the allowance for uncollectible accounts. The Company generally
does not require collateral for trade receivables.
Inventories
Inventories, mainly comprised of raw materials and consumables, are stated
at the lower of cost or market. Potential losses from obsolete and
slow-moving inventories are provided for when identified. Cost, which
comprises all costs of purchase and, where applicable, other costs that
have been incurred in bringing the inventories to their present location
and condition, is calculated using the first-in, first-out method.
Cash equivalents
Cash equivalents include all highly liquid investments with original
maturities of three months or less that are readily convertible to known
amounts of cash and are so near maturity that they represent insignificant
risk of changes in value because of changes in interest rates.
Use of estimates The preparation of financial statements in conformity
with USGAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the 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. Such estimates include but are not limited to
depreciation, taxes and contingencies. Actual results could differ from
those estimates.
Fair value of financial instruments
The estimated fair values for financial instruments under SFAS No. 107,
"Disclosures about Fair Value of Financial Instruments", are determined at
discrete points in time based on relevant market information. These
estimates involve uncertainties and cannot be determined with precision.
The estimated fair values of the Company's financial instruments, which
include cash, trade receivables and trade payables, approximate their
carrying values in the financial statements due to the short-term
maturities of these assets and liabilities.
New Taohuayuan Culture Tourism Company Limited
- --------------------------------------------------------------------------------
Notes to the Financial Statements
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 an
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.
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:
Leasehold land over the unexpired term of leases Buildings 40 years
Other building structures 15 years Fixtures and fiittings 15 years
Electrical equipments 12 years Motor vehicles 10 years Other equipments
10 years
Impairment of long-lived assets
Long-lived assets are evaluated for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable in accordance with SFAS No. 144 "Accounting for the Impairment
or Disposal of Long-Lived Assets". An asset is considered impaired if its
carrying amount exceeds the future net cash flows the asset is expected to
generate. If such asset is considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the
asset exceeds its fair value. The recoverability of long-lived assets is
assessed by determining whether the unamortized balances can be recovered
through undiscounted future net cash flows of the related assets. The
amount of impairment, if any, is measured based on projected discounted
future net cash flows using a discount rate reflecting the Company's
average cost of capital.
Related parties
Parties are considered to be related if one party has the ability,
directly or indirectly, to control the other party, or exercise
significant influence over the other party in making financial and
operating decisions. Parties are also considered to be related if they are
subject to common control or common significant influence.
New Taohuayuan Culture Tourism Company Limited
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Notes to the Financial Statements
- --------------------------------------------------------------------------------
3. INCOME TAX
The Company is subject to the PRC enterprise income tax at the rate of
33%. The income tax expense comprised:
(Unaudited) (Audited)
Six months ended Year ended
June 30, December 31,
---------------------- -------------------
2005 2004 2004 2003
US$ US$ US$ US$
Current tax expense 478,990 485,150 905,050 841,198
Deferred tax benefit (73,797) (76,030) (144,428) (25,427)
-------- -------- --------- ---------
405,193 409,120 760,622 815,771
======== ======== ========= =========
A reconciliation of the PRC enterprise income tax rate to the effective
income tax rate is as follows:
(Unaudited) (Audited)
Six months ended Year ended
June 30, December 31,
---------------------- -------------------
2005 2004 2004 2003
% % % %
Statutory rate 33 33 33 33
Surcharge on taxes not
deductible for PRC
enterprise income tax
purposes 22 13 19 9
Others (3) (7) 3 -
---------- ---------- --------- -------
Effective tax rate 50 39 55 42
========== ========== ========= =======
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amount of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The
Company's deferred tax assets represent deductible temporary differences
arising mainly from the impairment loss on property, plant and equipment
recognized in a prior year and the additional provision for other taxes.
New Taohuayuan Culture Tourism Company Limited
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Notes to the Financial Statements
- --------------------------------------------------------------------------------
4. 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 Economy The principal stockholder of the
Trade Company Limited Company in which Chen Jingmin has
("Trading Company") * control and a beneficial interest
Shaanxi Wenhao Zaliang Shifu, A stockholder and a fellow
Limited ("Wenhao") * subsidiary of the Company in
which Chen Jingmin has control
and a beneficial interest
Shaanxi Kangze Economic and Trade A stockholder of the Company in
Limited ("Kangze") * 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) (Audited)
As of As of
June 30, December 31,
------------ --------------------
2005 2004 2003
Note US$ US$ US$
Due from Trading Company (i) 327,161 112,739 970,605
Due from Wenhao (ii) 172,083 192,384 310,688
Due from Kangze (ii) - - 1,258
------------ ----------- ----------
499,244 305,123 1,282,551
============ =========== ==========
(i) The amount due from Trading Company is unsecured and has no fixed
repayment terms. Interest was charged on the outstanding balance due
from Trading Company at the average rate of 7.9% per annum for the
year ended December 31, 2003. No interest was charged for the six
months ended June 30, 2005 and the year ended December 31, 2004.
(ii) The amounts due from Wenhao and Kangze are unsecured,
interest-free and have no fixed repayment terms.
New Taohuayuan Culture Tourism Company Limited
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Notes to the Financial Statements
- --------------------------------------------------------------------------------
4. RELATED PARTY TRANSACTIONS (CONTINUED)
(c) Summary of related party transactions
(Unaudited) (Audited)
Six months ended Year ended
June 30, December 31,
------------------- ----------------
Note 2005 2004 2004 2003
US$ US$ US$ US$
Management fee income earned from:
- Trading Company (i) 211,692 204,677 411,773 297,337
- Wenhao (i) 514,111 494,272 993,866 768,384
Interest income
earned from Trading
Company (ii) - - - 296,745
Laundry income earned
from: - - - -
- Trading company (iii) 10,887 10,887 7,863 -
- Wenhao (iii) 14,516 14,516 42,944 -
Rental and other
services income
earned from Trading
Company (iv) 292,048 - 32,292 -
========= ========= ========= =======
(i) Pursuant to the agreements entered into between the Company and the
related parties, the Company provides management services including
recruitment and training of staff, setting internal control and
management policies, providing the cuisine menu and related services.
The management fee is calculated as 10% of the operating revenue of
the related parties and the agreements are renewable annually until
December 31, 2003.
The Company entered into new 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$423,385 and US$1,028,222
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 six months ended June 30,
2005 and the year ended December 31, 2004.
(ii) Interest was charged on the outstanding balance due from Trading
Company at the average rate of 7.9% per annum for the year ended
December 31, 2003. No interest was charged for the six months ended
June 30, 2005 and the year ended December 31, 2004.
(iii) 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$21,774 and US$29,032, respectively.
(iv) The Company entered into a rental agreement with Trading Company on
January 15, 2004. The rental income was charged at a 50% discount of
the standard daily rate.
New Taohuayuan Culture Tourism Company Limited
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Notes to the Financial Statements
- --------------------------------------------------------------------------------
5. PROPERTY, PLANT AND EQUIPMENT
(Unaudited) (Audited)
As of As of
June 30, December 31,
----------- ------------------------
2005 2004 2003
US$ US$ US$
Leasehold land 2,759,049 2,759,049 2,759,049
Buildings 6,012,124 6,012,124 5,835,512
Other building structures 1,417,619 1,417,619 1,417,619
Electric equipments 373,054 373,054 373,054
Fixtures and fittings 1,277,886 1,277,886 1,277,886
Motor vehicles 258,873 258,873 400,959
Other equipments 803,160 797,349 788,511
----------- ----------- ------------
Cost 12,901,765 12,895,954 12,852,590
Less: Accumulated
depreciation (3,938,767) (3,690,751) (3,292,136)
----------- ----------- ------------
Property, plant and
equipment, net 8,962,998 9,205,203 9,560,454
=========== =========== ============
The leasehold land is situated in the PRC and the leases are granted for:
(Unaudited) (Audited)
As of As of
June 30, December 31,
----------- ------------------------
2005 2004 2003
US$ US$ US$
40 years until 2037 1,228,379 1,228,379 1,228,379
68 years until 2065 1,530,670 1,530,670 1,530,670
----------- ----------- -----------
2,759,049 2,759,049 2,759,049
=========== =========== ===========
6. PREPAYMENTS
The balances as of June 30, 2005, December 31, 2004 and 2003 included
prepayments of US$11,733,824, US$10,282,217 and US$8,528,191 made to the
local government for acquisition of a piece of land in the PRC. Pursuant
to an agreement signed on May 26, 2002 (the "Agreement"), total estimated
consideration for the land is US$14,516,070. 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
June 30, 2005, the Company paid design and planning fees of US$1,330,639.
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.
New Taohuayuan Culture Tourism Company Limited
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Notes to the Financial Statements
- --------------------------------------------------------------------------------
6. PREPAYMENTS (CONTINUED)
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. STOCKHOLDERS' EQUITY
(a) Share capital
Details of the share capital of the Company are disclosed in note 1
to the financial statements.
(b) Additional paid-in capital
As discussed in note 1 to the financial statements, the difference
between the par value of shares of New Tao issued for the Transaction
and the par value of shares of Shaanxi THY of US$12,079,698 was
recorded as additional paid-in capital.
On incorporation of Shaanxi THY, the stockholders contributed net
assets of US$14,516,070 to subscribe for the share capital of
US$12,096,725. The excess of the value of the net assets contributed
over the registered capital of Shaanxi THY of US$2,419,345 was
recorded as additional paid-in capital.
(c) Statutory reserves
Statutory reserves include a statutory surplus reserve and a
statutory public welfare fund, which are maintained in accordance
with the legal requirements in the PRC.
Pursuant to the Articles of Association, the Company has to
appropriate 10% and 5% to 10% of the net income, based on the
accounts prepared in accordance with accounting principles generally
accepted in the PRC, to the statutory surplus reserve and statutory
public welfare fund, respectively.The statutory surplus reserve can
be utilized to offset prior years' losses or for capitalization as
paid-in capital, whereas the statutory public welfare fund shall be
utilized for collective staff welfare benefits such as building of
staff quarters or housing. No distribution of the statutory reserves
shall be made other than on liquidation of the Company.
New Taohuayuan Culture Tourism Company Limited
- --------------------------------------------------------------------------------
Notes to the Financial Statements
- --------------------------------------------------------------------------------
8. COMMITMENTS AND CONTINGENCIES
(a) Capital commitment
As of June 30, 2005, December 31, 2004 and 2003, 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$2,782,246, US$4,233,853
and US$5,987,879 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$120,967 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.
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.
9. RETIREMENT BENEFITS AND OTHER EMPLOYMENT BENEFITS
As stipulated by the rules and regulations in the PRC, the Company is
required to contribute to a state-sponsored social insurance plan for all
of its employees who are residents in the PRC at rates ranging from 12% to
17% of the basic salary of its employees. The Company has no further
obligations for the actual pension payments or post-retirement benefits
beyond the annual contributions. The state-sponsored retirement plan is
responsible for the entire pension obligations payable to all employees.
10. OPERATING RISK
(a) Country riskThe Company may be exposed to risks as a result of its
operations being carried out in the PRC. These include risks
associated with, among others, the political, economic and legal
environmental and foreign currency exchange. The Company's results may
be adversely affected by changes in the political and social
conditions in the PRC, and 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. The Company's management does not believe these
risks to be significant. There can be no assurance, however, those
changes in political and other conditions will not result in any
adverse impact.
New Taohuayuan Culture Tourism Company Limited
- --------------------------------------------------------------------------------
Notes to the Financial Statements
- --------------------------------------------------------------------------------
10. OPERATING RISK
(b) Bank balances and cash
The Company maintains its cash balances with various banks and trust
companies located in the PRC. Consistent with local practice, such
amounts are not insured or otherwise protected should the amounts
placed with the banks and trust companies be non-recoverable. There
has been no history of credit losses in these regards.
(c) Credit risk
Credit risk represents the accounting loss that would be recognized
at the reporting date if counterparties failed completely to perform
as contracted. Concentrations of credit risk (whether on or off
balance sheet) that arise from financial instruments exist for groups
of customers or counterparties when there are similar economic
characteristics that would cause their ability to meet contractual
obligations to be similarly affected by changes in economic or other
conditions. Since a majority of the Company's business is on a cash
basis and credit is only granted to limited customers, it does not
consider itself be exposed to significant credit risk with regards to
collection of the receivables. There was no significant credit loss
during the six months ended June 30, 2005 and the years ended
December 31, 2004 and 2003.
- --------------------------------------------------------------------------------
NEW TAOHUAYUAN CULTURE TOURISM CO., LTD.
500,000 shares of common stock
No dealer, salesperson or other person has been authorized to give any
information or to make any representation not contained in this prospectus, and
if given or made, such information or representations must not be relied upon as
having been authorized by New Taohuayuan Culture Tourism Co., Ltd. This
prospectus does not constitute an offer to sell, or a solicitation of an offer
to buy, any of the securities offered in any jurisdiction to any person to whom
it is unlawful to make an offer by means of this prospectus.