SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 2009
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. - None
NEW TAOHUAYUAN CULTURE TROURISM CO., LTD.
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(Name of Small Business Issuer in its charter)
Nevada Applied For
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1# Dongfeng Road
Xi'an Weiyang Tourism Development District
Xi'an, China N/A
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(Address of Principal Executive Office) Zip Code
Registrant's telephone number, including Area Code: 0086-29-86671555
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. [ ]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. [ ]
Indicate by check mark whether the registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (ss.232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act): [ ] Yes [X] No
The aggregate market value of the voting stock held by non-affiliates of the
Company on June 30, 2009 was $-0-.
As of March 31, 2010, the Company had 18,727,327 issued and outstanding shares
of common stock.
Documents incorporated by reference: None
ITEM 1. DESCRIPTION OF BUSINESS
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Taohuayuan Inn
We own and operate the Taohuayuan Inn hotel and resort located in the
northern suburbs of the city of Xi'an, province of Shaanxi in the PRC. The hotel
is approximately 10 miles from downtown Xi'an and is readily accessible to
downtown Xi'an by freeway. The Taohuayuan Inn is designed in the traditional
Chinese village compound style in which six to eight rooms and one suite are
located around individual courtyards. There are a total of 23 courtyards in the
hotel representing 146 rooms and approximately 292 beds.
The population of Shaanxi province is approximately 36,000,000 people and
the population of the city of Xi'an is approximately 6,000,000 people. Xi'an is
the capital of Shaanxi province and is located approximately 800 miles southwest
of Beijing. Xi'an is a well-known tourist destination and is a center of higher
education in the PRC with 46 public universities and 35 special purpose colleges
located within Shaanxi province. Xi'an is also a well-known historical city
considered to be one of four major tourist destinations in the PRC. Tourists are
drawn to the city because 13 Chinese dynasties built their capital there and
tourist attractions include the tombs of 71 emperors and the well-known terra
cotta soldiers attraction.
The Inn is a full-service hotel with automated air conditioning and heating
systems, television, telephone, fully-equipped bathrooms, a gym and health club,
swimming pool, fishing gardens, beauty and hair salons, restaurants, steam
baths, tea services, karaoke services, mini bars and related guest services.
The hotel employs approximately 300 persons organized into four
departments. A production department which includes food and beverage,
housekeeping and entertainment divisions, a sales department, an administration
department which includes hotel managers, a human resource division, security
division, finance division and a general hotel management department. The hotel
employees are unionized and we believe our relations with our employees are
satisfactory.
The Taohuayuan Inn property consists of 163,611 square feet of buildings
located on approximately 10 acres of land. The buildings are owned by us but the
underlying real estate (as it is throughout the PRC) is owned by the government
and provided to us under land use rights through the year 2065. We paid a
one-time fee of $1,567,000 for the land use rights covering the real estate
underlying the Taohuayuan Inn. The land use rights permit us to operate a hotel
or resort on the property. There is no restriction on our ability to transfer
our land use rights.
The Taohuayuan Inn attracts both business and leisure travelers seeking
upscale amenities and quality designed and decorated rooms at competitive
prices, all under the design of a traditional Chinese inn.
Our room rates are set by the PRC government and are priced at rates which
are approximately 20% below that of competitive hotels in the Xi'an metropolitan
area. Our room rates are less than those of our primary competitors because we
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offer traditional Chinese-style accommodations rather than the more expensive
western accommodations which are offered by our competitors.
We market the Taohuayuan Inn by emphasizing our traditional Chinese design
and through organizing and offering to our customers free entertainment and
music shows in the theme of traditional Chinese festivals and folk art.
Advertising includes magazine and other print media and communications with
travel agencies.
DongJin Taoyuan Villas
We manage the DongJin Taoyuan Villas, a hotel and resort property in the
outskirts of Xi'an approximately 10 miles from downtown. We have managed this
property since 1997. Vacation villas, also known as vacation villages, would
generally be considered in the U.S. as destination resort and convention hotels.
DongJin Taoyuan Villas, which is owned by Shaanxi New Taohuayuan Economy Trade
Co., Ltd., our largest stockholder, is a self-contained hotel property covering
75 acres and providing most of the recreational amenities required for a family
staying on the property for a week or longer. The hotel covers 15 acres and is
comprised of 17 buildings with 84 rooms and 168 beds. Room rates range from $43
to $120 per night. The hotel provides the same facilities, services and
amenities as the Taohuayuan Inn and also offers traditional Chinese opera shows.
Under the terms of the management agreement with Shaanxi New Taohuayuan
Economy Trade Co., Ltd. we receive a fixed fee of approximately $428,000
annually plus a bonus of 15% of the excess of actual revenue over targeted
revenue in exchange for providing all services relating to the operation of the
property. We did not achieve targeted revenues in 2004, 2005 or 2006 and did not
earn a bonus for managing this property. Refer to Note 10 to our financial
statements for information concerning the amount we have received for managing
this hotel and resort.
This property closed for major remodeling in 2006 and reopened in
September 2009.
Our agreement for the management of this property does not contain any
termination provisions, other than those which are typically found in contracts
and which are based upon a breach of contract. The management agreement may be
renewed or amended with our consent and that of Shaanxi New Taohuayuan Economy
Trade Co., Ltd.
Wenhao Restaurant Management
By agreement with Shaanxi Wenhao Zaliang Shifu, Ltd., an affiliate, we
manage a chain of three traditional Chinese restaurants in the PRC. We have
managed restaurants for this company since 1997. Two of the restaurants are in
Xi'an, and one is in Beijing. The Wenhao restaurants serve a traditional Chinese
village cuisine with emphasis on fresh and healthy foods and ingredients such as
fresh fruits and vegetables and grains.
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Under the terms of the management agreement, we receive a management fee of
approximately $1,039,000 plus a bonus of 15% of the excess of actual revenue
over targeted revenue in exchange for providing all services relating to the
operation of the restaurants. We are fully responsible for the operation of the
restaurants. We have never achieved targeted revenues and, as a result, have
never earned any bonuses. Refer to our financial statements for information
concerning the amount we have received for managing these restaurants.
Our agreement for the management of this property does not contain any
termination provisions, other than those which are typically found in contracts
and which are based upon a breach of contract. The management agreement may be
renewed or amended with our consent and that of Shaanxi Wenhao Zaliang Shifu,
Ltd.
Future Developments and Strategy
We purchased land use rights covering approximately 848 undeveloped acres
in the city of Lantian for a one-time cost (including taxes) of $16,198,000.
Lantian is located approximately 23 miles from Xi'an. The land use rights, which
expire in 2045, permit us to use the land to build a mixed-use development that
will include condominium units, hotel rooms, single-family residences,
educational facilities and commercial developments. We will supervise the
design, construction and development of this project. We will operate the
project once it is complete.
We have also obtained land use rights covering approximately 7.5
undeveloped acres in Xi'an for a one time cost of $1,258,000. The land use
rights, which expire in 2037, permit us to build a new 150 room, 270 bed, hotel
and resort on the property. The new development, named the New Hainan hotel and
resort, will be water oriented with the hotel surrounding a one-acre pool.
Smaller pools and beaches will compliment the main pool. We will supervise the
design, construction and development of this project. We will operate the
project once it is complete.
As of March 15, 2010 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. As
of March 25, 2009 we did not have any firm commitments from any third party with
respect to financing either project. If required financing is not be available
the development of the projects may take additional time or we may be unable to
develop the projects.
Competition
There are numerous upscale hotels in the Xi'an metropolitan area.
Competition among hotels primarily involves the age and location of the hotel
and the quality of services provided, since amenities tend to be consistent
among all upscale properties. Our competitors all have recognized trade names,
international reservation systems, greater resources and longer operating
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histories than we, and accordingly, we are at a competitive disadvantage in
these areas. However, we offer the only traditional upscale Chinese hotels,
offer similar amenities at slightly lower prices and believe that we can
continue to compete successfully in the hotel industry.
The DongJin Taoyuan Vacation Villas which we manage competes with three
other vacation village or convention-style hotels in the Shaanxi area. Each of
these properties is independently owned, not part of a franchise or reservation
system, and is located outside the market area of our hotel.
The three Wenhao restaurants compete with numerous mid-priced restaurants
in their respective markets. We believe the Wenhao restaurants successfully
compete due to their emphasis on menu items from China's Yellow River Valley.
PRC Laws and Regulations Affecting Our Business
We are regulated in accordance with the PRC's Foreign Invested Enterprise
Law and Wholly Foreign-Owned Enterprise Law, or WFOE Law. Article 8 of the WFOE
Law provides that an enterprise with foreign capital meets the conditions for
being considered a legal person under PRC law and shall acquire the status of a
PRC legal person, in accordance with the law.
Further, the WFOE Law provides in Article 4 that the investments of a
foreign investor in the PRC, the profits it earns and its other lawful rights
and interests are protected by PRC law. Article 5 of the WFOE Law also states
that the PRC cannot nationalize or requisition any enterprise with foreign
capital. Under special circumstances, when public interest requires, enterprises
with foreign capital may be requisitioned by legal procedures and appropriate
compensation must be made.
The first two provisions set forth above reflect the principle that the
PRC must protect the interests of the foreign investor. The third provision
reflects the power of all national governments, including the United States, to
nationalize private property under certain circumstances. Those Articles,
combined with the Foreign Invested Enterprise laws, provide that the PRC
government cannot have an intrusive role in the affairs of a Foreign Invested
Enterprise company. To the contrary, those laws place a continuing duty on the
government to ensure that the rights of foreign investors in Foreign Invested
Enterprise companies, as expressed in the approved provisions of Articles of
Association, are protected and preserved.
Based upon the foregoing, and subject to limitations on converting
currency and statutory reserve requirements, we do not believe there are any
limitations concerning our ability to access the assets held by Shaanxi, a PRC
corporation which is our wholly owned subsidiary.
The PRC Legal System
The practical effect of the PRC's legal system on our business operations
in the PRC can be viewed under two separate but intertwined considerations.
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First, as a matter of substantive law, the Foreign Invested Enterprise
laws provide significant protection from government interference. In addition,
these laws guarantee the full enjoyment of the benefits of contracts to Foreign
Invested Enterprise participants. These laws, however, do impose standards
concerning corporate formation and governance, which are not qualitatively
different from the corporation laws of U.S. states.
Similarly, the PRC's accounting laws mandate accounting practices, which
are not consistent with U.S. Generally Accepted Accounting Principles. The PRC
accounting laws require that an annual "statutory audit" be performed in
accordance with PRC's accounting standards and that the books of account of
Foreign Invested Enterprises are maintained in accordance with PRC accounting
laws. Article 14 of the PRC's Wholly Foreign-Owned Enterprise Law requires a
Wholly Foreign-Owned Enterprise to submit certain periodic fiscal reports and
statements to designated financial and tax authorities, at the risk of business
license revocation.
Second, while the enforcement of substantive rights may appear less clear
than U.S. procedures, the Foreign Invested Enterprises and Wholly Foreign-Owned
Enterprises are PRC registered companies which enjoy the same status as other
PRC registered companies in business-to-business dispute resolution. Therefore,
as a practical matter, although no assurances can be given, the PRC's legal
infrastructure, while different in operation from its U.S. counterpart, should
not present any significant impediment to the operation of Foreign Invested
Enterprises.
Earnings and Distributions of the FIE's
The Wholly-Foreign Owned Enterprise laws provide for and guarantee the
distribution of profits to foreign investors in PRC Foreign Invested
Enterprises.
Article 19 of the PRC's Wholly Foreign Owned-Enterprise Law provides that
a foreign investor may remit abroad profits that are earned by a Foreign
Invested Enterprise, as well as other funds remaining after the enterprise is
liquidated.
Taxes
All of our income is generated in the PRC and is subject to a corporate
income tax rate of 33% (30% state income tax and 3% local income tax).
Because PRC business is a controlled foreign corporation, for U.S. federal
income tax purposes, we may be required to include it in our gross income for
U.S. tax purposes:
o Those companies' "Subpart F" income, which includes certain passive
income and income from certain transactions with related persons,
whether or not this income is distributed to it; and
o Increases in those companies' earnings invested in certain U.S.
property.
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Based on our current and expected income, assets and operations, we
believe that we will not experience significant U.S. federal income tax
consequences under the controlled foreign corporation rules.
Regulation of Hotel Room Rates
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.
Required Statutory Reserve Funds
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.
Although we do not intend to pay dividends, the requirements pertaining to
funding statutory reserves may limit our ability to pay dividends in the future.
Political and Trade Relations with the United States
Political and trade relations between the U.S. and the PRC government
within the past five years have been volatile and may continue to be in the
future. Major causes of this volatility include the U.S.'s considered revocation
of the PRC's Most Favored Nation trade status, illegal transshipments of
textiles from the PRC to the U.S., issues surrounding the sovereignty of Taiwan,
and the U.S.'s bombing of the PRC's embassy in Yugoslavia. While these factors
have had no direct connection to our operations, other on-going causes of
volatility, including the protection of intellectual property rights within the
PRC and sensitive technology transfer from the U.S. to the PRC have closer
potential connection to our operations. There can be no assurance that the
political and trade ramifications of these causes of volatility or the emergence
of new causes of volatility will not cause difficulties in our operations in the
PRC marketplace.
Economic Reform Issues
Although the majority of productive assets in the PRC are owned by the PRC
government, in the past several years the government has implemented economic
reform measures that emphasize decentralization and encourage private economic
activity. Because these economic reform measures may be inconsistent or
ineffectual, there are no assurances that:
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o We will be able to capitalize on economic reforms;
o The PRC government will continue its pursuit of economic reform
policies;
o The economic policies, even if pursued, will be successful;
o Economic policies will not be significantly altered from time to time;
and
o Business operations in the PRC will not become subject to the risk of
nationalization.
Since 1978, the PRC government has reformed its economic systems. Because
many reforms are unprecedented or experimental, they are expected to be refined
and improved. Other political, economic and social factors, such as political
changes, changes in the rates of economic growth, unemployment or inflation, or
in the disparities in per capita wealth between regions within the PRC, could
lead to further readjustment of the reform measures. This refining and
readjustment process may negatively affect our operations.
Recently, there have been indications that rates of in the PRC inflation
have increased. In response, the PRC government recently has taken measures to
curb this excessively expansive economy. These measures have included
devaluations of the PRC currency, the Renminbi, restrictions on the availability
of domestic credit, reducing the purchasing capability of certain of its
customers and limited re-centralization of the approval process for purchases of
some foreign products. These austerity measures alone may not succeed in slowing
down the economy's excessive expansion or control inflation, and may result in
severe dislocations in the PRC economy. The PRC may adopt additional measures to
further combat inflation, including the establishment of freezes or restraints
on certain projects or markets.
There can be no assurance that the reforms to the PRC's economic system
will continue or that we will not be adversely affected by changes in the PRC's
political, economic, and social conditions and by changes in policies of the
government, such as changes in laws and regulations, measures which may be
introduced to control inflation, changes in the rate or method of taxation,
imposition of additional restrictions on currency conversion and remittance
abroad, and reduction in tariff protection and other import restrictions.
General Information
Our employees are unionized and we believe that our relations with our
employees are good.
We believe our properties are adequately insured.
The cost of compliance with environmental laws in China has been, and is
not expected to be, material.
Our website is www.xintaohuayuan.com.
ITEM 1B. UNRESOLVED STAFF COMMENTS
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Not applicable.
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ITEM 2. PROPERTIES
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Our principal executive offices are located at 1# Dongfeng Road, Xi'an
Weiyang Tourism Development District, Xi'an, China.
See Item 1 of this report for information concerning our properties.
ITEM 3. LEGAL PROCEEDINGS
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We are not involved in any legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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None.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
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ISSUER PURCHASE OF EQUITY SECURITIES.
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On May 24, 2006 our common stock started trading on the OTC Bulletin Board
under the symbol "NYTN". The following shows the high and low prices for our
common stock for the periods indicated:
Quarter Ended High Low
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3/31/08 $7.50 $3.00
6/30/08 $3.00 $3.00
9/30/08 $3.00 $0.25
12/31/08 $0.25 $0.25
3/31/09 $0.05 $0.05
6/30/09 -- --
9/30/09 -- --
12/31/09 $1.00 $0.06
During the year ended December 31, 2009, only 3,800 of our shares traded
on the OTC Bulletin Board.
As of March 31, 2010 we had 18,727,327 outstanding shares of common stock
held by approximately 975 stockholders. All of our outstanding shares can be
sold pursuant to Rule 144 of the Securities and Exchange Commission.
Our common stock is subject to rules that regulate broker-dealer practices
in connection with transactions in "penny stocks." The Securities and Exchange
Commission has adopted regulations that define a "penny stock" to be any equity
security that has a market price (as defined) of less than $5.00 per share,
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subject to certain exceptions. For any transaction involving a penny stock,
unless exempt, the rules require the delivery by the broker-dealer, prior to the
transaction, of a disclosure schedule prepared by the SEC relating to the penny
stock market. In addition, the broker-dealer, subject to certain exceptions,
must make an individualized written suitability determination for the purchase
of a penny stock and receive the purchaser's written consent prior to the
transaction. The broker-dealer also must disclose the commissions payable to
both the broker-dealer and the registered representative, current quotations for
the securities and, if the broker-dealer is the sole market-maker, the
broker-dealer must disclose this fact and the broker-dealer's presumed control
over the market. Finally, monthly statements must be sent disclosing recent
price information for the penny stock held in the account and information on the
limited market in penny stocks. These requirements may severely limit the market
liquidity of our common stock and the ability of our stockholders to sell their
shares should a market develop.
Although we have paid dividends in the past, we currently intend to retain
any future earnings for use in our business and do not expect for the
foreseeable future to pay any dividends on any shares of common stock.
During the year ended December 31, 2009 we did not purchase any shares of
our common stock from third parties in a private transaction or as a result of
any purchases in the open market. None of our officers or directors, nor any of
our principal shareholders purchased any shares of our common stock, on our
behalf, from third parties in a private transaction or as a result of purchases
in the open market during the year ended December 31, 2009.
We are authorized to issue 10,000,000 shares of preferred stock, $.001 par
value, in one or more series with such designations, voting powers, if any,
preferences and relative, participating, optional or other special rights, and
such qualifications, limitations and restrictions, as are determined by
resolution of our Board of Directors. The issuance of preferred stock may have
the effect of delaying, deferring or preventing a change in control of our
company without further action by stockholders and could adversely affect the
rights and powers, including voting rights, of the holders of common stock. In
certain circumstances, the issuance of preferred stock could depress the market
price of the common stock. As of March 25, 2009 we had not issued any shares of
Preferred Stock.
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
Not applicable.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
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RESULTS OF OPERATIONS
---------------------
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
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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
Year Ended December 31, 2009
- ----------------------------
Material changes of items in our Statement of Operations for the year
ended December 31, 2009, as compared to the year ended December 31, 2008, are
discussed below:
Increase (I)
Item or Decrease (D) Reason
- ---- --------------- ------
Foreign Currency
Translation Gain (loss) D Change in currency exchange rates.
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Liquidity and Capital Resources
Our material sources and (uses) of cash during the year ended December 31, 2009
are shown in our Statement of Cash Flows which are part of the financial
statements included with this report.
As discussed in Item 1 of this report, 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 March 15,
2010 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 March 15, 2010 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 December 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
"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.
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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
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.
13
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET DATA
----------------------------------------------------------
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
See the financial statements attached to and made a part of this report.
14
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURES
----------------------
Effective February 14, 2008 we hired Wen Jiang & Company PC as our
independent registered public accounting firm.
Wen Jiang & Company did not provide us with advice regarding the
application of accounting principles to a specified transaction, either
completed or proposed, or the type of audit opinion that might be rendered on
our financial statements, that was an important factor considered by us in
reaching a decision as to an accounting, auditing or financial reporting issue.
During the two most recent fiscal years and subsequent interim period ended
February 14, 2008, we did not consult with Wen Jiang & Company regarding any
matter that was the subject of a disagreement or a reportable event as defined
in the regulations of the Securities and Exchange Commission.
Effective February 21, 2008 Wen Jiang & Company resigned as our
independent certified public accountants. Since Wen Jiang & Company was retained
on February 14, 2008, Wen Jiang & Company did not audit our financial
statements. During our two most recent fiscal years and subsequent interim
period ended February 21, 2008 there were no disagreements with Wen Jiang &
Company on any matter of accounting principles or practices, financial statement
disclosure or auditing scope or procedures, which disagreements, if not resolved
to the satisfaction of Wen Jiang & Company, would have caused them to make
reference to such disagreements in any report they may have issued on our
financial statements.
Effective February 29, 2008 we hired Kabani & Company, Inc. as our
independent registered public accounting firm.
Kabani & Company did not provide us with advice regarding the application
of accounting principles to a specified transaction, either completed or
proposed, or the type of audit opinion that might be rendered on our financial
statements, that was an important factor considered by us in reaching a decision
as to an accounting, auditing or financial reporting issue. During the two most
recent fiscal years and subsequent interim period ended February 29, 2008, we
did not consult with Kabani & Company regarding any matter that was the subject
of a disagreement or a reportable event as defined in the regulations of the
Securities and Exchange Commission.
The change in our independent registered public accountants was
recommended and approved by our directors and our audit committee.
ITEM 9A. CONTROLS AND PROCEDURES
-----------------------
Cai Danmei, our Chief Executive and Principal Financial Officer, has
evaluated the effectiveness of our disclosure controls and procedures as of the
end of the period covered by this report and in her opinion our disclosure
controls and procedures are effective.
15
Management's Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate
internal control over financial reporting and for the assessment of the
effectiveness of internal control over financial reporting. As defined by the
Securities and Exchange Commission, internal control over financial reporting is
a process designed by, or under the supervision of our principal executive
officer and principal financial officer and implemented by our Board of
Directors, management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of our
financial statements in accordance with U.S. generally accepted accounting
principles.
Our internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect our transactions and dispositions of our
assets; (2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of our financial statements in accordance with
U.S. generally accepted accounting principles, and that our receipts and
expenditures are being made only in accordance with authorizations of our
management and directors; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use or disposition
of our assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
In connection with the preparation of our annual financial statements,
management has undertaken an assessment of the effectiveness of our internal
control over financial reporting as of December 31, 2009, based on criteria
established in Internal Control - Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission, or the COSO Framework.
Management's assessment included an evaluation of the design of our internal
control over financial reporting and testing of the operational effectiveness of
those controls.
Based on this evaluation, management has concluded that our internal
control over financial reporting was effective as of December 31, 2009.
There have been no changes in our internal controls over financial
reporting that occurred during the quarter ended December 31, 2009 that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting. As a result, no corrective actions with regard
to significant deficiencies or material weakness in our internal controls were
required.
This annual report does not include an attestation report of our
independent registered public accounting firm regarding internal control over
financial reporting. Management's report was not subject to attestation by our
independent registered public accounting firm pursuant to temporary rules of the
16
SEC that permit us to provide only management's report on internal control in
this annual report.
ITEM 9B. OTHER INFORMATION
-----------------
Not applicable
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
------------------------------------------------------
The names, ages and positions held by our executive officers and directors
are set forth below.
Officer/Director
Name Age Position Since
- ---- --- -------- ----------------
Chen Jingmin 56 Chairman of the Board of Directors 1997
Cai Danmei 48 Chief Executive Officer, Chief
Financial Officer and a Director 1997
Liu Bo 32 Secretary and a Director 2004
Hu Yangxiong 47 Director 2002
Yang Erping 54 Director 2004
Zhao Jianwen 50 Director 2004
Wang Changzhu 53 Director 2004
Directors serve in such capacity until the next annual meeting of our
stockholders and until their successors have been elected and qualified. Our
officers serve at the discretion of our Board of Directors, until their death,
or until they resign or have been removed from office.
Chen Jingmin is our founder and has been the chairman of our board of
directors since 1997. From 1993 to 1997 he was the General Manager of Shaanxi
Wenhao Zaliang Shifu, Ltd. with which we currently have a management agreement.
Cai Danmei has been our Chief Executive Officer and Chief Financial Officer
since our inception in 1997. Since 1993 she has also been an executive officer
of Shaanxi Wenhao Zaliang Shifu, Ltd. with which we have a management agreement.
Liu Bo graduated from Shaanxi Finance and Economics College in 1999. Ms.
Liu Bo was the Corporate Secretary and a Director of Jinhua Group, Ltd. between
2000 and 2004. Since 2004 she has been our Corporate Secretary and a Director.
Hu Yangxiong was employed by Shaanxi Aviation Industry Bureau, a government
agency, as a Senior Accountant and previously as Vice President of the
accounting office from 1991 to 2002. He is a Certified Public Accountant and
since 2002 has acted as an accounting consultant.
17
Yang Erping was Secretary to the Governor of Shaanxi Province from 1995 to
2000. From 2000 to 2003 he was the Chief Information Officer for the Shaanxi
Province Government and from 2003 to the present he has been a Vice Professor of
the Xi'an Finance Institute Management School.
Zhao Jianwen has been the Chief Secretary of the Shaanxi Folk Artist
Association since 1981.
Wang Changzhu has been the Senior Editor and a Director of Shaanxi
Television station since 1983.
Our Audit Committee is composed of Messrs. Hu (Chairman), Yang and Zhao.
Mr. Hu is the financial expert on our Audit Committee. Our Compensation
Committee is comprised of Messrs. Yang (Chairman), Zhao and Wang. All of these
directors are independent directors as defined in Section 803 of the listing
standards of the NYSE Amex.
Hu Yangxiong, Yang Erping, Zhao Jianwen and Wang Changzhu are independent
directors as that term is defined in Section 803 of the listing standards of the
NYSE Amex.
We have not adopted a Code of Ethics which is applicable to our principal
executive, financial, and accounting officers and persons performing similar
functions.
Compensation Committee Interlocks and Insider Participation
- -----------------------------------------------------------
Yang Erping, Zhao Jianwen and Wang Changzhu act as our compensation
committee. During the year ended December 31, 2009, Yang Erping, Zhao Jianwen
and Wang Changzhu participated in deliberations concerning executive officer
compensation.
During the year ended December 31, 2009, Yang Erping, Zhao Jianwen and
Wang Changzhu were not members of the compensation committee or a director of
another entity, which other entity had one of its executive officers serving as
one of our directors or as a member of our compensation committee.
ITEM 11. EXECUTIVE COMPENSATION
----------------------
The following table sets forth in summary form the compensation received
by (i) our Chief Executive Officer and (ii) by our two other executive officers
during the three years ended December 31, 2009.
18
Summary Compensation Table
All
Other
Name and Restricted Annual
Principal Stock Option Compen-
Position Year Salary Bonus Awards Awards sation Total
- --------------------------------------------------------------------------------
Chen Jingmin, 2009 $ 7,339 -- -- -- -- $ 7,339
Chairman 2008 $ 7,339 -- -- -- -- $ 7,339
2007 -- -- -- -- -- --
Cai Danmei, 2009 $ 6,935 -- -- -- -- $ 6,935
Chief Executive 2008 $ 6,935 -- -- -- -- $ 6,935
and Financial 2007 $10,500 -- -- -- -- $10,500
Officer
Liu Bo, 2009 $ 3,512 -- -- -- -- $ 3,512
Secretary 2008 $ 3,512 -- -- -- -- $ 3,512
2007 $ 2,900 -- -- -- -- $ 2,900
During the year ended December 31, 2009 we did not compensate any person
for serving as a director.
We have not granted or sold any options for the purchase of our common
stock.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
The following table shows, as of March 31, 2010, the common stock ownership
of (i) each person known by us to be the beneficial owner of five percent or
more of our common stock, (ii) each director individually and (iii) all officers
and directors as a group. Each person has sole voting and investment power with
respect to the shares of common stock shown, and all ownership is of record and
beneficial. The address of each owner is in care of us at 1# Dongfeng Road,
Xi'an Weiyang Tourism Development District, Xi'an, China.
Number Percent
Name of Shares of Class
---- --------- --------
Chen Jingmin 3,365,016 (1) 18%
Cai Danmei 52,632 .2%
Liu Bo -- --
Hu Yangxiong -- --
Yang Erping -- --
Zhao Jianwen -- --
Wang Changzhu -- --
Rising Star Holdings Investment
Corporation 1,699,999 9.1%
19
All officers and directors
as a group (7 persons) 3,417,648 18.2%
(1) Includes shares owned by Shaanxi New Taohuyuan Economy Trade Co., Ltd.
(2,204,025) Shaanxi Kangze Economic Trade Ltd. (541,796), Shaanxi Wenhao
Restaurant Ltd. (309,598), Shaanxi Taohuayuan Real Estate Development Ltd.
(77,399) and Shaanxi Traditional Decoration Ltd. (77,399) Chen Jingmin
controls these companies and may be considered the beneficial owner of their
shares.
The address of each shareholder listed above, with the exception of Rising
Star Holdings Investment Corporation, is in care of us at 1# Dongfeng Road,
Xi'an Weiyang Tourism Development District, Xi'an, China. The address of Rising
Star Holdings Investment Corporation is 16th Floor, Prince's Building, 10 Chater
Road, Hong Kong.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, DIRECTOR INDEPENDENCE
---------------------------------------------------------------------
On December 6, 2004 we merged Shaanxi New Taohuayuan Culture Tourism Co.,
Ltd., a PRC company organized in September 1997, into us. In connection with
this merger we issued 17,027,328 shares of our common stock to the shareholders
of Shaanxi New Taohuayuan Culture Tourism Co., Ltd. The purpose of the merger
was to redomicile us as a Nevada corporation. In correction with the merger, the
following members of our management and affiliates received shares of our common
stock:
o Chen Jingmin, 154,799 shares;
o Cai Danmei, 52,632 shares; and
o The following companies which are controlled by Chen Jingmin:
Shaanxi New Taohuayuan Economy Trade Co., Ltd., 2,204,025 shares.
Shaanxi Kangze Economic and Trade Ltd.; 541,796 shares
Shanaxi Wenhao Restaurant Ltd.; 309,598 shares
Shaanxi Taohuayuan Real Estate Development Ltd.; 77,399 shares, and
Shaanxi Traditional Decoration Ltd.; 77,399 shares
We currently receive management fees from Shaanxi New Taohuayuan Economy
Trade Co., Ltd., our largest stockholder, for managing its DongJin Taoyuan
Villas and from Shaanxi Wenhao Zaliang Shifu, Ltd., for managing its three
restaurants. Shaanxi New Taohuayuan Economy Trade Co., Ltd. and Shaanxi Wenhao
Zaliang Shifu, Ltd. are controlled by Chen Jingmin, our chairman. Details
regarding our management agreements, which were not negotiated at arms length,
with respect to these properties can be found in Item 1 of this report.
20
As of December 31, 2009 Shaanxi New Taohuayuan Economy Trade Co. Ltd. owed
$168,718 for management fees. As of December 31, 2009 Shaanxi Wenhao Zaliang
Shifu, Ltd. owed us $381,411 for management fees.
In January 2007 we sold 1,699,999 shares of our common stock to Rising Star
Holdings Investment Corporation at a price of $0.05 per share.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
--------------------------------------
Kabani & Company audited our financial statements for the fiscal years
ended December 31, 2009 and 2008. The following table shows the fees we were
billed during the years ended December 31, 2009 and 2008 by Kabani & Company.
2009 2008
---- ----
Audit Fees $87,500 $135,000
Audit-Related Fees -- --
Financial Information Systems -- --
Design and Implementation Fees -- --
Tax Fees -- --
All Other Fees -- --
Audit fees represent amounts billed for the audit of our annual financial
statements and the reviews of the financial statements included in our Forms
10-Q for the fiscal year. Before we engaged Kabani & Company to render audit
services, the engagement was approved by our Directors.
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES
----------------------------------------
Exhibit
Number Exhibit Name
- ------- ------------
3.1 Certificate of Incorporation *
3.2 Bylaws *
10.1 Hotel Management Agreement with Shaanxi New Taohuayuan
Economy Trade Co., Ltd. *
10.2 Restaurant Management Agreement with Shaanxi Wenhao Zaliang
Shifu, Ltd. *
10.3 Migratory Merger Agreement with Shaanxi New Taohuayuan
Culture Tourism Co., Ltd. *
21
10.4 Articles of Merger *
10.5 Employment Agreement with Cai Danmei *
10.6 Employment Agreement with Mr. Chen *
10.7 Employment Agreement with Liu Bo *
10.8 Land Use Agreement - Taohuayuan Inn *
10.9 Land Use Agreement - Lantian project *
10.10 Land Use Agreement - New Hainan Hotel and Resort *
10.11 Tax Agreement - *
21. Subsidiaries *
31. Rule 13a-14(a) Certifications
32. Section 1350 Certifications
*Incorporated by reference to the same exhibit filed with our Registration
Statement on Form SB-2 (SEC File # 333-121187).
22
TAOHUAYUAN CULTURE TOURISM COMPANY LIMIITED AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
TABLE OF CONTENTS
Report of Independent Registered Public Accounting Firm................ 1
Consolidated Balance Sheets as of December 31, 2009 and 2008............2
Consolidated Statements of Income.......................................3
for the years ended December 31, 2009 and 2008
Consolidated Statements of Cash Flows...................................4
for the years ended December 31, 2009 and 2008
Consolidated Statement of Stockholders' Equity......................... 5
for the years ended December 31, 2009 and 2008
Notes to consolidated financial statements ...........................6-16
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders of
New Taohuayuan Culture Tourism Company Limited and Subsidiary,
We have audited the accompanying consolidated balance sheets of New Taohuayuan
Culture Tourism Company Limited and subsidiary as of December 31, 2009 and 208,
and the related consolidated statements of income, stockholders' equity, and
cash flows for the years ended December 31, 2009 and 2008. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of New Taohuayuan
Culture Tourism Company Limited and subsidiary as of December 31, 2009 and 2008,
and the results of their operations and cash flows for the years ended December
31, 2009 and 2008, in conformity with U.S. generally accepted accounting
principles.
The company has deposited amounts with the local government, for land use rights
amounting $17,580,099 and $17,588,860 (RMB 120,000,000) as of December 31, 2009
and 2008, 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 $21,975,124 (RMB
150,000,000). As of December 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. The deposit for land use right was guaranteed by the
asset of the major shareholder company.
/s/ Kabani & Company, Inc.
Certified Public Accountants
Los Angeles, California
March 31, 2010
1
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2009 AND 2008
2009 2008
-------------- --------------
ASSETS
Current assets
Cash and cash equivalents $ 145,115 $ 89,252
Accounts receivable, net 32,656 39,657
Inventories 69,599 77,147
Prepaid expenses and other current assets 195 2,501
Due from related parties 570,967 566,748
-------------- --------------
Total Current Assets 818,532 775,305
Property & equipment, net 6,126,079 6,489,210
Construction-in- progress 17,570,430 13,134,481
Land use right, net 2,503,539 2,566,063
Deposit for land use right 17,580,099 17,588,860
-------------- --------------
Total assets $ 44,598,680 $ 40,553,918
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 744,762 $ 627,391
Deferred revenue 188,273 60,217
Taxes payable 6,517,543 5,461,359
-------------- --------------
Total Current Liabilities 7,450,578 6,148,967
Stockholders' equity
Preferred stock, $.001 par value,
10,000,000 shares authorized, none
issued and outstanding - -
Common stock, $.001 par value,
50,000,000 shares authorized, 18,727,327
issued and outstanding as of
December 31,2009 and 2008 18,727 18,727
Additional paid in capital 15,855,727 15,855,727
Statutory reserve 2,542,355 2,285,706
Other comprehensive income 5,481,382 5,304,720
Retained earnings 13,249,911 10,940,071
-------------- --------------
Total stockholders' equity 37,148,102 34,404,951
-------------- --------------
Total liabilities and stockholders' equity $ 44,598,680 $ 40,553,918
============== ==============
The accompanying notes are an integral part of these consolidated financial
statements.
1
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
2009 2008
---- ----
Net revenue
Catering and hotel related services income $ 4,947,307 $ 5,090,072
Management fee income 2,020,279 1,986,257
------------ ------------
Total net revenue 6,967,586 7,076,329
Cost of revenue 1,737,484 1,784,899
------------ ------------
Gross profit 5,230,102 5,291,431
Operating expenses
General and administrative expenses 1,365,944 1,332,783
Depreciation and amortization 429,614 433,977
Total operating expenses 1,795,558 1,766,760
------------ ------------
Income from operations 3,434,545 3,524,670
Other Income (Expense)
Interest income 524 1,183
Other income, net (13,084) 31,548
Total other income (expense) (12,560) 32,731
------------ ------------
Income before income taxes 3,421,985 3,557,401
Provision for income taxes 855,496 889,350
------------ ------------
Net income 2,566,489 2,668,051
Other comprehensive item:
Foreign currency translation gain (loss) 176,662 2,097,133
Net comprehensive income $ 2,743,151 $ 4,765,184
============ ============
Earning per share:
Basic & diluted earning per share $ 0.14 $ 0.14
============ ============
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 consolidated financial
statements.
2
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2009 AND 2008
2009 2008
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,566,489 $ 2,668,051
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 429,614 433,977
Bad debt expense 40,813 30,257
(Increase) / decrease in current assets:
Accounts receivables (31,357) (49,218)
Inventory 7,504 57,763
Other receivables (909) (1,423)
Prepaid expenses and other current assets 732 (629)
Increase/(decrease) in current liabilities:
Accounts payable and accrued expenses 117,600 95,549
Taxes payable 1,058,154 1,089,600
Deferred revenue 127,995 4,430
-------------- --------------
Net cash provided by operating activities 4,316,635 4,328,358
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Payment for construction in progress (4,439,344) (4,556,877)
Purchase of fixed assets (8,768) -
Advances to related parties (4,497) (40,333)
-------------- --------------
Net cash used in investing activities (4,452,610) (4,597,210)
-------------- --------------
Effect of exchange rate changes on cash
and cash equivalents 191,839 3,885
Net Increase/ (decrease) in cash and cash
equivalents 55,863 43,572
Cash and cash equivalents, beginning balance 89,252 45,680
-------------- --------------
Cash and cash equivalents, ending balance $ 145,115 $ 89,252
============== =============
SUPPLEMENTAL NONCASH FINANCIAL DISCLOSURES:
Cash paid during the year for:
Income tax payments $ - $ -
============== =============
Interest payments $ - $ -
============== =============
The accompanying notes are an integral part of these consolidated financial
statements.
3
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
Additional Other Total
Common Stock Paid Comprehensive Statutory Retained Stockholders'
Shares Amount in Capital Income Reserve Earnings Equity
----------- ---------- ----------- ------------- ----------- ----------- -------------
Balance as of
December 31, 2007 18,727,327 18,727 15,855,727 3,207,587 2,018,901 8,538,825 29,639,767
Foreign currency
translation gain 2,097,133 2,097,133
Transfer to statutory
reserve 266,805 (266,805) -
Net income for the year
ended December 31, 2008 2,668,051 2,668,051
----------- ---------- ----------- ------------- ----------- ----------- -------------
Balance as of December
31, 2008 18,727,327 18,727 15,855,727 5,304,720 2,285,706 10,940,071 34,404,951
Foreign currency
translation loss 176,662 176,662
Transfer to statutory
reserve 256,649 (256,649) -
Net income for the year
ended December 31, 2009 2,566,489 2,566,489
----------- ---------- ----------- ------------- ----------- ----------- -------------
Balance as of
December 31, 2009 18,727,327 $ 18,727 $15,855,727 $ 5,481,382 $2,542,355 $13,249,911 $ 37,148,102
=========== ========== =========== ============= =========== =========== =============
The accompanying notes are an integral part of these consolidated financial
statements.
4
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
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.
Shanxi New Taohuayuan Culture Tourism Company Limited ("Shanxi NTHY") was
incorporated in the People's Republic of China ("PRC") on August 3, 1997 as
a limited liability company. Shanxi 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 Shanxi NTHY on November 5, 2004, the Company acquired Shanxi NTHY by
issuing 17,027,328 shares of its common stock to the original shareholders
of Shanxi NTHY in exchange for 100% of their membership interests (the
"Merger"). As a result, the controlling member of Shanxi NTHY has effective
and actual operating control of the Company. The Merger was approved by the
Shanxi Ministry of Commerce on November 24, 2004. Since then, Shanxi 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 Shanxi 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
Basis of Presentation
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United
States of America. The Company's functional currency is the Chinese
Renminbi (CNY); however the accompanying consolidated financial statements
have been translated and presented in United States Dollars (USD).
Foreign currency transactions and comprehensive income (loss)
As of December 31, 2009, the accounts of Shanxi 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
(ASC830), "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 years ended December 31, 2009 and 2008 the transactions of
Shanxi 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.
5
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
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
Shanxi NTHY, collectively referred to within as the Company. All material
inter-company accounts, transactions and profits have been eliminated in
consolidation.
In January 2003, the Financial Accounting Standard Board issued FASB
Interpretation No. 46 (FIN) 46, "Consolidation of Variable Interest
Entities." This interpretation of Accounting Research Bulletin 51,
"Consolidated Financial Statements," addresses consolidation by business
enterprises of variable interest entities, in which an enterprise absorbs a
majority of the entity's expected losses, receives a majority of the
entity's expected residual returns, or both, as a result of ownership,
contractual or other financial interests in the entity. The interpretation
requires that if a business enterprise has a controlling financial interest
in a variable interest entity, the assets, liabilities, and results of the
activities of the variable interest entity must be included in the
consolidated financial statements with those of the business enterprise.
This interpretation applies immediately to variable interest entities
created after January 31, 2003 and to variable interest entities in which
and enterprise obtains an interest after that date. FIN 46 initially
applied to preexisting variable interest entities no later than the
beginning of the first interim reporting period beginning after June 15,
2003. However, the implementation deadline was delayed by the FASB to
periods beginning after December 15, 2004 for nonpublic entities and the
FASB issued a revised "FIN 46R" in December 2003.
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
collectability is reasonably assured. Such service revenues are recognized
net of discounts.
The Company also generates management fee income in accordance with Shanxi
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.
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.
6
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
Income Taxes
------------
The Company utilizes SFAS No. 109 (ASC740), "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 of
China 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 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.
7
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
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.
The Company may purchase foreign exchange for settlement of "current
account transactions", including payment of dividends to the Company's
shareholders, without the approval of the State Administration for Foreign
Exchange. The Company may also retain foreign exchange in the Company's
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 the Company's ability to purchase and
retain foreign currencies in the future.
Since a significant amount of the Company's future revenues will be
denominated in Renminbi, the existing and any future restrictions on
currency exchange may limit the Company's ability to use revenues generated
in Renminbi to fund any business activities outside China or fund
expenditures denominated in foreign currencies.
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 $100,776
and $50,599 at December 31, 2009 and 2008 respectively.
Inventory
---------
Inventory is valued at the lower of cost or market. Inventory includes gift
cards, raw materials and consumables.
8
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
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, 2005, the Company adopted Statement of Financial
Accounting Standards No. 144 (ASC 360), "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS 144") (ASC 360), which addresses
financial accounting and reporting for the impairment or disposal of
long-lived assets and supersedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of," and the accounting and reporting provisions of APB Opinion No. 30,
"Reporting the Results of Operations for a Disposal of a Segment of a
Business." The Company periodically evaluates the carrying value of
long-lived assets to be held and used in accordance with SFAS 144 (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.
9
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
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) (ASC260), "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 (ASC260). 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
$0.14 for the years ended December 31, 2009 and 2008 respectively.
Recent Accounting Pronouncements
--------------------------------
In September 2009, the Financial Accounting Standards Board ("FASB") issued
guidance related to revenue recognition for multiple element deliverables
which eliminates the requirement that all undelivered elements must have
objective and reliable evidence of fair value before a company can
recognize the portion of the consideration that is attributable to items
that already have been delivered. Under the new guidance, the relative
selling price method is required to be used in allocating consideration
between deliverables and the residual value method will no longer be
permitted. This guidance is effective prospectively for revenue
arrangements entered into or materially modified in 2011 although early
adoption is permitted. A company may elect, but will not be required, to
adopt the amendments retrospectively for all prior periods. The Company is
currently evaluating this guidance and has not yet determined the impact,
if any, that it will have on the consolidated financial statements.
In June 2009, the FASB issued ASC 105 (previously SFAS No. 168, "The FASB
Accounting Standards Codification and the Hierarchy of Generally Accepted
Accounting Principles ("GAAP")" - a replacement of FASB Statement No. 162),
which will become the source of authoritative accounting principles
generally accepted in the United States recognized by the FASB to be
applied to nongovernmental entities.
In June 2009, the FASB issued ASC 855 (previously SFAS No. 165, "Subsequent
Events"), which establishes general standards of accounting for and
disclosures of events that occur after the balance sheet date but before
the financial statements are issued or available to be issued. It is
effective for interim and annual periods ending after June 15, 2009. There
was no material impact upon the adoption of this standard on the Company's
consolidated financial statements.
In June 2009, the FASB issued ASC 860 (previously SFAS No. 166, "Accounting
for Transfers of Financial Assets") , 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 is effective for fiscal years beginning after November 15, 2009. The
Company does not believe this pronouncement will impact its financial
statements.
In June 2009, the FASB issued ASC 810 (previously SFAS No. 167) for
determining whether to consolidate a variable interest entity. These
amended standards eliminate a mandatory quantitative approach to determine
whether a variable interest gives the entity a controlling financial
interest in a variable interest entity in favor of a qualitatively focused
analysis, and require an ongoing reassessment of whether an entity is the
primary beneficiary. These amended standards are effective for us beginning
in the first quarter of fiscal year 2010 and we are currently evaluating
the impact that adoption will have on our consolidated financial
statements.
10
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
In August 2009, the FASB issued Accounting Standards Update ("ASU")
2009-05, which amends ASC Topic 820, Measuring Liabilities at Fair Value,
which provides additional guidance on the measurement of liabilities at
fair value. These amended standards clarify that in circumstances in which
a quoted price in an active market for the identical liability is not
available, we are required to use the quoted price of the identical
liability when traded as an asset, quoted prices for similar liabilities,
or quoted prices for similar liabilities when traded as assets. If these
quoted prices are not available, we are required to use another valuation
technique, such as an income approach or a market approach. These amended
standards became effective for us beginning in the fourth quarter of fiscal
year 2009 and are not expected to have a significant impact on our
consolidated financial statements.
Reclassifications
-----------------
Certain reclassifications have been made in prior years' financial
statements to conform to classifications used in the current year.
Note 3 - DEPOSIT FOR LAND USE RIGHT
The company has deposited amounts with the local government, for land use
rights amounting $17,580,099 and $17,588,860 (RMB 120,000,000) as of
December 31, 2009 and 2008, for obtaining land use rights in PRC. The
Company intends to utilize the land for the development of new project. To
obtain the land use rights from the Government, the Company is required to
pay the demolish fee associated with the obtaining of the land use rights
amounting $21,975,124 (RMB 150,000,000). As of December 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. The
deposit for land use rights was guaranteed by the assets of the
shareholder.
Note 4 - PROPERTY AND EQUIPMENT
As of December 31, 2009 and 2008, the property and equipment of the Company
consisted of the following:
2009 2008
-----------------------------
Buildings $ 7,216,389 $ 7,219,985
Infrastructure and Leasehold
Improvement 1,784,416 1,785,306
Furniture and fixtures 1,655,996 1,641,140
Equipments 1,971,673 1,979,558
Automobiles 313,516 313,672
-----------------------------
12,941,990 12,939,661
Accumulated Depreciation (6,815,911) (6,450,451)
-----------------------------
Property and Equipment, net $ 6,126,079 $ 6,489,210
=============================
The Company had depreciation expenses of $368,411 and $367,503 for the
years ended December 31, 2009 and 2008 respectively. Parts of depreciation
expenses amounted of $314,482 and $308,539 in 2009 and 2008 have been
presented as cost of sales.
Note 5 - LAND USE RIGHT
According to the laws of China, the State 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 December 31, 2009 and 2008, the land use rights of the Company
consisted of the following:
11
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
2009 2008
---- ----
Land use rights $ 3,341,425 $ 3,343,090
Accumulated amortization (837,886) (777,027)
------------ ------------
Land use rights, net $ 2,503,539 $ 2,566,063
------------ ------------
The Company had amortization expenses of $61,202 and $66,474 as of December
31, 2009 and 2008. The amortization expenses for land use right for next
five years after December 31, 2009 are as follows:
2010 $ 61,202
2011 61,202
2012 61,202
2013 61,202
2014 61,202
After 2,197,529
--------------
Total $ 2,503,539
==============
Note 6 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
The Company's accounts payable and accrued expenses as of December 31, 2009
and 2008 are summarized as follows:
2009 2008
---- ----
Accounts payables $ 274,171 $ 141,761
Other payables 364,752 372,014
Accrued payroll 40,998 41,019
Accrued expenses 64,841 72,597
----------- -----------
Total accounts payables and $744,762 $ 627,391
accrued expenses =========== ===========
Note 7 - DEFERRED REVENUE
The company has recorded deferred revenue of $188,273 and $60,217 as of
December 31, 2009 and 2008. Deferred revenue represents advances from
customers for using the resort facilities within the next twelve month
period.
Note 8- TAX PAYABLES
As of December 31, 2009 and 2008, tax payables are summarized as follows:
2009 2008
-------------- -------------
Income tax payable $ 5,286,176 $ 4,432,281
Business tax payable 1,101,154 904,104
VAT payable 42 109
Other taxes payable 130,171 124,865
------------- -------------
Tax payable $ 6,517,543 $ 5,461,359
============== =============
12
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
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 December 31, 2009. Accordingly, the Company
has no net deferred tax assets.
The provision for income taxes consists of the following for the years
ended December 31, 2009 and 2008:
2009 2008
US Current Income Tax
Expense (Benefit)
----------------------------------------------------
Federal $ - $ -
----------------------------------------------------
State - -
----------------------------------------------------
- -
----------------------------------------------------
PRC Current Income 855,496 889,350
Expense (Benefit)
----------------------------------------------------
Total Provision for $ 855,496 $ 889,350
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:
-------------------------------------------------------------
2009 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 December 31, 2009, the Company in the United States had approximately
$1,205,880 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
December 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 December 31, 2009 and
2008.
------------------------------------------------------
2009 2008
------------------------------------------------------
Net operation loss carry $ 1,205,880 $1,075,040
forward
------------------------------------------------------
Total deferred tax assets 409,999 365,514
------------------------------------------------------
Less: valuation allowance (409,999) (365,514)
------------------------------------------------------
Net deferred tax assets $ - $ -
------------------------------------------------------
13
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
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 December 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
December 31, 2009 and 2008.
Note 10 - MANAGEMENT FEE AGREEMENTS
The Company entered into five management agreements with Shanxi New
Taohuayuan Economy Trade Company Limited and Shanxi Wenhao Group and its
subsidiary on various time for a period of five years. Shanxi New
Taohuayuan Economy Trade Company Limited and Shanxi Wenhao Group and its
subsidiary are related parties. The annual management fees are fixed at
approximately $2,020,279 (RMB13,800,000). For the year ended December 31,
2009 and 2008, the Company earned $2,020,279 and $1,986,257 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:
Dongjin Taoyuan Co., Limited - a stockholder of the Company in which the
CEO has control and a beneficial interest.
Shanxi Wenhao Zaliang Shifu Co., Limited ("Wenhao Group") - a stockholder
of the Company in which the CEO has control and a financial interest.
Shanxi Xianyong Luye Developing Co., Limited - a stockholder of the Company
in which the CEO has control and a beneficial interest.
The Company as of December 31, 2009 had receivable $169,321 from Shanxi
NTHY - Dongjing Taoyuan Co. Ltd. $380,886 from the Wenhao Group, $20,760
from Shanxi 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.
14
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
The Company as of December 31, 2008 had receivable $128,460 from Shanxi
NTHY - Dongjing Taoyuan Co., $381,785 from the Wenhao Group, and $56,503
from Shanxi 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 December 31, 2009 and 2008, there were no related parties' payables.
Note 12 -- COMMITMENTS
Following are some of the significant commitments as of December 31, 2009
and 2008:
1. Management Agreements with Shanxi New Taohuayuan Tourism & Trading Co.
Ltd. - Dongjin Taoyuan Branch and Shanxi Wenhao Taoyuan Nanlu Branch
On January 15, 2004 the Company signed two five-year agreements with Shanxi
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 year ended December 31, 2009, the management fees
earned amounting to $512,393 and $512,393 respectively based upon the
agreements.
2. Management Agreements with Shanxi 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
Shanxi 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 year ended December
31, 2009, the management fees earned amounting $527,032, $263,516 and
$204,957 respectively based upon the agreements.
3. New Taohuayuan Decoration Project agreements with Shanxi Traditional
Decoration Co., Ltd.
On Mar. 15, 2006, the company signed a decoration agreement with Shanxi
Traditional Decoration Co. Ltd for company's Decoration Project. The
company hired the Shanxi 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 December 31, 2009, the Company has paid $3,494,045 to
the said contractor included in construction in progress.
15
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
4. Lantian Xintianyou Garden Green Project Agreement with Shanxi Qinghua
Green Project Co.,Ltd.
On May 15, 2007, the company signed an agreement with Shanxi Qinghua Green
Co. Ltd for the afforesting project of Lantian Xintianyou Garden Green. The
company hired Shanxi 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, Shanxi 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 December 31, 2009, the Company has
paid $14,076,386 to the said contractor included in construction in
progress.
5. Lantian Xintianyou Garden Project
The Company entered an agreement with Lantian County, Xian City, Shanxi
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 $17,580,099 (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;
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 $256,649
and $266,805 statutory fund for the years ended December 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 December 31, 2009 and 2008.
16
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
Note 14 - 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 December 31, 2009, the consulting company has not sold any
of these shares to the Company.
Note 15 - OTHER COMPREHENSIVE INCOME
Balances of related after-tax components comprising accumulated other
comprehensive income (loss), included in stockholders' equity, as of
December 31, 2009 and 2008 are as follows:
Foreign Currency
Translation Adjustment
-----------------------
Balance at December 31, 2007 $ 3,207,587
Change in 2008 2,097,133
-----------------------
Balance at December 31, 2008 $ 5,304,720
Change in 2009 176,662
-----------------------
Balance at December 31, 2009 $ 5,481,382
=======================
Note 16- 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:
17
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2009
For the years ended December 31,
2009 2008
Revenues
Resort income from unaffiliated customers $ 4,947,307 $ 5,090,072
Management fee income from affiliated
customers 2,020,279 1,986,257
------------- -------------
Consolidated $ 6,967,586 $ 7,076,329
============= =============
Operating income
Resort income $ 1,526,261 $ 2,573,897
Management fee income 2,020,279 1,986,257
Corporation (1) (111,995) (1,035,484)
------------- -------------
Consolidated $ 3,434,545 $ 3,524,670
============= =============
Net income before income taxes
Resort income $ 1,513,701 $ 2,606,628
Management fee income 2,020,279 1,986,257
Corporation (1) (111,995) (1,035,484)
------------- -------------
Consolidated $ 3,421,985 $ 3,557,401
============= =============
Identifiable assets:
Resort income $ 27,028,250 $ 27,419,437
Corporation (1) 17,570,430 13,134,481
------------- -------------
Consolidated $ 44,598,680 $ 40,553,918
============= =============
Depreciation and amortization:
Resort income $ 429,614 $ 433,977
============= =============
Capital expenditures:
Resort income $ 8,768 $ -
Corporation (1) 4,439,344 4,556,877
------------- -------------
Consolidated 4,448,112 $ 4,556,877
============= =============
(1). Unallocated income (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
SIGNATURES
In accordance with Section 13 or 15(a) of the Exchange Act, the Registrant
has caused this Report to be signed on its behalf by the undersigned, thereunto
duly authorized on the 9th day of April 2010.
NEW TAOHUAYUAN CULTURE TOURISM CO., LTD.
By: /s/ Cai Danmei
-----------------------------------------
Cai Danmei, Principal Executive, Financial
and Accounting Officer
Pursuant to the requirements of the Securities Act of l934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Chen Jingmin Director April 9, 2010
- ----------------------
Chen Jingmin
/s/ Liu Bo Director April 9, 2010
- ----------------------
Liu Bo
/s/ Cai Danmei Director April 9, 2010
- ----------------------
Cai Danmei
/s/ Hu Yangxiong Director April 9, 2010
- ----------------------
Hu Yangxiong
/s/ Yang Erping Director April 9, 2010
- ----------------------
Yang Erping
/s/ Zhao Jianwen Director April 9, 2010
- ----------------------
Zhao Jianwen
/s/ Wang Chang Zhu Director April 9, 2010
- ----------------------
Wang Chang Zhu
NEW TAOHUAYUAN CULTURE TOURISM CO., LTD.
FORM 10-K
EXHIBITS