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 JUNE 30, 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 Identification No.
of incorporation
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 August 15, 2006 the Company had 17,027,328 outstanding shares of
common stock.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
New Taohuayuan Culture Tourism Company Limited
Six months ended June 30, 2006 and 2005
INDEX TO FINANCIAL STATEMENTS
Page
Condensed Consolidated Balance Sheet as of June 30, 2006 (Unaudited) F-1
Condensed Consolidated Statements of Income and Accumulated Other
Comprehensive Income for the Six and Three Months Ended
June 30, 2006 and 2005 (Unaudited) F-2
Condensed Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2006 and 2005 (Unaudited) F-3
Notes to Condensed Consolidated Financial Statements F-4 - F-16
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED
CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 2006 (UNAUDITED)
(IN US$)
ASSETS
Current Assets:
Cash and cash equivalents $ 14,309
Accounts receivable 9,455
Inventories 43,109
Loan receivable 250,138
Prepaid expenses and other current assets 80,398
Due from related parties 953,439
--------------
Total Current Assets 1,360,848
-------------
Fixed assets, net of depreciation 8,755,573
-------------
Other Assets:
Long-term assets 16,479,091
------------
Total Other Assets 16,479,091
------------
TOTAL ASSETS $26,595,512
===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
LIABILITIES
Current Liabilities:
Accounts payable and accrued expenses $ 837,411
Deferred tax liability 2,993
Taxes payable 2,504,349
------------
Total Current Liabilities 3,344,753
------------
Commitments and contingencies
Total Liabilities 3,344,753
------------
STOCKHOLDERS' EQUITY
Preferred stock, $.001 Par Value; 10,000,000 shares authorized
and 0 shares issued and outstanding --
Common stock, $.001 Par Value; 50,000,000 shares authorized
and 17,027,328 shares issued and outstanding 17,027
Additional paid-in capital 14,922,428
Statutory reserves 1,585,036
Retained earnings 5,963,251
Accumulated other comprehensive income (loss) 763,017
------------
Total Stockholders' Equity 23,250,759
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 26,595,512
============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
F-1
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
ACCUMULATED OTHER COMPREHENSIVE INCOME
FOR THE SIX AND THREE MONTHS ENDED JUNE 30, 2006 AND 2005 (UNAUDITED)
(IN US $)
Six Months Ended Three Months Ended
June 30, June 30,
2006 2005 2006 2005
OPERATING REVENUES
Catering and hotel related services income $ 1,720,738 $ 1,818,691 $ 978,252 $ 876,704
Management, rental and laundry income 799,373 725,803 486,617 362,901
----------- ----------- --------- ---------
TOTAL OPERATING REVENUES 2,520,111 2,544,494 1,464,869 1,239,605
COST OF REVENUES 423,371 409,801 223,529 237,735
----------- ----------- ---------- ----------
GROSS PROFIT 2,096,740 2,134,693 1,241,340 1,001,870
----------- ----------- ---------- ----------
OPERATING EXPENSES
Salaries and wage related expenses 147,545 160,892 55,612 80,571
General and administrative fees 482,374 437,403 286,821 33,516
Depreciation, amortization and impairment 254,990 247,938 127,834 123,969
----------- ----------- ---------- ----------
Total Operating Expenses 884,909 846,233 470,267 438,056
----------- ----------- ---------- ----------
INCOME BEFORE OTHER INCOME (EXPENSE) 1,211,831 1,288,460 771,073 563,814
OTHER INCOME (EXPENSE)
Interest income 558 208 262 188
Loss on disposal of assets (9,502) -- (9,502) --
----------- ----------- ---------- ----------
Total Other Income (Expense) (8,944) 208 (9,240) 188
NET INCOME BEFORE PROVISION FOR INCOME TAXES 1,202,887 1,288,668 761,833 564,002
Provision for Income Taxes (430,377) (405,193) (152,003) (206,267)
----------- ----------- ---------- ----------
NET INCOME APPLICABLE TO COMMON SHARES $ 772,510 $ 883,475 $ 609,830 $ 357,735
=========== =========== ========= ==========
NET EARNINGS PER BASIC
AND DILUTED SHARES $ 0.05 $ 0.05 $ 0.04 $ 0.02
=========== =========== ========= ==========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 17,027,328 17,027,328 17,027,328 17,027,328
=========== =========== ========== ==========
COMPREHENSIVE INCOME
Net income $ 772,510 $ 883,475 $ 609,830 $ 357,735
Other comprehensive income
Currency translation adjustments 226,135 -- 194,986 --
------------ ------------ ----------- -----------
Comprehensive income $ 998,645 $ 883,475 $ 804,816 $ 357,735
============ ============ =========== ===========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
F-2
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2006 AND 2005 (UNAUDITED)
(IN US $)
2006 2005
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 772,510 $ 883,475
----------- ----------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, amortization and impairment 254,990 247,938
Loss on disposal of fixed assets 9,502 --
Changes in assets and liabilities
(Increase) decrease in accounts receivable 531 (1,454)
(Increase) decrease in inventory 1,000 (3,404)
(Increase) in prepaid expenses and other
current assets (41,021) (36,529)
Increase (decrease) in accounts payable
and accrued expenses (5,244) (11,571)
Increase in income taxes payable 598,078 629,237
(Increase) in deferred taxes (40,913) (73,796)
------------ ----------
Total adjustments 776,923 750,421
------------ ----------
Net cash provided by operating activities 1,549,433 1,633,896
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
(Increase) decrease in advances to related parties (244,784) (194,121)
(Increase) in loans receivable (250,138) --
(Increase) in long-term assets (1,243,942) (1,451,607)
(Acquisitions) disposals of fixed assets (90,798) (5,811)
------------ ----------
Net cash (used in) investing activities (1,829,662) (1,651,539)
------------- ----------
CASH FLOWS FROM FINANCING ACTIVITES
Dividends paid -- (23,163)
------------- ----------
Net cash (used in) financing activities -- (23,163)
------------- ----------
Effect of foreign currency translation 226,135 --
-------------- ----------
NET (DECREASE) IN
CASH AND CASH EQUIVALENTS (54,094) (40,806)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 68,403 93,294
-------------- ----------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 14,309 $ 52,488
============= ==========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
F-3
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006 AND 2005 (UNAUDITED)
NOTE 1- ORGANIZATION AND BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements included
herein have been prepared, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission ("SEC"). The
condensed consolidated financial statements and notes are presented
as permitted on Form 10-QSB and do not contain information included
in the Company's annual consolidated statements and notes. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles
generally accepted in the United States of America have been
condensed or omitted pursuant to such rules and regulations,
although the Company believes that the disclosures are adequate to
make the information presented not misleading. It is suggested that
these condensed consolidated financial statements be read in
conjunction with the December 31, 2005 audited financial statements
and the accompanying notes thereto. While management believes the
procedures followed in preparing these condensed consolidated
financial statements are reasonable, the accuracy of the amounts are
in some respects dependent upon the facts that will exist, and
procedures that will be accomplished by the Company later in the
year.
These condensed consolidated unaudited financial statements reflect
all adjustments, including normal recurring adjustments which, in
the opinion of management, are necessary to present fairly the
consolidated operations and cash flows for the periods presented.
New Taohuayuan Culture Tourism Company Limited (the "Company") was
incorporated under the laws of the State of Nevada on November 3,
2004. The Company is an investment holding company.
Shaanxi New Taohuayuan Culture Tourism Company Limited ("Shaanxi
THY") was incorporated in the People's Republic of China ("PRC") on
August 3, 1997 as a limited liability company. Shaanxi THY operates
a resort in Xi'an, in the PRC, providing catering, hotel and related
services.
Pursuant to an agreement and plan of migratory merger between the
Company and Shaanxi THY on November 5, 2004, the Company acquired
Shaanxi THY by issuing 17,027,328 shares of its common stock to the
original shareholders of Shaanxi THY in exchange for 100% of their
membership interests (the "Merger"). As a result, the controlling
member of Shaanxi THY has effective and actual operating control of
the Company. The Merger was approved by the Shaanxi Ministry of
Commerce on November 24, 2004. Since then, Shaanxi THY has become a
wholly owned subsidiary of the Company and its status has changed to
a wholly owned foreign owned enterprise.
F-4
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2006 AND 2005 (UNAUDITED)
NOTE 1- ORGANIZATION AND BASIS OF PRESENTATION CONTINUED)
Since the Company had no operations or net assets prior to the
Merger, the Merger was considered to be a capital transaction in
substance, rather than a business combination and no goodwill was
recognized. For financial reporting purposes, the Merger was treated
as a reverse acquisition whereby Shaanxi THY is considered to be the
accounting survivor and the operating entity while the Company is
considered to be the legal survivor.
On that basis, the historical financial information presented is
that 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 since the beginning of the
periods presented. The difference between the par value of the
shares issued for the Merger and the par value of the shares of
Shaanxi THY is recorded as additional paid-in capital.
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The condensed consolidated financial statements include the accounts
of the Company and its wholly owned subsidiary. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
Use of Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. On an on-going basis, the Company evaluates
its estimates, including, but not limited to, those related to bad
debts, income taxes and contingencies. The Company bases its
estimates on historical experience and on 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 value of assets and liabilities that are not readily
apparent from other sources. Actual results could differ from those
estimates.
Economic and Political Risks
The Company's operations are conducted in the PRC. Accordingly, the
Company's business, financial condition and results of operations
may be influenced by the political, economic and legal environment
in the PRC, and by the general state of the PRC economy.
F-5
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2006 AND 2005 (UNAUDITED)
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company's operations in the PRC are subject to special
considerations and significant risks not typically associated with
companies in North America and Western Europe. These include risks
associated with, among others, the political, economic and legal
environment and foreign currency exchange. The Company's results may
be adversely affected by changes in governmental policies with
respect to laws and regulations, anti-inflationary measures,
currency conversion, remittances abroad, and rates and methods of
taxation, among other things.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments and other
short-term investments with an initial maturity of three months or
less to be cash equivalents. The Company maintained $6,397 as of
June 30, 2006 in cash on hand. The remainder of the cash was in
financial institutions.
Comprehensive Income
The Company adopted Statement of Financial Accounting Standards No,
130, "Reporting Comprehensive Income," (SFAS No. 130). SFAS No. 130
requires the reporting of comprehensive income in addition to net
income from operations.
Comprehensive income is a more inclusive financial reporting
methodology that includes disclosure of information that
historically has not been recognized in the calculation of net
income.
Inventory
Inventory is valued at the lower of cost or market. Inventory
includes raw materials and consumables.
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 their inventories to their present location and
condition, is calculated using the first-in, first-out method.
Fair Value of Financial Instruments
The carrying amounts reported in the condensed consolidated balance
sheet for cash and cash equivalents, trade receivables and accounts
payable approximate fair value because of the immediate or
short-term maturity of these financial instruments.
F-6
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2006 AND 2005 (UNAUDITED)
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Currency Translation
The Company's functional currency is that of the PRC which is the
Chinese Renminbi (RMB). The reporting currency is that of the US
Dollar. Capital accounts of the consolidated financial statements
are translated into United States dollars from RMB at their
historical exchange rates when the capital transactions occurred.
Assets and liabilities are translated at the exchange rates as of
the balance sheet date. Income and expenditures are translated at
the average exchange rate of the year. The period end RMB to US
dollar as of June 30, 2006 and 2005 were 7.996 and 8.3,
respectively, and the average period RMB to the US dollar for 2006
and 2005 were 8.007 and 8.3, respectively. The RMB is not freely
convertible into foreign currency and all foreign currency exchange
transactions must take place through authorized institutions. No
representation is made that the RMB amounts could have been, or
could be, converted into US dollar at the rates used in translation.
The Company records these translation adjustments as accumulated
other comprehensive income (loss). Gains and losses from foreign
currency transactions are included in other income (expense) in the
results of operations. For the six months ended June 30, 2006 and
2005, the Company recorded approximately $226,135 and $0 in
transaction gains (losses) as a result of currency translation.
Revenue Recognition
The Company generates revenue from catering, hotel and related
services. Revenue is generally recognized: (a) when persuasive
evidence of an arrangement exists; (b) when services are rendered;
(c) when the fee is fixed or determinable; and (d) when
collectibility is reasonably assured. Such service revenues are
recognized net of discounts.
The Company also generates management fee income in accordance with
Shaanxi New Taohuayuan Economy Trade Company Limited, a related
party based on terms stated in the agreement. This company is
controlled by a common director and stockholder of the Company.
Accounts Receivable
The Company conducts business and extends credit based on an
evaluation of the customers' financial condition, generally without
requiring collateral. Exposure to losses on receivables is expected
to vary by customer due to the financial condition of each customer.
The Company monitors exposure to credit losses and maintains
allowances for anticipated losses considered necessary under the
circumstances. The Company has not established a reserve for
uncollectibles as of June 30, 2006.
Accounts receivable are generally due within 30 days and collateral
is not required.
F-7
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2006 AND 2005 (UNAUDITED)
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Advertising Costs
The Company expenses the costs associated with advertising as
incurred. Advertising expenses for the six months ended June 30,
2006 and 2005 are included in general and administration expenses in
the condensed consolidated statements of operations.
Fixed Assets
Fixed assets are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets,
net of the estimated residual values; buildings - 40 years (5%
estimated residual value), building improvements - 15 years (5%
residual value), electrical equipment - 12 years (5% residual
value), furniture and fixtures - 15 years (5% residual value) and
vehicles and other equipment - 10 years (5% residual value). In
addition, the Company purchased land use rights that are for a
period of 40-68 years, the unexpired lease term, with no residual
value.
When assets are retired or otherwise disposed of, the costs and
related accumulated depreciation are removed from the accounts, and
any resulting gain or loss is recognized in income for the period.
The cost of maintenance and repairs is charged to income as
incurred; significant renewals and betterments are capitalized.
Deduction is made for retirements resulting from renewals or
betterments.
Land Use Rights
According to the laws of China, the government owns all the land in
China. Companies or individuals are authorized to possess and use
the land only through land use rights granted by the Chinese
government. Land use rights are being amortized using the
straight-line method over the lease term of 40 to 68 years.
Impairment of Long-Lived Assets
Long-lived assets, primarily property and equipment and intangible
assets, are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets might
not be recoverable. The Company does perform a periodic assessment
of assets for impairment in the absence of such information or
indicators. Conditions that would necessitate an impairment
assessment include a significant decline in the observable market
value of an asset, a significant change in the extent or manner in
which an asset is used, or a significant adverse change that would
indicate that the carrying amount of an asset or group of assets is
not recoverable. For long-lived assets to be held and used, the
Company recognizes an impairment loss only if its carrying amount is
not recoverable through its undiscounted cash flows and measures the
impairment loss based on the difference between the carrying amount
and estimated fair value.
F-8
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2006 AND 2005 (UNAUDITED)
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Earnings Per Share of Common Stock
Basic net earnings per common share is computed using the weighted
average number of common shares outstanding. Diluted earnings per
share (EPS) includes additional dilution from common stock
equivalents, such as stock issuable pursuant to the exercise of
stock options and warrants. Common stock equivalents are not
included in the computation of diluted earnings per share when the
Company reports a loss because to do so would be antidilutive for
the periods presented.
The following is a reconciliation of the computation for basic and
diluted EPS:
June 30, June 30,
2006 2005
-------- -------
Net income $ 772,510 $ 883,475
---------- -----------
Weighted-average common shares
Outstanding (Basic) 17,027,328 17,027,328
Weighted-average common stock
Equivalents
Stock options -- --
Warrants -- --
----------- -----------
Weighted-average common shares
Outstanding (Diluted) 17,027,328 17,027,328
========== ==========
Income Taxes
The Company accounts for income tax using an asset and liability
approach and allows for recognition of deferred tax benefits in
future years. Under the asset and liability approach, deferred taxes
are provided for the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. A
valuation allowance is provided for deferred tax assets if it is
more likely than not these items will either expire before the
Company is able to realize their benefits, or that future
realization is uncertain.
In accordance with the relevant tax laws and regulations of PRC, the
Company has recorded a provision for income taxes based on their
applicable tax rate.
F-9
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2006 AND 2005 (UNAUDITED)
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Stock-Based Compensation
The Company follows FASB 123R in accounting for its stock based
compensation (see Recent Accounting Pronouncements). This measures
compensation expense for its employee stock-based compensation using
the intrinsic-value method. Under the intrinsic-value method of
accounting for stock-based compensation, when the exercise price of
options granted to employees and common stock issuances are less
than the estimated fair value of the underlying stock on the date of
grant, deferred compensation is recognized and is amortized to
compensation expense over the applicable vesting period. The Company
for 2006 and 2005 did not grant any options or warrants that would
need to be valued under such method. The following represents the
effect on net income attributable to common shareholders per share
if the fair value method had been applied to all awards.
Six Months Ended
June 30,
-----------------
2006 2005
Net income:
As reported $772,510 $883,475
Add: Stock-based employee
compensation expense included in
reported net loss, net of related
tax effects -- --
Less: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects (--) (--)
-------- --------
$772,510 $883,475
Pro forma
Net earnings per share:
As reported:
Basic $ 0.05 $ 0.05
Diluted $ 0.05 $ 0.05
Pro forma:
Basic $ 0.05 $ 0.05
Diluted $ 0.05 $ 0.05
The Company measures compensation expense for its non-employee
stock-based compensation under the Financial Accounting Standards
Board (FASB) Emerging Issues Task Force (EITF) Issue No. 96-18,
"Accounting for Equity Instruments that are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or
Services". The fair value of the option issued is used to measure the
transaction, as this is more reliable than the fair value of the
services received. The fair value is measured at the value of the
Company's common stock on the date that the commitment for performance
by the counterparty has been reached or the counterparty's performance
is complete. The fair value of the equity instrument is charged
directly to compensation expense and additional paid-in capital. NEW
TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 2006 AND 2005
(UNAUDITED)
F-10
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2006 AND 2005 (UNAUDITED)
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Segment Information
The Company follows the provisions of SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information". This
standard requires that companies disclose operating segments based
on the manner in which management disaggregates the Company in
making internal operating decisions. For 2006 and 2005, the Company
operated in one segment and one geographical location.
Related Party Transactions
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.
Recent Accounting Pronouncements
On December 16, 2004, the Financial Accounting Standards Board
("FASB") published Statement of Financial Accounting Standards No.
123 (Revised 2004), "Share-Based Payment" ("SFAS 123R"). SFAS 123R
requires that compensation cost related to share-based payment
transactions be recognized in the financial statements. Share-based
payment transactions within the scope of SFAS 123R include stock
options, restricted stock plans, performance-based awards, stock
appreciation rights, and employee share purchase plans. The
provisions of SFAS 123R, as amended, are effective for small
business issuers beginning as of the first interim or annual
reporting period that begins after December 15, 2005.
NOTE 3- FIXED ASSETS
Fixed assets as of June 30, 2006 were as follows:
Estimated Useful
Lives (Years)
Land use right 40-68 $2,329,876
Buildings 40 6,210,658
Building improvements 15 1,465,687
Electrical equipment 12 1,321,216
Furniture and fixtures 15 386,201
Vehicles and other equipment 10 1,032,840
----------
12,746,478
Less: accumulated depreciation 3,990,905
-----------
Property and equipment, net $8,755,573
==========
F-11
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2006 AND 2005 (UNAUDITED)
There was $254,990 and $247,938 charged to operations for
depreciation expense for the six months ended June 30, 2006 and
2005, respectively. There was no impairment for these assets during
the six months ended June 30, 2006 and 2005.
NOTE 4- LONG-TERM ASSETS
The balance as of June 30, 2006 included payments of $16,479,091
made to the local government for the acquisition of a piece of land
in the PRC. Pursuant to an agreement executed May 26, 2002, the
total estimated consideration for the land is $15,008,280. There is
no specific due date for payment of the balance of the
consideration.
The Company proposes to utilize the land for property development.
This agreement stipulates that the planning and preparation work
should be completed by the end of 2002, with construction to
commence by March 2004. The Company has paid design and planning
fees of $1,470,811 through June 30, 2006, and although this project
has been delayed, Management believes that the agreement is still
effective and there is no penalty for the delay pursuant to the
agreement.
Although it is the present intention of Management to develop the
land, the Company shall have the right to dispose of the land
through the local government subject to certain conditions. The land
has a value which has been prepared by an independent valuation
specialist on a depreciated replacement cost basis that exceeds the
carrying cost. There is no impairment on this amount as of June 30,
2006.
NOTE 5- RELATED PARTY TRANSACTIONS
The Company has identified the following related parties:
Chen Jingmin - a director and stockholder of the Company.
Shaanxi New Taohuayuan Economy Trade Company Limited - the principal
stockholder of the Company in which Chen Jingmin has control and a
beneficial interest.
Shaanxi Wenhao Zaliang Shifu Limited - a stockholder of the Company
in which Chen Jingmin has control and a financial interest.
Shaanxi Kangze Economic and Trade Limited - a stockholder of the
Company in which Chen Jingmin has control and a beneficial interest.
The Company as of June 30, 2006 has been advanced $589,151 from
Shaanxi New Taohuayuan Economy Trade Company and $267,159 from
Shaanxi Wenhao Zaliang Shifu Limited. These advances are unsecured,
interest-free and have no fixed repayment terms. The Company has
classified these as current assets.
F-12
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2006 AND 2005 (UNAUDITED)
NOTE 5- RELATED PARTY TRANSACTIONS (continued)
Management Fee Agreement
The Company entered into a management agreement with Shaanxi New
Taohuayuan Economy Trade Company Limited and Shaanxi Wenhao Zaliang
Shifu Limited on January 15, 2004 for a period of five years. The
annual management fees are fixed at approximately $1,400,000. The
Company entered into an additional management agreement in 2006 for
approximately $200,000 per year. For the six months ended June 30,
2006 and 2005, the Company earned $799,373 and $725,803 in
management fees, respectively. There is a bonus management fee
clause contained in the agreement calculated at 15% on the excess of
the actual revenue over targeted revenue, as defined therein. No
bonus management fees have been earned to date.
Laundry Fee Agreement
The Company entered into a laundry fee agreement with Shaanxi New
Taohuayuan Economy Trade Company Limited and Shaanxi Wenhao Zaliang
Shifu Limited on January 1, 2004. The laundry fees earned by the
Company for the six months ended June 30, 2006 and 2005 were $17,350
and $25,403, respectively.
Rental Agreement
The Company entered into a rental agreement with Shaanxi New
Taohuayuan Economy Trade Company Limited on January 15, 2004. Rental
income was charged at a 50% discount of the standard daily rate.
There was no rental income earned during the six months ended June
30, 2006.
NOTE 6- STOCKHOLDERS' EQUITY (DEFICIT)
Preferred Stock
As of June 30, 2006, the Company has 10,000,000 shares of preferred
stock authorized with a par value of $.001. There are as of June 30,
2006, no shares issued and outstanding.
Common Stock
As of June 30, 2006, the Company has 50,000,000 shares of common
stock authorized with a par value of $.001. As of June 30, 2006, the
Company has 17,027,328 shares issued and outstanding. These shares
were issued in November 2004 upon completion of the merger. There
have been no other shares issued.
F-13
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2006 AND 2005 (UNAUDITED)
NOTE 6- STOCKHOLDERS' EQUITY (DEFICIT) (continued)
Options and Warrants
The Company has not granted any options or warrants as of June 30,
2006.
Statutory Reserves
Statutory reserves include a statutory surplus reserve and a
statutory public welfare fund, which are maintained in accordance
with the legal requirements of the PRC. Pursuant to the Articles of
Association, the Company has to appropriate 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. The statutory surplus
reserve can be utilized to offset prior years' losses or for
capitalization as additional 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 a
liquidation of the Company.
NOTE 7- RETIREMENT PLAN
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.
NOTE 8- COMMITMENTS AND CONTINGENCIES
As of June 30, 2006, the Company had capital expenditure commitments
contracted, but not provided for net of deposits they paid for the
acquisition of the land as noted in Note 4, amounting to $947,710.
NOTE 9- PROVISION FOR INCOME TAXES
In accordance with the relevant tax laws and regulations of PRC, the
corporate income tax rate is 33% for the six months ended June 30,
2006 and 2005, respectively.
F-14
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2006 AND 2005 (UNAUDITED)
NOTE 9- PROVISION FOR INCOME TAXES (continued)
Six months ended
June 30,
-----------------
2006 2005
Current tax expense $ 471,290 $ 478,989
Deferred tax expense (benefit) (40,913) (73,796)
--------- ---------
$ 430,377 $ 405,193
========= =========
A reconciliation of the PRC enterprise income tax rate to the
effective income tax rate is as follows:
2006 2005
Statutory rate 33% 33%
Surcharge on taxes not deductible
for PRC enterprise income tax purposes 10 12
Other non-temporary differences (7) (13)
----- ------
36% 32%
Deferred Taxes - the Company
Deferred income taxes are determined using the liability method for
the temporary differences between the financial reporting basis and
income tax basis of the Company's assets and liabilities. Deferred
income taxes are measured based on the tax rates expected to be in
effect when the temporary differences are included in the Company's
tax return. Deferred tax assets and liabilities are recognized based
on anticipated future tax consequences attributable to differences
between financial statement carrying amounts of assets and
liabilities and their respective tax bases. The Company's deferred
tax liabilities represent deductible temporary differences arising
mainly from the welfare payable.
F-15
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2006 AND 2005 (UNAUDITED)
NOTE 9- PROVISION FOR INCOME TAXES (continued)
At June 30, 2006, deferred tax liabilities consist of the following:
Welfare payable $ (43,374)
Other 40,381
---------
$ (2,993)
=========
Value Added Tax
The Company only recognizes Value Added Tax ("VAT") for their store
revenue at a rate of 4%. A very small portion of the Company's
revenue is derived from this source.
F-16
4
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 hotels and resorts in Shaanxi, province in the PRC.
We also manage a chain of three traditional Chinese restaurants. Two of
the restaurants are in Xi'an, and one is in Beijing.
Our business is not seasonal in nature.
Results of Operation for the six months ended June 30, 2006
Gross profit for the six months ended June 30, 2006 was 83% of gross
revenues, which was the same as our gross profit percentage during the six
months ended June 30, 2005.
Net income per share for the six months ended June 30, 2006 and 2005 were
both $0.05.
Liquidity and Capital Resources
During the six months ended June 30, 2006 our operations generated cash of
$1,549,433.
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.
We have financed our operations to date through the sale of our common
stock and cash generated by our operations. As of June 30, 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.
Restrictions on currency exchange
Substantially all of our revenues and operating expenses are denominated in
Renminbi. The Renminbi is currently freely convertible under the "current
1
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
2
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.
3
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 defined in Rule 13a-15(e) of the Securities Exchange Act of 1934) as of the
end of the period covered by this report, and in her opinion the Company's
disclosure controls and procedures are effective. There were no changes in the
Company's internal controls over financial reporting that occurred during the
fiscal quarter that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.
4
PART II
OTHER INFORMATION
Item 6. Exhibits
(a) Exhibits
Number Exhibit
31 Rule 13a-14(a) Certifications
32 Section 1350 Certifications
5
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 August 20, 2006.
NEW TAOHUAYUAN CULTURE TOURISM CO., LTD.
By: /s/ Cai Danmei
----------------------------------
Cai Danmei, Chief Executive Officer,
Principal Financial Officer and
Principal Accounting Officer
6