Financial Statements of Teda Hotels Management Company, Limited, a British Virgin Islands Corporation as of December 31, 2003
EXHIBIT 10.2
TEDA HOTELS MANAGEMENT COMPANY, LIMITED AND SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF TEDA TRAVEL, INC.)
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2003 AND 2002
TEDA HOTELS MANAGEMENT COMPANY, LIMITED AND SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF TEDA TRAVEL, INC.)
CONTENTS
PAGE | 1 | INDEPENDENT AUDITORS' REPORT |
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PAGE | 2 | CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2003 |
PAGE | 3 | CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE |
PAGE | 4 | CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY |
PAGE | 5 | CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE |
PAGES | 6 – 14 | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF |
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of:
Teda Hotels Management Company, Limited
(A Wholly Owned Subsidiary of Teda Travel, Inc.)
We have audited the accompanying consolidated balance sheets of Teda Hotels Management Company, Limited and subsidiary (a wholly owned subsidiary of Teda Travel, Inc.) as of December 31, 2003 and 2002 and the related consolidated statements of operations, changes in stockholders’ equity and cash flows for the years ended December 31, 2003 and 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the 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 financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly in all material respects, the consolidated financial position of Teda Hotels Management Company, Limited and subsidiary (a wholly owned subsidiary of Teda Travel, Inc.) as of December 31, 2003 and 2002 and the results of their operations and their cash flows for the years ended December 31, 2003 and 2002, in conformity with accounting principles generally accepted in the United States of America.
WEBB & COMPANY, P.A.
Boynton Beach, Florida
April 9, 2004
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TEDA HOTELS MANAGEMENT COMPANY, LIMITED AND SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF TEDA TRAVEL, INC.)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2003 AND 2002
2003 | 2002 | ||||
ASSETS |
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CURRENT ASSETS | |||||
Cash | $ | 98,079 | $ | 323,283 | |
Accounts receivable, net | 88,509 | 176,455 | |||
Prepaid expenses and other current assets | 55,355 | 2,889 | |||
Due from director | — | 6,659 | |||
Total Current Assets | 241,943 | 509,286 | |||
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PROPERTY AND EQUIPMENT, NET | 13,064 | 3,506 | |||
INVESTMENT IN AFFILIATE | 3,661,868 | 3,613,334 | |||
TOTAL ASSETS | $ | 3,916,875 | $ | 4,126,126 | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||
CURRENT LIABILITIES | |||||
Accounts payable and accrued expenses | $ | 47,334 | $ | 87,356 | |
Due to related parties | 3,263,724 | 3,392,299 | |||
TOTAL LIABILITIES | 3,311,058 | 3,479,655 | |||
STOCKHOLDERS’ EQUITY | |||||
Common stock, $1.00 par value, 50,000 shares authorized, | 100 | 100 | |||
Retained earnings | 605,717 | 646,326 | |||
Total Stockholders’ Equity | 605,817 | 646,471 | |||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 3,916,875 | $ | 4,126,126 | |
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TEDA HOTELS MANAGEMENT COMPANY, LIMITED AND SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF TEDA TRAVEL, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
2003 | 2002 | |||||
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| |||||
REVENUE, NET | $ | 396,794 | $ | 515,546 | ||
EXPENSES | ||||||
Management fees | 31,400 | 24,645 | ||||
Payroll | 117,784 | 139,306 | ||||
Other selling, general and administrative | 313,046 | 268,050 | ||||
Total Expenses | 462,230 | 432,001 | ||||
INCOME (LOSS) FROM OPERATIONS | (65,436 | ) | 83,545 | |||
OTHER INCOME (EXPENSE) | ||||||
Equity in earnings of affiliate | 51,409 | 223,909 | ||||
Loss on disposal of property and equipment | (3,202 | ) | — | |||
Other income | 370 | 591 | ||||
Total Other Income (Expense) | 48,577 | 224,500 | ||||
INCOME (LOSS) BEFORE INCOME TAXES | (16,859 | ) | 308,045 | |||
Income taxes | 23,795 | 23,977 | ||||
NET INCOME (LOSS) | $ | (40,654 | ) | $ | 284,068 | |
NET INCOME (LOSS) PER COMMON SHARE – | $ | (406.54 | ) | $ | 2,840.68 | |
WEIGHTED AVERAGE SHARES OUTSTANDING – | 100 | 100 | ||||
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TEDA HOTELS MANAGEMENT COMPANY, LIMITED AND SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF TEDA TRAVEL, INC.)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
Common Stock | Retained Earnings | Total | ||||||||||
Shares | Amount | |||||||||||
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Balance, December 31, 2001 | 100 | $ | 100 | $ | 362,303 | $ | 362,403 | |||||
Net income, 2002 | — | — | 284,068 | 284,068 | ||||||||
Balance, December 31, 2002 | 100 | 100 | 646,371 | 646,471 | ||||||||
Net loss, 2003 | — | — | (40,654 | ) | (40,654 | ) | ||||||
BALANCE, DECEMBER 31, 2003 | 100 | $ | 100 | $ | 605,717 | $ | 605,817 | |||||
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TEDA HOTELS MANAGEMENT COMPANY, LIMITED AND SUBSIDIARY
(A WHOLLY OWNED SUBSIDIARY OF TEDA TRAVEL, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
2003 | 2002 | |||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net income (loss) | $ | (40,654 | ) | $ | 284,068 | |
Adjustments to reconcile net income (loss) to net cash | ||||||
Depreciation and amortization | 5,890 | 2,538 | ||||
Loss on disposal of property and equipment | 3,202 | — | ||||
Provision for bad debts | 21,556 | — | ||||
Earnings in affiliate | (48,534 | ) | (223,909 | ) | ||
(Increase) decrease in: | ||||||
Prepaid expenses | (52,466 | ) | (2,086 | ) | ||
Accounts receivable | 66,390 | 23,235 | ||||
Increase (decrease) in: | ||||||
Accounts payable and accrued expenses | (40,022 | ) | 61,470 | |||
Net Cash Provided By (Used In) Operating Activities | (84,638 | ) | 145,316 | |||
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CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||
Purchase of property and equipment | (18,650 | ) | (1,371 | ) | ||
Due from directors | 6,659 | 128 | ||||
Due from stockholders | 2,489 | 2,129 | ||||
Net Cash Provided By (Used In) Investing Activities | (9,502 | ) | 886 | |||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||
Payments on notes payable | (131,064 | ) | — | |||
Net Cash (Used In) Financing Activities | (131,064 | ) | — | |||
INCREASE (DECREASE) IN CASH AND | (225,204 | ) | 146,202 | |||
CASH AND CASH EQUIVALENTS - BEGINNING | 323,283 | 177,081 | ||||
CASH AND CASH EQUIVALENTS - END OF YEAR | $ | 98,079 | $ | 323,283 | ||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW | ||||||
Cash paid for income taxes | $ | 26,037 | $ | 15,716 | ||
NON-CASH INVESTING AND FINANCING ACTIVITIES:
During 2002, the Company recorded an investment in affiliate and due to related party of $3,389,425.
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NOTE 1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND
ORGANIZATION
(A) Nature of Operations and Organization and Basis of Presentation
Teda Hotels Management Company, Limited was incorporated in the British Virgin Islands on June 23, 2001.
Teda Hotels Management, Limited was incorporated in Hong Kong on July 28, 2000.
Teda Hotels Management Company, Limited is a wholly owned subsidiary of Teda Travel, Inc. (the “Parent”). Teda Hotels Management Company, Limited is hereafter referred to as (the “Company”) (See Note 11).
The Company provides management services for hotels and resorts located in China and invests in real estate through its joint venture in China.
(B) Principles of Consolidation
The accompanying consolidated financial statements for 2003 and 2002 include the accounts of Teda Hotels Management Company, Limited and its wholly owned subsidiary Teda Hotels Management Limited. The Company accounts for its 35% investment in a joint venture on the equity method (See Note 4).
All significant intercompany transactions and balances have been eliminated in the combination.
(C) Use of Estimates
In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reported period. Actual results could differ from those estimates.
(D) Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation. Depreciation is provided using the straight-line method over the estimated useful life of the assets from three to thirty nine years. Repairs and maintenance on property and equipment are expensed as incurred.
(E) Revenue Recognition
The Company recognizes hotel and resort management service fees in the period when the services are rendered and earned.
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(F) Earnings (Loss) Per Common Share
Basic earnings (loss) per common share are computed by dividing the net income (loss) applicable to common stock stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted average number of common shares including the dilutive effect of common share equivalents then outstanding. There are no dilutive securities outstanding as of December 31, 2003 and 2002.
(G) Foreign Currency Translation
The Company’s assets and liabilities that are denominated in foreign currencies are translated into the currency of U.S. dollars using the exchange rates at the balance sheet date. For revenues and expenses, the average exchange rate during the year was used to translate Hong Kong dollars and Chinese Renminbi into United States dollars. The translation gains and losses resulting form changes in the exchange rate are charged or credited directly to the shareholders’ equity section of the balance sheet when material. All realized and unrealized transaction gains and losses are included in the determination of income in the period in which they occur. Translation and transaction gains and losses are not included in the statement of operations because they are not material as of December 31, 2003 and 2002.
(H) Fair Value of Financial Instruments
The carrying amounts of the Company’s financial instruments, including accounts payable and accrued interest, approximate fair value due to the relatively short period to maturity for these instruments.
(I) Income Taxes
The Company accounts for income taxes under the Financial Accounting Standards Board Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" (“Statement 109”). Under Statement 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under Statement 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
(J) Long-Lived Assets
In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” long-lived assets and certain identifiable intangible assets held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. For purposes of evaluating the recoverability of long-lived assets, the recoverability test is performed using undiscounted net cash flows related to the long-lived assets. The Company reviews long-lived assets to determine that carrying values are not impaired.
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(K) Concentration of Credit Risk
The Company maintains its cash in foreign bank deposit accounts, which at times may exceed insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk for cash.
(L) Business Segments
The Company's operating segments are organized internally primarily by the type of services performed. The Company’s two operating segments include property management and real estate investments.
(M) Recent Accounting Pronouncements
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest Entities, and Interpretation of ARB 51". FIN No. 46 provides guidance on the identification of entities of which control is achieved through means other than voting rights (“variable interest entities” or “VIE’s”) and how to determine when and which business enterprise should consolidate the VIE (the “Primary Beneficiary”). In addition, FIN No. 46 required that both the Primary Beneficiary and all other enterprises with a significant variable interest in a VIE make additional disclosures. The transitional disclosure requirements of FIN No. 46 are required in all financial statements initially issued after January 31, 2003, if certain conditions are met.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities". SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". The changes in SFAS No. 149 improve financial reporting by requiring that contracts with comparable characteristics be accounted for similarly. This statement is effective for contracts entered into or modified after June 30, 2003 and all of its provisions should be applied prospectively.
In May 2003, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 150, “Accounting For Certain Financial Instruments with Characteristics of both Liabilities and Equity”. SFAS No. 150 changes the accounting for certain financial instruments with characteristics of both liabilities and equity that, under previous pronouncements, issuers could account for as equity. The new accounting guidance contained in SFAS No. 150 requires that those instruments be classified as liabilities in the balance sheet.
SFAS No. 150 affects the issuer’s accounting for three types of freestanding financial instruments. One type is mandatorily redeemable shares, which the issuing company is obligated to buy back in exchange for cash or other assets. A second type includes put options and forward purchase contracts, which involves instruments that do or may require the issuer to buy back some of its shares in exchange for cash or other assets. The third type of instruments that are liabilities under this Statement is obligations that can be settled with shares, the monetary value of which is fixed, tied solely or predominantly to a variable such
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as a market index, or varies inversely with the value of the issuer’s shares. SFAS No. 150 does not apply to features embedded in a financial instrument that is not a derivative in its entirety.
Most of the provisions of SFAS No. 150 are consistent with the existing definition of liabilities of FASB Concepts Statement No. 6, “Elements of Financial Statements”. The remaining provisions of this statement are consistent with the FASB’s proposal to revise that definition to encompass certain obligations that a reporting entity can or must settle by issuing its own shares. This statement is effective for financial instruments entered into or modified after May 31, 2003 and otherwise shall be effective at the beginning of the first interim period beginning after June 15, 2003.
The adoption of these pronouncements will not have a material effect on the Company’s financial position or results of operations.
NOTE 2
ACCOUNTS RECEIVABLE
Accounts receivable were as follows at December 31, 2003 and 2002:
2003 | 2002 | ||||
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Accounts receivable | $ | 110,065 | $ | 176,455 | |
Less Allowance for doubtful accounts | 21,556 | — | |||
$ | 88,509 | $ | 176,455 | ||
For the years ended December 31, 2003 and 2002, the Company recorded a provision for doubtful accounts of $21,556 and $0, respectively.
NOTE 3
PROPERTY AND EQUIPMENT
Property and equipment as of December 31, 2003 and 2002 consisted of the following:
2003 | 2002 | ||||
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Computer equipment | $ | 15,104 | $ | 8,380 | |
Office furniture | 7,657 | — | |||
Less accumulated depreciation | 9,697 | 4,874 | |||
$ | 13,064 | $ | 3,506 | ||
Depreciation expense for the years ended December 31, 2003 and 2002 was $5,890 and $2,538, respectively. During 2003, the Company closed its Beijing office and recognized a loss on leasehold improvements of $3,202.
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NOTE 4
INVESTMENT IN AFFILIATE
On January 6, 2002, the Company acquired a 35% interest in a real estate joint venture located in China. The joint venture was formed to develop and manage a mixed-use complex of apartments, restaurants, a hotel and a private clubhouse. The joint venture was formed with a maximum life of 50 years.
The Company’s 35% interest in the joint venture is accounted for using the equity method of accounting and is stated at cost plus equity in undistributed earnings since acquisition. The Company’s share of the earnings for 2003 and 2002 was $51,408 and $223,909.
A summary of the audited financial statements of the affiliate as of December 31, 2003 and 2002 is as follows:
2003 | 2002 | |||||
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Current assets | $ | 15,573,083 | $ | 10,379,641 | ||
Non-current assets | 32,624,627 | 26,904,049 | ||||
Total Assets | $ | 48,197,710 | $ | 37,283,690 | ||
Current liabilities | $ | 32,977,282 | $ | 25,191,768 | ||
Non-current liabilities | 4,837,929 | 4,837,930 | ||||
Stockholders’ equity | 10,382,499 | 7,253,992 | ||||
Total Liabilities and Stockholders’ Equity | $ | 48,197,710 | $ | 37,283,690 | ||
Revenues | 9,910,030 | 22,469,595 | ||||
Operating Income | 2,720,928 | 1,052,595 | ||||
Net Income | $ | 1,026,918 | $ | 964,681 | ||
The Company’s share of the earnings for 2003 after accounting for differences between Hong Kong GAAP and U.S. GAAP:
2003 | 2002 | |||||
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Company share at 35% | $ | 359,421 | $ | 337,638 | ||
Less U.S. GAAP adjustment for depreciation | 308,013 | 113,729 | ||||
Equity in earnings of affiliate | $ | 51,408 | $ | 223,909 | ||
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NOTE 5
DUE TO RELATED PARTIES
Due to related parties at December 31, 2003 and 2002 consists of the following:
2003 | 2002 | |||||
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Due to Parent | $ | 3,258,361 | $ | 3,389,425 | ||
Due to company owned by a stockholder and director | 5,363 | 2,874 | ||||
$ | 3,263,724 | $ | 3,392,299 | |||
NOTE 6
COMMITMENTS AND CONTINGENCIES
(A) Operating Lease Agreements
The Company leases corporate office space and office equipment under operating leases. The leases expire at various dates through November 2005. Future minimum lease payments for the operating leases are as follows:
Year | Amount | |||
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2004 | $ | 35,500 | ||
2005 | 25,100 | |||
$ | 60,600 | |||
Rent expense under operating leases for the years ended December 31, 2003 and 2002 aggregated $31,401 and $24,115, respectively.
NOTE 7
EQUITY
The Company is a wholly owned subsidiary of Teda Travel, Inc. (See Note 11).
NOTE 8
CONCENTRATION OF CREDIT RISK
The Company received 100% of its revenues from three hotels in 2003 and four hotels in 2002 that it provides management services for located in China. Three of the hotels constituted 52%, 31% and 15% of the revenue recorded for the year ended December 31, 2003 and 45%, 33% and 12% for December 31, 2002.
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NOTE 9
BUSINESS SEGMENTS
The Company has two operating segments. They are organized internally primarily by the type of services performed. The Company’s two operating segments include property management and real estate investments. The real estate investment segment invests in real estate development projects. The accounting policies of the segments are the same as described in the summary of significant accounting policies. There are no inter-segment sales.
Property Management | Real Estate Investments | Total | ||||||||
| 2003 |
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Revenue | $ | 396,794 | $ | — | $ | 396,794 | ||||
Net income (loss) | (92,063 | ) | 51,409 | (40,654 | ) | |||||
Depreciation | 3,202 | — | 3,202 | |||||||
Assets | 255,007 | 3,661,868 | 3,916,875 | |||||||
Capital expenditures | 18,650 | — | 18,650 | |||||||
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2002 | ||||||||||
Revenue | $ | 515,546 | $ | — | $ | 515,546 | ||||
Net income | 60,159 | 223,909 | 284,068 | |||||||
Depreciation | 2,538 | — | 2,538 | |||||||
Assets | 512,792 | 3,613,334 | 4,126,126 | |||||||
Capital expenditures | 1,371 | — | 1,371 | |||||||
NOTE 10
INCOME TAXES
Income tax expense for the years ended December 31, 2003 and 2002 is summarized as follows:
Current | Deferred | Total | |||||||
| 2003 |
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United States | $ | — | $ | — | $ | — | |||
Foreign | 23,795 | — | 23,795 | ||||||
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$ | 23,795 | $ | — | $ | 23,795 | ||||
2002 | |||||||||
United States | $ | — | $ | — | $ | — | |||
Foreign | 23,977 | — | 23,977 | ||||||
$ | 23,977 | $ | — | $ | 23,977 | ||||
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Income tax expense for the years ended December 31, 2003 and 2002 differed from amounts computed by applying the statutory U.S. federal corporate income tax rate of 34% to income before income tax benefit as a result of the following:
2003 | 2002 | ||||||
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Expected income tax expense (benefit) | $ | (13,822 | ) | $ | 96,583 | ||
Tax effect on foreign income which is not subject to the | 37,617 | (72,606 | ) | ||||
$ | 23,795 | $ | 23,977 | ||||
The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities at December 31, 2003 and 2002 are as follows:
2003 | 2002 | ||||||
Deferred tax assets: | |||||||
Net operating loss carryforward | $ | — | $ | — | |||
Total deferred tax assets | — | — | |||||
Less valuation allowance | — | — | |||||
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Net deferred tax assets | $ | — | $ | — | |||
At December 31, 2003, the Company had approximately $605,700 of undistributed earnings of the Company’s foreign subsidiaries. These earnings are considered to be indefinitely invested, and accordingly, no United States income tax has been provided for these earnings.
NOTE 11
SUBSEQUENT EVENTS
On March 10, 2004, the Company’s Parent approved the 100% spin-off of the Company to Acola Corp. As part of the transaction, the Parent set up a share redemption plan to distribute the shares of Acola Corp. to the common stockholders of the Parent. As of March 10, 2004, the Company became a wholly owned subsidiary of Acola Corp.
On March 18, 2004, $3,350,000 of the balance due to Parent was extinguished through a conversion of the debt towards a Convertible Promissory Note holder to equity in the Parent.
