UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q/A
[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.
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Nevada Applied For
- ------------------------------------------- ----------------------
State or other jurisdiction of incorporation (I.R.S.) Employer
Identification No.
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 18,727,327 January 15, 2009
ITEM 1. FINANCIAL STATEMENTS
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMIITED AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
(UNAUDITED)
TABLE OF CONTENTS
Consolidated Balance Sheets as of June 30, 2008 (unaudited)
and December 31, 2007 3
Unaudited consolidated Statements of Income for the three-month
and six-month periods ended June 30, 2008 and 2007 4
Unaudited consolidated Statements of Cash Flows for the six-month
periods ended June 30, 2008 and 2007 5
Notes to unaudited consolidated financial statements 6-21
EXPLANATORY NOTE
New Taohuayuan Culture Tourism Company Limited is filing this Amendment No. 1 on
Form 10-Q for the purpose of amending the deposit for land use rights explained
under Note 3 of the Quarterly Report on Form 10-Q for the six month period ended
June 30, 2008 filed with the U.S. Securities and Exchanges Commission on August
18, 2008 ("Original Report") reversing the impairment for the deposit for land
use rights for the period covered by the Original Report. Other accounts
restated are the result of this amendment.
Except as described above, no other material changes have been made to the
Original Report. In addition, as required by Rule 12b-15 under the Securities
Exchange Act of 1934, new certifications by our Principal Executive Officer and
Principal Financial Officer are filed as exhibits to this Amendment.
2
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS - RESTATED
June 30, 2008
(Restated) December 31,
(Unaudited) 2007
ASSETS
Current assets
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 6,881,597 6,713,733
Construction-in- progress 10,431,850 7,944,945
Land use right, net - restated 2,589,553 2,463,522
Deposit for land use rights - restated 17,508,000 16,452,000
------------ -----------
Total assets $ 38,096,800 $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 - restated 4,835,750 4,070,480
------------ -----------
Total Current Liabilities 5,326,504 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 - restated 2,138,268 2,018,901
Other comprehensive income - restated 5,144,446 3,207,587
Retained Earnings - restated 9,613,128 8,538,825
------------ -----------
Total stockholders' equity 32,770,296 29,639,767
------------ -----------
Total liabilities and stockholders' equity $ 38,096,800 $34,258,177
============ ===========
The accompanying notes are an integral part
of these unaudited consolidated financial statements.
3
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME - RESTATED
FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2008 AND 2007
(UNAUDITED)
For the three-month For the six-month
periods ended June 30, periods ended June 30,
2008 2007 2008 2007
---- ---- ---- ----
(Restated) (Restated)
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 profit 1,297,949 1,151,293 2,487,638 2,254,698
Operating expenses
General and administrative
expenses - restated 320,242 227,129 624,608 489,894
Depreciation and amortization -
restated 124,474 146,970 286,948 292,010
Impairment - Deposit - restated - - - -
------------ ---------- ----------- -----------
Total operating expenses 444,716 374,099 911,556 781,904
------------ ---------- ----------- -----------
Income from operations 853,233 777,194 1,576,082 1,472,794
------------ ---------- ----------- -----------
Other Income (expense)
Interest income (315) (256) (762) (566)
Other income, net (3,763) - (8,293) -
------------ ---------- ----------- -----------
Total other expense (4,078) (256) (9,055) (566)
------------ ---------- ----------- -----------
Income before income taxes 857,311 777,450 1,585,137 1,473,360
Provision for income taxes 207,634 257,848 391,466 482,199
------------ ---------- ----------- -----------
Net income - restated 649,677 519,602 1,193,671 991,161
Other comprehensive item:
Foreign currency translation
gain - restated 692,615 387,435 1,936,859 670,883
------------ ---------- ----------- -----------
Net comprehensive income -
restated $ 1,342,292 $ 907,037 $ 3,130,530 $ 1,662,044
=========== ========== =========== ===========
Earning per share (restated):
Basic & diluted earning per
share - restated $ 0.03 $ 0.03 $ 0.06 $ 0.05
=========== ========== =========== ===========
Weighted average number of shares
outstanding:
Basic & diluted weighted
average number of shares 18,727,327 18,727,327 18,727,327 18,727,327
=========== ========== =========== ===========
The basic and diluted shares are the same because there are no diluted shares
issued
The accompanying notes are an integral part of these
unaudited consolidated financial statements
4
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS - RESTATED
FOR THE SIX MONTH PERIODS ENDED JUNE 30, 2008 AND 2007
(UNAUDITED)
For the six month periods
ended June 30,
2008 2007
----- ----
(Restated)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income - (restated) $ 1,193,671 $ 991,161
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 286,948 292,010
(Increase)/decrease in current assets:
Accounts receivables 3,764 13,055
Inventory 49,194 (2,314)
Prepaid expenses and other current assets (1,132) (15,512)
Increase/(Decrease) in current liabilities:
Accounts payable and accrued expenses (47,105) (3,047)
Taxes payable 489,975 604,870
Deferred revenue (42,464) (8,191)
----------- ---------
Total Adjustments 739,179 880,871
----------- ---------
Net cash provided by operating activities 1,932,850 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)
Payment 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
----------- ---------
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 unaudited consolidated financial statements
5
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.
6
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
7
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Shaanxi NTHY, collectively referred to within as the Company. All
material 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.
8
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
9
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 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
10
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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
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 September 2006, FASB issued SFAS 158 `Employers' Accounting for Defined
Benefit Pension and Other Postretirement Plans--an amendment of FASB
Statements No. 87, 88, 106, and 132(R)' This Statement improves financial
reporting by requiring an employer to recognize the over funded or under
funded status of a defined benefit postretirement plan (other than a
multiemployer plan) as an asset or liability in its statement of financial
position and to recognize changes in that funded status in the year in
which the changes occur through comprehensive income of a business entity
or changes in unrestricted net assets of a not-for-profit organization.
This Statement also improves financial reporting by requiring an employer
to measure the funded status of a plan as of the date of its year-end
statement of financial position, with limited exceptions. An employer with
publicly traded equity securities is required to initially recognize the
funded status of a defined benefit postretirement plan and to provide the
required disclosures as of the end of the fiscal year ending after
December 15, 2006. An employer without publicly traded equity securities
is required to recognize the funded status of a defined benefit
postretirement plan and to provide the required disclosures as of the end
of the fiscal year ending after June 15, 2007. However, an employer
without publicly traded equity securities is required to disclose the
following information in the notes to financial statements for a fiscal
year ending after December 15, 2006, but before June 16, 2007, unless it
has applied the recognition provisions of this Statement in preparing
those financial statements:
a. A brief description of the provisions of this Statement
b. The date that adoption is required
c. The date the employer plans to adopt the recognition provisions of
this Statement, if earlier.
The requirement to measure plan assets and benefit obligations as of the
date of the employer's fiscal year-end statement of financial position is
effective for fiscal years ending after December 15, 2008. The management
is currently evaluating the effect of this pronouncement on financial
statements.
11
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 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
12
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 - RESTATED
The Company has deposited amounts with the local government, for land use
rights amounting $17,508,000 at June 30, 2008 for the acquisition of a
parcel of land in PRC. The Company intends to acquire the land for the
development of a new project. To obtain the land use rights from the
Government, the Company is required to pay the demolish fee associated with
the acquisition of the land use rights amounting to $21,885,000. As of June
30, 2008, the demolish fee was not deposited with the government,
therefore, the official title for the land use rights has not been
transferred to the Company. The deposit amount is secured by the assets of
the major shareholder of the Company as of July 23, 2008.
Note 4 - PROPERTY AND EQUIPMENT, NET
As of June 30, 2008 the property and equipment of the Company consisted of
the following:
June 30,2008 December 31,2007
------------ ----------------
Buildings $ 7,186,793 $ 7,970,697
Infrastructure and Leasehold Inprovement 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
----------- -----------
12,880,174 12,103,303
Accumulated Depreciation (5,998,577) (5,389,570)
----------- -----------
Property and Equipment, net $ 6,881,597 $ 6,713,733
=========== ===========
The Company had depreciation expenses of $255,747, and $261,518 for the
six-month periods ended June 30, 2008 and 2007 respectively.
13
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 5 - LAND USE RIGHT, NET - RESTATED
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 (738,168) (663,486)
---------- -----------
Land use rights, net $2,589,553 $ 2,463,522
========== ===========
The Company had amortization expenses of $32,744 and $30,492 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:
June 30, 2009 $ 65,489
June 30, 2010 65,489
June 30, 2011 65,489
June 30, 2012 65,489
June 30, 2013 65,489
After 2,262,108
-----------
Total $2,589,553
==========
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
========= ==========
14
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 - RESTATED
As of June 30, 2008, tax payables are summarized as follows:
June 30,2008 December 31,2007
Income tax payable $ 3,913,063 $ 3,456,655
Business tax payable 801,403 497,146
VAT payable 60 12,669
Other taxes payable 121,224 104,010
----------- -----------
Tax payable $ 4,835,750 $ 4,070,480
============ ===========
Note 9 - INCOME TAXES - RESTATED
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:
June 30, 2008 June 30, 2007
US Current Income Tax Expense (Benefit)
Federal $ - $ -
State - -
PRC current income expense 391,466 482,199
--------- --------
Total provision for income tax $ 391,466 $482,199
========= ========
15
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 June 30,2007
------------ -----------
Tax expense (credit) at 34% 34%
statutory rate - federal
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 25% 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.
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 June 30,2007
------------ -----------
Net operation loss carry
forward $ 941,000 $ -
Total deferred tax assets 338,760 -
Less: valuation allowance (338,760) -
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 $3,913,063 of income tax payable as of June 30,
2008.
16
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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. As of June 30, 2008
and December 31, 2007, the Company had no deferred tax assets.
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:
o Chen Jingmin - a director and stockholder of the Company.
o Dongjin Taoyuan - a stockholder of the Company in which Chen Jingmin
has control and a beneficial interest.
o Shaanxi New Taohuayuan Economy Trade Company Limited - the principal
stockholder of the Company in which Chen Jingmin has control and a
beneficial interest.
o Shaanxi Wenhao Zaliang Shifu Limited - a stockholder of the Company in
which Chen Jingmin has control and a financial interest.
17
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 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 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
18
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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
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).
19
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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.
In accordance with the Chinese Company Law, the company reserved statutory
funds of $ 119,367 and $196,813 as of June 30, 2008 and December 31,2007
respectively.
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
20
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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:
Foreign Currency
Translation Adjustment
----------------------
Balance at December 31, 2007 $ 3,207,587
Change in 2008 1,936,859
--------------
Balance at June 30, 2008 $ 5,144,446
==============
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:
21
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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
Resort income $ 604,886 $ 579,820
Management fee income 978,696 892,974
Corporation (1) (7,500) -
------------ -----------
Consolidated $ 1,576,082 $ 1,472,794
============ ===========
Net income:
Resort income $ 467,149 $ 321,431
Management fee income 734,022 669,731
Corporation (1) (7,500) -
------------ -----------
Consolidated $ 1,193,671 $ 991,161
============ ===========
Identifiable assets:
Resort income $ 10,156,950 $ 9,861,232
Management fee income - -
Corporation (1) 27,939,850 24,396,945
------------ -----------
Consolidated $ 38,096,800 $34,258,177
============ ===========
Depreciation and amortization:
Resort income $ 286,948 $ 292,010
============ ===========
Capital expenditures:
Resort income $ - $ 1,170
Management fee income - -
Corporation (1) 1,944,939 1,885,441
------------ -----------
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.
22
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 18- RESTATEMENTS
Subsequent to the issuance of the Company's financial statements for the
six month period ended June 30, 2008, the Company determined that certain
transactions and presentation in the financial statements had not been
accounted for properly in the Company's financial statements.
Specifically, the impairment of deposit for land use rights and
accumulated amortization of land use rights were not recorded properly.
The financial statements for the period ended June 30, 2008 have been
restated to give effect to the changes to the financial statements.
The effect of the restatements is as follows:
BALANCE SHEETS: June 30, 2008 June 30, 2008
------------- -------------
REPORTED RESTATED
ASSETS:
Property & equipment, net $ 6,362,091 $ 6,881,597
Land use right, net $ 3,081,665 $ 2,589,553
Deposit for construction-in-progress$ - $17,508,000
LIABILITIES:
Taxes payable $ 4,433,079 $ 4,835,750
STOCKHOLDER'S EQUITY/(DEFICIT)
Statutory reserve $ 2,018,901 $ 2,254,972
Other comprehensive income $ 4,667,688 $ 5,144,446
Accumulated deficit/(Retained Earnings) $ (6,923,470) $ 9,496,424
STATEMENTS OF INCOME/(OPERATIONS)
FOR THE THREE MONTH PERIODS FOR THE SIX MONTH PERIODS
ENDED JUNE 30,2008 ENDED JUNE 30,2008
REPORTED RESTATED REPORTED RESTATED
-------------- ------------ ---------- ----------
OPERATING EXPENSES
General and administrative
expenses $ 336,326 $ 320,242 $ 640,692 $ 624,608
Depreciation and amortization $ 135,022 $ 124,474 $ 297,496 $ 286,948
Impairment - Deposit $ - $ - $ 17,020,800 $ -
INCOME (LOSS) FROM OPERATIONS $ 826,601 $ 853,233 $(15,471,350) $ 1,576,082
INCOME (LOSS) BEFORE INCOME TAXES $ 830,679 $ 857,311 $ 15,462,295) $ 1,585,137
PROVISION FOR INCOME TAXES $ - $ 207,634 $ - $ 391,466
23
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTH PERIODS FOR THE SIX MONTH PERIODS
ENDED JUNE 30,2008 ENDED JUNE 30,2008
REPORTED RESTATED REPORTED RESTATED
-------------- ------------ ---------- ----------
NET INCOME (LOSS) $ 830,679 $ 649,677 $(15,462,295) $ 1,193,671
OTHER COMPREHENSIVE ITEM:
Foreign currency translation gain $ 327,072 $ 692,615 $ 1,460,101 $ 1,936,859
NET COMPREHENSIVE INCOME (LOSS) $ 1,157,751 $ 1,342,292 $(14,002,194) $ 3,130,530
EARNINGS (LOSS) PER SHARE:
Basic & diluted earning (loss)
per share $ 0.04 $ 0.03 $ (0.83) $ 0.06
24
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
Three and Six Months Ended June 30, 2008
Material changes of certain items in our Statement of Operations for the
three and six months ended June 30, 2008, as compared to the three 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 Increase was in line with greater
revenues during the periods.
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 to related parties (23,000)
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
3
own historical experience and various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Since the use of estimates is an
integral component of the financial reporting process, actual results could
differ from those estimates. Some of our accounting policies require higher
degrees of judgment than others in their application. We consider the policies
discussed below to be critical to an understanding of our financial statements
as their application assists management in making their business decisions
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.
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When assets are sold or retired, their costs and accumulated depreciation
are eliminated from the accounts and any gain or loss resulting from their
disposal is included in the statement of operations.
Depreciation is calculated to write off the cost of property, plant and
equipment over their estimated useful lives as set out below, from the date on
which they become fully operational and after taking into account their
estimated residual values, using the straight-line method.
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.
PART II
OTHER INFORMATION
Item 6. Exhibits
Exhibit
Number Exhibit Name
31 Rule 13a-14(a) Certifications
32 Section 1350 Certifications
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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.
January 20, 2009 By: /s/ Cai Danmei
---------------------------------
Cai Danmei, Chief Executive Officer
and Principal Financial and Accounting
Officer