UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2007
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number - None
NEW TAOHUAYUAN CULTURE TOURISM CO., LTD.
-------------------------------------------------
Nevada 98-0440893
--------------------------- ------------------------------------
State or other jurisdiction (I.R.S.) Employer Identification No.
of incorporation
1# Dongfeng Road
Xi'an Weiyang Tourism Development District
Xi'an, China
---------------------------- -------------
Address of principal executive offices
0086-29-86671555
-------------------------------------- -----------------
Registrant's telephone number, including area code
N/A
------------------------------------ ----
Former address of principal executive offices
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports) and (2) had been subject to such filing
requirements for the past 90 days.
Yes X No __
------------ ------------
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act):
Yes No __X___
------------------ -
As of October 31, 2007 the Company had 18,727,327 outstanding shares of
common stock.
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
INDEX TO FINANCIAL STATEMENTS
Page
Condensed Consolidated Balance Sheet as of September 30, 2007 (Unaudited)
Condensed Consolidated Statements of Income and Accumulated Other
Comprehensive Income for the Nine and Three Months Ended
September 30, 2007 and 2006 (Restated) (Unaudited)
Condensed Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2007 and 2006 (Restated) (Unaudited)
Notes to Condensed Consolidated Financial Statements
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED
CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2007 (UNAUDITED)
(IN US$)
ASSETS
Current Assets:
Cash and cash equivalents $ 106,791
Accounts receivable 24,131
Inventories 40,066
Deferred tax asset 65,687
Prepaid expenses and other current assets 9,262
Due from related parties 1,004,319
--------------
Total Current Assets 1,250,256
--------------
Fixed assets, net of depreciation 9,299,782
--------------
Other Assets:
Long-term assets 22,455,074
--------------
Total Other Assets 22,455,074
--------------
TOTAL ASSETS $ 33,005,112
==============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
LIABILITIES
Current Liabilities:
Accounts payable and accrued expenses $ 961,080
Taxes payable 4,423,301
--------------
Total Current Liabilities 5,384,381
--------------
Commitments and contingencies
Total Liabilities 5,384,381
--------------
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 18,727,327 shares issued and
outstanding 18,727
Additional paid-in capital 15,005,728
Statutory reserves 1,822,088
Retained earnings 8,429,063
Accumulated other comprehensive income (loss) 2,345,125
--------------
Total Stockholders' Equity 27,620,731
--------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 33,005,112
==============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND
ACCUMULATED OTHER COMPREHENSIVE INCOME
FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006 (UNAUDITED)
(IN US $)
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2007 2006 2007 2006
----------- ----------- ----------- -----------
OPERATING REVENUES
Catering and hotel related services income $ 2,880,007 $ 2,732,847 $ 1,055,853 $ 1,012,110
Management, rental and laundry income 1,349,166 1,234,031 456,192 434,658
----------- ----------- ----------- -----------
TOTAL OPERATING REVENUES 4,229,173 3,966,878 1,512,045 1,446,768
COST OF REVENUES 733,179 679,328 270,749 255,957
----------- ----------- ----------- -----------
GROSS PROFIT 3,495,994 3,287,550 1,241,296 1,190,811
----------- ----------- ----------- -----------
OPERATING EXPENSES
Salaries and wage related expenses 319,837 268,948 104,921 121,403
General and administrative fees 407,065 710,168 132,087 227,798
Depreciation, amortization and impairment 405,060 341,018 113,050 86,026
----------- ----------- ----------- -----------
Total Operating Expenses 1,131,962 1,320,134 350,058 435,227
----------- ----------- ----------- -----------
INCOME BEFORE OTHER INCOME (EXPENSE) 2,364,032 1,967,416 891,238 755,584
OTHER INCOME (EXPENSE)
Interest income 870 759 304 202
Loss on disposal of assets - (9,502) - -
----------- ----------- ----------- -----------
Total Other Income (Expense) 870 (8,743) 304 202
----------- ----------- ----------- -----------
NET INCOME BEFORE PROVISION FOR INCOME TAXES 2,364,902 1,958,673 891,542 755,786
Provision for Income Taxes (781,301) (332,462) (299,103) 97,915
----------- ----------- ----------- -----------
NET INCOME APPLICABLE TO COMMON SHARES $ 1,583,601 $ 1,626,211 $ 592,439 $ 853,701
============ ============ ============ ============
NET EARNINGS PER BASIC AND DILUTED SHARES $ 0.08 $ 0.10 $ 0.03 $ 0.05
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 18,633,920 7,027,328 18,727,327 17,027,328
============ ============ ============ ============
COMPREHENSIVE INCOME
Net income $ 1,583,601 $ 1,626,211 $ 592,439 $ 853,701
Other comprehensive income
Currency translation adjustments 1,077,358 549,083 406,475 322,948
------------ ------------ ------------ ------------
Comprehensive income $ 2,660,959 $ 2,175,294 $ 998,914 $ 1,176,649
============ ============ ============ ============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006 (UNAUDITED)
(IN US $)
2007 2006
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income 1,583,601 1,626,211
----------- -----------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, amortization and impairment 405,060 341,018
Loss on disposal of fixed assets - 9,502
Changes in assets and liabilities
Decrease in accounts receivable 15,200 (57,618)
(Increase) decrease in inventory (4,944) 4,629
(Increase) decrease in prepaid expenses and other
current assets 935 (8,217)
Increase (decrease) in accounts payable and
and accrued expenses (22,057) 35,082
Increase in income taxes payable 983,801 893,937
(Increase) in deferred taxes (6,996) (417,185)
----------- -----------
Total adjustments 1,370,999 801,148
----------- -----------
Net cash provided by operating activities 2,954,600 2,427,359
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
(Increase) in advances to related parties (16,092) (267,147)
(Increase) in loans receivable - (634,535)
(Increase) in long-term assets (2,962,571) (1,389,668)
(Acquisitions) of fixed assets (1,596) (734,442)
----------- -----------
Net cash (used in) investing activities (2,980,259) (3,025,792)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITES
Proceeds from issuance of common stock 85,000 -
----------- -----------
Net cash provided by financing activities 85,000 -
----------- -----------
Effect of foreign currency translation 1,056 549,083
----------- -----------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS 60,397 (49,350)
CASH AND CASH EQUIVALENTS -
BEGINNING OF PERIOD 46,394 68,403
----------- -----------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 106,791 $ 19,053
=========== ===========
SUPPLEMENTAL NONCASH FINANCIAL INFORMATION
Shares of stock issued for liabilities $ - $ -
=========== ===========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2007 AND 2006 (UNAUDITED)
NOTE 1- ORGANIZATION AND BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements included
herein have been prepared, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission ("SEC"). The
condensed consolidated financial statements and notes are presented
as permitted on Form 10-QSB and do not contain information included
in the Company's annual consolidated statements and notes. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles
generally accepted in the United States of America have been
condensed or omitted pursuant to such rules and regulations,
although the Company believes that the disclosures are adequate to
make the information presented not misleading. It is suggested that
these condensed consolidated financial statements be read in
conjunction with the December 31, 2006 audited financial statements
and the accompanying notes thereto. While management believes the
procedures followed in preparing these condensed consolidated
financial statements are reasonable, the accuracy of the amounts are
in some respects dependent upon the facts that will exist, and
procedures that will be accomplished by the Company later in the
year.
These condensed consolidated unaudited financial statements reflect
all adjustments, including normal recurring adjustments which, in
the opinion of management, are necessary to present fairly the
consolidated operations and cash flows for the periods presented.
New Taohuayuan Culture Tourism Company Limited (the "Company") was
incorporated under the laws of the State of Nevada on November 3,
2004. The Company is an investment holding company.
Shaanxi New Taohuayuan Culture Tourism Company Limited ("Shaanxi
THY") was incorporated in the People's Republic of China ("PRC") on
August 3, 1997 as a limited liability company. Shaanxi THY operates
a resort in Xi'an, in the PRC, providing catering, hotel and related
services.
Pursuant to an agreement and plan of migratory merger between the
Company and Shaanxi THY on November 5, 2004, the Company acquired
Shaanxi THY by issuing 17,027,328 shares of its common stock to the
original shareholders of Shaanxi THY in exchange for 100% of their
membership interests (the "Merger"). As a result, the controlling
member of Shaanxi THY has effective and actual operating control of
the Company. The Merger was approved by the Shaanxi Ministry of
Commerce on November 24, 2004. Since then, Shaanxi THY has become a
wholly owned subsidiary of the Company and its status has changed to
a wholly owned foreign owned enterprise.
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.
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2007 AND 2006 (UNAUDITED)
NOTE 1- ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED)
On that basis, the historical financial information presented is
that of Shaanxi THY. The historical stockholders' equity accounts of
the Company have been retroactively restated to reflect the issuance
of the 17,027,328 shares of common stock since the beginning of the
periods presented. The difference between the par value of the
shares issued for the Merger and the par value of the shares of
Shaanxi THY is recorded as additional paid-in capital.
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The condensed consolidated financial statements include the accounts
of the Company and its wholly owned subsidiary. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
Use of Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. On an on-going basis, the Company evaluates
its estimates, including, but not limited to, those related to bad
debts, income taxes and contingencies. The Company bases its
estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the
carrying value of assets and liabilities that are not readily
apparent from other sources. Actual results could differ from those
estimates.
Economic and Political Risks
The Company's operations are conducted in the PRC. Accordingly, the
Company's business, financial condition and results of operations
may be influenced by the political, economic and legal environment
in the PRC, and by the general state of the PRC economy.
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.
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2007 AND 2006 (UNAUDITED)
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 $13,055 as of
September 30, 2007 in cash on hand. The remainder of the cash was in
financial institutions.
Comprehensive Income
The Company adopted Statement of Financial Accounting Standards No,
130, "Reporting Comprehensive Income," (SFAS No. 130). SFAS No.
130 requires the reporting of comprehensive income in addition to
net income from operations.
Comprehensive income is a more inclusive financial reporting
methodology that includes disclosure of information that
historically has not been recognized in the calculation of net
income.
Inventory
Inventory is valued at the lower of cost or market. Inventory
includes raw materials and consumables.
Potential losses from obsolete and slow-moving inventories are
provided for when identified. Cost, which comprises all costs of
purchase and, where applicable, other costs that have been incurred
in bringing their inventories to their present location and
condition, is calculated using the first-in, first-out method.
Fair Value of Financial Instruments
The carrying amounts reported in the condensed consolidated balance
sheet for cash and cash equivalents, trade receivables and accounts
payable approximate fair value because of the immediate or
short-term maturity of these financial instruments.
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 September 30, 2007 was 7.5061, and the average period
RMB to the US dollar for the nine months ended September 30, 2007
and 2006 were 7.5626 and 7.94, respectively. The RMB is not freely
convertible into foreign currency and all foreign
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2007 AND 2006 (UNAUDITED)
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 nine months ended September
30, 2007 and 2006, the Company recorded approximately $1,077,358 and
$549,083 in transaction gains (losses) as a result of currency
translation.
Revenue Recognition
The Company generates revenue from catering, hotel and related
services. Revenue is generally recognized: (a) when persuasive
evidence of an arrangement exists; (b) when services are rendered;
(c) when the fee is fixed or determinable; and (d) when
collectibility is reasonably assured. Such service revenues are
recognized net of discounts.
The Company also generates management fee income in accordance with
Shaanxi New Taohuayuan Economy Trade Company Limited, a related
party based on terms stated in the agreement. This company is
controlled by a common director and stockholder of the Company.
Accounts Receivable
The Company conducts business and extends credit based on an
evaluation of the customers' financial condition, generally without
requiring collateral. Exposure to losses on receivables is expected
to vary by customer due to the financial condition of each customer.
The Company monitors exposure to credit losses and maintains
allowances for anticipated losses considered necessary under the
circumstances. The Company has established a reserve of $2,598 as of
September 30, 2007.
Accounts Receivable (Continued)
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 nine months ended September
30, 2007 and 2006 are included in general and administration
expenses in the condensed consolidated statements of income.
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2007 AND 2006 (UNAUDITED)
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Fixed Assets
Fixed assets are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets,
net of the estimated residual values; buildings - 40 years (5%
estimated residual value), building improvements - 15 years (5%
residual value), electrical equipment - 12 years (5% residual
value), furniture and fixtures - 15 years (5% residual value) and
vehicles and other equipment - 10 years (5% residual value). In
addition, the Company purchased land use rights that are for a
period of 40-68 years, the unexpired lease term, with no residual
value.
When assets are retired or otherwise disposed of, the costs and
related accumulated depreciation are removed from the accounts, and
any resulting gain or loss is recognized in income for the period.
The cost of maintenance and repairs is charged to income as
incurred; significant renewals and betterments are capitalized.
Deduction is made for retirements resulting from renewals or
betterments.
Land Use Rights
According to the laws of China, the government owns all the land in
China. Companies or individuals are authorized to possess and use
the land only through land use rights granted by the Chinese
government. Land use rights are being amortized using the
straight-line method over the lease term of 40 to 68 years.
Impairment of Long-Lived Assets
Long-lived assets, primarily property and equipment and intangible
assets, are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets might
not be recoverable. The Company does perform a periodic assessment
of assets for impairment in the absence of such information or
indicators. Conditions that would necessitate an impairment
assessment include a significant decline in the observable market
value of an asset, a significant change in the extent or manner in
which an asset is used, or a significant adverse change that would
indicate that the carrying amount of an asset or group of assets is
not recoverable. For long-lived assets to be held and used, the
Company recognizes an impairment loss only if its carrying amount is
not recoverable through its undiscounted cash flows and measures the
impairment loss based on the difference between the carrying amount
and estimated fair value.
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2007 AND 2006 (UNAUDITED)
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Earnings Per Share of Common Stock
Basic net earnings per common share is computed using the weighted
average number of common shares outstanding. Diluted earnings per
share (EPS) includes additional dilution from common stock
equivalents, such as stock issuable pursuant to the exercise of
stock options and warrants. Common stock equivalents are not
included in the computation of diluted earnings per share when the
Company reports a loss because to do so would be antidilutive for
the periods presented.
The following is a reconciliation of the computation for basic and
diluted EPS:
September 30, September 30,
2007 2006
------------- -------------
Net income $ 1,583,601 $ 1,626,211
------------- -------------
Weighted-average common shares
Outstanding (Basic) 18,633,920 17,027,328
Weighted-average common stock
Equivalents
Stock options - -
Warrants - -
------------- -------------
Weighted-average common shares
Outstanding (Diluted) 18,633,920 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.
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2007 AND 2006 (UNAUDITED)
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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 2007 and 2006 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.
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2007 AND 2006 (UNAUDITED)
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Stock-Based Compensation (Continued)
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 2007 and 2006, the Company
operated in one segment and one geographical location.
Related Party Transactions
Parties are considered to be related if one party has the ability,
directly or indirectly, to control the other party, or exercise
significant influence over the other party in making financial and
operating decisions. Parties are also considered to be related if
they are subject to common control or common significant influence.
Recent Accounting Pronouncements
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 has not had a material impact
on the consolidated 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
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2007 AND 2006 (UNAUDITED)
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recent Accounting Pronouncements (Continued)
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). The adoption of SFAS 158 has not had a material
impact on the Company's consolidated 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. The adoption of
SFAS 158 is not expected to have a material impact on the Company's
consolidated financial statements
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. The
adoption of FIN No. 48 has not had a material impact on the
Company's consolidated 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
adoption of SAB 108 has not had a material impact on the Company's
consolidated financial statements.
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2007 AND 2006 (UNAUDITED)
NOTE 3- FIXED ASSETS
Fixed assets as of September 30, 2007 were as follows:
Estimated
Useful
Lives
(Years)
Land use right 40-68 $3,038,627
Buildings 40 6,622,508
Building improvements 15 1,561,268
Furniture and fixtures 12 389,825
Electrical equipment 15 1,408,325
Vehicles and other 10 1,763,518
---------
14,784,071
Less: accumulated depreciation 5,484,289
---------
Property and equipment, net $9,299,782
==========
There was $405,060 and $341,018 charged to operations for
depreciation expense for the nine months ended September 30, 2007
and 2006, respectively. There was no impairment for these assets
during the nine months ended September 30, 2007 and 2006.
NOTE 4- LONG-TERM ASSETS
The balance as of September 30, 2007 included payments of
$22,455,074 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 $7,446,794 through September 30, 2007, 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 September
30, 2007.
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2007 AND 2006 (UNAUDITED)
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.
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.
Xianyong Road Industry - company with common shareholders.
The Company as of September 30, 2007 has advanced $510,918 to
Shaanxi New Taohuayuan Economy Trade Company, $289,590 to the Wenhao
Group, $127,135 to Dongjin Taoyuan, $60,128 to Yuan Taizu, and
$17,203 to Xianyong Road Industry. These advances are unsecured,
interest-free and have no fixed repayment terms. The Company has
classified these 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. Additionally, in 2006,
the Company entered into a management agreement with Yuan Taizu for
a five year period. The annual management fees are fixed at
approximately $1,774,240. For the nine months ended September 30,
2007 and 2006, the Company earned $1,349,166 and $1,234,031 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.
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2007 AND 2006 (UNAUDITED)
NOTE 6- STOCKHOLDERS' EQUITY (DEFICIT)
Preferred Stock
As of September 30, 2007, the Company has 10,000,000 shares of
preferred stock authorized with a par value of $.001. There are as
of September 30, 2007, no shares issued and outstanding.
Common Stock
As of September 30, 2007, the Company has 50,000,000 shares of
common stock authorized with a par value of $.001. As of September
30, 2007, the Company has 18,727,327 shares issued and outstanding.
Of the issued and outstanding shares, 17,027,328 of these shares
were issued in November 2004 upon completion of the merger. In
January 2007, 1,699,999 were issued at $.05 per share ($85,000) for
cash.
Options and Warrants
The Company has not granted any options or warrants as of September
30, 2007.
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.
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2007 AND 2006 (UNAUDITED)
NOTE 8- COMMITMENTS AND CONTINGENCIES
As of September 30, 2007, 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 $16,490,257.
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 nine months ended September
30, 2007 and 2006, respectively.
Nine Months Ended
September 30,
2007 2006
------ ------
Current tax expense $ 773,428 $ 752,728
---------- ----------
Deferred tax expense (benefit) 7,873 (420,266)
---------- ----------
$ 781,301 $ 332,462
========== ==========
A reconciliation of the PRC enterprise income tax rate to the
effective income tax rate is as follows:
---------------------------
2007 2006
----------- ------------
Statutory rate 33% 33%
Surcharge on taxes not deductible for
PRC enterprise income
tax purposes 9 10
Other non-temporary differences (9) (7)
----------- ------------
----------- ------------
33% 36%
=========== ============
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.
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2007 AND 2006 (UNAUDITED)
NOTE 9- PROVISION FOR INCOME TAXES (CONTINUED)
At September 30, 2007, deferred tax assets consist of the following:
Other payables $ 65,687
===========
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.
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND PLAN
OF OPERATION
You should read the following discussion and analysis of our financial
condition and results of operations in conjunction with our financial statements
and the related notes included elsewhere in this report. Our financial
statements have been prepared in accordance with U.S. GAAP. The following
discussion and analysis contains forward-looking statements that involve risks
and uncertainties. Actual results could differ materially from those projected
in the forward-looking statements.
Overview
We own and operate the Taohuayuan Inn hotel and resort located in the city
of Xi'an, province of Shaanxi, in the PRC. The Taohuayuan Inn has 23 courtyards
with 146 rooms and 292 beds.
We manage the DongJin Taoyuan Villas, a hotel and resort property
approximately 10 miles from downtown Xi'an. DongJin Taoyuan Villas has 84 rooms
and 168 beds. This property closed for major remodeling in 2006 and is expected
to reopen in October 2007.
We also manage a chain of three traditional Chinese restaurants. Two of
the restaurants are in Xi'an, and one is in Beijing.
We receive fees for managing the DongJin Taoyuan Villas and the three
restaurants.
Room rates in the Shaanxi province are established by the Shaanxi Price
Bureau. Room rates are established for each hotel or resort in the Shaanxi
Province and are based upon a number of factors, including the quality of the
property and amenities offered. Room rates may be changed at any time by the
Shaanxi Price Bureau based upon economic conditions in China.
Our business is not seasonal in nature.
Results of Operation for the nine months ended September 30, 2007 compared to
nine months ended September 30, 2006
Material changes of certain items in our Statement of Operations for the
nine months ended September 30, 2007, as compared to the nine months ended
September 30, 2006, are discussed below:
Increase (I)
Item or Decrease (D) Reason
Operating Revenue I Increase in Operating Revenues was primarily
the result of improved service and new menu.
Provision for Income I During the nine months ended September 30, 2006
Taxes our income tax expense was reduced by a
deferred tax benefit. We were not able to use
a deferred tax benefit to offset income taxes
during the nine months ended
September 30, 2007.
Gross profit, as a percentage of Operating Revenues, was 83% during the
current period, which was the same as our gross profit percentage in the
comparable nine-month period in 2006.
Liquidity and Capital Resources
We intend to develop an 848 acre commercial and residential development in
Lantian, a city located approximately 23 miles from Xi'an and a 150 room hotel
and resort in Xi'an. We have not started actual construction work on these
projects.
We anticipate that the remaining costs to develop the Lantian project,
will be approximately $17,800,000 over five years. We expect to begin
construction on the property in 2008.
We expect to complete the New Hainan hotel and resort project in 2008 and
commence operations at the end of 2009. The remaining costs to develop the
project are expected to be approximately $9,000,000.
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 $17,800,000
Construction and development costs -
New Hainan project 2007-2008 $ 9,000,000
We have financed our operations to date through the sale of our common
stock and cash generated by our operations. As of September 30, 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.
We do not know of any trends, events or uncertainties that have, or are
reasonably likely to have, a material impact on our short-term or long-term
liquidity other than our need to pay the taxes and surcharges which we have
accrued as liabilities on our June 30, 2007 balance sheet.
2
Restrictions on currency exchange
Substantially all of our projected revenues and operating expenses are
denominated in Renminbi. The Renminbi is currently freely convertible under the
"current account", which includes dividends, trade and service-related foreign
exchange transactions, but not under the "capital account", which includes
foreign direct investment and loans.
We may purchase foreign exchange for settlement of "current account
transactions", including payment of dividends to our shareholders, without the
approval of the State Administration for Foreign Exchange. We may also retain
foreign exchange in our current account, subject to a ceiling approved by the
State Administration for Foreign Exchange, to satisfy foreign exchange
liabilities or to pay dividends. However, the Chinese government may change its
laws or regulations and limit or eliminate our ability to purchase and retain
foreign currencies in the future.
Since a significant amount of our future revenues will be denominated in
Renminbi, the existing and any future restrictions on currency exchange may
limit our ability to utilize revenues generated in Renminbi to fund any business
activities outside China or fund expenditures denominated in foreign currencies.
Reserves
In accordance with current Chinese laws, regulations and accounting
standards, we are required to set aside as a general reserve at least 10% of our
respective after-tax profits. Appropriations to the reserve account are not
required after these reserves have reached 50% of our registered capital. These
reserves are created to fund potential operating losses and are not
distributable as cash dividends. We are also required to set aside between 5% to
10% of our after-tax profits to the statutory public welfare reserve. In
addition and at the discretion of our directors, we may set aside a portion of
our after-tax profits for enterprise expansion funds, staff welfare and bonus
funds and a surplus reserve. These statutory reserves and funds can only be used
for specific purposes and may not be used for dividends.
Critical Accounting Policies and Estimates
We prepare financial statements in conformity with U.S. GAAP, which
requires us to make estimates and assumptions that affect the reported amounts
of assets and liabilities, disclosure of contingent assets and liabilities on
the date of the financial statements, and the reported amounts of revenue and
expenses during the financial reporting period. We continually evaluate these
estimates and assumptions based on the most recently available information, our
own historical experience and various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Since the use of estimates is an
integral component of the financial reporting process, actual results could
differ from those estimates. Some of our accounting policies require higher
degrees of judgment than others in their application. We consider the policies
discussed below to be critical to an understanding of our financial statements
3
as their application assists management in making their business decisions
Revenue recognition
We generally recognize service revenues when persuasive evidence of an
arrangement exists, services are rendered, the fee is fixed or determinable, and
collectibility is probable. Service revenues are recognized net of discounts.
Foreign currency translation
We consider Renminbi as our functional currency as a substantial portion
of our business activities are based in Renminbi ("RMB"). However, we have
chosen the United States dollar as our reporting currency.
Transactions in currencies other than the functional currency during the
year are translated into the functional currency at the applicable rates of
exchange prevailing at the time of the transactions. Monetary assets and
liabilities denominated in currencies other than the functional currency are
translated into the functional currency at the applicable rates of exchange in
effect at the balance sheet date. Exchange gains and losses are recorded in the
statements of operations.
For translation of financial statements into the reporting currency,
assets and liabilities are translated at the exchange rate at the balance sheet
date, equity accounts are translated at historical exchange rates, and revenues,
expenses, gains and losses are translated at the weighted average rates of
exchange prevailing during the period. Translation adjustments resulting from
this process are recorded in accumulated other comprehensive income (loss)
within stockholders' equity.
Property, plant and equipment and depreciation
Property, plant and equipment are stated at cost less accumulated
depreciation.
The cost of an asset consists of its purchase price and any directly
attributable costs of bringing the asset to its present working condition and
location for its intended use. Expenditures incurred after the assets have been
put into operation, such as repairs and maintenance, are normally recognized as
an expense in the period in which they are incurred. In situations where it can
be clearly demonstrated that expenditure has resulted in an increase in the
future economic benefits expected to be obtained from the use of the assets, the
expenditure is capitalized.
When assets are sold or retired, their costs and accumulated depreciation
are eliminated from the accounts and any gain or loss resulting from their
disposal is included in the statement of operations.
4
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.
ITEM 3. CONTROLS AND PROCEDURES
Cai Danmei, our Chief Executive and Financial Officer, has evaluated the
effectiveness of our disclosure controls and procedures as of a date prior to
the filing date of this report, and in her opinion our disclosure controls and
procedures are effective to ensure that material information relating to us,
including our consolidated subsidiaries, is made known to her by others within
those entities, particularly during the period in which this report is being
prepared, so as to allow timely decisions regarding required disclosure. There
have been no changes in our internal controls or in other factors that could
significantly affect our internal controls. As a result, no corrective actions
with regard to significant deficiencies or material weakness in our internal
controls were required.
5
PART II
OTHER INFORMATION
Item 6. Exhibits
Number Exhibit
------ -------
31 Rule 13a-14(a) Certifications
32 Section 1350 Certifications
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized on November 18, 2007.
NEW TAOHUAYUAN CULTURE TOURISM CO., LTD.
By: /s/ Cai Danmei
---------------------------------------
Cai Danmei, Chief Executive Officer,
Principal Financial Officer and
Principal Accounting Officer