As filed with the Securities and Exchange Commission on ________, 2007
Registration No. 333-________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
NEW TAOHUAYUAN CULTURE TOURISM CO., LTD.
-------------------------------------------
(Name of small business issuer in its charter)
Nevada 7011 98-0440893
- ------------------------- ------------------ -----------------
(State or jurisdiction of (Primary Standard (I.R.S. Employer
incorporation or Industrial I.D. Number)
organization) Classification Code
Number)
1# Dongfeng Road
Xi'an Weiyang Tourism Development District
Xi'an, China
0086-29-86671555
---------------------------------------
(Address and telephone number of principal executive offices)
1# Dongfeng Road
Xi'an Weiyang Tourism Development District
Xi'an, China
0086-29-86671555
--------------------------------------------------------
(Address of principal place of business or intended principal place of business)
National Registered Agents, Inc. of Nevada
1000 E. William Street, Suite 204
Carson City, NV 89701
(888) 682-4368
-------------------------------------------
(Name, address and telephone number of agent for service)
Copies to:
William T. Hart
1624 Washington Street
Denver, CO 80203
(303) 839-0061
Approximate date of commencement of proposed sale to the public: As soon
as practicable after the effective date of this registration statement.
If any securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act, check
the following box: [x]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------
Proposed Proposed
Maximum Maximum
Amount to Offering Aggregate Amount of
Title of Each Class of Be Price Offering Registration
Securities to be Registered Registered Per Share Price Fee
- --------------------------------------------------------------------------------
Common stock, $.001
par value 1,699,999 shares $0.65 $1,105,000 $119
This registration statement registers the resale of 1,699,999 shares of
common stock held by a shareholder of the Registrant.
The Proposed Maximum Offering Price Per Share and the Proposed Maximum
Aggregate Offering Price in the table above are estimated solely for the purpose
of calculating the registration fee pursuant to Rule 457.
The Registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until it shall file a
further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
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NEW TAOHUAYUAN CULTURE TOURISM CO., LTD.
------------------------------
1,699,999 Shares of Common Stock
This prospectus covers the resale of 1,699,999 shares of our common stock
held by a selling stockholder for which information is provided under the
"Selling Stockholder and Plan of Distribution" section of this prospectus. The
shares will be offered by the selling stockholder at prevailing market prices or
at privately negotiated prices. We will not receive any proceeds from the sale
of shares offered by the selling stockholder.
Our common stock is listed on the OTC Bulletin Board under the symbol
"NTYN".
Investing in our common stock involves substantial risks. See "Risk
Factors" beginning on page 5.
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 , 2007.
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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.
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.
PROSPECTUS 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 offered by selling stockholder: 1,699,999 shares of common stock.
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Securities outstanding prior to and
after this offering: 18,727,327 shares of common stock.
Use of proceeds: We will not receive any proceeds
from the sale of the shares
offered by this prospectus.
By means of this prospectus, we are registering the resale of 1,699,999
shares of our common stock which are held by Rising Star Holdings Investment
Corporation, one of our shareholders. Rising Star purchased these shares from us
in January 2007 at a price of $0.05 per share.
Conventions Which Apply to This Prospectus
- ------------------------------------------
Except as otherwise indicated and for purposes of this prospectus only:
o "we", "us" and "our" refer to:
Our company - New Taohuayuan Culture Tourism Co., Ltd., as well as Shaanxi,
a PRC company that was merged into us in December 2004,
o "China" or "PRC" refers to the People's Republic of China, excluding
Taiwan, Hong Kong and Macau; and
o all references to "RMB" or "Renminbi" are to the legal currency of
China and all references to "$", "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.
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.
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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.
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.
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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 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
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.
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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
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.
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Sales of Our Common Stock Could Reduce the Price of Our Stock.
We have 18,727,327 outstanding shares of common stock. All of these shares
are freely tradable without restrictions under the Securities Act of 1933,
except for any shares held by our officers and directors, which are restricted
by the resale limitations of Rule 144 under the Securities Act of 1933.
The sale, or the availability for sale, of a substantial number of these
shares could reduce the market price for our common stock.
There is Only a Limited Market for Our Common Stock Which May Make it Difficult
for Investors to Sell Our Common Stock.
There is only a limited public market for our common stock and there can
be no assurance that a public market will continue. Accordingly, our
stockholders may not be able to sell their shares should they desire to do so.
Required Disclosure Concerning Trading of Penny Stocks or Low-Priced Securities
May Reduce the Liquidity of Our Common Stock.
Our common stock trades on OTC Bulletin Board and 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 limit the market for our common stock and the ability of our
stockholders to sell their shares.
MARKET FOR OUR COMMON STOCK
On May 24, 2006 our common stock started trading on the OTC Bulletin Board
under the symbol "NYTN". The following shows the high and low prices for our
common stock for the periods indicated:
Quarter Ended High Low
------------- ----- -----
June 30, 2006 $0.90 $0.65
September 30, 2006 $0.90 $0.55
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December 31, 2006 $0.55 $0.55
March 31, 2007 $0.65 $0.55
As of March 31, 2007 we had 18,727,327 outstanding shares of common stock
held by approximately 975 stockholders. All of our outstanding shares, with the
exception of the 1,699,999 shares owned by Rising Star Holdings Investment
Corporation, can be sold pursuant to Rule 144 of the Securities and Exchange
Commission.
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.
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 for the
foreseeable future to pay any dividends on any shares of common stock.
During the year ended December 31, 2006 neither we, any of our officers or
directors, nor to our knowledge none of our principal shareholders, purchased
any shares of our common stock either from us, from third parties in a private
transaction, or as a result of purchases in the open market.
We are authorized to issue 10,000,000 shares of preferred stock,
$.001 par value, 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. As of March 31, 2007 we had not issued any shares of
Preferred Stock.
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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.
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 four 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. 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 Operations
Year Ended December 31, 2005
- ----------------------------
Material changes of certain items in our Statement of Operations for the
year ended December 31, 2005, as compared to the year ended December 31, 2004,
are discussed below:
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Increase (I)
Item or Decrease (D) Reason
- ---- --------------- ------
Operating Revenue D 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
early 2005 all levels of governments and state-owned
companies reduced unnecessary conferences to improve
efficiency. As a result, our occupancy rate for
fiscal 2005 was 70% compared to 79% during fiscal
2004.
Operating Expenses D The cost of our raw materials and consumables for
the year ended December 31, 2005 declined from that
for the year ended December 31, 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 were higher in 2004 than in
2005 since we incurred significant financial
consulting and legal expenses associated with the
filing of our registration statement with the
Securities and Exchange Commission in 2004. The
decrease in General and Administrative expenses was
partially offset by a substantial increase in the
price of fuel and electricity in 2005. 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.
Year Ended December 31, 2006
- ----------------------------
Material changes of certain items in our Statement of Operations for the
year ended December 31, 2006, as compared to the year ended December 31, 2005,
are discussed below:
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Increase (I)
Item or Decrease (D) Reason
- ---- --------------- ------
Operating Revenue I In 2006 we began to manage a fourth restaurant.
Operating Expenses I General and Administrative
expenses increased due to higher salaries
paid to our kitchen employees.
Liquidity and Capital Resources
Our material sources and (uses) of cash during the year ended December 31,
2005 were:
Cash provided by operations $ 3,422,986
Payment for land use rights (3,622,361)
Payment for land use rights, building improvements,
and purchase of equipment (320,537)
Changes to foreign currency exchange rate 495,021
Cash on hand at January 1, 2005 24,891
Our material sources and (uses) of cash during the year ended December 31,
2006 were:
Cash provided by operations $ 3,799,345
Loans to related parties (239,456)
Payment for land use rights (3,430,845)
Payment for land use rights, building improvements,
and purchase of equipment (669,441)
Sale of assets 23,760
Changes to foreign currency exchange rate 494,628
Cash on hand at January 1, 2006 22,009
As discussed in the "Business" section of this prospectus, 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 December 31, 2006 project expenditures for the mixed use
development in Lantian were approximately $15,400,000 for the land use rights
and approximately $1,400,000 for preliminary planning and design. We anticipate
that the remaining costs to develop the project, excluding the remaining payment
for the land use rights, will be approximately $64,000,000 over five years. We
expect to begin construction on the property in 2007.
As of December 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 2008 and commence operations in 2009. The
remaining costs to develop the project are expected to be approximately
$10,000,000.
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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 2007 $800,000
Construction and development costs -
Lantian project 2007-2012 $64,000,000
Construction and development costs -
New Hainan project 2007-2008 $10,000,000
We have financed our operations to date through the sale of our common
stock and cash generated by our operations. As of March 31, 2007 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.
Material changes in our assets and liabilities during the two years ended
December 31, 2006 were:
o Due From Related Parties - This receivable represents amounts
primarily owed to us for management fees by Shaanxi New Taohuayuan
Economy Trade Co., Ltd. ($490,305) and Shaanxi Wen Hao Zaliang Shifu,
Ltd. ($277,920).
o Long Term Assets - Represents amounts we have paid since 2003 for the
right to use land for the Lantian project.
o Tax Payable - Represents amounts we have accrued for income taxes.
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 December 31, 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
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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.
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 December 31, 2006 the currency exchange rate was 7.82 RMB for each
U.S. dollar.
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.
15
Refer to Note 2 to our financial statement for our information concerning
our significant accounting policies and recent accounting pronouncements.
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.
16
BUSINESS
Taohuayuan Inn
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 approximately 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 $1,567,000 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 2006 was 71% and the average daily room rate for 2006 was
$38.00.
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
17
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.
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. Vacation 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 approximately $428,000
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. We did not achieve targeted revenues in 2004, 2005 or 2006 and did not
earn a bonus for managing this property. Refer to Note 4(c) to our financial
statements for information concerning the amount we have received for managing
this hotel and resort.
This property closed for major remodeling in 2006 and is expected to reopen
in May 2007.
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.
The Wenhao restaurants serve a traditional Chinese village cuisine with emphasis
18
on fresh and healthy foods and ingredients such as fresh fruits and vegetables
and grains.
Under the terms of the management agreement, we receive a management fee of
approximately $1,039,000 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
restaurants. We did not achieve targeted revenues in 2004, 2005 or 2006. Refer
to Note 5 to our financial statements for information concerning the amount we
have received for managing these restaurants.
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 (including taxes) of $16,198,000.
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 December 31, 2006
project expenditures were approximately $15,400,000 for the land use rights and
approximately $1,400,000 for preliminary planning and design. We anticipate that
the remaining costs to develop the project will be approximately $64,000,000
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 $1,258,000. 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 December 31, 2006
project expenditures, exclusive of the amounts paid for the land use rights,
were minimal. We expect to complete the New Hainan hotel and resort project in
2008 and commence operations in 2009. The remaining costs to develop the project
are expected to be approximately $10,000,000. We will supervise the design,
construction and development of this project. We will operate the project once
it is complete.
As of March 31, 2007 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 March 31, 2007 we did not have any firm commitments from any third party with
respect to financing either project. If required financing is not be available
19
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.
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.
20
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.
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.
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).
21
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.
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.
22
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.
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.
General Information
As of March 31, 2007 we had 295 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.
The cost of compliance with environmental laws in China has been, and is
not expected to be, material.
23
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.
Officer/Director
Name Age Position Since
- ---- --- ---------------- -----
Chen Jingmin 53 Chairman of the Board of Directors 1997
Cai Danmei 45 Chief Executive Officer, Chief Financial
Officer and a Director 1997
Liu Bo 29 Secretary and a Director 2004
Hu Yangxiong 44 Director 2002
Yang Erping 51 Director 2004
Zhao Jianwen 47 Director 2004
Wang Changzhu 50 Director 2004
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 is our founder and has been the chairman of our board of
directors since 1997. 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 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.
24
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.
Our Audit Committee is composed of Messrs. Hu (Chairman), Yang and Zhao.
Mr. Hu is the financial expert on our Audit Committee. Our Compensation
Committee is comprised of Messrs. Yang (Chairman), Zhao and Wang. All of these
directors are independent directors as defined in section 121(a) of the listing
standards of the American Stock Exchange.
Hu Yangxiong, Yang Erping, Zhao Jianwen and Wang Changzhu are independent
directors as that term is defined in section 121(a) of the listing standards of
the American Stock Exchange.
We have not adopted a Code of Ethics which is applicable to our principal
executive, financial, and accounting officers and persons performing similar
functions.
Executive Compensation
The following table sets forth in summary form the compensation received
by (i) our Chief Executive Officer and (ii) by our two other executive officers
during the two years ended December 31, 2006.
Summary Compensation Table
All
Name Other
and Restricted Annual
Principal Stock Option Compen-
Position Year Salary Bonus Awards Awards sation Total
- --------------------------------------------------------------------------------
Chen Jingmin, 2006 0 0 0 0 0 0
Chairman 2005 0 0 0 0 0
Cai Danmei, 2006 $10,644 0 0 0 0 $10,644
Chief Executive 2005 $5,968 0 0 0 0 $ 5,968
and Financial Officer
Liu Bo, 2006 $2,993 0 0 0 0$ 2,993
Secretary 2005 $2,993 0 0 0 0$ 2,993
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 prevent the
25
employees from competing with us during or after their employment with us.
During the year ended December 31, 2006 we paid Ms. Cai an additional $512
per month as a result of her seniority with us.
During the year ended December 31, 2006 we did not compensate any person
for serving as a director.
We have not granted or sold any options for the purchase of our common
stock.
Transactions with Related Parties
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.
As of December 31, 2006 Shaanxi New Taohuayuan Economy Trade Co. Ltd. owed
us $490,305 for management fees. As of December 31, 2006 Shaanxi Wenhao Zaliang
Shifu, Ltd. owed us $277,920 for management fees.
26
In January 2007 we sold 1,699,999 shares of our common stock to Rising
Star Holdings Investment Corporation at a price of $0.05 per share. In January
2007 Rising Star Holdings also agreed to act as our investor relations
consultant.
PRINCIPAL SHAREHOLDERS
The following table shows, as of March 31, 2007, 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) 18%
Cai Danmei 52,632 .2%
Liu Bo -- --
Hu Yangxiong -- --
Yang Erping -- --
Zhao Jianwen -- --
Wang Changzhu -- --
Rising Star Holdings Investment
Corporation 1,699,999 9.1%
All officers and directors
as a group (7 persons) 3,417,648 18.2%
(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.
The address of each shareholder listed above, with the exception of Rising
Star Holdings Investment Corporation, is in care of us at 1# Dongfeng Road,
Xi'an Weiyang Tourism Development District, Xi'an, China. The address of Rising
Star Holdings Investment Corporation is 16th Floor, Prince's Building, 10 Chater
Road, Hong Kong.
SELLING SHAREHOLDER AND PLAN OF DISTRIBUTION
Rising Star Holdings Investment Corporation, one of our shareholders,
plans to offer 1,699,999 shares of our common stock by means of this prospectus.
Rising Star purchased these shares from us in January 2007 at a price of $0.05
per share. Rising Star is sometimes referred to in this prospectus as the
selling shareholder.
27
We will not receive any proceeds from the sale of the shares by the
selling shareholder. Although we will pay all costs of registering the shares
offered by the selling shareholder the selling shareholders will pay all sales
commissions and other costs the sale of the shares.
Shares ownership
after this Offering
Shares Shares to be sold ----------------------
Selling Shareholder Owned in this Offering Number %
- ------------------- ----- ----------------- ------ -----
Rising Star Holdings 1,699,999 1,699,999 -- --
Plan of Distribution
The shares of our common stock which the selling shareholder 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 OTC 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 stockholder determine from time to
time.
The selling shareholder may also sell its shares pursuant to Rule 144 under
the Securities Act of 1933.
The selling shareholder may also sell its shares 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 shareholder and/or the purchasers of these shares for whom such
broker-dealers may act as agent. As to a particular broker-dealer, this
compensation might be in excess of customary commissions. Market makers and
block purchasers purchasing these shares may do so for their own account and at
their own risk. It is possible that the selling shareholder will attempt to sell
its shares 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 offered by this
prospectus will be sold by the selling shareholder. Upon effecting the sale of
any shares of our common stock offered under this prospectus, the selling
shareholder and any brokers, dealers or agents, may be deemed "underwriters" as
28
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 shareholder may sell all or any part of its
shares through an underwriter. The selling shareholder has not entered into any
agreement with a prospective underwriter and there is no assurance that any such
agreement will be entered into. If the selling shareholder 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 shareholder 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 it considers the purchase price to be unsatisfactory at any particular time.
The selling shareholder and any other persons participating in the sale or
distribution of its shares 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 the
activities of, and limit the timing of purchases and sales of any shares of our
common stock by the selling shareholder. 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 shareholder. These
regulations may affect the marketability of the shares of our common stock.
The selling shareholder is not a broker/dealers and is not affiliated with
any broker/dealer.
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.
Common Stock
As of the date of this prospectus we had 18,727,327 outstanding shares of
common stock held by approximately 1,000 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
29
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.
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.
INDEMNIFICATION
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.
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.
EXPERTS
Our audited financial statements included in this prospectus as of and for
the years ended December 31, 2005 and 2006 have been included in reliance on the
reports of Michael Pollack, CPA, an independent registered certified public
accountant, given on the authority of Mr. Pollack as an expert in accounting and
auditing.
30
Effective August 7, 2006 we dismissed Moores Rowland Mazars ("Moores
Rowland") as our independent certified public accountants. Moores Rowland
audited our financial statements for the fiscal years ended December 31, 2004
and 2005. The reports of Moores Rowland for these fiscal years did not contain
an adverse opinion, or disclaimer of opinion and were not qualified or modified
as to audit scope or accounting principles. However, the reports of Moores
Rowland for these fiscal years included an explanatory paragraph describing the
uncertainty as to our ability to continue as a going concern. During our two
most recent fiscal years and subsequent interim period ended August 7, 2006
there were no disagreements with Moores Rowland on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedures, which disagreements, if not resolved to the satisfaction of Moores
Rowland, would have caused it to make reference to such disagreements in its
report.
Effective August 7, 2006 we hired Michael Pollack CPA, as our independent
registered public accounting firm.
Michael Pollack did not provide us with any advice regarding the
application of accounting principles to a specified transaction, either
completed or proposed, or the type of audit opinion that might be rendered on
our financial statements, that was an important factor considered by us in
reaching a decision as to an accounting, auditing or financial reporting issue.
During the two most recent fiscal years and subsequent interim period ended
August 7, 2006, we did not consult with Mr. Pollack regarding any matter that
was the subject of a disagreement or a reportable event as defined in the
regulations of the Securities and Exchange Commission.
The change in our independent registered public accountants was
recommended and approved by our directors and our audit committee.
AVAILABLE 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.
31
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2006 AND 2005
INDEX TO FINANCIAL STATEMENTS
Pages
Report of Independent Registered Public Accounting Firm 1
Consolidated Balance Sheet as of December 31, 2006 and 2005 (Restated) 2
Consolidated Statements of Income and Accumulated Other
Comprehensive Income for the Years Ended December 31, 2006
and 2005 (Restated) 3
Consolidated Statement of Changes in Stockholders' Equity for the
Years Ended December 31, 2006 and 2005 (Restated) 4
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2006 and 2005 (Restated) 5
Notes to Consolidated Financial Statements 6-20
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
New Taohuayuan Culture Tourism Company Limited
I have audited the accompanying consolidated balance sheet of New Taohuayuan
Culture Tourism Company Limited. (the "Company") as of December 31, 2006 and
2005 and the related consolidated statements of income and accumulated other
comprehensive income, changes in stockholders' equity, and cash flows for the
years ended December 31, 2006 and 2005. These consolidated financial statements
are the responsibility of the Company's management. My responsibility is to
express an opinion on these consolidated financial statements based on my
audits.
I conducted my audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that I plan
and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. I was not
engaged to perform an audit of the Company's internal control over financial
reporting. My audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company's internal control over financial reporting.
Accordingly, I express no such opinion. 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. I believe that my audits provide a reasonable
basis for my opinion.
In my opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of New
Taohuayuan Culture Tourism Company Limited as of December 31, 2006 and 2005, and
the results of its consolidated statements of income and accumulated other
comprehensive income, changes in stockholders' equity, and cash flows for the
years ended December 31, 2006 and 2005 in conformity with U.S. generally
accepted accounting principles.
/s/ Michael Pollack CPA
Cherry Hill, NJ
February 23, 2007
1
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2006 AND 2005
(IN US$)
ASSETS
2006 2005
---- ----
(RESTATED)
Current Assets:
Cash and cash equivalents $ 46,394 $ 68,403
Accounts receivable 37,745 19,986
Inventories 33,705 44,102
Prepaid expenses and other current assets 9,786 39,378
Due from related parties 948,123 708,667
----------- ----------
Total Current Assets 1,075,753 880,536
----------- ----------
Fixed assets, net of depreciation 9,320,801 8,929,407
----------- ----------
Other Assets:
Long-term assets 18,666,100 15,235,255
Deferred tax assets 56,323 --
----------- ----------
Total Other Assets 18,722,423 15,235,255
----------- ----------
TOTAL ASSETS $29,118,977 $25,045,198
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
LIABILITIES
Current Liabilities:
Accounts payable and accrued expenses $ 943,473 $ 841,975
Deferred tax liability -- 36,834
Taxes payable 3,300,733 1,914,283
----------- ----------
Total Current Liabilities 4,244,206 2,793,092
----------- ----------
Commitments and contingencies
Total Liabilities 4,244,206 2,793,092
----------- ----------
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 17,027
Additional paid-in capital 14,922,428 14,922,428
Statutory reserves 1,822,088 1,587,771
Retained earnings 6,845,461 5,229,859
Accumulated other comprehensive income (loss) 1,267,767 495,021
----------- ----------
Total Stockholders' Equity 24,874,771 22,252,106
----------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $29,118,977 $25,045,198
============ ===========
The accompanying notes are an integral part of the consolidated financial
statements.
2
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS AND
ACCUMULATED OTHER COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
(IN US $)
December 31,
-------------------
2006 2005
(RESTATED)
OPERATING REVENUES
Catering and hotel related services income $ 3,933,958 $ 3,767,218
Management, rental and laundry income 1,673,489 1,411,312
------------ ------------
TOTAL OPERATING REVENUES 5,607,447 5,178,530
COST OF REVENUES 980,883 953,384
------------ ------------
GROSS PROFIT 4,626,564 4,225,146
------------ ------------
OPERATING EXPENSES
Salaries and wage related expenses 376,522 326,414
General and administrative fees 904,172 437,674
Depreciation, amortization and impairment 526,702 501,131
------------ ------------
Total Operating Expenses 1,807,396 1,265,219
------------ ------------
INCOME BEFORE OTHER INCOME (EXPENSE) 2,819,168 2,959,927
OTHER INCOME (EXPENSE)
Interest income 1,026 1,239
Loss on disposal of assets (5,703) --
------------ ------------
Total Other Income (Expense) (4,677) 1,239
------------ ------------
NET INCOME BEFORE PROVISION FOR
INCOME TAXES 2,814,491 2,961,166
Provision for Income Taxes (964,572) (929,157)
------------ ------------
NET INCOME APPLICABLE TO COMMON SHARES $ 1,849,919 $ 2,032,009
============ ============
NET EARNINGS PER BASIC AND DILUTED SHARES $ 0.11 $ 0.12
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 17,027,328 17,027,328
============ ============
COMPREHENSIVE INCOME
Net income $ 1,849,919 $ 2,032,009
Other comprehensive income
Currency translation adjustments 772,746 495,021
------------ ------------
Comprehensive income $ 2,622,665 $ 2,527,030
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
3
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
(IN US $)
Accumulated
Additional Other
Common Stock Paid-in Statutory Retained Comprehensive
Shares Amount Capital Reserves Earnings Income Total
------ ------ ---------- --------- -------- ------------- -----
Balance December 31, 2004, restated 17,027,328 $ 17,027 $14,922,428 $ 1,271,817 $ 3,511,069 $ -- $19,722,341
Transfer of statutory reserves -- -- -- 315,954 (313,219) -- 2,735
Allocation of noncontrolling interest -- -- -- -- -- -- --
Net income for the year ended
December 31, 2005, as previously
reported -- -- -- -- 1,051,996 352,710 1,404,706
Prior period adjustment, see Note 10 -- -- -- -- 980,013 142,311 1,122,324
----------- ------------ ------------ ----------- ------------ ----------- ------------
Net income for the year ended
December 31, 2005 -- -- -- -- 2,032,009 495,021 2,527,030
----------- ------------ ------------ ----------- ------------ ----------- ------------
Balance December 31, 2005 17,027,328 17,027 14,922,428 1,587,771 5,229,859 495,021 22,252,106
Transfer of statutory reserves -- -- -- 234,317 (234,317) -- --
Net income for the year ended
December 31, 2006 -- -- -- -- 1,849,919 772,746 2,622,665
----------- ------------ ------------ ----------- ------------ ----------- ------------
Balance December 31, 2006 17,027,328 $ 17,027 $14,922,428 $1,822,088 $6,845,461 $1,267,767 $24,874,771
=========== ============ ============ =========== ============ ========== ============
The accompanying notes are an integral part of the consolidated financial
statements.
4
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2006 AND 2005
(IN US $)
2006 2005
---------------------------
(RESTATED)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,849,919 $ 2,032,009
------------- -------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, amortization and impairment 526,702 501,131
Loss on disposal of fixed assets 5,703 -
Changes in assets and liabilities
(Increase) decrease in accounts receivable (17,759) 11,041
Decrease in inventory 10,397 759
(Increase) decrease in prepaid expenses and other
current assets 29,59 (430,504)
Increase (decrease) in accounts payable
and accrued expenses 101,498 (40,287)
Increase in income taxes payable 1,386,450 1,415,855
(Increase) in deferred taxes (93,157) (67,018)
------------- -------------
Total adjustments 1,949,426 1,390,977
------------- -------------
Net cash provided by operating activities 3,799,345 3,422,986
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
(Increase) decrease in advances to related parties (239,456) -
(Increase) in long-term assets (3,430,845) (3,622,361)
(Acquisitions) of fixed assets (669,441) (320,537)
Disposition of fixed assets 23,760 -
------------- -------------
Net cash (used in) investing activities (4,315,982) (3,942,898)
------------- -------------
Effect of foreign currency translation 494,628 495,021
------------- -------------
NET (DECREASE) IN
CASH AND CASH EQUIVALENTS (22,009) (24,891)
CASH AND CASH EQUIVALENTS -
BEGINNING OF PERIOD 68,403 93,294
------------- -------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 46,394 $ 68,403
============= =============
The accompanying notes are an integral part of the consolidated financial
statements.
5
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006 AND 2005
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
--------------------------------------
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.
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.
As noted in Note 10, the Company has restated its consolidated
financial statements to adjust certain tax accrual and accruals for
tax surcharges (penalties and interest) previously recorded. The net
effect of the adjustments was an increase in net income of the
Company for the year ended December 31, 2005 of $980,013 from a net
income of $1,051,996 to a net income of $2,032,009. The adjustments
increased the earnings (loss) per share $0.06 from $0.06 to $0.12.
6
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006 AND 2005
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
Principles of Consolidation
---------------------------
The 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.
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 $5,105 and
$4,668 as of December 31, 2006 and 2005, respectively in cash on
hand. The remainder of the cash was in financial institutions.
7
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006 AND 2005
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------------------------------------------------------
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 consolidated balance sheets 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.
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 December 31, 2006 and 2005 were 7.82 and 8.08,
respectively, and the average period RMB to the US dollar for 2006
and 2005 were 7.95 and 8.18, 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 years ended December 31, 2006 and
2005, the Company recorded approximately $772,746 and $495,021 in
transaction gains as a result of currency translation.
8
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006 AND 2005
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------------------------------------------------------
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 established a reserve of $2,493 as of
December 31, 2006.
Accounts receivable are generally due within 30 days and collateral
is not required.
Advertising Costs
-----------------
The Company expenses the costs associated with advertising as
incurred. Advertising expenses for the years ended December 31, 2006
and 2005 are included in general and administration expenses in the
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.
9
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006 AND 2005
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------------------------------------------------------
Fixed Assets (cont')
--------------------
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.
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.
10
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006 AND 2005
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------------------------------------------------------
The following is a reconciliation of the computation for basic and
diluted EPS:
December 31, December 31,
2006 2005
---- ----
(Restated)
Net income $ 1,849,919 $ 2,032,009
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.
11
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006 AND 2005
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 2005 and 2004 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.
On January 1, 2006, the Company adopted the provisions of FAS No.
123R "Share-Based Payment" ("FAS 123R") which requires recognition
of stock-based compensation expense for all share-based payments
based on fair value. Prior to January 1, 2006, the Company measured
compensation expense for all of its share-based compensation using
the intrinsic value method prescribed by Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25") and related interpretations. The Company has provided pro
forma disclosure amounts in accordance with FAS No. 148, "Accounting
for Stock-Based Compensation - Transition and Disclosure - an
amendment of FASB Statement No. 123" ("FAS 148"), as if the fair
value method defined by FAS No. 123, "Accounting for Stock Based
Compensation" ("FAS 123") had been applied to its stock-based
compensation.
The Company has elected to use the modified-prospective approach
method. Under that transition method, the calculated expense in 2006
is equivalent to compensation expense for all awards granted prior
to, but not yet vested as of January 1, 2006, based on the
grant-date fair values estimated in accordance with the original
provisions of FAS 123. Stock-based compensation expense for all
awards granted after January 1, 2006 is based on the grant-date fair
values estimated in accordance with the provisions of FAS 123R. The
Company recognizes these compensation costs, net of an estimated
forfeiture rate, on a pro rata basis over the requisite service
period of each vesting tranche of each award. The Company considers
voluntary termination behavior as well as trends of actual option
forfeitures when estimating the forfeiture rate.
12
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006 AND 2005
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------------------------------------------------------
Stock-Based Compensation (Continued)
------------------------------------
Years Ended December 31,
2006 2005
---- ----
(Restated) Net income:
As reported $1,849,919 $2,032,009
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 -- --
----------- -----------
Pro forma $1,849,919 $2,032,009
Net earnings per share:
As reported:
Basic $ 0.11 $ 0.12
Diluted $ 0.11 $ 0.12
Pro forma:
Basic $ 0.11 $ 0.12
Diluted $ 0.11 $ 0.12
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.
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.
13
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006 AND 2005
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
------------------------------------------------------
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.
Reclassifications
-----------------
Certain amounts that were not part of the restatement reported in
for the year ended December 31, 2005 have been reclassified to
conform to the presentation of the December 31, 2006 amounts. The
reclassifications have no effect on operations or equity for the
years ended December 31, 2005.
Recent Accounting Pronouncements
--------------------------------
In September 2006, the FASB issued SFAS 157, "Fair Value
Measurements." This standard defines fair value, establishes a
framework for measuring fair value in generally accepted accounting
principles, and expands disclosure about fair value measurements.
This statement is effective for financial statements issued for
fiscal years beginning after November 15, 2007. Early adoption is
encouraged. The adoption of SFAS 157 is not expected to have a
material impact on the financial statements.
In September 2006, the FASB issued SFAS 158, "Employers' Accounting
for Defined Benefit Pension and Other Postretirement Plans, an
amendment of FASB Statements 87, 88, 106 and 132(R)" ("SFAS 158").
SFAS 158 requires an employer to recognize the over-funded or
under-funded status of a defined benefit postretirement plan (other
than a multiemployer plan) as an asset or liability in its statement
of financial position and to recognize changes in that funded status
in the year in which the changes occur through comprehensive income.
SFAS 158 also requires the measurement of defined benefit plan
assets and obligations as of the date of the employer's fiscal
year-end statement of financial position (with limited exceptions).
Management does not expect adoption of SFAS 158 to have a material
impact on the Company's financial statements.
In February 2007, the FASB issued FAS No. 159, "The Fair Value
Option for Financial Assets and Financial Liabilities - Including an
amendment of FASB Statement No. 115", ("FAS 159") which permits
entities to choose to measure many financial instruments and certain
other items at fair value at specified election dates. A business
entity is required to report unrealized gains and losses on items
for which the fair value option has been elected in earnings at each
subsequent reporting date. This statement is expected to expand the
use of fair value measurement. FAS 159 is effective for financial
statements issued for fiscal years beginning after November 15,
2007, and interim periods within those fiscal years.
14
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006 AND 2005
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recent Accounting Pronouncements (Continued)
--------------------------------------------
In July 2006, the FASB issued Interpretation No. 48 (FIN No. 48),
"Accounting for Uncertainty in Income Taxes." This interpretation
requires recognition and measurement of uncertain income tax
positions using a "more-likely-than-not" approach. FIN No. 48 is
effective for fiscal years beginning after December 15, 2006.
Management is still evaluating what effect this will have on the
Company's financial statements.
In September 2006, the United States Securities and Exchange
Commission ("SEC") issued SAB 108, "Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in Current Year
Financial Statements."
This SAB provides guidance on the consideration of the effects of
prior year misstatements in quantifying current year misstatements
for the purpose of a materiality assessment. SAB 108 establishes an
approach that requires quantification of financial statement errors
based on the effects of each of the company's financial statements
and the related financial statement disclosures. SAB 108 permits
existing public companies to record the cumulative effect of
initially applying this approach in the first year ending after
November 15, 2006 by recording the necessary correcting adjustments
to the carrying values of assets and liabilities as of the beginning
of that year with the offsetting adjustment recorded to the opening
balance of retained earnings. Additionally, the use of the
cumulative effect transition method requires detailed disclosure of
the nature and amount of each individual error being corrected
through the cumulative adjustment and how and when it arose. The
Company does not anticipate that SAB 108 will have a material impact
on its financial statements.
NOTE 3- FIXED ASSETS
------------
Fixed assets as of December 31, 2006 and 2005 were as follows:
Estimated
Useful
Lives
(Years) 2006 2005
--------- ---- ----
Land use right 40-68 $2,916,033 $2,825,116
Buildings 40 6,355,321 6,156,086
Building improvements 15 1,498,278 1,451,564
Furniture and fixtures 12 374,097 381,987
Electrical equipment 15 1,350,892 1,308,485
Vehicles and other 10 1,691,421 1,093,285
---------- ----------
14,186,042 13,216,523
Less: accumulated depreciation 4,865,241 4,287,116
---------- ----------
Property and equipment, net $9,320,801 $8,929,407
========== ==========
15
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006 AND 2005
NOTE 3- FIXED ASSETS (CONTINUED)
------------------------
There was $526,702 and $501,131 charged to operations for
depreciation expense for the years ended December 31, 2006 and 2005,
respectively. There was no impairment for these assets during the
years ended December 31, 2006 and 2005.
NOTE 4- LONG-TERM ASSETS
----------------
The balance as of December 31, 2006 included payments of $18,666,100
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 $3,657,820 through December 31, 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 December
31, 2006.
NOTE 5- RELATED PARTY TRANSACTIONS
--------------------------
The Company has identified the following related parties:
Chen Jingmin - a director and stockholder of the Company.
Dongjin Taoyuan - a stockholder of the Company in which Chen Jingmin
has control and a beneficial interest.
Yuan Taizu - a stockholder of the Company in which Chen Jingmin has
control and a beneficial interest.
Shaanxi New Taohuayuan Economy Trade Company Limited - the principal
stockholder of the Company in which Chen Jingmin has control and a
beneficial interest.
16
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006 AND 2005
NOTE 5- RELATED PARTY TRANSACTIONS (CONTINUED)
--------------------------------------
Shaanxi Wenhao Zaliang Shifu Limited - a stockholder of the Company
in which Chen Jingmin has control and a financial interest. The
Wenhao Group has various entities as noted below.
Shaanxi Wenhao Dongjin Taohuyuan - part of Wenhao Group.
Shaanxi Wenhao Naner Huan Wenhao - part of Wenhao Group.
Shaanxi Wenhao Xijiao Wenhao - part of Wenhao Group.
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 December 31, 2006 had advanced $490,305 to Shaanxi
New Taohuayuan Economy Trade Company, $277,920 to the Wenhao Group,
$122,365 to Dongjin Taoyuan, and $57,533 to Yuan Taizu. These
advances are unsecured, interest-free and have no fixed repayment
terms. The Company has classified these advances as current assets.
Management Fee Agreement
------------------------
The Company entered into a management agreement with Shaanxi New
Taohuayuan Economy Trade Company Limited and Shaanxi Wenhao Group on
January 15, 2004 for a period of five years. The annual management
fees are fixed at approximately $1,400,000. For the years ended
December 31, 2006 and 2005, the Company earned $1,443,359 and
$1,411,312 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.
Additionally, in 2006, the Company entered into a management
agreement with Yuan Taizu and earned approximately $230,130 in
management fees. The agreement will pay the Company approximately
$1,800,000 (RMB) annually.
NOTE 6- STOCKHOLDERS' EQUITY (DEFICIT)
------------------------------
Preferred Stock
---------------
As of December 31, 2006, the Company has 10,000,000 shares of
preferred stock authorized with a par value of $.001. There are as
of December 31, 2006, no shares issued and outstanding.
17
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006 AND 2005
NOTE 6- STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
------------------------------------------
Common Stock
------------
As of December 31, 2006, the Company has 50,000,000 shares of common
stock authorized with a par value of $.001. As of December 31, 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.
Options and Warrants
--------------------
The Company has not granted any options or warrants as of December
31, 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 December 31, 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 $968,783.
18
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006 AND 2005
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 years ended December 31,
2006 and 2005, respectively.
Years ended December 31,
------------------------
2006 2005
Current tax expense $1,057,729 $ 996,175
Deferred tax expense (benefit) (93,157) (67,018)
------------- ------------
$ 964,572 $ 929,157
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 2% (1)%
------ -----
35% 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 assets represent deductible temporary differences arising mainly
from the other payables.
19
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006 AND 2005
NOTE 9- PROVISION FOR INCOME TAXES (CONTINUED)
At December 31, 2006, deferred tax assets consist of the following:
Bad debt $ 823
Other payables 55,500
-----------
$ 56,323
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.
NOTE 10- RESTATED FINANCIAL STATEMENTS
As noted in Note 1, the Company has restated its consolidated
financial statements to adjust certain tax accrual and accruals for
tax surcharges (penalties and interest) previously recorded. The net
effect of the adjustments was an increase in net income of the
Company for the year ended December 31, 2005 of $980,013 from a net
income of $1,051,996 to a net income of $2,032,009. The adjustments
increased the earnings (loss) per share $0.06 from $0.06 to $0.12.
20
TABLE OF CONTENTS
Page
PROSPECTUS SUMMARY ...............................................
RISK FACTORS .....................................................
MARKET FOR OUR COMMON STOCK ......................................
MANAGEMENT'S DISCUSSION AND ANALYSIS
AND PLAN OF OPERATION .......................................
BUSINESS..........................................................
MANAGEMENT .......................................................
PRINCIPAL SHAREHOLDERS............................................
SELLING SHAREHOLDER...............................................
DESCRIPTION OF CAPITAL STOCK......................................
INDEMNIFICATION ..................................................
EXPERTS...........................................................
AVAILABLE INFORMATION.............................................
FINANCIAL STATEMENTS..............................................
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 Security Devices. 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.
Until _______, 2007 all dealers effecting transactions in the registered
securities, whether or not participating in this distribution, may be required
to deliver a prospectus. This is in addition to the obligation of dealers to
deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article VII, Section 2 of our Articles of Incorporation provides for
indemnification of our officers, directors and controlling persons to the full
extent provided by Nevada law. Further, Article VII, Section 3, provides that no
director is personally liable to us or our stockholders for monetary damages for
any breach of fiduciary duty by such person as a director or officer except for
(i) a breach of the director's duty of loyalty to us or our stockholders, (ii)
acts or omissions not in good faith or which involve intentional misconduct,
fraud or a knowing violation of law, (iii) a transaction from which the director
received an improper benefit or (iv) an act or omission for which the liability
of a director is expressly provided under Nevada law.
Under the Nevada corporate statutes, Nevada corporations are permitted to
indemnify their officers and directors for liability to stockholders, so long as
such indemnification does not include the items set forth in the previous
paragraph under (i) through (iv).
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.(1)
SEC Registration Fees $119
Blue Sky Fees 200
Printing Expenses 100
Legal Fees 20,000
Accounting Fees 5,000
Miscellaneous Expenses 581
-------
Total $26,000
=======
(1) All expenses, except the SEC registration fee, are estimated.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
On December 6, 2004 we issued 17,027,328 shares of our common stock to 934
stockholders pursuant to our merger with Shaanxi New Taohuayuan Culture Tourism
Co., Ltd.
In January 2007 we sold 1,699,999 shares of our common stock to Rising
Star Holdings Investment Corporation at a price of $0.05 per share.
These shares were all issued to non-U.S. persons who reside outside of the
United States. The negotiations and agreements relating to the issuance of these
shares were made by the Company's officers (who were all Chinese citizens) from
China. The shares are restricted from resale in the public markets for a period
of one year from the date of their issuance.
The issuance of these shares was exempt from the registration requirements
of the Securities Act of 1933 pursuant to Rule 901 of the Securities and
Exchange Commission.
ITEM 27. EXHIBIT INDEX.
Number Exhibit
3.1 Articles of Incorporation of the Registrant *
3.2 Bylaws of the Registrant *
5 Opinion of Counsel
10.1 Hotel Management Agreement with Shaanxi New Taohuayuan Economy Trade
Co., Ltd. *
10.2 Restaurant Management Agreement with Shaanxi Wenhao Zaliang Shifu,
Ltd. *
10.3 Migratory Merger Agreement with Shaanxi New Taohuayuan Culture
Tourism Co., Ltd. *
10.4 Articles of Merger *
10.5 Employment Agreement with Cai Danmei *
10.6 Employment Agreement with Mr. Chen *
10.7 Employment Agreement with Liu Bo *
10.8 Land Use Agreement - Taohuayuan Inn *
10.9 Land Use Agreement - Lantian project *
10.10 Land Use Agreement - New Hainan Hotel and Resort *
10.11 Tax Agreement - *
21. Subsidiaries *
23.1 Consent of Attorneys ___
23.2 Consent of Accountants ___
* Incorporated by reference to the same exhibit filed with the Company's
Registration Statement on Form SB-2 (File #333-121187).
2
ITEM 28. UNDERTAKINGS.
The Registrant hereby undertakes:
(a) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers
and controlling persons of the small business issuer pursuant to the
foregoing provisions, or otherwise, the small business issuer has been
advised that in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Act and
is, therefore, unenforceable.
In the event that a claim for indemnification against such
liabilities (other than the payment by the small business issuer of
expenses incurred or paid by a director, officer or controlling person of
the small business issuer in the successful defense of any action, suit or
proceeding) is asserted by such director or controlling person in
connection with the securities being registered, the small business issuer
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question of whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of
such issue.
(b) That subject to the terms and conditions of Section 13(a) of the
Securities Exchange Act of 1934, it will file with the Securities and
Exchange Commission such supplementary and periodic information, documents
and reports as may be prescribed by any rule or regulation of the
Commission heretofore or hereafter duly adopted pursuant to authority
conferred in that section.
(c) That any post-effective amendment filed will comply with the
applicable forms, rules and regulations of the Commission in effect at the
time such post-effective amendment is filed.
(d) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3)
of the Securities Act;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof), which, individually or in
the aggregate, represent a fundamental change in the information set
forth in the registration statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
3
(e) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(f) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the Offering.
SIGNATURES
Pursuant to the requirements of the Securities Act, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing Form SB-2 and has caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized in the city of Xi'an, Shaanxi Province, China on April 12, 2007.
NEW TAOHUAYUAN CULTURE TOURISM CO., LTD.
By: /s/ Cai Danmei
-----------------------------------
Cai Danmei
Chief Executive Officer
Pursuant to the requirements of the Securities Act, as amended, this
Registration Statement has been signed below by the following persons.
Name Position Date
- ----- --------- ----
/s/ Chen Jingmin Chairman of the Board April 12, 2007
- --------------------------
Chen Jingmin
/s/ Cai Danmei Chief Executive Officer, April 12, 2007
- -------------------------- Chief Financial Officer
Cai Danmei (Principal Accounting
Officer) and Director
/s/ Liu Bo Secretary and Director April 12, 2007
- ---------------------------
Liu Bo
/s/ Hu Yangxiong Director April 12, 2007
- ---------------------------
Hu Yangxiong
/s/ Yang Erping Director April 12, 2007
- --------------------------
Yang Erping
/s/ Zhao Jianwen Director April 12, 2007
- --------------------------
Zhao Jianwen
/s/ Wang Changzhu Director April 12, 2007
- --------------------------
Wang Changzhu
EXHIBITS
NEW TAOHUAYUAN CULTURE TOURISM CO., LTD.
REGISTRATION STATEMENT ON FORM SB-2