UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2010
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _____ to _______
Commission File Number: None
NEW TAOHUAYUAN CULTURE TOURISM CO., LTD.
(Exact Name of Registrant as Specified in its Charter)
Nevada Applied For
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1# Dongfeng Road
Xi'an Weiyang Tourism Development District
Xi'an, China
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number including area code: 0086-29-86671555
N/A
----------------------------------------------------------------------
Former name, former address, and former fiscal year, if changed
since last report
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant 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 [ ] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definition of "large accelerated filer", "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Larger accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
Indicate by check mark whether registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 18,727,327 shares outstanding
as of August 15, 2010.
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMIITED
AND SUBSIDIARY
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
TABLE OF CONTENTS
Unaudited Consolidated Balance Sheets as of September 30, 2010
and December 31, 20091.................................................1
Unaudited Consolidated Statements of Income for the three and
nine month periods ended September 30, 2010 and 2009...................2
Unaudited Consolidated Statements of Cash Flows for the nine
month periods ended September 30, 2010 and 2009........................3
Notes to Unaudited Consolidated Financial Statements .................. 4-15
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED AND SUBSIDIARY
UNAUDITED CONSLIDATED BALANCE SHEETS
Assets
------
As at
-----
September 30, 2010 December 31, 2009
------------------ -----------------
Current assets
Cash and cash equivalents $ 82,611 $ 145,115
Accounts receivable, net 97,141 32,656
Inventories 64,556 69,599
Prepaid expenses and other
current assets 2,065 195
Due from related parties 570,853 570,967
----------- ------------
Total Current Assets 817,227 818,533
Property & equipment, net 5,934,054 6,126,079
Construction-in- progress 21,214,184 17,570,430
Land use right, net 2,504,887 2,503,539
Deposit for land use right 17,935,879 17,580,099
----------- ------------
Total assets 48,406,231 44,598,680
=========== ============
Liabilities and Stockholders' Equity
------------------------------------
Liabilities
Current liabilities
Accounts payable and accrued
expenses 661,184 744,762
Deferred revenue 243,564 188,273
Due to related party 122,896 -
Taxes payable 7,470,651 6,517,543
----------- ------------
Total Current Liabilities 8,498,295 7,450,578
Stockholders' equity
Share Capital
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 September 30,2010 and December 31,
2009 18,727 18,727
Additional paid in capital 15,855,727 15,855,727
Statutory reserve 2,739,753 2,542,355
Other comprehensive income 6,267,235 5,481,382
Retained earnings 15,026,494 13,249,911
----------- ------------
Total Stockholders' equity 39,907,936 37,148,102
----------- ------------
Total liabilites and stockholder's
equity 48,406,231 44,598,680
=========== ============
The accompanying notes are an integral part of these
unaudited consolidated financial statements.
1
NEW TAOHUAYUAN CULTURE TOURISM OMPANY LIMITED
AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
For the Three Month Periods For the Nine Month Periods
Ended September 30, Ended September 30,
2010 2009 2010 2009
---- ---- ---- ----
Net revenue
Catering and hotel related services
income $ 1,269,595 $ 1,256,043 $ 3,518,673 $ 3,570,610
Management fee income 509,794 506,648 1,520,728 1,514,944
----------- ----------- ----------- -----------
Total net revenue 1,779,389 1,762,691 5,039,401 5,085,554
Cost of revenue 419,801 411,745 1,226,444 1,284,666
----------- ----------- ----------- -----------
Gross profit 1,359,587 1,350,946 3,812,956 3,800,888
Operating expenses
General and administrative expenses 218,978 50,269 786,338 883,734
Depreciation and amortization 190,567 344,363 382,730 560,381
----------- ----------- ----------- -----------
Total operating expenses 409,545 394,632 1,169,068 1,444,115
----------- ----------- ----------- -----------
Income from operations 950,043 956,314 2,643,889 2,356,773
----------- ----------- ----------- -----------
Other Income (Expense)
Interest income - 143 - 382
Other income (expense) , net (13,897) 4,037 (11,914) 10,779
----------- ----------- ----------- -----------
Total other income (expense) (13,897) 4,180 (11,914) 11,161
----------- ----------- ----------- -----------
Income before income taxes 936,146 960,494 2,631,975 2,367,934
Provision for income taxes 235,028 240,124 657,994 591,984
----------- ----------- ----------- -----------
Net income 701,118 720,370 1,973,981 1,775,950
Other comprehensive item:
Foreign currency translation gain (loss) 534,403 95,176 785,853 (17,155)
----------- ----------- ----------- -----------
Net comprehensive income $ 1,235,521 $ 815,546 $ 2,759,834 $ 1,758,795
=========== =========== =========== ===========
Earning per share:
Basic & diluted earning per share $ 0.04 $ 0.04 $ 0.11 $ 0.09
=========== =========== =========== ===========
Weighted average number of shares
outstanding:
Basic & diluted weighted average
number of shares 18,727,327 18,727,327 18,727,327 18,727,327
=========== =========== =========== ===========
The accompanying notes are an integral part of these
unaudited consolidated financial statements.
2
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED
AND SUBSIDIARY
UNCONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine month periods
ended September 30,
2010 2009
----------- ----------
Cash Flows from Operating Activities
Net income $ 1,973,981 $ 1,775,951
Adjustments to reconcile net
income to net cash
provided by operating
activities:
Depreciation and amortization 382,730 560,381
Loss as sales of fixed assets 20,277 -
Bad debt expense 102,816 109,748
(Increase) / decrease in current assets:
Accounts receivables (62,742) (37,348)
Inventory 6,342 (1,184)
Other receivables (71) (1,353)
Prepaid expenses and other current
assets (1763) 732
Increase/(decrease) in current
liabilities:
Accounts payable and accrued expenses (96,977) 57,603
Taxes payable 807,279 734,564
Deferred revenue 50,607 45,661
----------- -----------
Net cash provided by operating activities 3,182,478 3,244,755
----------- -----------
Cash Flows from Investing Activities
Payment for construction in progress (3,232,391) (3,294,088)
Purchase of fixed assets (47,323) -
Proceeds from sales of fixed asset 3,439
Advances to related parties 132,282 (29,708)
----------- -----------
Net cash used in investing activities (3,143,993) (3,323,796)
----------- -----------
Effect of exchange rate changes on cash
and cash equivalents (100,988) (115)
Net Increase/ (decrease) in cash and
cash equivalents (62,504) (79,156)
Cash and cash equivalents, beginning balance 145,115 89,252
----------- -----------
Cash and cash equivalents, ending balance $ 82,611 $ 10,096
=========== ===========
Supplemental noncash financial disclosures:
Cash paid during the year for:
Income tax payments $ - $ -
=========== ===========
Interest payments $ - $ -
=========== ===========
The accompanying notes are an integral part of these
unaudited consolidated financial statements.
3
NEW TAOHUAYUAN CULTURE TOURISM COMPANY LIMITED AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
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).
The consolidated condensed interim financial statements included herein
have been prepared by the Company, without audit, pursuant to the rules
and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations of the Securities and Exchange Commission, although the
Company believes that the disclosures are adequate to make the information
presented not misleading. These statements reflect all adjustments,
consisting of normal recurring adjustments, which, in the opinion of
management, are necessary for fair presentation of the information
contained therein. It is suggested that these consolidated condensed
financial statements be read in conjunction with the financial statements
and notes thereto included in the Company's annual report on Form 10-K for
the year ended December 31, 2009. The Company follows the same accounting
policies in preparation of interim reports. Results of operations for the
interim periods are not indicative of annual results.
Foreign currency transactions and comprehensive income (loss)
As of September 30, 2010, 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
4
currency. According to the Statement, all assets and liabilities were
translated at the current exchange rate, stockholder's equity are
translated at the historical rates and income statement items are
translated at the average exchange rate for the period. The resulting
translation adjustments are reported under other comprehensive income in
accordance with SFAS No. 130 (ASC 220), "Reporting Comprehensive Income"
as a component of shareholders' equity.
During the nine month periods ended September 30, 2010 and 2009 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.
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.
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.
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
5
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 for fiscal years beginning after December
15, 2006.
Beginning January 1, 2008, the new Enterprise Income Tax ("EIT") law of
China has replaced 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 have continued 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.
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.
6
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 $102,816
and $100,776 at September 30, 2010 and December 31, 2009 respectively.
Inventory
Inventory is valued at the lower of cost or market. Inventory includes
gift cards, raw materials and consumables.
Potential losses from obsolete and slow-moving inventories are provided
for when identified. Cost, which comprises all costs of purchase and,
where applicable, other costs that has been incurred in bringing their
inventories to their present location and condition, is calculated using
the first-in, first-out method.
Property, Plant & Equipment
Property and equipment are stated at cost. Expenditures for maintenance
and repairs are charged to earnings as incurred; additions, renewals and
betterments are capitalized. When property and equipment are retired or
otherwise disposed of, the related cost and accumulated depreciation are
removed from the respective accounts, and any gain or loss is included in
operations. Depreciation of property and equipment is provided using the
straight-line method for substantially all assets with estimated lives of:
7
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.
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 $0.11 and $0.09 for the nine month periods ended
September 30, 2010 and 2009 respectively.
8
Recent Accounting Pronouncements
In January 2010, FASB issued ASU No. 2010-06 - Improving Disclosures about
Fair Value Measurements. This update provides amendments to Subtopic
820-10 that requires new disclosure as follows: 1) Transfers in and out of
Levels 1 and 2. A reporting entity should disclose separately the amounts
of significant transfers in and out of Level 1 and Level 2 fair value
measurements and describe the reasons for the transfers. 2) Activity in
Level 3 fair value measurements. In the reconciliation for fair value
measurements using significant unobservable inputs (Level 3), a reporting
entity should present separately information about purchases, sales,
issuances, and settlements (that is, on a gross basis rather than as one
net number). This update provides amendments to Subtopic 820-10 that
clarifies existing disclosures as follows: 1) Level of disaggregation. A
reporting entity should provide fair value measurement disclosures for
each class of assets and liabilities. A class is often a subset of assets
or liabilities within a line item in the statement of financial position.
A reporting entity needs to use judgment in determining the appropriate
classes of assets and liabilities. 2) Disclosures about inputs and
valuation techniques. A reporting entity should provide disclosures about
the valuation techniques and inputs used to measure fair value for both
recurring and nonrecurring fair value measurements. Those disclosures are
required for fair value measurements that fall in either Level 2 or Level
3. The new disclosures and clarifications of existing disclosures are
effective for interim and annual reporting periods beginning after
December 15, 2009, except for the disclosures about purchases, sales,
issuances, and settlements in the roll forward of activity in Level 3 fair
value measurements. These disclosures are effective for fiscal years
beginning after December 15, 2010, and for interim periods within those
fiscal years. The Company does not believe that this will have a material
impact on its consolidated financial statements.
In February 2010, FASB issued ASU No. 2010-9 -Amendments to Certain
Recognition and Disclosure Requirements. This update addresses certain
implementation issues related to an entity's requirement to perform and
disclose subsequent-events procedures, removes the requirement that public
companies disclose the date of their financial statements in both issued
and revised financial statements. According to the FASB, the revised
statements include those that have been changed to correct an error or
conform to a retrospective application of U.S. GAAP. The amendment is
effective for interim and annual reporting periods in fiscal year ending
after June 15, 2010. The Company does not believe that this will have a
material impact on its consolidated financial statements.
In March 2010, FASB issued ASU No. 2010-10 -Amendments for Certain
Investment Funds. This update defers the effective date of the amendments
to the consolidation requirements made by FASB Statement 167 to a
reporting entity's interest in certain types of entities. The deferral
will mainly impact the evaluation of reporting enterprises' interests in
mutual funds, private equity funds, hedge funds, real estate investment
entities that measure their investment at fair value, real estate
investment trusts, and venture capital funds. The ASU also clarifies
guidance in Statement 167 that addresses whether fee arrangements
represent a variable interest for all service providers and decision
makers. The ASU is effective for interim and annual reporting periods in
fiscal year beginning after November 15, 2009. The adoption of this ASU
did not have a material impact on the Company's consolidated financial
statements.
In March 2010, FASB issued ASU No. 2010-11 -Scope Exception Related to
Embedded Credit Derivatives. Embedded credit-derivative features related
only to the transfer of credit risk in the form of subordination of one
financial instrument to another are not subject to potential bifurcation
and separate accounting as clarified by recently issued FASB guidance.
Other embedded credit-derivative features are required to be analyzed to
determine whether they must be accounted for separately. This update
provides guidance on whether embedded credit-derivative features in
financial instruments issued by structures such as collateralized debt
obligations (CDOs) and synthetic CDOs are subject to bifurcation and
separate accounting. The guidance is effective at the beginning of a
company's first fiscal quarter beginning after June 15, 2010. The Company
does not expect the adoption of this ASU to have a material impact on the
Company's consolidated financial statements.
9
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 $17,935,879 and $17,580,099 (RMB 120,000,000) as of
September 30, 2010 and December 31, 2009, 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 $22,419,849 (RMB 150,000,000). As of September 30,
2010, 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 asset of
the shareholder company.
Note 4 - PROPERTY AND EQUIPMENT
As of September 30, 2010 and December 31, 2009, the property and equipment
of the Company consisted of the following:
9/30/2010 12/31/2009
--------------------------------
Buildings $ 7,376,631 $ 7,216,389
Infrastructure and
Leasehold Improvement 1,820,529 1,784,416
Furniture and fixtures 1,571,063 1,655,996
Equipments 1,706,731 1,971,673
Automobiles 319,860 313,516
--------------------------------
12,794,814 12,941,990
Accumulated Depreciation (6,860,760) (6,815,911)
--------------------------------
Property and Equipment, Net
5,934,054 6,126,079
================================
The Company had depreciation expenses of $334,249 and $515,288 for the
nine month periods ended September 30, 2010 and 2009 respectively. Parts
of depreciation expenses amounted of $177,668 in nine month periods ended
September 30, 2010 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 September 30, 2010 and December 31, 2009, the land use rights of the
Company consisted of the following:
9/30/2010 12/31/2009
Land use rights $3,409,048 $3,341,425
---------- ----------
Accumulated amortization (904,161) (837,886)
---------- ----------
Land use rights, net $2,504,887 $2,503,539
---------- ----------
10
The Company had amortization expenses of $48,481 and $45,093 as of
September 30, 2010 and 2009. The amortization expenses for land use right
for next five years after September 30, 2010 are as follows:
2010 $ 16,160
2011 64,641
2012 64,641
2013 64,641
2014 64,641
After 2,230,163
-----------
Total $ 2,504,887
===========
Note 6 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
The Company's accounts payable and accrued expenses as of September 30,
2010 and December 31, 2009 are summarized as follows:
9/30/2010 12/31/2009
---------- ----------
Accounts payables $ 174,144 $ 274,171
Other payables 371,572 364,752
Accrued payroll 41,828 40,998
Accrued expenses 73,640 64,841
Total accounts payables and
accrued expenses 661,184 $ 744,762
Note 7 - DEFERRED REVENUE
The company has recorded deferred revenue of $243,564 and $188,273 as of
September 30, 2010 and December 31, 2009. Deferred revenue represents
advances from customers for using the resort facilities within the next
twelve month period.
Note 8- TAX PAYABLES
As of September 30, 2010 and December 31, 2009, tax payables are summarized
as follows:
9/30/2010 12/31/2009
----------- -----------
Income tax payable $ 6,062,504 $ 5,286,176
Business tax payable 1,271,193 1,101,154
VAT payable 42 42
Other taxes payable 136,912 130,171
Tax payable $ 7,470,651 $ 6,517,543
Note 9 - INCOME TAXES
The Company is registered in the State of Nevada and has registered
primarily in two tax jurisdictions - the PRC and the United States. For
certain operations in US and China, the Company has incurred net
accumulated operating losses for income tax purposes The Company believes
that it is more likely than not that these net accumulated operating
losses will not be utilized in the future. Therefore, the Company has
provided full valuation allowance for the deferred tax assets arising from
the losses at these locations as of September 30, 2010. Accordingly, the
Company has no net deferred tax assets.
11
The provision for income taxes consists of the following for the nine
month periods ended September 30, 2010 and 2009:
US Current Income Tax
Expense (Benefit) 2010 2009
----------------------------------------------------
Federal $ - $ -
State - -
- -
PRC Current Income 657,994 591,984
Expense (Benefit)
Total Provision for
Income Tax $ 657,994 $ 591,984
The following is a reconciliation of the provision for income taxes at the
U.S. federal income tax rate to the income taxes reflected in the
Statement of Operations:
9-30-2010 9-30-2009
--------- ---------
Tax expense (credit) at
statutory rate - federal 34% 34%
State tax expense net of federal
tax 6% 6%
Valuation allowance (40%) (40%)
Foreign income tax - PRC 25% 25%
Tax expense (benefit) at actual
rate 25% 25%
United States of America
------------------------
As of September 30, 2010, the Company in the United States had
approximately $1,298,542 in net operating loss carry forwards available to
offset future taxable income. Federal net operating losses can generally
be carried forward 20 years. The deferred tax assets for the United States
entities at September 30, 2010 consists mainly of net operating loss carry
forwards and were fully reserved as the management believes it is more
likely than not that these assets will not be realized in the future.
The following table sets forth the significant components of the net
deferred tax assets for operation in the US as of September 30, 2010 and
December 31, 2009.
6/30/2010 12/31/2009
---------- ----------
Net operation loss carry
forward $1,298,542 $1,205,880
Total deferred tax assets 441,504 409,999
Less: valuation allowance (441,504) (409,999)
Net deferred tax assets $ - $ -
People's Republic of China (PRC)
Pursuant to the PRC Income Tax Laws, the Enterprise Income Tax ("EIT") is
at a statutory rate of 33%, which is comprises of 30% national income tax
and 3% local income tax. Beginning January 1, 2008, the new Enterprise
Income Tax ("EIT") law has replaced 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 has continued until the
tax exemption period expires. The applicable new EIT for the Company is
25%. The Company paid $0 of income tax payable as of September 30, 2010
and 2009.
12
Deferred income tax assets
Deferred income taxes are determined using the liability method for the
temporary differences between the financial reporting basis and income tax
basis of the Company's assets and liabilities. Deferred income taxes are
measured based on the tax rates expected to be in effect when the
temporary differences are included in the Company's tax return. Deferred
tax assets and liabilities are recognized based on anticipated future tax
consequences attributable to differences between financial statement
carrying amounts of assets and liabilities and their respective tax bases.
The Company's deferred tax assets represent deductible temporary
differences arising mainly from the other payables.
The Company did not have any significant deferred income tax in PRC as of
September 30, 2010 and December 31, 2009.
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 $2,027,623 (RMB13,800,000). For the nine month periods ended
September 30, 2010 and 2009, the Company earned $1,520,717 and $1,514,944
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 September 30, 2010 had receivable $131,383 from Shanxi
NTHY - Dongjing Taoyuan Co. Ltd. $385,702 from the Wenhao Group, $51,453
from StateplaceShanxi Xianyong Luye Developing Co., Ltd. These receivables
are unsecured, interest-free and have no fixed repayment terms. The
Company has classified these receivables as due from related parties under
current assets.
The Company as of December 31, 2009 had receivable $169,321 from Shanxi
NTHY - Dongjing Taoyuan Co. Ltd. $380,886 from the Wenhao Group, $20,760
from StateplaceShanxi Xianyong Luye Developing Co., Ltd. These receivables
are unsecured, interest-free and have no fixed repayment terms. The
Company has classified these receivables as due from related parties under
current assets.
The Company as of September 30, 2010 has related parties' payable of
$122,896 and company doesn't have related parties' payables as of December
31, 2009.
13
Note 12 -- COMMITMENTS
Following are some of the significant commitments as of September 30, 2010
and 2009:
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 nine month periods ended
September 30, 2010, the management fees earned amounting to $385,689 and
$385,689 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, 2011. For the nine
month periods ended September 30, 2010, the management fees earned
amounting $396,709, $198,354 and $154,276 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 September 30, 2010, the Company has paid
$3,564,756 to the said contractor included in construction in progress.
4. PlaceNameplaceLantian PlaceNameXintianyou PlaceTypeGarden 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 100,000,000
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
September 30, 2010, the Company has paid $17,649,428 to the said
contractor included in construction in progress.
14
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 $17,935,879 (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 $197,398
and $177,595 statutory fund for the nine month periods ended September 30,
2010 and 2009 respectively.
According to the new Company Law of the People's Republic of China (PRC)
executed in 2006, the Company is no more required to reserve the
"Statutory common welfare fund". Accordingly, the Company did not reserve
the common welfare fund as of September 30, 2010.
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 September 30, 2010, the consulting company has not sold
any of these shares to the Company.
15
Note 15 - OTHER COMPREHENSIVE INCOME
Balances of related after-tax components comprising accumulated other
comprehensive income (loss), included in stockholders' equity, as of
September 30, 2010 and December 31, 2009 are as follows:
Foreign Currency Translation
Adjustment
----------------------------
Balance at December 31, 2009 $ 5,481,382
Change in 2010 785,853
Balance at September 30, 2010 $ 6,267,235
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:
For the nine month periods ended
September 30,
2010 2009
----------- -----------
Revenues
Resort income from unaffiliated
customers $ 3,518,673 $ 3,570,610
Management fee income from
affiliated customers 1,520,728 1,514,944
----------- -----------
Consolidated $ 5,039,401 $ 5,085,554
=========== ===========
Operating income
Resort income $ 1,215,824 $ 953,824
Management fee income 1,520,728 1,514,944
Corporation (1) (92,663) (111,995)
----------- -----------
Consolidated $ 2,643,889 $ 2,356,773
=========== ===========
Net income (loss)
Resort income $ 545,916 $ 751,738
Management fee income 1,520,728 1,136,208
Corporation (1) (92,663) (111,995)
----------- -----------
Consolidated $ 1,973,981 $ 1,775,950
=========== ===========
16
Identifiable assets:
Resort income $27,192,047 $26,723,694
Corporation (1) 21,214,184 16,424,218
----------- -----------
Consolidated $48,406,231 $43,147,912
=========== ===========
Depreciation and amortization:
Resort income $ 382,730 $ 560,381
=========== ===========
Capital expenditures:
Resort income $ 47,323 $ -
Corporation (1) 3,232,391 3,294,088
----------- -----------
Consolidated $ 3,279,714 $ 3,294,088
=========== ===========
(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.
17
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operation
You should read the following discussion and analysis of our financial
condition and results of operations in conjunction with our financial statements
and the related notes included elsewhere in this report. Our financial
statements have been prepared in accordance with U.S. GAAP. In addition, our
financial statements and the financial data included in this report reflect our
reorganization and have been prepared as if our current corporate structure had
been in place throughout the relevant periods. The following discussion and
analysis contains forward-looking statements that involve risks and
uncertainties. Actual results could differ materially from those projected in
the forward-looking statements.
Overview
We own and operate the Taohuayuan Inn hotel and resort located in the city
of Xi'an, province of Shaanxi, in the PRC. The Taohuayuan Inn has 23 courtyards
with 146 rooms and 292 beds.
We manage the DongJin Taoyuan Villas, a hotel and resort property
approximately 10 miles from downtown Xi'an. DongJin Taoyuan Villas has 84 rooms
and 168 beds. This property closed for major remodeling in 2006 and reopened in
September 2009.
We also manage a chain of four traditional Chinese restaurants. Two of the
restaurants are in Xi'an, and one is in Beijing.
We receive fees for managing the DongJin Taoyuan Villas and the three
restaurants.
Room rates in the Shaanxi province are established by the Shaanxi Price
Bureau. Room rates are established for each hotel or resort in the Shaanxi
Province and are based upon a number of factors, including the quality of the
property and amenities offered. Room rates may be changed at any time by the
Shaanxi Price Bureau based upon economic conditions in China.
Our business is not seasonal in nature.
Results of Operations
Three Months Ended September 30, 2010
Material changes of items in our Statement of Operations for the three
months ended September 30, 2010, as compared to the three months ended September
30, 2009, are discussed below:
18
Increase (I)
Item or Decrease (D) Reason
- ---- -------------- ------
Gross profit as a % of
Total net revenue D Increase in cost of revenue.
General and Administrative
Expenses I Increase in fuel costs.
Foreign Currency
Translation Gain (loss) I Change in currency exchange rates.
Nine Months Ended September 30, 2010
Material changes of items in our Statement of Operations for the nine
months ended September 30, 2010, as compared to the nine months ended September
30, 2009, are discussed below:
Increase (I)
Item or Decrease (D) Reason
- ---- -------------- ------
Gross profit as a % of
Total net revenue I Reduction in cost of revenue.
General and Administrative
Expenses D Reduction in fuel costs.
Foreign Currency
Translation Gain (loss) I Change in currency exchange rates.
Liquidity and Capital Resources
Our material sources and (uses) of cash during the nine months ended
September 30, 2010 are shown in our Statement of Cash Flows which are part of
the financial statements included with this report.
We have financed our operations to date through the sale of our common
stock and cash generated by our operations.
We do not know of any trends, events or uncertainties that have, or are
reasonably likely to have, a material impact on our short-term or long-term
liquidity other than our need to pay the taxes and surcharges which we have
accrued as liabilities on our September 30, 2010 balance sheet.
19
Restrictions on currency exchange
Substantially all of our projected revenues and operating expenses are
denominated in Renminbi. The Renminbi is currently freely convertible under the
"current account", which includes dividends, trade and service-related foreign
exchange transactions, but not under the "capital account", which includes
foreign direct investment and loans.
We may purchase foreign exchange for settlement of "current account
transactions", including payment of dividends to our shareholders, without the
approval of the State Administration for Foreign Exchange. We may also retain
foreign exchange in our current account, subject to a ceiling approved by the
State Administration for Foreign Exchange, to satisfy foreign exchange
liabilities or to pay dividends. However, the Chinese government may change its
laws or regulations and limit or eliminate our ability to purchase and retain
foreign currencies in the future.
Since a significant amount of our future revenues will be denominated in
Renminbi, the existing and any future restrictions on currency exchange may
limit our ability to utilize revenues generated in Renminbi to fund any business
activities outside China or fund expenditures denominated in foreign currencies.
Exchange rate fluctuations may adversely affect our financial performance
because of our foreign currency denominated assets and liabilities, and may
reduce the value, translated or converted, as applicable into U.S. dollars, of
our net fixed assets, our earnings and our declared dividends. We do not engage
in any hedging activities in order to minimize the effect of exchange rate
risks.
Reserves
In accordance with current Chinese laws, regulations and accounting
standards, we are required to set aside as a general reserve at least 10% of our
respective after-tax profits. Appropriations to the reserve account are not
required after these reserves have reached 50% of our registered capital. These
reserves are created to fund potential operating losses and are not
distributable as cash dividends. We are also required to set aside between 5% to
10% of our after-tax profits to the statutory public welfare reserve. In
addition and at the discretion of our directors, we may set aside a portion of
our after-tax profits for enterprise expansion funds, staff welfare and bonus
funds and a surplus reserve. These statutory reserves and funds can only be used
for specific purposes and may not be used for dividends.
Critical Accounting Policies and Estimates
We prepare financial statements in conformity with U.S. GAAP, which
requires us to make estimates and assumptions that affect the reported amounts
of assets and liabilities, disclosure of contingent assets and liabilities on
the date of the financial statements, and the reported amounts of revenue and
expenses during the financial reporting period. We continually evaluate these
20
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.
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.
21
When assets are sold or retired, their costs and accumulated depreciation
are eliminated from the accounts and any gain or loss resulting from their
disposal is included in the statement of operations.
Depreciation is calculated to write off the cost of property, plant and
equipment over their estimated useful lives as set out below, from the date on
which they become fully operational and after taking into account their
estimated residual values, using the straight-line method.
Item 4. Controls and Procedures
Our Principal Executive and Financial Officer has evaluated the
effectiveness of our disclosure controls and procedures (as defined in Rule
13a-15(e) of the Securities Exchange Act of 1934) as of the end of the period
covered by this report, and in her opinion our disclosure controls and
procedures are effective.
There were no changes in our internal controls over financial reporting
that occurred during the fiscal quarter ended September 30, 2010 that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting as discussed above.
PART II
Item 6. Exhibits
Exhibits
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NEW TAOHUAYUAN CULTURE TOURISM CO., LTD.
November 15, 2010 By: /s/ Cai Danmei
------------------------------------
Cai Danmei, Principal Executive,
Financial and Accounting Officer