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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
--------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______________________ to ________________
Commission File Number 000-33119
Yi Wan Group, Inc.
(Exact name of registrant as specified in its charter)
Florida 33-0960062
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
101 E. 52 Street, 9th Floor, New York, New York 10022
(Address of principal executive offices) (Zip Code)
(212) 752-9700
(Registrant's telephone number, including area code)
2 East Camino Real, Suite 202, Boca Raton, Florida 33432
(Former Address)
All Correspondence to:
Arthur S. Marcus, Esq.
Gersten, Savage, Kaplowitz, Wolf & Marcus, LLP
101 E. 52 Street, 9th Floor
New York, New York 10022
(212) 752-9700
Indicate by check mark whether the registrant: (1) has filed all reports
required 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 is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act)
Yes [ ] No [X]
The number of shares outstanding of the issuer's common stock as of May 10, 2004
was 16,506,250.
YI WAN GROUP, INC.
TABLE OF CONTENTS
Page
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements 1
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures about Market Risks 14
Item 4. Controls and Procedures 14
PART II
OTHER INFORMATION
Item 1 Legal Proceedings 14
Item 2 Changes in Securities, Use of Proceeds 14
and Issuer Purchases of Equity Securities 15
Item 3 Defaults upon Senior Securities 15
Item 4 Submission of Matters to a Vote of Security Holders 15
Item 5 Other Information 15
Item 6 Exhibits and Reports on Form 8-K 15
PART I
FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
YI WAN GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2004 AND DECEMBER 31, 2003
A S S E T S
March 31, December 31,
2004 2003
------------ ------------
(Unaudited) (Audited)
------------ ------------
CURRENT ASSETS:
Cash $ 4,097,299 $ 3,365,842
Accounts receivable, net of allowance
for doubtful accounts of $8,104 at
March 31, 2004 and December 31, 2003 1,488,646 1,612,710
Due from related parties 3,569,750 3,599,133
Inventories 555,598 513,432
Prepaid expenses 47,807 55,308
------------ ------------
Total current assets 9,759,100 9,146,425
------------ ------------
BUILDINGS, EQUIPMENT AND AUTOMOBILES, net 17,820,197 18,002,661
------------ ------------
OTHER ASSETS:
Intangible asset, net 1,578,092 1,590,561
Equipment held for sale 529,750 529,750
Deferred tax asset 31,718 31,718
Other non-current assets 388,060 369,075
------------ ------------
Total other assets 2,527,620 2,521,104
------------ ------------
Total assets $ 30,106,917 $ 29,670,190
============ ============
L I A B I L I T I E S A N D S H A R E H O L D E R S' E Q U I T Y
----------------------------------------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 376,876 $ 327,862
Accounts payable - related party 34,874 56,540
Accrued liabilities 876,906 733,261
Wages and benefits payable 295,073 301,815
Sales tax payable 881,726 873,208
Income taxes payable 922,949 1,049,331
Due to shareholders 89,044 89,044
Due to prior owners of joint ventures 4,932,273 4,932,273
Notes payable 63,599 64,809
------------ ------------
Total current liabilities 8,473,320 8,428,143
------------ ------------
MINORITY INTEREST 1,894,870 1,843,198
------------ ------------
SHAREHOLDERS' EQUITY:
Common stock, no par value, authorized
50,000,000 shares, 16,506,250 shares
issued and outstanding 10,078 10,078
Paid-in-capital 5,116,613 5,115,222
Statutory reserves 10,655,821 10,655,821
Retained earnings 3,818,869 3,480,712
Accumulated other comprehensive income 137,346 137,016
------------ ------------
Total shareholders' equity 19,738,727 19,398,849
------------ ------------
Total liabilities and
shareholders' equity $ 30,106,917 $ 29,670,190
============ ============
The Accompanying notes are an integral part of these financial statements.
-1-
YI WAN GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
FOR THE THREE ENDED MARCH 31, 2004 AND 2003
Three months ended March 31,
------------ ------------
2004 2003
------------ ------------
(Unaudited) (Unaudited)
------------ ------------
NET SALES $ 2,841,721 $ 3,159,617
COST OF SALES 1,096,319 1,155,104
------------ ------------
GROSS PROFIT 1,745,402 2,004,513
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 1,123,445 1,130,403
------------ ------------
INCOME FROM OPERATIONS 621,957 874,110
OTHER INCOME 4,489 15,280
------------ ------------
INCOME FROM CONTINUING OPERATIONS BEFORE
PROVISION FOR INCOME TAXES AND
MINORITY INTEREST 626,446 889,390
PROVISION FOR INCOME TAXES 236,617 278,990
------------ ------------
INCOME BEFORE MINORITY INTEREST 389,829 610,400
MINORITY INTEREST (51,672) (51,088)
------------ ------------
NET INCOME 338,157 559,312
OTHER COMPREHENSIVE INCOME:
Foreign currency translation adjustment 330 (1,401)
------------ ------------
COMPREHENSIVE INCOME $ 338,487 $ 557,911
============ ============
EARNINGS (LOSS) PER SHARE - BASIC AND DILUTED:
Earnings per share, basic and diluted $ 0.02 $ 0.03
============ ============
The Accompanying notes are an integral part of these financial statements.
-2-
YI WAN GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003
Accumulated
other
Number Common Paid-in Statutory Retained comprehensive
of shares stock capital reserves earnings income Totals
----------- ---------- ---------- ----------- ---------- ---------- -----------
(Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
----------- ---------- ---------- ----------- ---------- ---------- -----------
BALANCE, December 31, 2003, audited 16,506,250 $ 10,078 $5,115,222 $10,655,821 $3,480,712 $ 137,016 $19,398,849
Net income 338,157 338,157
Additions to paid in capital
(land use right) 1,391 -- 1,391
Foreign currency translation
adjustments 330 330
----------- ---------- ---------- ----------- ---------- ---------- -----------
BALANCE, March 31, 2004 16,506,250 $ 10,078 $5,116,613 $10,655,821 $3,818,869 $ 137,346 $19,738,727
=========== ========== ========== =========== ========== ========== ===========
BALANCE, December 31, 2002, audited 16,506,250 $ 10,078 $5,109,656 $10,832,731 $1,707,878 $ 70,595 $17,730,938
--
Net income 559,312 559,312
Additions to paid in capital
(land use right) 1,389 1,389
Foreign currency translation
adjustments (1,401) (1,401)
----------- ---------- ---------- ----------- ---------- ---------- -----------
BALANCE, March 31, 2003 16,506,250 $ 10,078 $5,111,045 $10,832,731 $2,267,190 $ 69,194 $18,290,238
=========== ========== ========== =========== ========== ========== ===========
The Accompanying notes are an integral part of these financial statements.
-3-
YI WAN GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003
Three months ended March 31,
----------------------------
2004 2003
------------ ------------
(Unaudited) (Unaudited)
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 338,157 $ 559,312
Adjustments to reconcile net income to net
cash provided by operating activities:
Minority interest 51,672 51,088
Depreciation 353,363 367,766
Amortization 12,469 12,436
Land use cost 1,391 1,389
Deferred tax assets -- (29,991)
Translation adjustment 330 (1,401)
(Increase) decrease in assets:
Accounts receivable 124,064 26,032
Related party receivables 29,383 (756,467)
Inventories (42,166) (54,960)
Prepaid expenses 7,501 (16,455)
Other non-current assets (18,985) (42,411)
Increase (decrease) in liabilities:
Accounts payable 49,014 12,314
Accounts payable - related party (21,666) (19,607)
Accrued liabilities and other
current liabilities 143,645 (86,549)
Wages and benefits payable (6,742) (4,717)
Sales tax payable 8,518 197
Income taxes payable (126,382) 67,587
------------ ------------
Net cash provided by
operating activities 903,566 85,563
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of improvements and equipment (170,899) (26,741)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Collections on note receivable -- 696,437
Borrowings on notes payable (1,210) 7,326
------------ ------------
Net cash provided by
financing activities (1,210) 703,763
------------ ------------
NET CHANGE IN CASH 731,457 762,585
CASH, beginning of period 3,365,842 2,135,154
------------ ------------
CASH, end of period $ 4,097,299 $ 2,897,739
============ ============
The Accompanying notes are an integral part of these financial statements.
-4-
YI WAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE REPORTING ENTITY
The financial statements of Yi Wan Group, Inc. and subsidiaries (referred to as
the Company or YWG in the accompanying financial statements) reflect the
activities and financial transactions of its subsidiaries, which are as follows:
Percentage
Subsidiary Ownership
- ---------------------------------------------------------- ----------------
Shun De Yi Wan Communication Equipment
Plant Co., Ltd. (TELECOMMUNICATIONS) 100%
Jiao Zuo Yi Wan Hotel Co., Ltd. (HOTEL) 90
Qinyang Yi Wan Hotel Co., Ltd. (QINYANG) 80
Yi Wan Group, Inc. was incorporated under the laws of the State of Florida in
the United States in May 1999. Yi Wan Group, Inc. is authorized to issue
50,000,000 shares of no par value common stock and 20,000,000 shares of no par
value preferred stock. The Company's TELECOMMUNICATIONS, HOTEL and QINYANG
subsidiaries are incorporated under the laws of the People's Republic of China
(PRC).
The Company's subsidiaries are classified as Foreign Invested Enterprises (FIE)
in the PRC and are subject to the FIE laws of the PRC. The HOTEL and QINYANG are
Foreign Invested Enterprise Joint Ventures, known as FIEJV or sino-foreign joint
venture, and TELECOMMUNICATIONS is a Wholly Foreign Owned Enterprise company or
WFOE. All three of these companies are Chinese registered limited liability
companies, with legal structures similar to regular corporations and limited
liability companies organized under state laws in the United States. The
respective Articles of Association for these FIE subsidiaries provide a 30-year
term for the HOTEL and QINYANG companies and 15 years for the
TELECOMMUNICATIONS.
BASIS OF PRESENTATION
The financial statements represent the activities of Yi Wan Group, Inc. and its
subsidiaries. The consolidated financial statements of YWG include its
subsidiaries HOTEL, TELECOMMUNICATIONS and QINYANG. All significant
inter-company accounts and transactions have been eliminated in the
consolidation.
FOREIGN CURRENCY TRANSLATION
The reporting currency of YWG is US dollar. The Company's foreign subsidiaries
use their local currency, Renminbi, as their functional currency. Results of
operations and cash flow are translated at average exchange rates during the
period, and assets and liabilities are translated at the end of period exchange
rates. Translation adjustments resulting from this process are included in
accumulated other comprehensive income in the statement of shareholders' equity.
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. These amounts are not
material to the financial statements.
-5-
YI WAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - CONDENSED FINANCIAL STATEMENTS AND FOOTNOTES
The interim consolidated financial statements presented herein have been
prepared by the Company and include the unaudited accounts of YWG and its
subsidiaries TELECOMMUNICATIONS, HOTEL, and QINYANG. All significant
inter-company accounts and transactions have been eliminated in the
consolidation.
These condensed financial statements have been prepared in accordance with
generally accepted accounting principles in the United States for interim
financial information and the instructions to Form 10-Q and Article 10 of
Regulation S-X. Certain information and footnote disclosures normally included
in financial statements presented in accordance with generally accepted
accounting principles have been condensed or omitted. YWG believes the
disclosures made are adequate to make the information presented not misleading.
The condensed consolidated financial statements should be read in conjunction
with the YWG's consolidated financial statements for the year ended December 31,
2003 and notes thereto included in YWG's Form 10-K, which was filed with the
Securities and Exchange Commission on March 30, 2004.
In the opinion of management, the unaudited condensed consolidated financial
statements reflect all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position of the Company
as of March 31, 2004 and the results of operations for the three months ended
March 31, 2004 and 2003, respectively. Interim results are not necessarily
indicative of full year performance because of the impact of seasonal and
short-term variations.
NOTE 3 - INVENTORIES
Inventories are stated at the lower of cost or market using the first-in,
first-out basis and consists of the following:
March 31, December 31,
2004 2003
------------ ------------
(Unaudited) (Audited)
------------ ------------
Hotel inventory $ 218,558 $ 210,728
Telecommunication inventory 337,040 302,704
------------ ------------
Total inventories $ 555,598 $ 513,432
============ ============
The HOTEL inventory consists of food products, alcohol, beverages and supplies.
At March 31, 2004, TELECOMMUNICATION's inventory are consisted of raw materials,
work in process, and finished goods, which amounted to $102,102, $83,245, and
$151,693, respectively.
NOTE 4 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Income taxes paid amounted to $363,000 and $241,339 for the three months ended
March 31, 2004 and 2003, respectively. No interest expense was paid for the
three months ended March 31, 2004 and 2003.
NOTE 5 - EARNINGS PER SHARE
Basic and diluted earnings per share are calculated based on the weighted
average number of common stock issued and outstanding (16,506,250 shares for the
three months ended March 31, 2004 and 2003, respectively),
-6-
YI WAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - HOTEL BOWLING OPERATIONS CEASED
HOTEL BOWLING OPERATIONS
The HOTEL ceased its bowling operation at the end of September 2003. The
Management of Hotel is in the process of finding potential buyers and
formalizing a plan to sell the equipment. As of March 31, 2004, the fair market
value of the bowling equipment has not been determined and no impairment of the
asset value has been calculated. As of March 31, 2004, the related equipment
with a net book value of $529,750 has been recorded as equipment held for sale;
no gain or loss has been recognized in the current period.
NOTE 7 - SEGMENT INFORMATION
YWG includes four major operating segments: restaurant, lodging, entertainment
and telecommunication equipment. YWG evaluates the performance of its segments
based primarily on operating profit before corporate expenses and depreciation
and amortization. The following table presents revenues and other financial
information by business segment for the periods presented:
Telecom- Inter-
munication segment
Hotel equipment elimination Totals
----------- ----------- ----------- -----------
TOTAL ASSETS:
March 31, 2004 $25,207,481 $ 6,954,914 $(2,055,478) $30,106,917
=========== =========== =========== ===========
December 31, 2003 $24,667,327 $ 6,837,457 $(1,834,594) $29,670,190
=========== =========== =========== ===========
-7-
YI WAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - SEGMENT INFORMATION
HOTEL
-----------------------------------------------------
Telecommu- Inter-
Entertain- nication segment
Restaurant Lodging ment Subtotals equipment elimination Totals
------------ ---------- ---------- ------------ ---------- ----------- ------------
THREE MONTHS ENDED MARCH 31, 2004
Net sales $ 1,277,559 $ 533,136 $ 565,518 $ 2,376,213 $ 465,508 $ $ 2,841,721
Cost of sales 655,244 53,807 87,269 796,320 299,999 1,096,319
------------ ---------- ---------- ------------ ---------- ----------- ------------
Gross profit 622,315 479,329 478,249 1,579,893 165,509 -- 1,745,402
Operating expenses 159,898 92,067 129,973 381,938 110,801 492,739
Depreciation and
amortization 210,678 445 211,123
Unallocated expenses 322,387 322,387
------------ ---------- ---------- ------------ ---------- ----------- ------------
Income from operations $ 462,417 $ 387,262 $ 348,276 664,890 54,263 -- 719,153
============ ========== ==========
Interest income 4,944 3,876 8,820
Other income (expense) (4,331) (4,331)
Provision for income tax (216,972) (19,645) (236,617)
Corporate expenses (97,196)
------------ ---------- ----------- ------------
Income before minority
interest $ 448,531 $ 38,494 $ -- $ 389,829
============ ========== =========== ============
THREE MONTHS ENDED MARCH 31, 2003
Net sales $ 1,194,256 $ 597,094 $ 539,557 $ 2,330,907 $ 828,710 $ $ 3,159,617
Cost of sales 602,895 50,328 53,197 706,420 448,684 1,155,104
------------ ---------- ---------- ------------ ---------- ----------- ------------
Gross profit 591,361 546,766 486,360 1,624,487 380,026 -- 2,004,513
Operating expenses 148,299 86,072 93,103 327,474 161,783 489,257
Depreciation and
amortization 341,020 5,478 346,498
Unallocated expenses 294,648 294,648
------------ ---------- ---------- ------------ ---------- ----------- ------------
Income from operations $ 443,062 $ 460,694 $ 393,257 $ 661,345 $ 212,765 $ -- $ 874,110
============ ========== ==========
Interest income 2,670 1,680 4,350
Other income (expense) 10,930 10,930
Provision for income tax (206,990) (72,000) (278,990)
------------ ---------- ----------- ------------
Income before minority
interest $ 467,955 $ 142,445 $ -- $ 610,400
============ ========== =========== ============
-8-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
FORWARD-LOOKING STATEMENTS
The following discussion of our financial condition and results of operations
should be read in conjunction with the consolidated financial statements and
related notes thereto. The following discussion contains forward-looking
statements. Yi Wan Group, Inc. is referred to herein as "we" or "our." The words
or phrases "would be," "will allow," "intends to," "will likely result," "are
expected to," "will continue," "is anticipated," "estimate," "project," or
similar expressions are intended to identify "forward-looking statements". Such
statements include those concerning expected financial performance, corporate
strategy, and operational plans. Actual results could differ materially from
those projected in the forward-looking statements as a result of a number of
risks and uncertainties, including: (a) general economic conditions in China;
(b) regulatory factors in China that may lead to additional costs or otherwise
negatively affect our business; (c) whether we are able to manage our planned
growth efficiently, including whether our management will be able to: (i)
identify, hire, train, retain, motivate and manage required personnel or (ii)
successfully manage and exploit existing and potential market opportunities; (d)
whether we are able to generate sufficient revenues or obtain financing to
sustain and grow our operations; (e) whether we are able to successfully fulfill
our primary cash requirements which are explained below under "Liquidity and
Capital Resources"; (f) whether there will be continuing negative economic
effects upon China and the China hotel and tourist industries due to possible
continuing negative perceptions pertaining to SARS; and (g) whether worldwide
economic conditions will negatively affect the tourist industry in China and our
hotel related revenues. Statements made herein are as of the date of the filing
of this Form 10-Q with the Securities and Exchange Commission and should not be
relied upon as of any subsequent date. Unless otherwise required by applicable
law, we do not undertake, and we specifically disclaim any obligation, to update
any forward-looking statements to reflect occurrences, developments,
unanticipated events or circumstances after the date of such statement.
GENERAL
RESULTS OF OPERATIONS
As of March 31, 2004, we had $ 3,818,869 of retained earnings. As of March 31,
2004, we had cash of $ 4,097,299 and total shareholders' equity of $19,738,727.
For the three months ended March 31, 2004, we had revenues of $2,841,721 and
general, administrative and sales expenses of $1,123,445.
CONSOLIDATED RESULTS
(1) SALES. Consolidated sales decreased by $317,896, or approximately 10.06%,
from $3,159,617 for the three months ended March 31, 2003 to $2,841,721 for the
three months ended March 31, 2004. The 10.06% decrease was due to under
development and promotion
-9-
of new products, which led to a decrease in the market share in the highly
innovative and competitive telecommunications market.
(2) COST OF GOODS SOLD. Consolidated cost of goods sold decreased by $58,785,
from $1,155,104 for the three months ended March 31, 2003 to $1,096,319 for the
three months ended March 31, 2004. Cost of goods sold as a percentage of sales
increased by 2.02%, from 35.56% for the three months ended March 31, 2003 to
38.58% for the three months ended March 31, 2004. This increase was a result of:
(1) an increase in the cost of raw materials and an increase in the discounted
promotions for the hotel operation; and (2) an increase in the cost of raw
materials and a decrease in sales in the telecommunications operation.
(3) GROSS PROFIT. Consolidated gross profit decreased by $259,111, from
$2,004,513 for the three months ended March 31, 2003 to $1,745,402 for the three
months ended March 31, 2004. Gross profit as a percentage of sales decreased by
2.02%, from 63.44% for the three months ended March 31, 2003 to 61.42% for the
three months ended March 31, 2004. This decrease in gross profit as a percentage
of sales was the result of a decrease in sales and an increase in the cost of
materials and operating expenses.
(4) SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses
decreased by $6,958, from $1,130,403 for the three months ended March 31, 2003
to $1,123,445 for the three months ended March 31, 2004. The selling and
administrative expenses as a percentage of sales increased by 3.76%, from 35.78%
for the three months ended March 31, 2003 to 39.53% for the three months ended
March 31, 2004. The increase in selling and administrative expenses as a
percentage of sales is attributed to an increase in corporate expenses and a
decrease in sales in the telecommunications equipment operation.
(5) NET INCOME. Consolidated net income decreased by $221,155, or approximately
39.54%, from $559,312 for the three months ended March 31, 2003 to $338,157 for
the three months ended March 31, 2004. The decrease was mainly due to: (1) a
decrease in sales and an increase in cost of raw materials for the
telecommunications equipment operation; and (2) an increase in cost of raw
materials and operating costs in the hotel operation.
SEGMENTED RESULTS
(1) SALES. An itemization of each operating unit's data and an explanation of
significant changes are as follows:
Hotel operations: Sales increased by $45,306, or approximately 1.94%,
from $2,330,907 for the three months ended March 31, 2003 to $2,376,213 for the
three months ended March 31, 2004. The increase was a result of a new management
team and an improvement in marketing strategies.
Telecommunication operations: Sales decreased by $363,202, or
approximately 43.83%, from $828,710 for the three months ended March 31, 2003 to
$465,508 for the three months ended March 31, 2004. The decrease was the result
of under development and promotion of new products, which led to a decrease in
market share in the highly innovative and competitive telecommunication market.
-10-
(2) COST OF GOODS SOLD. An itemization of each operating unit's data and an
explanation of significant changes are as follows:
Hotel operations: Cost of goods sold increased by $89,900, from
$706,420 for the three months ended March 31, 2003 to $796,320 for the three
months ended March 31, 2004. Cost of goods sold as a percentage of sales
increased to 33.51% for the three months ended March 31, 2004 from 30.31% for
the three months ended March 31, 2003. The increase is attributed to an increase
in the cost of raw materials and an increase in discounted sales promotions in
the hotel operation.
Telecommunication operations: Cost of goods sold decreased by $148,685,
from $448,684 for the three months ended March 31, 2003 to $299,999 for the
three months ended March 31, 2004. Cost of goods sold as a percentage of sales
increased to 64.45% for the three months ended March 31, 2004 from 54.14% for
the three months ended March 31, 2003. The increase in cost of goods sold as a
percentage of sales was a result of an increase in cost of raw materials and a
decrease in sales in the telecommunications operation.
(3) GROSS PROFIT. An itemization of each operating unit's data and an
explanation of significant changes are as follows:
Hotel operations: Gross profit decreased by $44,594, from $1,624,487
for the three months ended March 31, 2003 to $1,579,893 for the three months
ended March 31, 2004. As a percentage of sales, gross profit decreased from
69.69% for the three months ended March 31, 2003 to 66.49% for the three months
ended March 31, 2004. The decrease in gross profit as a percentage of sales was
due to an increase in the cost of materials and operating expenses.
Telecommunication operations: Gross profit decreased by $214,517, from
$380,026 for the three months ended March 31, 2003 to $165,509 for the three
months ended March 31, 2004. As a percentage of sales, gross profit decreased
from 45.86% for the three months ended March 31, 2003 to 35.55% for the three
months ended March 31, 2004. The decrease in gross profit as a percentage of
sales was due to an increase in the cost of materials and a decrease in sales.
(4) SELLING AND ADMINISTRATIVE EXPENSES. An itemization of each operating unit's
data and an explanation of significant changes are as follows:
Hotel operations: Selling and administrative expenses decreased by
$48,139, from $963,142 for the three months ended March 31, 2003 to $915,003 for
the three months ended March 31, 2004. Selling and administrative expenses as a
percentage of sales decreased to 38.51% for the three months ended March 31,
2004 from 41.32% for the three months ended March 31, 2003. This decrease was a
result of a decrease in our administrative and selling expenses, such as water,
electricity and fuel materials.
Telecommunication operations: Selling and administrative expenses
decreased by $56,015, from $167,261 for the three months ended March 31, 2003 to
$111,246 for the three months ended March 31, 2004. Selling and administrative
expenses as a percentage of sales increased to 23.9% for the three months ended
March 31, 2004 from 20.2% for the three
-11-
months ended March 31, 2003. The increase in selling and administrative expenses
as a percentage of sales was a result of a decrease in sales.
(5) NET INCOME. An itemization of each operating unit's data and further
explanations of significant changes are as follows:
Hotel operations: Net income decreased by $19,424, from $467,955, or
20.08% of sales, for the three months ended March 31, 2003 to $448,531, or
18.88% of sales, for the three months ended March 31, 2004. The decrease as a
percentage of sales was an increase in cost of raw materials and operating
expenses.
Telecommunications operations: Net income decreased by $103,951, from
$142,445, or 17.19% of sales, for the three months ended March 31, 2003 to
$38,494, or 8.27% of sales, for the three months ended March 31, 2004. The
decrease was a result of a decrease in sales and an increase in the cost of raw
materials.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2004, net cash provided by operating activities was $903,566;
net cash used in investing activities was $170,899; and net cash used in
financing activities was $1,210. As of March 31, 2003, net cash provided by
operating activities was $85,563; net cash used in investing activities was
$26,741; and net cash provided by financing activities was $703,763.
Net cash provided by operating activities increased by $818,003 to $903,566 for
the three months ended March 31, 2004, representing an increase of approximately
956.0%. The increase in cash flow from operating activities reflects a decrease
in related party receivables and an increase in accounts receivable during the
three months ended March 31, 2004. Due to the nature of conducting business in
China many financial transaction are completed in cash, instead of by check or
draft. Customarily, officers, managers and employees of companies located in
China, including our personnel, are advanced cash on a daily basis to pay for
normal business operating expenses. These advances are accounted for when the
officer or employee submits the paid invoice to the accounting department to
support the receipt of goods and services.
Net cash used in investing activities increased by $144,158 to $170,899 for the
three months ended March 31, 2004, representing a 539.1% increase, compared with
the $26,741 net cash used for the same period ended in 2003. The increase was
due to spending on equipment upgrades.
Net cash used in financing activities increased by $1,210 to $1,210 for the
three months ended March 31, 2004, representing a 100% increase, compared to
$703,763 provided by financing activities for the same period of 2003. The
increase was primarily due to full collections on existing note receivables at
March 31, 2003.
Going forward, our primary requirements for cash consist of: (1) the continued
implementation of the Hotel and Telecommunications Divisions' existing business
model in China, and the general overhead and personnel related expenses in
support of this implementation; (2) continued promotional activities to increase
hotel related revenues; (3) the development costs of the hotel operations in
China; (4) the payment of cash contributions
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to the joint ventures under the existing agreements; and (5) payments due to
some of the subsidiaries' former equity owners. We do not have any material
commitments for capital expenditures as of March 31, 2004. We anticipate that
our current operating activities will enable us to meet the anticipated cash
requirements for the 2004 fiscal year.
Historically, our subsidiary companies have financed operations principally
through cash generated from operations. Initial capital for the Hotel and
Telecommunication operations came from shareholders' contributions and are as
follows: Hotel operations: $11,960,000; and Telecommunication operations:
$1,580,000. No bank loans were obtained for the Hotel or Telecommunications
operations. We have to make capital contributions to our subsidiaries by June
2004 to meet the capital registration requirement. Other investment requirements
include payments due of $7,371,730 and $4,932,273 to the joint venture's former
partners. Since the Farm operation ceased on December 31, 2002, only $500,000
additional capital investment for the Telecommunication division remains
outstanding. The balances are to be funded from the profits generated from the
operations of the subsidiaries , and, if necessary, equity financing. There is
no assurance that equity financing can be obtained for the above purposes. The
joint venture's board of directors extended the June 2003 payment date to June
2004 for capital contributions. We intend to fund the hotel operation's capital
improvements from the positive cash flow generated from hotel operations.
MANAGEMENT ASSUMPTIONS.
Management anticipates, based on internal forecasts and assumptions relating to
our operations, that existing cash and funds generated from operations will be
sufficient to meet working capital and capital expenditure requirements for at
least the next 12 months. In the event that plans change, our assumptions change
or prove inaccurate, or if other capital resources and projected cash flow
otherwise prove to be insufficient to fund operations (due to unanticipated
expense, technical difficulties, or otherwise), we could be required to seek
additional financing. There can be no assurance that we will be able to obtain
additional financing on terms acceptable to us, or at all.
EFFECTS OF INFLATION
We are subject to commodity price risks arising from price fluctuations in the
market prices of the various raw materials that comprise our products. Price
risks are managed by each business unit through productivity improvements and
cost-containment measures. Management does not believe that inflation risk is
material to our business or our consolidated financial position, results of
operations or cash flows.
EFFECT OF FLUCTUATION IN FOREIGN EXCHANGE RATES
Our operating subsidiaries are located in China. These companies buy and sell
products in China using Chinese Renminbi as the functional currency. Based on
China government regulation, all foreign currencies under the category of
current accounts are allowed to be freely exchanged with hard currencies. During
the past two years of operation, there were no significant changes in exchange
rates; however, unforeseen developments may cause a significant change in
exchange rates.
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OFF-BALANCE SHEET ARRANGEMENTS
None.
CONTRACTUAL OBLIGATIONS
Table of Contractual Obligations
- -------------------------------------------------------------------------------------------------------------
PAYMENT DUE BY PERIOD
- -------------------------------------------------------------------------------------------------------------
CONTRACTUAL OBLIGATIONS TOTAL LESS THAN 1-3 YEARS 3-5 YEARS MORE THAN
1 YEAR 5 YEARS
- -------------------------------------------------------------------------------------------------------------
Long-Term Debt Obligations None -- -- -- --
- -------------------------------------------------------------------------------------------------------------
Capital Lease Obligations None -- -- -- --
- -------------------------------------------------------------------------------------------------------------
Operating Lease Obligations None -- -- -- --
- -------------------------------------------------------------------------------------------------------------
Purchase Obligations None -- -- -- --
- -------------------------------------------------------------------------------------------------------------
Other Long-Term Liabilities None -- -- -- --
Reflected on the Registrant's
Balance Sheet under GAAP
- -------------------------------------------------------------------------------------------------------------
Total 0 -- -- -- --
- -------------------------------------------------------------------------------------------------------------
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Not applicable.
Item 4 CONTROLS AND PROCEDURES
With the participation of management, our Chief Executive Officer and Chief
Financial Officer evaluated our disclosure controls and procedures within the 90
days preceding the filing date of this quarterly report. Based upon this
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures are effective in ensuring that
material information required to be disclosed is included in the reports that we
file with the Securities and Exchange Commission.
There were no significant changes in our internal control over financial
reporting to the knowledge of our management, or in other factors that have
materially affected or are reasonably likely to materially affect these internal
controls over financial reporting subsequent to the evaluation date.
PART II
OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Not applicable.
Item 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
Not applicable.
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Item 3. DEFAULT UPON SENIOR SECURITIES
Not applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
Item 5. OTHER INFORMATION
Not applicable.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3(i) Articles of Incorporation of the Registrant*
3(ii) Bylaws of the Registrant*
3.1 Jiaozuo Yi Wan Hotel Co., Ltd. Articles of Association*
3.2 Shunde Yi Wan Communication Equipment Plant Co., Ltd. Articles of
Association*
4 Form of Common Stock Certificate of the Registrant*
10.1 Form of Employment Agreement Jiaozuo Yi Wan Hotel Co., Ltd.*
10.2 Form of Employment Agreement Shunde Yi Wan Communication Equipment
Plant Co., Ltd.*
10.3 Land Use Permits of Shunde Yi Wan Communication Equipment Plant Co.,
Ltd.*
10.4 Land Use Permits of Jiaozuo Yi Wan Hotel Co., Ltd.*
10.5 Joint Venture Contract Jiaozuo Yi Wan Hotel Co., Ltd.*
10.6 Agreement of Shunde Yi Wan Communication Equipment Plant Co., Ltd.*
10.7 Agreement of Jiaozuo Yi Wan Maple Leaf High Technology Agriculture
Development Ltd., Co. on the Transfer of Equity Shares**
10.8 Agreement of Jiaozuo Yi Wan Hotel Co., Ltd. on the Transfer of
Equity Shares**
10.9 Transfer of Stock Rights and Property Rights Agreement of Jiaozuo Yi
Wan Maple Leaf High Technology Agriculture Development Co., Ltd.***
10.10 Qinyang Yi Wan Hotel Co., Ltd. Joint Venture Contract***
10.11 Joint Venture Contract with Qinyang Hotel***
10.12 Jiaozuo Foreign Trade and Economy Cooperation Bureau Reply about
Building Qinyang Yi Wan Hotel Co., Ltd.***
10.13 Agreement with Jiaozuo Yi Wan Maple Leaf High Technology
Agricultural Development Co., Ltd.***
10.14 Reply To The Transfer Of The Transfer Of The Stock Rights Of Jiaozuo
Yi Wan Maple Leaf High Technology Agricultural Development Co.,
Ltd.***
23.1 Consent of MOORE STEPHENS WURTH FRAZER AND TORBET, LLP for Yi Wan
Group, Inc. and Subsidiaries*
23.2 Consent of MOORE STEPHENS FRAZER AND TORBET, LLP for Yi Wan Group,
Inc. Reviewed Financial Statements December 31, 2001 and 2000***
23.3 Consent of MOORE STEPHENS FRAZER AND TORBET, LLP for Yi Wan Group,
Inc. Audited Financial Statements December 31, 2000 and 1999**
23.4 Consent of MOORE STEPHENS FRAZER AND TORBET, LLP for Yi Wan Group,
Inc. Subsidiaries Audited Financial Statements December 31, 1999 and
1998**
23.5 Consent of Independent Accountants for Yi Wan Group, Inc. Audited
Financial Statements December 31, 2002 and 2001***
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23.6 Consent of Independent Accountants for Yi Wan Group, Inc. Audited
Financial Statements December 31, 2002 and 2003****
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
32.1 Certification pursuant to 18 U.S.C Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification pursuant to 18 U.S.C Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
99.1 Application for the Transfer of the Stock Rights of Jiaozuo Yi Wan
Maple Leaf High Technology Agriculture Development Co., Ltd.***
99.2 Reply to the Transfer of the Transfer of the Stock Rights of Jiaozuo
Yi Wan Maple Leaf High Technology Agriculture Development Co.,
Ltd.***
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* Denotes previously filed exhibit, filed with Form 10-12G/A on 11/07/01, SEC
File No. 000-33119, hereby incorporated by reference.
** Denotes previously filed exhibit, filed with Form 10-12G/A on 5/21/02, SEC
File No. 000-33119, hereby incorporated by reference
*** Denotes previously filed exhibit, filed with Form 10-K on 4/16/03, SEC File
No. 000-33119, hereby incorporated by reference
**** Denotes previously filed exhibit, filed with Form 10-K on 3/30/04, SEC File
No. 000-33119, hereby incorporated by reference
We hereby incorporate the following documents by reference: (a) our Form 10
Registration Statement filed on August 24, 2001 and amendments thereto filed on
November 7, 2001, January 7, 2002, February 7, 2002, March 28, 2002, and May 22,
2002; (b) our Form 10Q for the period ended September 30, 2001 filed on December
7, 2001 and an amendment thereto filed on February 6, 2002; (c) our Form 10K for
the period ended December 31, 2001 filed on April 1, 2002 and an amendment
thereto filed on May 22, 2002; (d) our Form 10Q for the period ended March 31,
2002 filed on May 14, 2002; (e) our Form 10Q for the period ended June 30, 2002
filed on August 13, 2002 and an amendment thereto filed on August 13, 2002 and
August 16, 2002; (f) our Form 10Q for the period ended September 30, 2002, filed
on November 14, 2002; (g) our Form 10K for the year ended December 31, 2002,
filed on April 16, 2003; (h) our Form 10Q for the period ended March 31, 2003,
filed on May 15, 2003; (i) our Form 10Q for the period ended June 30, 2003,
filed on August 14, 2003 and an amendment thereto filed on September 23, 2003;
(j) our Form 10Q for the period ended September 30, 2003, filed on November 14,
2003; and (k) our Form 10K for the year ended December 31, 2003, filed on March
30, 2004.
(b) Reports on Form 8-K
None
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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.
Date: May 14, 2004 YI WAN GROUP, INC.
(Registrant)
/s/ Cheng Wan Ming
----------------------------------------------
Name: Cheng Wan Ming
Title: President and Chief Executive Officer