UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended June 30, 2008
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 Applied For
----------------------------- ------------------------------------
State or other jurisdiction (I.R.S.) Employer Identification No.
of incorporation
1# Dongfeng Road
Xi'an Weiyang Tourism Development District
Xian, 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 large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check One):
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
(Do not check if a smaller reporting company)
Indicate by check mark whether the Registrant is a shell company (as defined in
Exchange Act Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Class of Stock No. Shares Outstanding Date
Common June 15, 2008 18,727,327
TABLE OF CONTENTS
Page
Consolidated Balance Sheets as of June 30, 2008 (unaudited) and
December 31, 2007 1
Unaudited consolidated Statements of Income for the three month and
six month periods ended June 30, 2008 and 2007 2
Unaudited consolidated Statements of Cash Flows for the six month
periods ended June 30, 2008 and 2007 3
Notes to unaudited consolidated financial statements 4-16
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31,
June 30, 2008 2007
----------------------------------
Current assets (Unaudited)
Cash and cash equivalents $ 36,179 $ 45,680
Accounts receivable, net[ 16,382 34,178
Inventories 84,743 127,182
Prepaid expenses and other current assets 1,574 385
Due from related parties 546,922 476,552
----------------------------------
Total Current Assets $ 685,800 $ 683,977
Property & equipment, net 6,362,091 6,713,733
Construction-in-progress 10,431,850 7,944,945
Land use right, net 3,081,665 2,463,522
Other assets
Deposit for construction-in-progress - 16,452,000
------------- -----------
Total assets $ 20,561,406 $34,258,177
============= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 478,984 $ 495,825
Deferred revenue 11,770 52,105
Taxes payable 4,433,079 4,070,480
------------- ----------
Total Current Liabilities 4,923,833 4,618,410
Stockholders' equity
Common stock, $.001 par value, 50,000,000
shares authorized, 18,727,327 issued and
outstanding 18,727 18,727
Preferred stock, $.001 par value, 10,000,000
shares authorized, none shares issued
and outstanding - -
Additional paid in capital 15,855,727 15,855,727
Statutory reserve 2,018,901 2,018,901
Other comprehensive income 4,667,688 3,207,587
Accumulated deficit (6,923,470) 8,538,825
------------- ----------
Total stockholders' equity 15,637,573 29,639,767
============= ==========
Total liabilities and stockholders' equity $ 20,561,406 $34,258,177
============= ===========
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
1
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME
FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2008 AND 2007
(UNAUDITED)
For the three month periods For the six month periods
ended June 30, ended June 30,
2008 2007 2008 2007
----------- ---------- ---------- --------
Net revenue
Catering and hotel related services
income $ 1,171,976 $ 943,292 $ 2,198,624 $1,824,154
Management fee income 496,489 449,414 978,696 892,974
----------- ---------- ----------- ----------
Total net revenue 1,668,465 1,392,706 3,177,320 2,717,128
Cost of revenue 370,516 241,413 689,682 462,430
----------- ---------- ----------- ----------
Gross 1,297,949 1,151,293 2,487,638 2,254,698
Operating expenses
General and administrative expenses 336,326 227,129 640,692 489,894
Depreciation and amortization 135,022 146,970 297,496 292,010
Impairment - Deposit - - 17,020,800 -
----------- ---------- ----------- ----------
Total operating expenses 471,348 374,099 17,958,988 781,904
----------- ---------- ----------- ----------
Income (loss) from operations 826,601 777,194 (15,471,350) 1,472,794
----------- ---------- ----------- ----------
Other (Income) expense
Interest income (315) (256) (762) (566)
Other income, net (3,763) - (8,293) -
----------- ---------- ----------- ----------
Total other income (4,078) (256) (9,055) (566)
----------- ---------- ----------- ----------
Income (loss) before income taxes 830,679 777,450 (15,462,295) 1,473,360
Provision for income taxes - 257,848 - 482,199
----------- ---------- ----------- ----------
Net income (loss) 830,679 519,602 (15,462,295) 991,161
Other comprehensive item:
Foreign currency translation gain 327,072 387,435 1,460,101 670,883
----------- ---------- ----------- ----------
Net comprehensive income (loss) 1,157,751 907,037 $(14,002,194) $1,662,044
=========== ========== ============ ==========
Earning (loss) per share:
Basic & diluted earning (loss)
per share 0.044 0.028 $ (0.826) $ 0.053
=========== ========== ============ ==========
Weighted average number of shares
outstanding:
Basic & diluted weighted average number
of shares 18,727,327 18,727,327 18,727,327 18,586,444
========== ========== =========== ==========
The basic and diluted shares are the same because they are no diluted shares
The accompanying notes are an integral part of these consolidated financial
statements.
2
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTH PERIODS ENDED JUNE 30, 2008 AND 2007
(UNAUDITED)
For the six month periods
ended June 30,
2008 2007
---------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $(15,462,295) $ 991,161
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 313,580 292,010
Impairement of deposit 17,020,800 -
(Increase) / decrease in current assets:
Accounts receivables 3,764 13,055
Inventory 49,194 (2,314)
Other receivables (1,132) (15,512)
Increase/(Decrease) in current liabilities:
Accounts payable and accrued expenses (47,105) (3,047)
Taxes payable 98,509 604,870
Deferred revenue (42,464) (8,191)
------------- -------------
Total Adjustments 17,395,146 880,871
------------- -------------
Net cash provided by operating activities 1,932,851 1,872,032
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Payment for construction-in-progress (1,921,932) -
Advances to related parties (23,007) (15,315)
Purchase of property & equipment - (1,170)
(Increase) in long-term assets - (1,870,126)
------------- -------------
Net cash used in investing activities (1,944,939) (1,886,611)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceed from stock issuance - 85,000
Net cash provided by financing activities - 85,000
Effect of exchange rate changes on cash and
cash equivalents 2,587 4,720
Net increase (decrease) in cash and cash
equivalents (9,501) 75,141
Cash and cash equivalents, beginning balance 45,680 46,394
------------- -------------
Cash and cash equivalents, ending balance $ 36,179 $ 121,535
============= =============
SUPPLEMENTAL DISCLOSURES:
Cash paid during the year for:
Income tax payments $ - $ -
============= =============
Interest payments $ - $ -
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
3
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION
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 NTHY") was
incorporated in the People's Republic of China ("PRC") on August 3, 1997 as
a limited liability company. Shaanxi NTHY 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 NTHY on November 5, 2004, the Company acquired Shaanxi NTHY by
issuing 17,027,328 shares of its common stock to the original shareholders
of Shaanxi NTHY in exchange for 100% of their membership interests (the
"Merger"). As a result, the controlling member of Shaanxi NTHY 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 NTHY 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 acquisition,
the acquisition was considered to be a capital transaction in substance,
rather than a business combination and no goodwill was recognized. For
financial reporting purposes, the acquisition was treated as a reverse
acquisition whereby Shaanxi NTHY is considered to be the accounting
survivor and the operating entity while the Company is considered to be the
legal survivor.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Unaudited Interim Financial Information
---------------------------------------
The accompanying unaudited consolidated financial statements have been
prepared by New Taohuayuan Tourism Company Limited pursuant to the rules
and regulations of the Securities and Exchange Commission (the "SEC") Form
10-QSB and Item 310 of Regulation S-B, and generally accepted accounting
principles for interim financial reporting. The information furnished
herein reflects all adjustments (consisting of normal recurring accruals
and adjustments) which are, in the opinion of management, necessary to
fairly present the operating results for the respective periods. Certain
information and footnote disclosures normally present in annual
consolidated financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
omitted pursuant to such rules and regulations. These consolidated
financial statements should be read in conjunction with the audited
consolidated financial statements and footnotes included in the Company's
Annual Report on Form 10-KSB. The results of the six months ended June 30,
2008 are not necessarily indicative of the results to be expected for the
full year ending December 31, 2008.
4
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Basis of Presentation
---------------------
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United
States of America. The Company's functional currency is the Chinese
Renminbi (CNY); however the accompanying consolidated financial statements
have been translated and presented in United States Dollars (USD).
Foreign currency transactions and comprehensive income (loss)
-------------------------------------------------------------
As of June 30, 2008, the accounts of Shaanxi NTHY were maintained, and its
financial statements were expressed, in Chinese Yuan Renminbi (CNY). Such
financial statements were translated into U.S. Dollars (USD) in accordance
with Statement of Financial Accounts Standards ("SFAS") No. 52, "Foreign
Currency Translation," with the CNY as the functional currency. According
to the Statement, all assets and liabilities were translated at the current
exchange rate, stockholder's equity are translated at the historical rates
and income statement items are translated at the average exchange rate for
the period. The resulting translation adjustments are reported under other
comprehensive income in accordance with SFAS No. 130, "Reporting
Comprehensive Income" as a component of shareholders' equity.
During the six month periods ended June 30, 2008 and 2007 the transactions
of Shaanxi NTHY were denominated in foreign currency and were recorded in
Chinese Yuan Renminbi (CNY) at the rates of exchange in effect when the
transactions occur. Exchange gains and losses are recognized for the
different foreign exchange rates applied when the foreign currency assets
and liabilities are settled. Transaction gains and losses that arise from
exchange rate fluctuations on transactions denominated in a currency other
than the functional currency are included in the results of operations as
incurred.
Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles in the United States ("GAAP") requires
management to make certain 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.
Actual results could differ from those estimates, and such differences may
be material to the financial statements. Certain prior year amounts have
been reclassified to conform to the current year presentation.
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of New
Taohuayuan Culture Tourism Company Limited and its wholly owned subsidiary
Shaanxi NTHY, collectively referred to within as the Company. All material
5
inter-company accounts, transactions and profits have been eliminated in
consolidation.
Revenue Recognition
-------------------
The Company generates revenue from catering, hotel, and related services.
The Company's revenue recognition policies are in compliance with Staff
accounting bulletin (SAB) 104. 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 and its subsidiaries (related
parties) based on terms stated in the agreement. These companies are
controlled by a common director and stockholder of the Company. Cost of
good sold related to management fee income is immaterial comparing with the
total expenses incurred for the Company during its fiscal year.
Income Taxes
------------
The Company utilizes SFAS No. 109, "Accounting for Income Taxes," which
requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred income
taxes are recognized for the tax consequences in future years of
differences between the tax bases of assets and liabilities and their
financial reporting amounts at each period end based on enacted tax laws
and statutory tax rates applicable to the periods in which the differences
are expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized.
In July 2006, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 48, Accounting for Uncertainty in Income Taxes--an
Interpretation of FASB Statement No. 109 ("FIN 48"). FIN 48 seeks to reduce
the diversity in practice associated with certain aspects of measuring and
recognition in accounting for income taxes. In addition, FIN 48 requires
expanded disclosure with respect to the uncertainty in income taxes and is
effective
Beginning January 1, 2008, the new Enterprise Income Tax ("EIT") law will
replace the existing laws for Domestic Enterprises ("DES") and Foreign
Invested Enterprises ("FIEs"). The new standard EIT rate of 25% will
replace the 33% rate currently applicable to both DES and FIEs. The two
years tax exemption, three years 50% tax reduction tax holiday for
production-oriented FIEs will be eliminated.
6
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Statement of Cash Flows
-----------------------
In accordance with SFAS No. 95, "Statement of Cash Flows," cash flows from
the Company's operations is based upon the local currencies. As a result,
amounts related to assets and liabilities reported on the statement of cash
flows will not necessarily agree with changes in the corresponding balances
on the balance sheet.
Segment Reporting
-----------------
Statement of Financial Accounting Standards No. 131 ("SFAS 131"),
"Disclosure About Segments of an Enterprise and Related Information"
requires use of the "management approach" model for segment reporting. The
management approach model is based on the way a company's management
organizes segments within the company for making operating decisions and
assessing performance. Reportable segments are based on products and
services, geography, legal structure, management structure, or any other
manner in which management disaggregates a company.
Risks and Uncertainties
-----------------------
The Company is subject to substantial risks from, among other things,
intense competition associated with the industry in general, other risks
associated with financing, liquidity requirements, rapidly changing
customer requirements, limited operating history, foreign currency exchange
rates and the volatility of public markets.
The Company's operations are carried out in the PRC. Accordingly, the
Company's business, financial condition and results of operations may be
influenced by the political, economic and legal environments in the PRC, by
the general state of the PRC's economy. The Company's business may be
influenced by changes in governmental policies with respect to laws and
regulations, anti-inflationary measures, currency conversion and remittance
abroad, and rates and methods of taxation, among other things.
Contingencies
-------------
Certain conditions may exist as of the date the financial statements are
issued, which may result in a loss to the Company but which will only be
resolved when one or more future events occur or fail to occur. The
Company's management and legal counsel assess such contingent liabilities,
and such assessment inherently involves an exercise of judgment. In
assessing loss contingencies related to legal proceedings that are pending
against the Company or unasserted claims that may result in such
proceedings, the Company's legal counsel evaluates the perceived merits of
any legal proceedings or unasserted claims as well as the perceived merits
of the amount of relief sought or expected to be sought.
If the assessment of a contingency indicates that it is probable that a
material loss has been incurred and the amount of the liability can be
estimated, then the estimated liability would be accrued in the Company's
financial statements. If the assessment indicates that a potential material
loss contingency is not probable but is reasonably possible, or is probable
7
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
but cannot be estimated, then the nature of the contingent liability,
together with an estimate of the range of possible loss if determinable and
material would be disclosed.
Loss contingencies considered to be remote by management are generally not
disclosed unless they involve guarantees, in which case the guarantee would
be disclosed.
Allowance for Doubtful Accounts
-------------------------------
Management reviews the composition of accounts receivable, loans and
prepaid expense and analyzes historical bad debts, aging analysis, current
economic trends and changes in payment patterns to evaluate the adequacy of
these reserves. Reserves are recorded primarily on a specific
identification basis. Allowance for doubtful accounts amounted to $28,872
and $27,130 at June 30, 2008 and December 31, 2007 respectively.
Intangible Assets
-----------------
The Company applies criteria specified in SFAS No. 141, "Business
Combinations" to determine whether an intangible asset should be recognized
separately from goodwill. Intangible assets acquired through business
acquisitions are recognized as assets separate from goodwill if they
satisfy either the "contractual-legal" or "separability" criterion. Per
SFAS 142, intangible assets with definite lives are amortized over their
estimated useful life and reviewed for impairment in accordance with SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets."
Intangible assets, such as purchased technology, trademark, customer list,
user base and non-compete agreements, arising from the acquisitions of
subsidiaries and variable interest entities are recognized and measured at
fair value upon acquisition. Intangible assets are amortized over their
estimated useful lives from one to ten years. The Company reviews the
amortization methods and estimated useful lives of intangible assets at
least annually or when events or changes in circumstances indicate that
assets may be impaired. The recoverability of an intangible asset to be
held and used is evaluated by comparing the carrying amount of the
intangible asset to its future net undiscounted cash flows. If the
intangible asset is considered to be impaired, the impairment loss is
measured as the amount by which the carrying amount of the intangible asset
exceeds the fair value of the intangible asset, calculated using a
discounted future cash flow analysis. The Company uses estimates and
judgments in its impairment tests, and if different estimates or judgments
had been utilized, the timing or the amount of the impairment charges could
be different.
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" ("SFAS 144"), which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets and
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of," and the accounting and
reporting provisions of APB Opinion No. 30, "Reporting the Results of
Operations for a Disposal of a Segment of a Business." The Company
periodically evaluates the carrying value of long-lived assets to be held
and used in accordance with SFAS 144. SFAS 144 requires impairment losses
to be recorded on long-lived assets used in operations when indicators of
8
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
impairment are present and the undiscounted cash flows estimated to be
generated by those assets are less than the assets' carrying amounts. In
that event, a loss is recognized based on the amount by which the carrying
amount exceeds the fair market value of the long-lived assets. Loss on
long-lived assets to be disposed of is determined in a similar manner,
except that fair market values are reduced for the cost of disposal.
Recent Accounting Pronouncements
--------------------------------
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests
in Consolidated Financial Statements", which is an amendment of Accounting
Research Bulletin ("ARB") No. 51. This statement clarifies that a
noncontrolling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated
financial statements. This statement changes the way the consolidated
income statement is presented, thus requiring consolidated net income to be
reported at amounts that include the amounts attributable to both parent
and the noncontrolling interest. This statement is effective for the fiscal
years, and interim periods within those fiscal years, beginning on or after
December 15, 2008. Based on current conditions, the Company does not expect
the adoption of SFAS 160 to have a significant impact on its results of
operations or financial position.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business
Combinations." This statement replaces FASB Statement No. 141, "Business
Combinations." This statement retains the fundamental requirements in SFAS
141 that the acquisition method of accounting (which SFAS 141 called the
purchase method) be used for all business combinations and for an acquirer
to be identified for each business combination. This statement defines the
acquirer as the entity that obtains control of one or more businesses in
the business combination and establishes the acquisition date as the date
that the acquirer achieves control. This statement requires an acquirer to
recognize the assets acquired, the liabilities assumed, and any
noncontrolling interest in the acquiree at the acquisition date, measured
at their fair values as of that date, with limited exceptions specified in
the statement. This statement applies prospectively to business
combinations for which the acquisition date is on or after the beginning of
the first annual reporting period beginning on or after December 15, 2008.
The Company does not expect the adoption of SFAS 160 to have a significant
impact on its results of operations or financial position.
In March, 2008, the FASB issued FASB Statement No. 161, "Disclosures about
Derivative Instruments and Hedging Activities". The new standard is
intended to improve financial reporting about derivative instruments and
hedging activities by requiring enhanced disclosures to enable investors to
better understand their effects on an entity's financial position,
financial performance, and cash flows. It is effective for financial
statements issued for fiscal years and interim periods beginning after
November 15, 2008, with early application encouraged. The new standard also
improves transparency about the location and amounts of derivative
instruments in an entity's financial statements; how derivative instruments
and related hedged items are accounted for under Statement 133; and how
9
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
derivative instruments and related hedged items affect its financial
position, financial performance, and cash flows.
FASB Statement No. 161 achieves these improvements by requiring disclosure
of the fair values of derivative instruments and their gains and losses in
a tabular format. It also provides more information about an entity's
liquidity by requiring disclosure of derivative features that are credit
risk-related. Finally, it requires cross-referencing within footnotes to
enable financial statement users to locate important. Based on current
conditions, the Company does not expect the adoption of SFAS 161 to have a
significant impact on its results of operations or financial position.
In May 0f 2008, FSAB issued SFASB No.162, The Hierarchy of Generally
Accepted Accounting Principles. The pronouncement mandates the GAAP
hierarchy reside in the accounting literature as opposed to the audit
literature. This has the practical impact of elevating FASB Statements of
Financial Accounting Concepts in the GAAP hierarchy. This pronouncement
will become effective 60 days following SEC approval. The company does not
believe this pronouncement will impact its financial statements.
In May of 2008, FASB issued SFASB No. 163, Accounting for Financial
Guarantee Insurance Contracts-an interpretation of FASB Statement No. 60.
The scope of the statement is limited to financial guarantee insurance (and
reinsurance) contracts. The pronouncement is effective for fiscal years
beginning after December 31, 2008. The company does not believe this
pronouncement will impact its financial statements.
NOTE 3 - DEPOSIT FOR LAND USE RIGHT
The company had deposit balance as of June 30, 2008 comprised of land use
cost of $17,508,000 made to the local government in 2006 for the
acquisition of a piece of land in PRC. The Company acquired the land for
new project's development. To obtain the land use right the Company has to
pay the demolish fee associated with the acquisition of the land use right
and as a result the official title of land use right is not transferred to
the Company as of June 30, 2008.
As of June 30, 2008, the Company determined that the deposit for land use
right is impaired as the transfer of the title of land use right could not
be assured based the Company's assessment of the title transfer process.
Therefore, the accompanying consolidated financial statements showed
impairment loss of $17,020,800. Pursuant the Chinese law, the local
government may take back the land for which was being idle for more than
two years.
10
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - PROPERTY AND EQUIPMENT
As of June 30, 2008 the property and equipment of the Company consisted of
the following:
June 30, 2008 December 31, 2007
------------- -----------------
Buildings $ 7,170,248 $ 7,970,697
Infrastructure and Leasehold
Improvement 1,777,098 1,669,912
Furniture and fixtures 1,633,595 401,163
Equipments 1,970,458 1,768,132
Automobiles 312,230 293,399
------------- -----------------
12,863,629 12,103,303
Accumulated Depreciation (6,501,538) (5,389,570)
------------- -----------------
Property and Equipment, net $ 6,362,091 $ 6,713,733
The Company had depreciation expenses of $282,379, and $292,010 for the six
month periods ended June 30, 2008 and 2007 respectively.
NOTE 5 - LAND USE RIGHT
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.
As of June 30, 2008 the intangible assets of the Company consisted of the
following:
June 30, 2008 December 31, 2007
------------- -----------------
Land use rights $3,327,721 $ 3,127,008
Accumulated amortization (246,056) (663,486)
------------- -----------------
Land use rights, net $3,081,665 $ 2,463,522
============= =================
11
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The Company had amortization expenses of $31,201 and $0 as of June 30, 2008
and 2007. The amortization expenses for land use right for next five years
after June 30, 2008 are as follows:
One year after June 30, 2008 $ 62,000
Two years after June 30, 2008 62,000
Three years after June 30, 2008 62,000
Four years after June 30, 2008 62,000
Five years after June 30, 2008 62,000
---------
Total $310,000
=========
NOTE 6 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
The Company's accounts payable and accrued expenses as of June 30, 2008 are
summarized as follows:
June 30, 2008 December 31, 2007
------------- -----------------
Accounts payables $ 77,612 $ 130,828
Other payables 290,968 268,302
Accrued payroll 30,639 28,791
Accrued expenses 79,765 67,905
Total accounts payables and
accrued expenses $ 478,984 $ 495,825
NOTE 7 - DEFERRED REVENUE
The company has recorded deferred revenue of $11,770 and $52,105 as of June
30, 2008 and December 31, 2007. Deferred revenue represents advances from
customers for using the resort facilities within the next twelve month
period.
NOTE 8 - TAX PAYABLES
As of June 30, 2008, tax payables are summarized as follows:
June 30, 2008 December 31, 2007
------------- -----------------
Income tax payable $ 3,510,392 $ 3,456,655
Business tax payable 801,403 497,146
VAT payable 60 12,669
Other taxes payable 121,224 104,010
------------- -----------------
Tax payable $ 4,433,079 $ 4,070,480
============= =================
12
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - INCOME TAXES
The Company is registered in the State of Nevada and has registered
primarily in two tax jurisdictions - the PRC and the United States. For
certain operations in US and China, the Company has incurred net
accumulated operating losses for income tax purposes The Company believes
that it is more likely than not that these net accumulated operating losses
will not be utilized in the future. Therefore, the Company has provided
full valuation allowance for the deferred tax assets arising from the
losses at these locations as of June 30, 2008. Accordingly, the Company has
no net deferred tax assets.
The provision for income taxes from operations on income consists of the
following for the years ended June 30, 2008 and 2007:
US Current Income Tax Expense (Benefit)
June 30, 2008 December 31, 2007
------------- -----------------
Federal $ - $ -
State - -
------------- -----------------
- -
PRC Current Income Expense (Benefit) - 482,199
------------- -----------------
Total Provision for Income Tax $ - $ 482,199
============= =================
The following is a reconciliation of the provision for income taxes at the
U.S. federal income tax rate to the income taxes reflected in the Statement
of Operations:
June 30, 2008 December 31, 2007
------------- -----------------
Tax expense (credit) at statutory
rate - federal 34% 34%
State tax expense net of federal tax 6% 6%
Valuation allowance (40%) (40%)
Foreign income tax - PRC 25% 33%
Tax expense (benefit) at actual rate 0% 33%
United States of America
------------------------
As of June 30, 2008, the Company in the United States had approximately
$7,500 in net operating loss carry forwards available to offset future
taxable income. Federal net operating losses can generally be carried
forward 20 years. The deferred tax assets for the United States entities at
June 30, 2008 consists mainly of net operating loss carry forwards and were
fully reserved as the management believes it is more likely than not that
these assets will not be realized in the future.
13
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth the significant components of the net
deferred tax assets for operation in the US as of June 30, 2008 and 2007.
June 30, 2008 December 31, 2007
------------- -----------------
Net operation loss carry forward $ 941,000 $ -
Total deferred tax assets 319,940 -
Less: valuation allowance (319,940) -
------------- -----------------
Net deferred tax assets$ - $ -
============= =================
People's Republic of China (PRC)
--------------------------------
Pursuant to the PRC Income Tax Laws, the Enterprise Income Tax ("EIT") is
at a statutory rate of 33%, which is comprises of 30% national income tax
and 3% local income tax. Beginning January 1, 2008, the new Enterprise
Income Tax ("EIT") law will replace the existing laws for Domestic
Enterprises ("DES") and Foreign Invested Enterprises ("FIEs"). The new
standard EIT rate of 25% replaced the 33% rate currently applicable to both
DES and FIEs. The two years tax exemption, three years 50% tax reduction
tax holiday for production-oriented FIEs will continue until the tax
exemption period expired. The applicable new EIT for the Company is 25%.
The Company paid $0 of income tax payable as of June 30, 2008 and 2007.
Deferred income tax assets
--------------------------
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.
The following table sets forth the significant components of the net
deferred tax assets for operation in the PRC as of June 30, 2008 and 2007.
June 30, 2008 December 31, 2007
------------- -----------------
Net operation loss carry forward $15,462,295 $ -
Total deferred tax assets 3,865,574 66,005
Less: valuation allowance (3,865,574) -
------------- ----------------
Net deferred tax assets $ - $ 66,005
============= ================
14
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 10 - Management Fee Agreement
The Company entered into five management agreements with Shaanxi New
Taohuayuan Economy Trade Company Limited and Shaanxi Wenhao Group and its
subsidiary on various time for a period of five years. Shaanxi New
Taohuayuan Economy Trade Company Limited and Shaanxi Wenhao Group and its
subsidiary are related parties. The annual management fees are fixed at
approximately $1,400,000. For the six month periods ended June 30, 2008 and
2007, the Company earned $978,696 and $892,974 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 (See notes #M for details).
Note 11 -RELATED PARTIES 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.
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(pound)(0)
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 Wenhao Yuan Taizu - 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 June 30, 2008 had receivable from Shaanxi New Taohuayuan
Economy Trade Company, $419,053 to the Wenhao Group, $127,869 to Dongjin
Taoyuan. These advances are unsecured, interest-free and have no fixed
repayment terms. The Company has classified these advances as receivables
from related parties under current assets.
As of June 30, 2008, amounting of $3,479,715 and $5,347,235 had been paid
to Shaanxi Traditional Decoration Co. Ltd and Shannxi Qinghua Green Project
15
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Co.,Ltd respectively, which are both related parties, for Lantian
Xingtianyou Project included in construction in progress.
Note 12 -- COMMITMENTS
Following are some of the significant commitments as of June 30, 2008 and
2007.
1. Management Agreements with Shaanxi New Taohuayuan Tourism & Trading Co.
Ltd. - Dongjin Taoyuan Branch and Xi'an Taoyuan Nanlu Branch
On January 15, 2004 the Company signed two five-year agreements with
Shannxi New Taohuayuan Tourism & Trading Co. Ltd - Dongjin Taoyuan Branch
and Xi'an Taoyuan Nanlu Branch to manage the restaurants. The company will
perform management and operation function including advertising, marketing,
human resources and accounting on monthly basis. The Company will receive
RMB 3,500,000 from each of the restaurant respectively as basic annual
management fees, paid quarterly. In addition, if the annual revenue exceeds
the targeted amount, the company will be compensated for additional 15% of
the revenue as bonus. The agreements will expire on Jan 14, 2009. For the
six month period ended June 30, 2008, the management fee earned amounting
to $496,440 based upon the agreements.
2. Management Agreements with Shaanxi Wenhao Zaliang Co. Ltd - Xi'an
Nanerhuan Branch, Yuantaizu Branch and Beijing Branch
On January 10, 2006 the Company signed three five-year agreements with
Shaanxi Wenhao Zaliang Co. Ltd - Xi'an Nanerhuan Branch and Yuantaizu
Branch respectively to manage the restaurants. The company will perform
management and operation function including advertising, marketing, human
resources and accounting on monthly basis. The Company will receive RMB
3,600,000, RMB 1,800,000 and RMB 1,400,000 from each of these restaurants
respectively as basic annual management compensation, paid quarterly. In
addition, if the annual revenue exceeds the targeted amount, the company
will be compensated for additional 15% of the revenue as bonus. The
agreements will expire on Jan 09, 2010. For the six month period ended June
30, 2008, the management fee earned amounting $482,256 based upon the
agreements.
3. Lantian Xintianyou Garden Decoration Project agreements with Shaanxi
Traditional Decoration Co., Ltd.
On Mar. 15, 2006, the company signed a decoration agreement with Shannxi
Traditional Decoration Co. Ltd for Shannxi Lantian Xintianyou Garden
Decoration Project. The company hired the Shannxi Traditional Decoration
Co. Ltd., to do decoration work on its property with the commitment to pay
RMB 80,000,000 as total compensation. The company will pay 30% of the
amount at the beginning of the construction, 30% will be paid on 50%
completion and 40% after the project is completed. The company is also
responsible for appointing the third party as supervisor to monitor the
project and to protect the surrounding environment. The project started on
16
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
April 1st, 2006 and will be finished in 2008. As of June 30, 2008, the
Company has paid $3,479,715 to the said contractor included in construction
in progress.
4. Lantian Xintianyou Garden Green Project Agreement with Shannxi Qinghua
Green Project Co.,Ltd.
On May 15, 2007, the company signed an agreement with Shannxi Qinghua Green
Co. Ltd for the afforesting project of Lantian Xintianyou Garden Green. The
company hired Shannxi Oinghua Green Project Co. Ltd., to perform
afforesting work on the garden with the commitment to pay RMB 50,000,000 as
total compensation. The company will pay 30% of the amount at the inception
of the construction, 35% will be paid on 50% completion and 30% after the
project completes. The final 5% will be held as project quality insurance
deposit. After the project completed, Shannxi Qinghua Green Co.,Ltd will be
responsible for the maintenance of the garden and the company will pay RMB
1,250,000 as annual compensation for services. The project started on Oct.
6, 2007 and will be finished at the end of 2008. As of June 30, 2008, the
Company has paid $5,347,235 to the said contractor included in construction
in progress.
5. Lantian Xintianyou Garden Project
The Company entered an agreement with Lantian County, Xian City, Shaanxi
Province to offer a new project's development - Lantian Xingtianyou Project
in 2003. The Company acquired a land (4512 Mu) in Lantian County and
committed to finish the project in one year. The project has been started
since 2004. However, the Company paid amount of $17,136,000 as land cost in
2006 but the title is not yet transferred to the Company without paying the
demolish fee associated with the project (See note C for details).
NOTE 13 - STATUTORY RESERVE AND STATUTORY COMMON WELFARE FUND
As stipulated by the Company Law of the People's Republic of China (PRC),
net income after taxation can only be distributed as dividends after
appropriation has been made for the following:
i. Making up cumulative prior years' losses, if any;
ii. Allocations to the "Statutory surplus reserve" of at least 10% of
income after tax, as determined under PRC accounting rules and
regulations, until the fund amounts to 50% of the Company's
registered capital;
iii. Allocations of 5-10% of income after tax, as determined under PRC
accounting rules and regulations, to the Company's "Statutory
common welfare fund", which is established for the purpose of
providing employee facilities and other collective benefits to
the Company's employees; and
iv. Allocations to the discretionary surplus reserve, if approved in
the stockholders' general meeting.
17
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
In accordance with the Chinese Company Law, the company did not reserve
statutory fund as of June 30, 2008.
According to the new Company Law of the People's Republic of China (PRC)
executed in 2006, the Company is no more required to reserve the "Statutory
common welfare fund". Accordingly, the Company did not reserve the common
welfare fund as of June 30, 2008.
NOTE 14 - 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 15 - STOCKHOLDERS' EQUITY
In January 2007, the Company entered into an agreement with outside third
party to provide consulting services. As part of agreement the Company
agreed to issue 1,699,999 shares of common stock at discount at $0.05 per
share or $85,000 for cash. The consulting company will provide consulting
service to the Company during the six months period starting January 2007.
The fair market value of the common stocks of the company was $0.55 on the
agreement date. Accordingly the Company booked $850,000 as compensation
expense after accounting for the shares issued at discount price of $0.05
for the said stock issuance as of December 31, 2007.
Since the consulting company did not accomplish the services stated in the
agreement, the board of directors of the Company dated on February 28, 2008
approved to buy back the common stocks at $0.05 per share subsequently. As
of June 30, 2008, the consulting company did not sell 1,699,999 shares back
to the Company.
NOTE 16 - OTHER COMPREHENSIVE INCOME
Balances of related after-tax components comprising accumulated other
comprehensive income (loss), included in stockholders' equity, as of June
30, 2008 and 2007 are as follows:
18
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Foreign Currency
Translation Adjustment
----------------------
Balance at December 31, 2007 $ 3,207,587
Change in 2008 1,460,101
--------------
Balance at June 30, 2008 $ 4,667,688
==============
NOTE 17- SEGMENT REPORTING
The Company had two principal operating segments which were: resort income
and management fee income. These operating segments were determined based
on the nature of the services provided. Operating segments are defined as
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision-maker
in deciding how to allocate resources and in assessing performance. The
Company's chief executive officer and chief financial officer have been
identified as the chief operating decision makers. The Company's chief
operating decision makers direct the allocation of resources to operating
segments based on the profitability, cash flows, and other measurement
factors of each respective segment.
The Company evaluates performance based on several factors, of which the
primary financial measure is business segment income before taxes. The
segments' accounting policies are the same as those described in the
summary of significant accounting policies. The following table shows the
operations of the Company's reportable segments:
The six-month periods
ended June 30,
----------------------
2008 2007
-------- --------
Revenues :
Resort income from unaffiliated customers $ 2,198,624 $ 1,824,154
Management fee income from affiliated
customers 978,696 892,974
------------- -------------
Consolidated $ 3,177,320 $ 2,717,128
============= =============
Operating income (loss)
Resort income $ 578,254 $ 579,820
Management fee income 978,696 892,974
Corporation (1) (17,028,300) -
------------- -------------
Consolidated $(15,471,350) $ 1,472,794
============= =============
Net income (loss):
Resort income $ 587,309 $ 98,187
Management fee income 978,696 892,974
Corporation (1) (17,028,300) -
------------- -------------
Consolidated $(15,462,295) $ 991,161
============= =============
19
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Identifiable assets:
Resort income $ 11,243,706 $ 11,830,219
Management fee income - -
Corporation (1) 9,317,700 19,749,964
------------- -------------
Consolidated $ 20,561,406 $ 31,580,183
============= =============
Depreciation and amortization:
Resort income $ 313,580 $ 292,010
Capital expenditures:
Resort income $ 1,944,939 $ 1,886,611
Management fee income - -
Corporation (1) - -
------------- -------------
Consolidated $ 1,944,939 $ 1,886,611
============= =============
(1). Unallocated loss from Operating income (loss) and Net income (loss)
before taxes are primarily related to general corporate expenses and
capital expenditure for new project.
20
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. In addition, our
financial statements and the financial data included in this report 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. This property closed for major remodeling in 2006 and is expected
to reopen in July 2008.
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.
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
Six Months Ended June 30, 2008
- ------------------------------
Material changes of certain items in our Statement of Operations for the
six months ended June 30, 2008, as compared to the six months ended June 30,
2008, are discussed below:
Increase (I)
Item or Decrease (D) Reason
- ---- --------------- ------
Operating Revenue I Increase in customers due to improvements
made to our facilities and services.
Operating Expenses I Write off of deposit for land use rights
associated with our commercial and
residential development in Lantian. See
Note 3 to the financial statements
included as part of this report for more
information.
Liquidity and Capital Resources
Our material sources and (uses) of cash during the six months ended June
30, 2008 were:
Cash provided by operations $1,932,851
Payment for land use rights, building improvements,
and of equipment (1,921,932)
Loans from related parties (23,007)
Changes in foreign currency exchange rate 2,587
Cash provided by cash in bank at January 1, 2008 9,501
Our material sources and (uses) of cash during the six months ended June
30, 2007 were:
Cash provided by operations $1,872,032
Payment for land use rights, building improvements,
and equipment (1,871,296)
Loans to related parties 15,315
Sale of stock 85,000
Changes in foreign currency exchange rate 4,720
We intend to develop a 150 room hotel and resort in Xi'an. We have not
started actual construction work on this project.
We have financed our operations to date through the sale of our common
stock and cash generated by our operations. As of June 30, 2008 expenditures for
our Xi'an project 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 Xi'an project 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 project may take additional time or we may be unable to
develop the project. At present, we do not have any lines of credit or other
bank financing arrangements.
We do not know of any trends, events or uncertainties that have, or are
reasonably likely to have, a material impact on our short-term or long-term
liquidity other than our need to pay the taxes and surcharges which we have
accrued as liabilities on our March 31, 2008 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.
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.
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
3
integral component of the financial reporting process, actual results could
differ from those estimates. Some of our accounting policies require higher
degrees of judgment than others in their application. We consider the policies
discussed below to be critical to an understanding of our financial statements
as their application assists management in making their business decisions
Revenue recognition
We generally recognize service revenues when persuasive evidence of an
arrangement exists, services are rendered, the fee is fixed or determinable, and
collectibility is probable. Service revenues are recognized net of discounts.
Foreign currency translation
We consider Renminbi as our functional currency as a substantial portion of
our business activities are based in Renminbi ("RMB"). However, we have chosen
the United States dollar as our reporting currency.
Transactions in currencies other than the functional currency during the
year are translated into the functional currency at the applicable rates of
exchange prevailing at the time of the transactions. Monetary assets and
liabilities denominated in currencies other than the functional currency are
translated into the functional currency at the applicable rates of exchange in
effect at the balance sheet date. Exchange gains and losses are recorded in the
statements of operations.
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 4.T. CONTROLS AND PROCEDURES
Cai Danmei, our Chief Executive Officer and Principal Financial and
Accounting Officer, has evaluated the effectiveness of our disclosure controls
and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of
1934) as of the end of the period covered by this report, and in her opinion our
disclosure controls and procedures are effective.
There were no changes in our internal controls over financial reporting
that occurred during the fiscal quarter that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
5
PART II
OTHER INFORMATION
Item 6. Exhibits
Exhibit
Number Exhibit Name
- -------- ------------
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.
NEW TAOHUAYUAN CULTURE TOURISM CO., LTD.
August 15, 2008 By: /s/ Cai Danmei
----------------------------------
Cai Danmei, Chief Executive Officer
and Principal Financial and
Accounting Officer