UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2006
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to ________.
Commission File Number - None
NEW TAOHUAYUAN CULTURE TOURISM CO., LTD.
Nevada 98-0440893
- --------------------------- -------------------------
State or other jurisdiction (I.R.S.) Employer
of incorporation Identification No.
1# Dongfeng Road
Xi'an Weiyang Tourism Development District
Xi'an, China
Address of principal executive offices
0086-29-86671555
Registrant's telephone number, including area code
N/A
Former address of principal executive offices
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports) and (2) had been subject to such filing
requirements for the past 90 days.
Yes X No
--------- ----
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act):
Yes No X
-------- ------
As of May 15, 2006 the Company had 17,027,328 outstanding shares of common
stock.
Condensed Consolidated Financial Statements
New Taohuayuan Culture Tourism Company Limited
Three months ended March 31, 2006 and 2005
New Taohuayuan Culture Tourism Company Limited
Condensed Consolidated Statements of Operations
- -------------------------------------------------------------------------------
(Unaudited)
Three months ended
March 31,
---------------------
2006 2005
Note US$ US$
Operating revenues
Catering services income 497,809 447,730
Hotel and related services income 384,922 326,983
Management fee income 5(c) 312,756 362,902
--------- ---------
1,195,487 1,137,615
--------- ---------
Operating expenses
Depreciation 127,156 123,969
Raw materials and consumables used 199,842 171,346
Salaries, wages and allowances 91,933 80,321
General and administrative expenses 137,048 133,794
Other taxes 62,493 70,093
--------- ---------
Total operating expenses 618,472 579,523
--------- ---------
Income from operations 577,015 558,092
--------- ---------
Non-operating income (expense)
Interest income 296 20
Sundry income 3,988 1,985
Surcharge on taxes 7(b) (367,457) (293,088)
--------- ---------
(363,173) (291,083)
--------- ---------
Income before income tax 213,842 267,009
Income tax 4 (278,374) (198,926)
--------- ---------
Net (loss) income (64,532) 68,083
========= =========
Earnings (Loss) per share
- - Basic 0.00 0.00
- - Diluted 0.00 0.00
========= =========
The financial statements should be read in conjunction with the accompanying
notes.
1 of 9
New Taohuayuan Culture Tourism Company Limited
Condensed Consolidated Balance Sheet
- -------------------------------------------------------------------------------
(Unaudited)
As of
March 31,
2006 US$
ASSETS Note
Current assets
Bank balances and cash 52,732
Trade receivables 30,580
Prepayments and other debtors 40,999
Inventories 44,205
Due from related parties 5(b) 786,298
---------
Total current assets 954,814
Property, plant and equipment, net 8,808,165
Prepayments 6 15,842,188
Deferred tax assets 739,838
-----------
Total assets 26,345,005
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Trade payables 124,908
Accrued charges and other creditors 867,719
Deposits 56,866
Income tax payable 5,062,334
Other taxes payable 1,662,982
Surcharge on taxes payable 7(b) 3,101,507
-----------
Total current liabilities 10,876,316
----------
Commitments and contingencies 7
Stockholders' equity
Preferred stock, par value of US$0.001
10,000,000 shares of stock authorized,
none issued and outstanding
Common stock, par value of US$0.001 50,000,000
shares of stock authorized, 17,027,328
shares of stock issued and outstanding 17,027
Additional paid-in capital 14,922,428
Statutory reserves 1,584,607
Other comprehensive income 352,710
Accumulated losses (1,408,083)
------------
Total stockholders' equity 15,468,689
-----------
Total liabilities and stockholders' equity 26,345,005
============
The financial statements should be read in conjunction with the accompanying
notes.
2 of 9
New Taohuayuan Culture Tourism Company Limited
Condensed Consolidated Statements of Cash Flows
- -------------------------------------------------------------------------------
(Unaudited)
Three months ended
March 31,
-----------------------
2006 2005
US$ US$
Cash flows from operating activities:
Net (loss) income (64,532) 68,083
Adjustments to reconcile net (loss) income to
net cash provided by operating activities:
Depreciation 127,156 123,969
Changes in working capital:
Trade receivables (10,594) 1,311
Prepayments and other debtors (1,621) (3,494)
Inventories (103) (3,539)
Due from related parties (77,631) (277,141)
Trade payables (34,338) 17,052
Accrued charges and other creditors (4,758) (14,791)
Deposits (25,784) 7,077
Income tax payable 223,737 201,554
Other taxes payable 43,550 33,078
Surcharge on taxes 367,457 293,088
Deferred tax assets 54,637 (2,628)
---------- -----------
Net cash provided by operating activities 597,176 443,619
--------- ---------
Cash flows from investing activities:
Purchase of property, plant and equipment (5,914) (5,812)
Prepayments (606,933) (471,773)
--------- --------
Net cash used in investing activities (612,847) (477,585)
-------- --------
Net decrease in cash and cash equivalents (15,671) (33,966)
Cash and cash equivalents at beginning of period 68,403 93,294
-------- ----------
Cash and cash equivalents at end of period,
represented by bank balances and cash 52,732 59,328
======== =========
The financial statements should be read in conjunction with the accompanying
notes.
3 of 9
New Taohuayuan Culture Tourism Company Limited
Notes to the Condensed Consolidated Financial Statements
- -------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to
Form 10-QSB and Article 10 of Regulation S-B. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three month period ended March 31, 2006 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 2006.
These financial statements should be read in conjunction with the
consolidated financial statements for the year ended December 31, 2005
included in the Company's Form 10-KSB filed on April 14, 2006.
2. ORGANIZATION AND PRINCIPAL ACTIVITIES
New Taohuayuan Culture Tourism Company Limited ("New Tao") was
incorporated under the laws of the state of Nevada on November 3, 2004.
New Tao is an investment holding company and its subsidiary, Shaanxi New
Taohuayuan Culture Tourism Company Limited ("Shaanxi THY"), principally
operates a resort in Xian, the People's Republic of China, providing
catering, hotel and related services.
In November 2004, Shaanxi THY was converted into a wholly foreign owned
enterprise.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of accounting
The financial statements have been prepared in accordance with generally
accepted accounting principles in the United States of America.
Preparation of financial statements
The Company had negative working capital of US$9,921,502 as of March 31,
2006. This raised substantial doubt about the Company's ability to
continue as a going concern. The negative working capital mainly arises
from the provision for income and other taxes and related surcharge as
discussed in note 7(b) to the financial statements. Management believes
that the Company will be able to negotiate a settlement in installments
with the PRC tax authority if the PRC tax authority demands payment. In
addition, since the Company has generated 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
come due. As a result, the financial statements have been prepared in
conformity with the principles applicable to a going concern.
4 of 9
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 collectability is
probable. Such service revenues are recognized net of discounts.
Management fee income is recognized when services are rendered in
accordance with the agreements (see note 5(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.
5 of 9
4. INCOME TAX
The Company is subject to the PRC enterprise income tax at the rate of 33%.
The income tax expense comprised:
(Unaudited)
Three months ended
March 31,
-------------------
2006 2005
US$ US$
Current tax expense 223,737 201,554
Deferred tax expense (benefit) 54,637 (2,628)
--------- ---------
278,374 198,926
========= =========
5. RELATED PARTY TRANSACTIONS
In addition to the transactions/information disclosed elsewhere in these
financial statements, the Company had the following transactions with related
parties.
(a) Name and relationship of related parties
Name Relationships with the Company
Chen Jingmin A director and stockholder of the
Company
Shaanxi New Taohuayuan Economy Trade The principal stockholder of the
Company Limited ("Trading Company") Company in which Chen Jingmin
* has control and a beneficial
interest
Shaanxi Wenhao Zaliang Shifu, A stockholder of the Company in
Limited ("Wenhao") * 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.
6 of 9
5. RELATED PARTY TRANSACTIONS (CONTINUED)
(b) Due from related parties
(Unaudited)
As of
March 31, 2006
---------------
Note US$
Due from Trading Company (i) 520,966
Due from Wenhao (i) 265,332
--------
786,298
========
(i) The amounts due from Trading Company and Wenhao are unsecured,
interest-free and have no fixed repayment terms.
(c) Summary of related party transactions
(Unaudited)
Three months ended
March 31,
------------------
Note 2006 2005
US$ US$
Management fee income earned from:
- Trading Company (i) 49,546 105,847
- Wenhao (i) 263,210 257,055
Laundry income earned from:
- Trading company (ii) 2,477 5,444
- Wenhao (ii) 7,432 6,048
Rental and other services income
earned from Trading Company (iii) -- 8,073
======= ========
(i) The Company entered into management agreements with Trading Company and
Wenhao on January 15, 2004 for a period of five years commencing from
January 15, 2004. The annual management fees from Trading Company and
Wenhao are fixed at US$433,524 and US$1,052,843 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 three months ended March 31, 2006 and 2005.
(ii) Pursuant to 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$22,295 and
US$29,727, respectively.of US$22,295 and US$29,727, respectively.
7 of 9
5. RELATED PARTY TRANSACTIONS (CONTINUED)
(c) Summary of related party transactions (Continued)
The amounts of management fee income and laundry income from Trading
Company recognized during the three months ended March 31, 2006 were
different from the amounts stipulated in the agreements because
Trading Company has suspended business for renovation from
mid-February to March 31, 2006 and therefore no income was earned
from Trading Company during that period.
(iii) The Company entered into a rental agreement with Trading Company on
January 15, 2004. The rental income was charged at a 50% discount of the
standard daily rate. No rental income was earned from Trading Company for
the three months ended March 31, 2006.
6. PREPAYMENTS
The balance as of March 31, 2006 included prepayments of US$14,479,685
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 approximately US$15 million.
There is no specific due date for payment of the balance of the
consideration in the Agreement.
The Company proposes to use the land for property development. The
Agreement stipulates that the planning and preparation works should be
completed by the end of 2002 while the construction work should have
commenced by March 2003. Up to March 31, 2006, the Company paid design and
planning fees of US$1,362,503. Although the project has been delayed,
management believes that the Agreement still remains effective and there
is no penalty for the delay pursuant to the Agreement.
Although it is the present intention of the management to develop the
land, the Company shall have a right to dispose of the land through the
local government. The land was valued by international professional
valuation specialists on a depreciated replacement cost basis and its
value at December 31, 2005 was approximately US$19 million.
8 of 9
7. COMMITMENTS AND CONTINGENCIES
(a) Capital commitment
As of March 31, 2006, 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$383,977.
(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 of the Company,
including mainly the PRC enterprise income tax and business tax, was
subject to a maximum amount of US$123,864 per annum and that Shaanxi
THY was not liable for any taxes in excess of that 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 of 9
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND PLAN OF
OPERATION
You should read the following discussion and analysis of our financial
condition and results of operations in conjunction with our financial statements
and the related notes included elsewhere in this report. Our financial
statements have been prepared in accordance with U.S. GAAP. The following
discussion and analysis contains forward-looking statements that involve risks
and uncertainties. Actual results could differ materially from those projected
in the forward-looking statements.
Overview
We own and operate the Taohuayuan Inn hotel and resort located in the city
of Xi'an, province of Shaanxi, in the PRC. The Taohuayuan Inn has 23 courtyards
with 146 rooms and 292 beds.
We manage the DongJin Taoyuan Villas, a hotel and resort property
approximately 10 miles from downtown Xi'an. DongJin Taoyuan Villas has 84 rooms
and 168 beds.
We also manage a chain of three traditional Chinese restaurants. Two of
the restaurants are in Xi'an, and one is in Beijing.
We receive fees for managing the DongJin Taoyuan Villas and the three
restaurants.
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 three months ended March 30, 2006 compared to three
months ended March 31, 2005
Key performance indicators which we use to manage our business and to
assess future operating results are shown below:
Increase or
Category (Decrease) US$ Percentage
Operating Revenue 57,872 5.1%
Operating Expenses 38,949 6.7%
Non-Operating Expenses 72,090 24.8%
Income Tax 79,448 40.0%
Net Income (132,615) (194.8)%
Operating Revenues
Three months ended
March 31, Increase or
Category 2006 US$ 2005 US$ (Decrease) US$ Percentage
- -------- -------- -------- -------------- ----------
Catering Services Revenue 497,809 447,730 50,079 11.19%
Hotel and Related Services
Revenue 384,922 326,983 57,939 17.72%
Management Revenue 312,756 362,902 (50,146) (13.82)%
---------- --------- ---------
Total 1,195,487 1,137,615 57,872 5.1%
========= ========= =========
The increase in Catering Services revenue was due to the new menu items
introduced this year. Hotel and Related Services revenue was lower than normal
last year as a result of cold weather and heavy snow during the first three
months of 2005. The winter was not as severe this year and our occupancy rate
for the first three months of 2006 improved to 79%, as compared to 52% for the
same period last year. Management revenues decreased because the Dongjin Taoyuan
Villas closed for repairs on February 13, 2006.
Operating Expenses
Three months ended
March 31, Increase or
Category 2006 US$ 2005 US$ (Decrease) US$ Percentage
- -------- -------- -------- -------------- ----------
Depreciation 127,156 123,969 3,187 2.57%
Raw material and
consumables used 199,842 171,346 28,496 16.63%
Salaries, Wages and
Allowances 91,933 80,321 11,612 14.46%
General and Administrative 137,048 133,794 3,254 2.43%
Other taxes 62,493 70,093 (7,600) 10.84%
--------- -------- --------
Total Operating Expenses 618,472 579,523 38,949 6.7%
========= ======== =======
The cost of our raw materials and consumables for the three months ended
March 31, 2006 increased in line with the increases in revenue from Catering
Services and Hotel and Related Services.
Salaries, Wages and Allowances increased due to the hiring of new
management personnel and higher wages paid to our power station engineers.
General and Administrative expenses increased from the comparable period in
2005 since we hired more employees during the first three months of 2006. We
also hosted more events during the 2006 spring festival which resulted in more
power consumption.
2
Non-operating Income (Expense)
Three months ended
March 31, Increase or
Category 2006 US$ 2005 US$ (Decrease) US$ Percentage
- -------- -------- -------- -------------- ----------
Interest Revenue 296 20 276 1380.00%
Sundry Revenue 3,988 1,985 2,003 100.91%
Surcharge on taxes (367,457) (293,088) 74,369 25.37%
--------- --------- --------
Total Non-operating Expense (363,173) (291,083) 76,648 26.3%
========= ========= ========
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$123,864 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. The
increase in the surcharge on taxes was the result of the accumulation of
additional unpaid taxes.
Income tax
Our effective tax rates were 130% and 75% respectively for the three
months ended March 31, 2006 and 2005. The difference between the effective tax
rate and the PRC enterprise income tax rate is mainly due to the surcharge on
taxes which we are accruing and which is not deductible for PRC enterprise
income tax purposes.
Liquidity and Capital Resources
Our material sources (uses) of cash during the following periods were:
Three months Three months
ended ended
March 31, 2006 March 31, 2005
-------------- --------------
Cash provided by operations $597,176 $443,619
Purchase of property, plant and equipment (5,914) (5,812)
Payment for land use rights 606,933) (471,773)
Cash on hand at beginning of period 68,403 93,294
We intend to develop an 848 acre commercial and residential development in
Lantian, a city located approximately 23 miles from Xi'an and a 150 room hotel
and resort in Xi'an. We have not started actual construction work on these
projects.
As of March 31, 2006 project expenditures for the mixed-use development in
Lantian were $14,480,000 for the land use rights and $1,363,000 for preliminary
3
planning and design. We anticipate that the remaining costs to develop the
project, excluding the remaining $2,325,000 payment for the land use rights,
will be approximately $45,000,000 over five years. We expect to begin
construction on the property in 2007.
As of March 31, 2006 project expenditures for the hotel and resort in Xian
were $1,258,000 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
$5,000,000.
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$123,864 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. By December
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 12/2006 $ 2,325,000
Construction and development costs -
Lantian project 2007-2012 $45,000,000
Construction and development costs - New
Hanian project 2006-2007 $ 5,000,000
Accrued taxes Unknown $ 9,827,000
We have financed our operations to date through the sale of our common
stock and cash generated by our operations. As of March 31, 2006 expenditures
for the Lantian and New Hainan projects have been funded with cash from our
operations and proceeds from the sale of our common stock. We expect to finance
the remaining costs for the Lantian and New Hainan projects through cash from
our operations and loans. Loans would be collateralized by the property and
issued in conjunction with the government. However, required financing may not
be available to us, in which case the development of the projects may take
additional time or we may be unable to develop the projects. At present, we do
not have any lines of credit or other bank financing arrangements.
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 March 31, 2006 balance sheet.
4
Restrictions on currency exchange
Substantially all of our projected revenues and operating expenses are
denominated in Renminbi. The Renminbi is currently freely convertible under the
"current account", which includes dividends, trade and service-related foreign
exchange transactions, but not under the "capital account", which includes
foreign direct investment and loans.
We may purchase foreign exchange for settlement of "current account
transactions", including payment of dividends to our shareholders, without the
approval of the State Administration for Foreign Exchange. We may also retain
foreign exchange in our current account, subject to a ceiling approved by the
State Administration for Foreign Exchange, to satisfy foreign exchange
liabilities or to pay dividends. However, the Chinese government may change its
laws or regulations and limit or eliminate our ability to purchase and retain
foreign currencies in the future.
Since a significant amount of our future revenues will be denominated in
Renminbi, the existing and any future restrictions on currency exchange may
limit our ability to utilize revenues generated in Renminbi to fund any business
activities outside China or fund expenditures denominated in foreign currencies.
Reserves
In accordance with current Chinese laws, regulations and accounting
standards, we are required to set aside as a general reserve at least 10% of our
respective after-tax profits. Appropriations to the reserve account are not
required after these reserves have reached 50% of our registered capital. These
reserves are created to fund potential operating losses and are not
distributable as cash dividends. We are also required to set aside between 5% to
10% of our after-tax profits to the statutory public welfare reserve. In
addition and at the discretion of our directors, we may set aside a portion of
our after-tax profits for enterprise expansion funds, staff welfare and bonus
funds and a surplus reserve. These statutory reserves and funds can only be used
for specific purposes and may not be used for dividends.
Critical Accounting Policies and Estimates
We prepare financial statements in conformity with U.S. GAAP, which
requires us to make estimates and assumptions that affect the reported amounts
of assets and liabilities, disclosure of contingent assets and liabilities on
the date of the financial statements, and the reported amounts of revenue and
expenses during the financial reporting period. We continually evaluate these
estimates and assumptions based on the most recently available information, our
own historical experience and various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Since the use of estimates is an
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
5
Revenue recognition
We generally recognize service revenues when persuasive evidence of an
arrangement exists, services are rendered, the fee is fixed or determinable, and
collectibility is probable. Service revenues are recognized net of discounts.
Foreign currency translation
We consider Renminbi as our functional currency as a substantial portion
of our business activities are based in Renminbi ("RMB"). However, we have
chosen the United States dollar as our reporting currency.
Transactions in currencies other than the functional currency during the
year are translated into the functional currency at the applicable rates of
exchange prevailing at the time of the transactions. Monetary assets and
liabilities denominated in currencies other than the functional currency are
translated into the functional currency at the applicable rates of exchange in
effect at the balance sheet date. Exchange gains and losses are recorded in the
statements of operations.
For translation of financial statements into the reporting currency,
assets and liabilities are translated at the exchange rate at the balance sheet
date, equity accounts are translated at historical exchange rates, and revenues,
expenses, gains and losses are translated at the weighted average rates of
exchange prevailing during the period. Translation adjustments resulting from
this process are recorded in accumulated other comprehensive income (loss)
within stockholders' equity.
Property, plant and equipment and depreciation
Property, plant and equipment are stated at cost less accumulated
depreciation.
The cost of an asset consists of its purchase price and any directly
attributable costs of bringing the asset to its present working condition and
location for its intended use. Expenditures incurred after the assets have been
put into operation, such as repairs and maintenance, are normally recognized as
an expense in the period in which they are incurred. In situations where it can
be clearly demonstrated that expenditure has resulted in an increase in the
future economic benefits expected to be obtained from the use of the assets, the
expenditure is capitalized.
When assets are sold or retired, their costs and accumulated
depreciation are eliminated from the accounts and any gain or loss resulting
from their disposal is included in the statement of operations.
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.
6
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$123,864 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. If the taxes and interest we ultimately are required to pay are less
than the amounts we have accrued, we will reduce our recorded liability for
unpaid taxes.
ITEM 3. CONTROLS AND PROCEDURES
Cai Danmei, the Company's Chief Executive and Financial Officer, has
evaluated the effectiveness of the Company's disclosure controls and procedures
as of a date prior to the filing date of this report, and in her opinion the
Company's disclosure controls and procedures are effective to ensure that
material information relating to the Company, including its consolidated
subsidiaries, is made known to her by others within those entities, particularly
during the period in which this report is being prepared, so as to allow timely
decisions regarding required disclosure. There have been no changes in the
Company's internal controls or in other factors that could significantly affect
the Company's internal controls. As a result, no corrective actions with regard
to significant deficiencies or material weakness in the Company's internal
controls were required.
7
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Number Exhibit
31 Rule 13a-14(a) Certifications
32 Section 1350 Certifications
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the three
months ended March 31, 2006.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized on May 17, 2006.
NEW TAOHUAYUAN CULTURE TOURISM CO., LTD.
By: /s/ Cai Danmei
-------------------------------
Cai Danmei, Chief Executive Officer,
Principal Financial Officer and
Principal Accounting Officer