UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended March 31, 2009
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from _____ to _______
Commission File Number: None
NEW TAOHUAYUAN CULTURE TOURISM CO., LTD.
-----------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Nevada Applied For
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1# Dongfeng Road
Xi'an Weiyang Tourism Development District
Xi'an, China
-------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number including area code: 0086-29-86671555
N/A
----------------------------------------------------------------------
Former name, former address, and former fiscal year, if changed
since last report
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has 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
definition of "large accelerated filer", "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Larger accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
Indicate by check mark whether registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 18,727,327 shares outstanding
as of May 12, 2009.
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMIITED AND SUBSIDIARY
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
TABLE OF CONTENTS
Unaudited consolidated Balance Sheets as of March 31, 2009
and December 31,2008 1
Unaudited consolidated Statements of Operations for the
three month periods ended March 31, 2009 and 2008 2
Unaudited consolidated Statements of Cash Flows for the
three month periods ended March 31, 2009 and 2008 3
Notes to consolidated financial statements 4-16
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2009 AND DECEMBER 31, 2008
(UNAUDITED)
March 31, 2009 December 31, 2008
-------------- -----------------
ASSETS
Current assets
Cash and cash equivalents $ 55,665 $ 89,252
Accounts receivable, net 24,646 39,657
Inventories 82,800 77,147
Prepaid expenses and other current assets 4,310 2,501
Due from related parties 574,128 566,748
-------------- --------------
Total Current Assets 741,550 775,305
Property & equipment, net 6,292,108 6,489,210
Construction-in- progress 14,223,297 13,134,481
Land use right, net 2,544,535 2,566,063
Deposit for land use right 17,529,508 17,588,860
-------------- --------------
Total assets $ 41,330,997 $ 40,553,918
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 794,627 $ 627,391
Deferred revenue 131,861 60,217
Taxes payable 5,643,093 5,461,359
-------------- --------------
Total Current Liabilities 6,569,581 6,148,967
Stockholders' equity
Common stock, $.001 par value,
50,000,000 shares authorized,
18,727,327 issued and outstanding
as of March 31, 2009 and December 31,2008 18,727 18,727
Preferred stock, $.001 par value,
10,000,000 shares authorized, none
issued and outstanding - -
Additional paid in capital 15,855,727 15,855,727
Statutory reserve 2,332,955 2,285,706
Other comprehensive income 5,141,442 5,304,720
Retained earnings 11,412,564 10,940,071
-------------- --------------
Total stockholders' equity 34,761,416 34,404,951
-------------- --------------
Total liabilities and stockholders' equity $ 41,330,997 $ 40,553,918
============== ==============
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 MONTH PERIODS ENDED MARCH 31, 2009 AND 2008
(UNAUDITED)
2009 2008
-------------- --------------
Net revenue
Catering and hotel related services income $ 1,135,224 $ 1,026,648
Management fee income 503,900 482,207
-------------- --------------
Total net revenue 1,639,125 1,508,855
Cost of revenue 340,094 319,166
-------------- --------------
Gross profit 1,299,030 1,189,689
Operating expenses
General and administrative expenses 484,266 304,366
Depreciation and amortization 188,046 162,474
-------------- --------------
Total operating expenses 672,312 466,840
-------------- --------------
Income from operations 626,719 722,849
-------------- --------------
Other Income
Interest income - 447
Other income, net 3,272 4,530
-------------- --------------
Total other income 3,272 4,977
-------------- --------------
Income before income taxes 629,991 727,826
Provision for income taxes 157,498 183,832
-------------- --------------
Net income 472,493 543,994
Other comprehensive item:
Foreign currency translation gain (163,278) 1,244,244
-------------- --------------
Net comprehensive income $ 309,215 $ 1,788,238
============== ==============
Earning per share:
Basic & diluted earning per share $ 0.03 $ 0.03
============== ==============
Weighted average number of shares
outstanding:
Basic & diluted weighted average
number of shares 18,727,327 18,727,327
============== ==============
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
2
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2009 AND 2008
(UNAUDITED)
2009 2008
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 472,493 $ 543,994
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 188,046 162,474
Bad debt expense 33,639 -
(Increase) / decrease in current assets:
Accounts receivables (18,764) 13,249
Inventory (5,913) 47,763
Other receivables (460) (449)
Prepaid expenses and other current assets (1358) -
Increase/(decrease) in current liabilities:
Accounts payable and accrued expenses 169,329 45,828
Taxes payable 200,134 220,454
Deferred revenue 71,836 (40,499)
-------------- --------------
Total Adjustments 636,489 448,821
-------------- --------------
Net cash provided by operating activities 1,108,982 992,815
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Payment for construction in progress (1,132,973) (1,020,321)
-------------- --------------
Net cash used in investing activities (1,132,973) (1,020,321)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Advances to related parties (9,291) 7,065
-------------- --------------
Net cash provided by (used in) financing
activities (9,291) 7,065
-------------- --------------
Effect of exchange rate changes on cash and
cash equivalents (306) 1,457
Net increase/(decrease) in cash and cash
equivalents (33,587) (18,984)
Cash and cash equivalents, beginning
balance 89,252 45,680
-------------- --------------
Cash and cash equivalents, ending balance $ 55,665 $ 26,696
============== ==============
SUPPLEMENTAL NONCASH FINANCIAL 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.
3
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
AS OF MARCH 31, 2009 AND DECEMBER 31, 2008
(UNAUDITED)
Additional Other Total
Common Stock Paid Comprehensive Statutory Retained Stockholders'
Shares Amount in Capital Income Reserve Earnings Equity
------ ------ ---------- ------------- --------- -------- -------------
Balance as at
December 31, 2007 18,727,327 18,727 15,855,727 3,207,587 2,018,901 8,538,825 29,639,767
------------- ------------- ------------- ------------- ------------- ------------- -------------
Change in foreign currency
translation gain 2,097,133 2,097,133
Transfer to statutory
reserve 266,805 (266,805) -
Net income for the
period ended
December 31, 2008 2,668,051 2,668,051
------------- ------------- ------------- ------------- ------------- ------------- -------------
Balance as at
December 31, 2008 18,727,327 $ 18,727 $ 15,855,727 $ 5,304,720 $ 2,285,706 $ 10,940,071 $ 34,404,951
============= ============= ============= ============= ============= ============= =============
Change in foreign currency
translation gain (163,278) (163,278)
Transfer to statutory reserve 47,249 47,249
Net income for the period
ended March 31, 2009 472,493 472,493
------------- ------------- ------------- ------------- ------------- ------------- -------------
Balance as at March 31, 2009 18,727,327 $ 18,727 $ 15,855,727 $ 5,141,442 $ 2,332,955 $ 11,412,564 $ 34,761,415
============= ============= ============= ============= ============= ============= =============
The accompanying notes are an integral part of these unaudited consolidated
financial statements.
4
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 as of December 31, 2009.. The results of the
three month periods ended March 31, 2009 are not necessarily indicative of
the results to be expected for the full year ending December 31, 2009.
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).
5
Foreign currency transactions and comprehensive income (loss)
-------------------------------------------------------------
As of March 31, 2009, 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 three month ended March 31, 2009 and 2008 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 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.
6
Advertising
-----------
Advertising expenses consist primarily of costs of promotion for corporate
image and product marketing and costs of direct advertising. The Company
expenses all advertising costs as incurred.
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 continue until it expires.
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.
Concentration of Credit Risk
----------------------------
Financial instruments that potentially subject the Company to concentrations
of credit risk are cash, and other receivables arising from our normal
business activities. We place our cash in what we believe to be credit-worthy
financial institutions. We have a diversified customer base, most of which are
in China. We control credit risk by collecting the revenue in advance. The
Company routinely assesses the financial strength of its customers and, based
upon factors surrounding the credit risk, establishes an allowance, if
required, for uncollectible accounts and, as a consequence, believes that its
accounts receivable credit risk exposure beyond such allowance is limited.
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
7
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
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.
Cash and Cash Equivalents
-------------------------
Cash and cash equivalents include cash in hand and cash in time deposits,
certificates of deposit and all highly liquid debt instruments with original
maturities of three months or less.
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 $93,405 and $28,258 at March 31,
2009 and 2008 respectively.
8
Inventory
---------
Inventory is valued at the lower of cost or market. Inventory includes gift
cards, raw materials and consumables.
Potential losses from obsolete and slow-moving inventories are provided for
when identified. Cost, which comprises all costs of purchase and, where
applicable, other costs that has been incurred in bringing their inventories
to their present location and condition, is calculated using the first-in,
first-out method.
Property, Plant & Equipment
---------------------------
Property and equipment are stated at cost. Expenditures for maintenance and
repairs are charged to earnings as incurred; additions, renewals and
betterments are capitalized. When property and equipment are retired or
otherwise disposed of, the related cost and accumulated depreciation are
removed from the respective accounts, and any gain or loss is included in
operations. Depreciation of property and equipment is provided using the
straight-line method for substantially all assets with estimated lives of:
Buildings 40 years
Infrastructures and leasehold improvement 15 years
Equipment (including electronic facilities,
sports, education and recreation facilities) 5-7 years
Automobile 7 years
Furniture and Fixtures 5 years
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
9
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 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.
Basic and Diluted Earnings Per Share
------------------------------------
Earnings per share are calculated in accordance with the Statement of
financial accounting standards No. 128 (SFAS No. 128), "Earnings per share".
SFAS No. 128 superseded Accounting Principles Board Opinion No.15 (APB 15).
Net income (loss) per share for all periods presented has been restated to
reflect the adoption of SFAS No. 128. Basic net income (loss) per share is
based upon the weighted average number of common shares outstanding. Diluted
net loss per share is based on the assumption that all dilutive convertible
shares and stock options were converted or exercised. Dilution is computed by
applying the treasury stock method. Under this method, options and warrants
are assumed to be exercised at the beginning of the period (or at the time of
issuance, if later), and as if funds obtained thereby were used to purchase
common stock at the average market price during the period. Basic and diluted
earnings per share were $0.03 and $0.03 for the three month periods ended
March 31, 2009 and 2008 respectively.
Recent Accounting Pronouncements
--------------------------------
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements". This Statement amends ARB 51 to establish
accounting and reporting standards for the noncontrolling (minority) interest
in a subsidiary and for the deconsolidation of a subsidiary. It 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. SFAS No. 160 is effective for the Company's fiscal year
beginning January 1, 2009. Management does not believe this pronouncement will
have a material effect on the Company's financial statements.
In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations".
This Statement replaces SFAS No. 141, Business Combinations. This Statement
retains the fundamental requirements in Statement 141 that the acquisition
method of accounting (which Statement 141 called the purchase method) be used
for all business combinations and for an acquirer to be identified for each
business combination. This Statement also establishes principles and
requirements for how the acquirer: a) recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, and any
noncontrolling interest in the acquiree; b) recognizes and measures the
goodwill acquired in the business combination or a gain from a bargain
purchase and c) determines what information to disclose to enable users of the
financial statements to evaluate the nature and financial effects of the
business combination. SFAS No. 141(R) will apply prospectively to business
combinations for which the acquisition date is on or after Company's fiscal
year beginning January 1, 2009. The Company will be required to expense costs
related to any acquisitions after December 31, 2008. Management does not
believe this pronouncement will have a material effect on the Company's
financial statements.
10
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.
Note 3 - DEPOSIT FOR LAND USE RIGHT
--------------------------
The company has deposited amounts with the local government, for land use
rights amounting $17,529,508 and $17,588,860 (RMB 120,000,000) at March 31,
2009 and December 31, 2008, respectively, for the acquisition of a piece of
land in PRC. The Company intends to acquire the land for the development of
new project. To obtain the land use right from the Government, the Company is
required to pay the demolish fee associated with the acquisition of the land
use right amounting $21,911,885 (RMB 150,000,000). As of March 31, 2009, the
demolish fee was not deposited with the government, therefore, the official
title of land use right has not been transferred to the Company.
Note 4 - PROPERTY AND EQUIPMENT
----------------------
As of March 31, 2009 and December 31, 2008, the property and equipment of the
Company consisted of the following:
3/31/2009 12/31/2008
--------- -----------
Buildings 7,195,622 7,219,985
Infrastructure and Leasehold Improvement 1,779,281 1,785,306
Furniture and fixtures 1,635,602 1,641,140
Equipments 1,972,878 1,979,558
Automobiles 312,613 313,672
----------- -----------
12,895,997 12,939,661
Accumulated Depreciation (6,603,889) (6,450,451)
----------- -----------
Property and Equipment, net $6,292,108 $6,489,210
=========== ===========
The Company had depreciation expenses of $175,179 and $147,101 for the three
month ended March 31, 2009 and 2008 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 March 31, 2009 and December 31, 2008, the intangible assets of the
Company consisted of the following:
3-31-2009 12-31-2008
Land use rights 3,331,809 $3,343,090
Accumulated amortization (787,274) (777,027)
---------- ----------
Land use rights, net 2,544,535 $2,566,063
--------- ----------
11
The Company had amortization expenses of $12,867 and $15,373 as of March 31,
2009 and 2008. The amortization expenses for land use right for next five
years after March 31, 2009 are as follows:
2010 $ 51,468
2011 51,468
2012 51,468
2013 51,468
2014 51,468
After 2,287,195
----------
Total $2,544,535
===========
Note 6 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
-------------------------------------
The Company's accounts payable and accrued expenses as of March 31, 2009 and
December 31, 2008 are summarized as follows:
---------------------------------------------------------------
3-31-2009 12-31-08
---------------------------------------------------------------
Accounts payables $ 247,811 $ 141,761
---------------------------------------------------------------
Other payables 433,583 372,014
---------------------------------------------------------------
Accrued payroll 40,880 41,019
---------------------------------------------------------------
Accrued expenses 72,353 72,597
---------------------------------------------------------------
Total accounts payables and
accrued expenses $ 794,627 $ 627,391
---------------------------------------------------------------
Note 7 - DEFERRED REVENUE
----------------
The company has recorded deferred revenue of $131,861 and $60,217 as of March
31, 2009 and December 31, 2008. Deferred revenue represents advances from
customers for using the resort facilities within the next twelve month period.
Note 8- TAX PAYABLES
------------
As of March 31, 2009 and December 31, 2008, tax payables are summarized as
follows:
3/31/2009 12/31/2008
------------- --------------
Income tax payable $ 4,574,823 $ 4,432,281
Business tax payable 942,616 904,104
VAT payable 76 109
Other taxes payable 125,578 124,865
------------- --------------
Tax payable $ 5,643,093 $ 5,461,359
============= ==============
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
12
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 March
31, 2009. Accordingly, the Company has no net deferred tax assets.
The provision for income taxes from operations on income consists of the
following for the year three month periods ended March 31, 2009 and 2008:
US Current Income Tax 3-31-2009 3-31-2008
Expense (Benefit)
-----------------------------------------------------
Federal $ - $ -
-----------------------------------------------------
State - -
-----------------------------------------------------
- -
-----------------------------------------------------
PRC Current Income
Expense (Benefit) 157,498 183,832
-----------------------------------------------------
Total Provision for $157,498 $183,832
Income Tax
-----------------------------------------------------
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:
-------------------------------------------------------------
3-31-2009 3-31-2008
-------------------------------------------------------------
Tax expense (credit) at 34% 34%
statutory rate - federal
-------------------------------------------------------------
State tax expense net of 6% 6%
federal tax
-------------------------------------------------------------
Valuation allowance (40%) (40%)
-------------------------------------------------------------
Foreign income tax - PRC 25% 25%
-------------------------------------------------------------
Tax expense (benefit) at 25% 25%
actual rate
-------------------------------------------------------------
United States of America
------------------------
As of March 31, 2009, the Company in the United States had approximately
$84,495 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 March 31,
2009 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 March 31, 2009 and December 31, 2008.
---------------------------------------------------------
3-31-2009 12-31-2008
---------------------------------------------------------
Net operation loss carry
forward $1,159,535 $ 933,500
---------------------------------------------------------
Total deferred tax assets 394,242 317,500
---------------------------------------------------------
Less: valuation allowance (394,242) (317,500)
---------------------------------------------------------
Net deferred tax assets $ - $ -
---------------------------------------------------------
13
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 expires.
The applicable new EIT for the Company is 25%. The Company paid $0 of income
tax payable as of March 31, 2009 and 2008.
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 Company did not have any significant deferred income tax in PRC as of
March 31, 2009 and December 31, 2008.
Note 10 - MANAGEMENT FEE AGREEMENTS
-------------------------
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
$2,015,602 (RMB13,800,000). For the three-month periods ended March 31, 2009
and 2008, the Company earned $503,900 and $482,207 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 Note 12 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 ChenJingmin has control and a beneficial
interest.
Shaanxi Wenhao Zaliang Shifu Co., Limited - a stockholder of the Company in
which Chen Jingmin has control and a financial interest. The Wenhao Group has
various entities as noted below:
Shaanxi Wenhao Dongjin Taohuyuan - part of Wenhao Group.
Shaanxi Wenhao Naner Huan Wenhao - part of Wenhao Group.
Shaanxi Wenhao Xijiao Wenhao(Taoyuan Nanlu Branch) - part of Wenhao Group.
Shaanxi Wenhao Yuan Taizu - part of Wenhao Group
14
Shaanxi Kangze Economic and Trade Co., Limited - a stockholder of the Company
in which Chen Jingmin has control and a beneficial interest.
Shaanxi Xianyong Luye Developing Co., Limited - a stockholder of the Company
in which Chen Jingmin has control and a beneficial interest.
The Company as of March 31, 2009 had receivable $174,432 from Shaani NTHY -
Dongjing Taoyuan Co., $380,647 from the Wenhao Group, $19,048 from Shaanxi
Xianyong Luye Developing Co., Ltd. These receivables are unsecured,
interest-free and have no fixed repayment terms. The Company has classified
these receivables as due from related parties under current assets.
The Company as of December 31, 2008 had receivable $128,460 from Shaani
NTHY - Dongjing Taoyuan Co., $381,785 from the Wenhao Group, and $56,503
from Shaanxi Xianyong Luye Developing Co., Ltd. These receivables are
unsecured, interest-free and have no fixed repayment terms. The Company
has classified these receivables as due from related parties under
current assets.
As of March 31, 2009 and December 31, 2008, there were no related parties'
payables.
Note 12 -COMMITMENTS
-----------
Following are some of the significant commitments as of March 31, 2009 and
2008:
1. Management Agreements with Shaanxi New Taohuayuan Tourism & Trading Co. Ltd.
- - Dongjin Taoyuan Branch and Shaanxi Wenhao 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 expired on Jan 14, 2009. The Company extended the
agreements for 5 years and the new agreements will expire on January 9, 2014.
For the three-month period ended March 31, 2009, the management fees earned
amounted to $127,801 and $127,801 respectively 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, Yuantaizu Branch and Beijing
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 January 9, 2010. For the three-month period ended March 31, 2009,
the management fees earned amounting $131,452, $65,726 and $51,120
respectively based upon the agreements.
15
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. The project was delayed because of public facility
construction. As of March 31, 2009, the Company has paid $3,483,990 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. The project was delayed because of public
facility construction. As of March 31, 2009, the Company has paid $9,132,435
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 $17,588,860 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
16
iv. Allocations to the discretionary surplus reserve, if approved in the
stockholders' general meeting.
In accordance with the Chinese Company Law, the Company reserved $47,249
and $56,345 in its statutory fund for the three-month periods ending
March 31, 2009 and 2008 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 March 31, 2009.
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 month periods 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 $85,000 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 provide the services to the company's
satisfaction, on February 28, 2008, the Company's directors adopted a
resolution authorizing the repurchase of these shares at a price of $0.05 per
share. As of March 31, 2009, the consulting company has not sold any of these
shares 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 March 31,
2009 and December 31, 2008 are as follows:
Foreign Currency
Translation Adjustment
----------------------
Balance at December 31, 2008 $ 5,304,720
Change in 2009 (163,278)
---------------
Balance at March 31, 2009 $ 5,141,442
===============
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
17
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:
For the three month periods
ended March 31
2009 2008
Revenues
Resort income from unaffiliated customers $ 1,135,224 $ 1,026,648
Management fee income from affiliated
customers 503,900 482,207
------------- -------------
Consolidated $ 1,639,125 $ 1,508,855
============= =============
Operating income (loss)
Resort income $ 207,313 $ 248,142
Management fee income 503,900 482,207
Corporation (1) (84,495) (7,500)
------------- -------------
Consolidated $ 626,719 (727,826)
============= =============
Net income (loss)
Resort income $ 179,063 $ 165,989
Management fee income 377,925 378,005
Corporation (1) (84,495) --
------------- -------------
Consolidated $ 472,493 $ 543,994
============= =============
Identifiable assets:
Resort income $ 27,107,701 $ 10,015,242
Management fee income - -
Corporation (1) 14,223,297 26,453,700
------------- -------------
Consolidated $ 41,330,997 $ 36,468,942
============= =============
Depreciation and amortization:
Resort income $ 188,046 $ 162,474
============= =============
Capital expenditures:
Resort income $ - $ -
Management fee income - -
Corporation (1) 1,132,973 1,020,321
------------- -------------
Consolidated $ 1,132,973 $ 1,020,321
============= =============
(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.
18
Item 2. Management's Discussion and Analysis of Financial Condition and Results
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 June 2009.
We also manage a chain of four traditional Chinese restaurants. Two of the
restaurants are in Xi'an, and one is in Beijing.
We receive fees for managing the DongJin Taoyuan Villas and the three
restaurants. The agreements relating to the management of these properties are
discussed in more detail in Item 1 of this report.
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 Months Ended March 31, 2009
Material changes of certain items in our Statement of Operations for the
three months ended March 31, 2009, as compared to the three months ended March
31, 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.
19
Operating Expenses I Increase in employees and salaries.
Liquidity and Capital Resources
Our material sources and (uses) of cash during the three months ended
March 31, 2009 were:
Cash provided by operations $1,108,982
Payment for land use rights, building improvements,
and purchase of equipment (1,132,973)
Loans to related parties (9,291)
Changes to foreign currency exchange rate 306
Cash on hand at January 1, 2009 33,587
Our material sources and (uses) of cash during the three months ended
March 31, 2008 were:
Cash provided by operations $ 448,821
Payment for land use rights, building improvements,
and purchase of equipment (1,020,321)
Loans from related parties 7,065
Changes to foreign currency exchange rate 1,457
Cash on hand at January 1, 2008 18,984
As discussed in our annual report on Form 10-K for the year ended December
31, 2008, we intend to develop an 848 acre commercial and residential
development in Lantian, a city located approximately 23 miles from Xi'an and a
150 room hotel and resort in Xi'an. As of April 30, 2009 we had not started
actual construction work on these projects.
We have financed our operations to date through the sale of our common
stock and cash generated by our operations. As of April 30, 2009 expenditures
for the Lantian and New Hainan projects have been funded with cash from our
operations and proceeds from the sale of our common stock. We expect to finance
the remaining costs for the Lantian and New Hainan projects through cash from
our operations and loans. Loans would be collateralized by the property and
issued in conjunction with the government. However, required financing may not
be available to us, in which case the development of the projects may take
additional time or we may be unable to develop the projects. At present, we do
not have any lines of credit or other bank financing arrangements.
We do not know of any trends, events or uncertainties that have, or are
reasonably likely to have, a material impact on our short-term or long-term
liquidity other than our need to pay the taxes and surcharges which we have
accrued as liabilities on our March 31, 2009 balance sheet.
Restrictions on currency exchange
- ---------------------------------
Substantially all of our projected revenues and operating expenses are
denominated in Renminbi. The Renminbi is currently freely convertible under the
20
"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
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
21
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.
22
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. Controls and Procedures.
(a) NTHY maintains a system of controls and procedures designed to ensure
that information required to be disclosed in reports filed or submitted under
the Securities Exchange Act of 1934, as amended ("1934 Act"), is recorded,
processed, summarized and reported, within time periods specified in the SEC's
rules and forms and to ensure that information required to be disclosed by NTHY
in the reports that it files or submits under the 1934 Act, is accumulated and
communicated to NTHY's management, including its Principal Executive and
Financial Officer, as appropriate to allow timely decisions regarding required
disclosure. As of March 31, 2009, NTHY's Principal Executive and Financial
Officer evaluated the effectiveness of the design and operation of NTHY's
disclosure controls and procedures. Based on that evaluation, the Principal
Executive and Financial Officer concluded that NTHY's disclosure controls and
procedures were effective.
(b) Changes in Internal Controls. There were no changes in NTHY's internal
control over financial reporting during the quarter ended March 31, 2009, that
materially affected, or are reasonably likely to materially affect, its internal
control over financial reporting.
PART II
Item 6. Exhibits
Exhibits
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
32 Certification pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NEW TAOHUAYUAN CULTURE TOURISM CO., LTD.
May 14, 2009 By: /s/ Cai Danmei
------------------------------------
Cai Danmei, Principal Executive,
Financial and Accounting Officer