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 September 30, 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 November 10, 2009.
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMIITED AND SUBSIDIARY
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
TABLE OF CONTENTS
Unaudited consolidated Balance Sheets as of September 30, 2009
and December 31, 2008 ................................................ 1
Unaudited consolidated Statements of Income........................... 2
for the three and nine month periods ended September 30, 2009
and 2008
Unaudited consolidated Statements of Cash Flows....................... 3
for the nine month periods ended September 30, 2009 and 2008
Notes to unaudited consolidated financial statements ................. 4-16
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2009 AND DECEMBER 31, 2008
(UNAUDITED)
September 30, 2009 December 31, 2008
------------------ -----------------
ASSETS
Current assets
Cash and cash equivalents $ 10,096 $ 89,252
Accounts receivable, net 13,972 39,657
Inventories 78,290 77,147
Prepaid expenses and other
current assets 3,121 2,501
Due from related parties 549,376 566,748
------------------- -----------------
Total Current Assets 654,855 775,305
Property & equipment, net 5,969,971 6,489,210
Construction-in- progress 16,424,218 13,134,481
Land use right, net 2,519,541 2,566,063
Deposit for land use right 17,579,327 17,588,860
------------------- -----------------
Total assets $ 43,147,913 $ 40,553,918
=================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current
liabilities
Accounts payable and accrued expenses $ 684,702 $ 627,391
Deferred revenue 105,884 60,217
Taxes Payable 6,193,579 5,461,359
------------------- -----------------
Total Current Liabilities 6,984,166 6,148,967
Stockholders' equity
Common stock, $.001 par value, 50,000,000
shares authorized, 18,727,327 issued and
outstanding as of September 30, 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 2,463,301 2,285,706
Other comprehensive income 5,287,565 5,304,720
Retained earnings 12,538,427 10,940,071
------------------- -----------------
Total stockholders' equity 36,163,747 34,404,951
------------------- -----------------
Total liabilities and stockholders'
equity $ 43,147,913 $ 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 INCOME AND OTHER COMPREHENSIVE INCOME
FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2009 AND 2008
(UNAUDITED)
Three month periods Nine month periods
ended ended
September 30 September 30
------------------------- ------------------------
2009 2008 2009 2008
----------- ----------- ------------ -----------
Net revenue
Catering and hotel related services income $ 1,256,043 $ 1,381,739 $ 3,570,610 $ 3,580,363
Management fee income 506,648 503,494 1,514,944 1,482,190
------------ ------------ ------------ ------------
Total net revenue 1,762,691 1,885,232 5,085,554 5,062,552
Cost of revenue 411,745 397,949 1,284,666 1,087,631
------------ ------------ ------------ ------------
Gross profit 1,350,946 1,487,283 3,800,888 3,974,921
Operating expenses
General and administrative expenses 50,269 299,204 883,734 939,896
Depreciation and amortization 344,363 258,075 560,381 555,571
------------ ------------ ------------ ------------
Total operating expenses 394,631 557,279 1,444,114 1,495,467
------------ ------------ ------------ ------------
Income from operations 956,314 930,004 2,356,773 2,479,454
------------ ------------ ------------ ------------
Other Income
Interest income 143 283 382 1,045
Other income, net 4,037 7,107 10,779 15,400
------------ ------------ ------------ ------------
Total other income 4,180 7,390 11,161 16,445
------------ ------------ ------------ ------------
Income before income taxes 960,495 937,395 2,367,935 2,495,899
Provision for income taxes 240,124 232,545 591,984 624,011
------------ ------------ ------------ ------------
Net income 720,371 704,850 1,775,951 1,871,889
Other comprehensive item:
Foreign currency translation gain (loss) 95,176 317,412 (17,155) 2,253,508
------------ ------------ ------------ ------------
Net comprehensive income $ 815,547 $ 1,022,262 $ 1,758,796 $ 4,125,397
============ ============ ============ ============
Earning per share:
Basic & diluted earning per share $ 0.04 $ 0.06 $ 0.09 $ 0.10
============ ============ ============ ============
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 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 NINE MONTH PERIOD ENDED SEPTEMBER 30, 2009 AND 2008
(UNAUDITED)
2009 2008
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,775,951 $ 1,871,889
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 560,381 555,571
Bad debt expense 109,748 -
(Increase) / decrease in current assets:
Accounts receivables (37,348) (23,266)
Inventory (1,184) 48,535
Other receivables (1,353) (1,562)
Prepaid expenses and other current assets 732 -
Increase/(decrease) in current liabilities:
Accounts payable and accrued expenses 57,603 (53,693)
Taxes Payable 734,564 787,194
Deferred revenue 45,661 (42,874)
------------ ------------
Net cash provided by operating activities 3,244,755 3,141,794
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Payment for construction in progress (3,294,088) (3,090,401)
Advances to related parties (29,708) (31,234)
------------ ------------
Net cash used in investing activities (3,323,796) (3,121,635)
------------ ------------
Effect of exchange rate changes on cash
and cash equivalents (115) 3,964
------------ ------------
Net increase/(decrease) in cash and
cash equivalents (79,156) 24,122
Cash and cash equivalents, beginning balance 89,252 45,680
------------ ------------
Cash and cash equivalents, ending balance $ 10,096 $ 69,802
============ ============
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
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-K as of December 31, 2008. The results of the nine month periods ended
September 30, 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
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Foreign currency transactions and comprehensive income (loss)
As of September 30, 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 (ASC 830), "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 (ASC 220), "Reporting Comprehensive Income" as a
component of shareholders' equity.
During the nine months ended September 30, 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 (ASC 605). 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
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 (ASC 740), "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") (ASC 740). 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 (ASC 230), "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") (ASC 250),
"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
7
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 $169,772 and $29,144 at September
30, 2009 and 2008 respectively.
8
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 (ASC 805), "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 (ASC
350), intangible assets with definite lives are amortized over their estimated
useful life and reviewed for impairment in accordance with SFAS No. 144 (ASC
360), "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 (ASC 360), "Accounting for the Impairment or Disposal of
Long-Lived Assets" ("SFAS 144"), which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets and supersedes
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of," and the accounting and reporting
provisions of APB Opinion No. 30, "Reporting the Results of Operations for a
Disposal of a Segment of a Business." The Company periodically evaluates the
carrying value of long-lived assets to be held and used in accordance with SFAS
9
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
144 (ASC 360). SFAS 144 (ASC 360) 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) (ASC 260), "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 $0.09 and $0.10 for the nine month periods ended September 30, 2009 and
2008 respectively.
Recent Accounting Pronouncements
In June 2009, the FASB issued SFAS No. 166 (ASC 860), "Accounting for Transfers
of Financial Assets -- an amendment of FASB Statement No. 140" ("SFAS 166 (ASC
860)"), which requires additional information regarding transfers of financial
assets, including securitization transactions, and where companies have
continuing exposure to the risks related to transferred financial assets. SFAS
166 eliminates the concept of a "qualifying special-purpose entity," changes the
requirements for derecognizing financial assets, and requires additional
disclosures. SFAS 166 (ASC 860) is effective for fiscal years beginning after
November 15, 2009.
In June 2009, the FASB issued SFAS No. 167 (ASC 860), "Amendments to FASB
Interpretation No. 46(R)" ("SFAS 167") (ASC 860), which modifies how a company
determines when an entity that is insufficiently capitalized or is not
controlled through voting (or similar rights) should be consolidated. SFAS 167
(ASC 860) clarifies that the determination of whether a company is required to
consolidate an entity is based on, among other things, an entity's purpose and
design and a company's ability to direct the activities of the entity that most
significantly impact the entity's economic performance. SFAS 167 (ASC 860)
requires an ongoing reassessment of whether a company is the primary beneficiary
of a variable interest entity. SFAS 167 (ASC 860) also requires additional
disclosures about a company's involvement in variable interest entities and any
significant changes in risk exposure due to that involvement. SFAS 167 (ASC 860)
is effective for fiscal years beginning after November 15, 2009.
In June 2009, the FASB issued SFAS No. 168 (ASC 105), The FASB Accounting
Standards Codification TM and the Hierarchy of Generally Accepted Accounting
Principles ("SFAS No. 168") (ASC 105), which becomes effective for financial
statements issued for interim and annual periods ending after September 15,
2009. SFAS No. 168 (ASC 105) replaces SFAS No. 162, The Hierarchy of Generally
Accepted Accounting Principles. SFAS No. 168 identifies the sources of
accounting principles and the framework for selecting principles used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with US GAAP (the GAAP hierarchy).
10
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
In August 2009, the FASB issued Accounting Standards Update No. 2009-05,
"Measuring Liabilities at Fair Value" (ASU 2009-05). This Standards Update
provides amendments to ASC Topic 820, "Fair Value Measurements and Disclosure"
for the fair value measurement of liabilities when a quoted price in an active
market is not available. ASU 2009-05 is effective for reporting periods
beginning after August 28, 2009. This ASU is effective for our third quarter of
our fiscal 2010 ending December 31, 2009. The adoption is not expected to have
an impact on our financial position or results of operations.
Reclassifications - Certain amounts in the 2008 financial statements have been
reclassified to conform to the 2009 presentation. These reclassifications had no
effect on previously reported results of operations or retained earnings.
Note 3 - DEPOSIT FOR LAND USE RIGHT
The Company has deposited amounts with the local government, for land use rights
amounting $17,579,327 (RMB 120,000,000) as of September 30, 2009, 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 $21,974,158 (RMB 150,000,000). As of
September 30, 2009, the demolish fee was not deposited to the government,
therefore, the official title of land use right has not been transferred to the
Company. The deposit for land use right was guaranteed by the asset of the
shareholder company.
Note 4 - PROPERTY AND EQUIPMENT
As of September 30, 2009 and December 31, 2008, the property and equipment of
the Company consisted of the following:
9/30/2009 12/31/2008
-----------------------------
Buildings 7,216,072 7,219,985
Infrastructure and
Leasehold Improvement 1,784,338 1,785,306
Furniture and fixtures 1,640,250 1,641,140
Equipments 1,978,485 1,979,558
Automobiles 313,502 313,672
-----------------------------
12,932,647 12,939,661
Accumulated Depreciation (6,962,676) (6,450,451)
-----------------------------
Property and Equipment, net $ 5,969,971 $ 6,489,210
=============================
The Company had depreciation expenses of $515,288 and $505,967 for the nine
month ended September 30, 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 September 30, 2009 and December 31, 2008, the intangible assets of the
Company consisted of the following:
11
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
9-30-2009 12-31-2008
Land use rights $ 3,341,278 $ 3,343,090
Accumulated amortization (821,737) (777,027)
------------- -------------
Land use rights, net $ 2,519,541 $ 2,566,063
============================
The Company had amortization expenses of $45,093 and $49,604 as of September 30,
2009 and 2008. The amortization expenses for land use right for next five years
after September 30, 2009 are as follows:
2010 $ 60,123
2011 60,123
2012 60,123
2013 60,123
2014 60,123
After 2,218,926
-------------
Total $ 2,519,541
=============
Note 6 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
The Company's accounts payable and accrued expenses as of September 30, 2009 and
December 31, 2008 are summarized as follows:
-------------------------------------------------------------
9-30-2009 12-31-08
-------------------------------------------------------------
Accounts payables $ 195,277 $ 141,761
-------------------------------------------------------------
Other payables 340,317 372,014
-------------------------------------------------------------
Accrued payroll 69,038 41,019
-------------------------------------------------------------
Accrued expenses 80,070 72,597
-------------------------------------------------------------
Total accounts payables and $684,702 $ 627,391
accrued expenses
-------------------------------------------------------------
Note 7 - DEFERRED REVENUE
The Company has recorded deferred revenue of $105,884 and $60,217 as of
September 30, 2009 and December 31, 2008. Deferred revenue represents advances
from customers for using the resort facilities within the next twelve month
period.
Note 8- TAXES PAYABLE
As of September 30, 2009 and December 31, 2008, taxes payable are summarized as
follows:
9/30/2009 12/31/2008
------------------------------
Income tax payable $ 4,839,413 $ 4,432,281
Business tax payable 1,042,372 904,104
Other taxes payable 311,794 124,974
------------ ------------
Taxes payable $ 6,193,579 $ 5,461,359
============ ============
12
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 9 - INCOME TAXES
The Company is registered in the State of Nevada and has registered primarily in
two tax jurisdictions - the PRC and the United States. For certain operations in
US and China, the Company has incurred net accumulated operating losses for
income tax purposes The Company believes that it is more likely than not that
these net accumulated operating losses will not be utilized in the future.
Therefore, the Company has provided full valuation allowance for the deferred
tax assets arising from the losses at these locations as of September 30, 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 nine month periods ended September 30, 2009 and 2008:
9-30-2009 9-30-2008
US Current Income Tax Expense (Benefit)
-------------------------------------------------------------------
PRC Current Income 591,984 624,011
Expense (Benefit)
------------ ------------
Total Provision for $ 591,984 $ 624,011
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:
-------------------------------------------------------------
9-30-2009 9-30-2008
-------------------------------------------------------------
Tax expense (credit) at 34% 34%
statutory rate - federal
-------------------------------------------------------------
State tax expense net of federal 6% 6%
tax
-------------------------------------------------------------
Valuation allowance (40%) (40%)
-------------------------------------------------------------
Foreign income tax - PRC 25% 25%
-------------------------------------------------------------
Tax expense (benefit) at actual 25% 25%
rate
-------------------------------------------------------------
United States of America
- ------------------------
As of September 30, 2009, the Company in the United States had approximately
$1,187,035 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 September 30,
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 September 30, 2009 and 2008.
------------------------------------------------------
9-30-2009 12-31-2008
------------------------------------------------------
Net operation loss carry $ 1,187,035 $1,075,040.00
forward
------------------------------------------------------
Total deferred tax assets 474,814 365,514
------------------------------------------------------
Less: valuation allowance (474,814) (365,514)
------------------------------------------------------
Net deferred tax assets $ - $ -
------------------------------------------------------
13
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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
September 30, 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
September 30, 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 $2,019,925
(RMB13,800,000). For the nine month periods ended September 30, 2009 and 2008,
the Company earned $1,514,944 and $1,482,190 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 Chen Jingmin 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:
14
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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
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 September 30, 2009 had receivable $168,625 from Shaani NTHY -
Dongjing Taoyuan Co., $379,923 from the Wenhao Group, $20,195 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 September 30, 2009 and December 31, 2008, there were no related parties'
payables.
Note 12 -- COMMITMENTS
Following are some of the significant commitments as of September 30, 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 Jan. 9, 2014. For the nine month periods ended
September 30, 2009, the management fees earned amounting to $384,225 and
$384,225 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
15
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
compensated for additional 15% of the revenue as bonus. The agreements will
expire on January 9, 2010. For the nine month periods ended September 30, 2009,
the management fees earned amounting $395,203, $197,601 and $153,690
respectively 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 June 2012. The
project was delayed because of public facility construction. As of September 30,
2009, the Company has paid $3,493,891 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 in June 2012.
The project was delayed because of public facility construction. As of September
30, 2009, the Company has paid $12,930,327 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 $17,531,557 (RMB 120,000,000) as land cost
in 2006 but the title is not yet transferred to the Company without paying the
demolish fee associated with the project (See note C for details).
Note 13- STATUTORY RESERVE AND STATUTORY COMMON WELFARE FUND
As stipulated by the Company Law of the People's Republic of China (PRC), net
income after taxation can only be distributed as dividends after appropriation
has been made for the following:
i. Making up cumulative prior years' losses, if any;
ii. Allocations to the "Statutory surplus reserve" of at least 10% of income
after tax, as determined under PRC accounting rules and regulations, until the
fund amounts to 50% of the Company's registered capital;
16
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 $177,595 and
$187,189 statutory fund for the nine month periods ended September 30, 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 September 30, 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
September 30, 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 September
30, 2009 and December 31, 2008 are as follows:
Foreign Currency
Translation Adjustment
-------------------------
Balance at December 31, 2008 $ 5,304,720
Change in 2009 (17,153)
-------------------------
Balance at September 30, 2009 $ 5,287,567
=========================
17
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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:
For the nine month periods ended
September 30
2009 2008
Revenues
Resort income from unaffiliated customers $ 3,570,610 $ 3,580,363
Management fee income from affiliated
customers 1,514,944 1,482,190
------------- -------------
Consolidated $ 5,085,554 $ 5,062,552
============= =============
Operating income(loss)
Resort income $ 953,824 $ 1,106,752
Management fee income 1,514,944 1,482,190
Corporation (1) (111,995) (109,588)
------------- -------------
Consolidated $ 2,356,773 $ 2,479,454
============= =============
Net income (loss)
Resort income $ 751,738 $ 869,834
Management fee income 1,136,208 1,111,643
Corporation (1) (111,995) (109,588)
------------- -------------
Consolidated $ 1,775,951 $ 1,871,889
============= =============
Identifiable assets:
Resort income $ 26,723,694 $ 40,553,918
Corporation (1) 16,424,218 -
------------- -------------
Consolidated $ 43,147,913 $ 40,553,91
============= =============
Depreciation and amortization:
Resort income $ 560,381 $ 555,571
============= =============
Capital expenditures:
Resort income $ 3,294,088 $ 3,090,401
------------- -------------
Consolidated $ 3,294,088 $ 3,090,401
============= =============
(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 reopened in
September 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 and Nine Months Ended September 30, 2009
Material changes of certain items in our Statement of Operations for the
three and nine months ended September 30, 2009, as compared to the three and
nine months ended September 30, 2008, are discussed below:
1
Increase (I)
Item or Decrease (D) Reason
- ---- --------------- ------
Foreign Currency
Translation Gain (loss) D Change in currency exchange rates.
Liquidity and Capital Resources
Our material sources and (uses) of cash during the nine months ended September
30, 2009 are shown in our Statement of Cash Flows which are part of the
financial statements included with this report.
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 November 10, 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 September 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 September 30, 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
"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.
2
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
discussed below to be critical to an understanding of our financial statements
as their application assists management in making their business decisions
3
Revenue recognition
We generally recognize service revenues when persuasive evidence of an
arrangement exists, services are rendered, the fee is fixed or determinable, and
collectibility is probable. Service revenues are recognized net of discounts.
Foreign currency translation
We consider Renminbi as our functional currency as a substantial portion of
our business activities are based in Renminbi ("RMB"). However, we have chosen
the United States dollar as our reporting currency.
Transactions in currencies other than the functional currency during the
year are translated into the functional currency at the applicable rates of
exchange prevailing at the time of the transactions. Monetary assets and
liabilities denominated in currencies other than the functional currency are
translated into the functional currency at the applicable rates of exchange in
effect at the balance sheet date. Exchange gains and losses are recorded in the
statements of operations.
For translation of financial statements into the reporting currency, assets
and liabilities are translated at the exchange rate at the balance sheet date,
equity accounts are translated at historical exchange rates, and revenues,
expenses, gains and losses are translated at the weighted average rates of
exchange prevailing during the period. Translation adjustments resulting from
this process are recorded in accumulated other comprehensive income (loss)
within stockholders' equity.
Property, plant and equipment and depreciation
Property, plant and equipment are stated at cost less accumulated
depreciation.
The cost of an asset consists of its purchase price and any directly
attributable costs of bringing the asset to its present working condition and
location for its intended use. Expenditures incurred after the assets have been
put into operation, such as repairs and maintenance, are normally recognized as
an expense in the period in which they are incurred. In situations where it can
be clearly demonstrated that expenditure has resulted in an increase in the
future economic benefits expected to be obtained from the use of the assets, the
expenditure is capitalized.
When assets are sold or retired, their costs and accumulated depreciation
are eliminated from the accounts and any gain or loss resulting from their
disposal is included in the statement of operations.
Depreciation is calculated to write off the cost of property, plant and
equipment over their estimated useful lives as set out below, from the date on
which they become fully operational and after taking into account their
estimated residual values, using the straight-line method.
4
Item 4T. Controls and Procedures
Our Principal Executive and Financial 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 at the reasonable assurance level to ensure that
information is adequately disclosed.
There were no changes in our internal controls over financial reporting
that occurred during the fiscal quarter ended September 30, 2009 that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting as discussed above.
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.
5
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.
November 10, 2009 By: /s/ Cai Danmei
------------------------------------
Cai Danmei, Principal Executive,
Financial and Accounting Officer