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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, 2003
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-33119
Yi Wan Group, Inc.
Exact name of registrant as specified in its charter)
Florida 33-0960062
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
2 East Camino Real, Suite 202, Boca Raton, Florida 33432
(Address of principal executive office) (Zip Code)
(561) 416-8956
(Registrant's telephone number, including area code)
All Correspondence to:
Brenda Lee Hamilton, Esquire
Hamilton, Lehrer & Dargan, P.A.
2 East Camino Real, Suite 202
Boca Raton, Florida 33432
(561) 416-8956
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 [ ]
The number of shares outstanding of each of Issuer's classes of common equity as
of March 31, 2003 was 16,506,250.
Title of Class Number of Shares Outstanding
Common Stock 16,506,250
Transitional Small Business Disclosure Format: Yes [ ] No [X]
YI WAN GROUP, INC.
TABLE OF CONTENTS
Page
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements ............................................ 2
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ....................................... 14
Item 3. Qualitative and Quantitative Disclosures about Market Risks...... 18
Item 4. Controls and Procedures.......................................... 18
PART II
OTHER INFORMATION
Item 1 Legal Proceedings ............................................... 19
Item 2 Changes in Securities and Use of Proceeds ....................... 19
Item 3 Defaults upon Senior Securities.................................. 19
Item 4 Submission of Matters to a Vote of Securities ................... 19
Item 5 Other Information ............................................... 19
Item 6 Exhibits and Reports on Form 8-K ................................ 19
Item 1 Financial Statements
Forward-Looking Statements
This quarterly report for the period ended March 31, 2003 on Form 10-Q contains
forward looking statements. 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". Actual results could differ materially
from those projected in the forward looking statements as a result of a number
of risks and uncertainties, including the risks stated on page 14 of this Form
10-Q. 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.
-2-
YI WAN GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2003 AND DECEMBER 31, 2002
A S S E T S
March 31, December 31,
2003 2002
------------- -------------
(Unaudited) (Audited)
------------- -------------
CURRENT ASSETS:
Cash $ 2,897,739 $ 2,135,154
Accounts receivable, net of allowance
for doubtful accounts of $6,455 at
March 31, 2003 and December 31, 2002 1,258,623 1,284,655
Due from related parties 2,442,971 1,686,504
Note receivable 521,142 1,217,579
Inventories 623,011 568,051
Assets of discontinued operations - 1,289
Prepaid expenses 61,281 44,826
------------- -------------
Total current assets 7,804,767 6,938,058
------------- -------------
BUILDINGS, EQUIPMENT AND AUTOMOBILES, net 18,790,019 19,131,044
------------- -------------
OTHER ASSETS:
Intangible asset, net 1,623,522 1,635,958
Deferred tax asset 212,035 182,044
Other non-current assets 337,536 295,125
------------- -------------
Total other assets 2,173,093 2,113,127
------------- -------------
Total assets $ 28,767,879 $ 28,182,229
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 382,415 $ 370,101
Accounts payable - related party 67,810 87,417
Accrued liabilities 676,760 763,309
Wage and benefits payable 260,863 265,580
Sales tax payable 875,707 875,510
Income taxes payable 1,347,182 1,279,595
Due to shareholders 88,800 88,800
Due to prior owners of joint ventures 4,932,273 4,932,273
Notes payable 90,433 83,107
Liabilities of discontinued operations - 1,289
------------- -------------
Total current liabilities 8,722,243 8,746,981
------------- -------------
MINORITY INTEREST 1,755,398 1,704,310
------------- -------------
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 5,111,045 5,109,656
Statutory reserves 10,832,731 10,832,731
Retained earnings 2,267,190 1,707,878
Accumulated other comprehensive income 69,194 70,595
------------- -------------
Total shareholders' equity 18,290,238 17,730,938
------------- -------------
Total liabilities and
shareholders' equity $ 28,767,879 $ 28,182,229
============= =============
-3-
YI WAN GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
Three months ended March 31,
----------------------------
2003 2002
----------- -----------
(Unaudited) (Unaudited)
----------- -----------
NET SALES $ 3,159,617 $ 2,799,890
COST OF SALES 1,155,104 990,359
----------- -----------
GROSS PROFIT 2,004,513 1,809,531
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 1,130,403 1,010,813
----------- -----------
INCOME FROM OPERATIONS 874,110 798,718
----------- -----------
OTHER INCOME 15,280 2,797
----------- -----------
INCOME FROM CONTINUING OPERATIONS BEFORE
PROVISION FOR INCOME TAXES AND MINORITY INTEREST 889,390 801,515
PROVISION FOR INCOME TAXES 278,990 237,835
----------- -----------
INCOME BEFORE MINORITY INTEREST 610,400 563,680
MINORITY INTEREST (51,088) (46,662)
----------- -----------
NET INCOME FROM CONTINUING OPERATIONS 559,312 517,018
DISCONTINUED OPERATIONS:
Loss from operations of discontinued
operations (net of applicable income
tax of $0) - (17,065)
Minority interest - 1,707
----------- -----------
Loss from discontinued operations - (15,358)
NET INCOME 559,312 501,660
OTHER COMPREHENSIVE INCOME:
Foreign currency translation adjustment (1,401) (2,014)
----------- -----------
COMPREHENSIVE INCOME $ 557,911 $ 499,646
=========== ===========
EARINGS (LOSS) PER SHARE - BASIC AND DILUTED:
From continuing operations 0.03 0.03
From discontinued operations - -
----------- -----------
Earnings per share, basic and diluted $ 0.03 $ 0.03
=========== ===========
-4-
YI WAN GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
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, January 1, 2003, 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
========== ========== ========== =========== ========== ============= ===========
BALANCE, January 1, 2002, audited 16,256,250 $ 5,078 $5,104,105 $ 9,113,617 $2,945,701 $ (17,370)$17,151,131
Net income 501,660 501,660
Additions to paid in capital
(land use right) 1,389 1,389
Adjustmentment to statutory
reserves -
Foreign currency translation
adjustments (2,014) (2,014)
Foreign currency translation
adjustments
---------- ---------- ---------- ----------- ---------- ------------- -----------
BALANCE, March 31, 2002 16,256,250 $ 5,078 $5,105,494 $ 9,113,617 $3,447,361 $ (19,384)$17,652,166
========== ========== ========== =========== ========== ============= ===========
-5-
YI WAN GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
Three months ended March 31,
----------------------------
2003 2002
----------- -----------
(Unaudited) (Unaudited)
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 559,312 $ 501,660
Loss from discontinued operations - (15,358)
----------- -----------
Income from continuing operations 559,312 486,302
Adjustments to reconcile net income to cash
Minority interest 51,088 44,955
Depreciation 367,766 312,718
Amortization 12,436 9,919
Land use cost 1,389 1,389
Deferred tax assets (29,991) (32,803)
Translation adjustment (1,401) (2,014)
Decrease (increase) in accounts receivable 26,032 (87,928)
Increase in related party receivables (756,467) (120,447)
Increase in inventories (54,960) (42,519)
(Increase) decrease in prepaid expenses (16,455) 3,517
Increase in due from officers and employees (42,411) (65,871)
Increase (decrease) in accounts payable 12,314 (14,633)
Decrease in accounts payable - related party (19,607) -
Decrease in accrued liabilities and other
current liabilities (86,549) (105,330)
Decrease in wages and benefits payable (4,717) (17,039)
Increase (decrease) in sales tax payable 197 (29,842)
Increase in income taxes payable 67,587 270,538
Cash provided by discontinued operations - 34,320
----------- -----------
Net cash provided by operating activities 85,563 645,232
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of improvements and equipments (26,741) (30,742)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from note receivable 696,437 -
Borrowings on notes payable 7,326 -
----------- -----------
Net cash provided by financing activities 703,763 -
----------- -----------
INCREASE IN CASH 762,585 614,490
CASH, beginning of period 2,135,154 1,306,992
----------- -----------
CASH, end of period $ 2,897,739 $ 1,921,482
=========== ===========
-6-
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 100 %
Plant Co., Ltd. (TELECOMMUNICATIONS)
Jiao Zuo Yi Wan Hotel Co., Ltd. (HOTEL) 90
Yi Wan Maple Leaf High Technology 90
Agriculture Developing Ltd. Co. (FARM)
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, FARM 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, FARM 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 four 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, FARM and QINYANG companies and 15 years
for the TELECOMMUNICATIONS. As further discussed in Note 7, the Company
discontinued the FARM operations and sold all of the FARM assets in the fourth
quarter of 2002.
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, FARM, TELECOMMUNICATIONS and QINYANG. All significant
inter-company accounts and transactions have been eliminated in the
consolidation.
-7-
YI WAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of significant accounting policies, (continued)
Foreign currency translation
The reporting currency of YWG is the 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.
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, FARM 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,
2002 and notes thereto included in YWG's Form 10-K, dated April 16, 2003.
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, 2003, the results of operations for the three months ended March
31, 2003 and 2002, respectively. Interim results are not necessarily indicative
of full year performance because of the impact of seasonal and short-term
variations.
-8-
YI WAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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,
2003 2002
--------------- ---------------
(Unaudited) (Audited)
--------------- ---------------
Hotel inventory $ 204,053 $ 211,453
Telecommunication inventory 418,958 356,598
--------------- ---------------
Total inventories $ 623,011 $ 568,051
=============== ===============
The HOTEL inventory consists of food products, alcohol, beverages and supplies.
At March 31, 2003, TELECOMMUNICATION's inventory consists of raw materials
($114,888), work in process ($115,744) and finished goods ($188,326).
Note 4 - Supplemental disclosure of cash flow information
Income taxes paid amounted to $241,339 and $0 for the three months ended March
31, 2003 and 2002, respectively. No interest expense was paid for the three
months ended March 31, 2003 and 2002.
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 and 16,256,250
shares for the three months ended March 31, 2003 and 2002, respectively),
Note 6 - QINYANG operations
In 2001, YWG entered into a joint venture agreement with Qinyang Hotel (OLD
QINYANG), a third party to set up Qinyang Yi Wan Hotel Co., Ltd. According to
the joint venture agreement, the registered capital of QINYANG is approximately
$2,413,389 (RMB(Y)20,000,000). YWG will contribute approximately $1,930,711
(RMB(Y)16,000,000) in exchange for an 80% equity interest in QINYANG. OLD
QINYANG will contribute approximately $361,906 (RMB(Y)3,000,000) in the form of
building and land use right and $120,672 (RMB(Y)1,000,000) in cash in exchange
for a 20% equity interest of QINYANG. The registered capital amount of
$2,413,389 (RMB(Y)20,000,000) has been contributed by each joint venture
partner. YWG has contributed it share of capital of $1,930,711
(RMB(Y)16,000,000) from funds generated by its HOTEL division and proceeds
generated from the sale of the assets of the FARM.
In the People's Republic of China, a business entity can not legally operate
until they are issued a business license. QINYANG obtained a temporary business
license on June 3, 2002. Prior to June 2, 2002, QINYANG had generated minimal
revenues and expenses and the Company did not consider this activity material to
the consolidated financial statements at March 31, 2002. QINYANG's entire net
operating results of $(124,162) from inception (2001) to June 02, 2002 have been
included in the consolidated financial statements for the three months ending
June 30, 2002. Details are as follows:
-9-
YI WAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 6 - QINYANG operations, (continued)
Net loss for the period ended December 31, 2001 $ (191,739)
Net income for the period from January 1, 2002
to June 2, 2002 67,577
-----------------
Net loss through June 2, 2002 $ (124,162)
=================
As a percentage of YWG's consolidated net
income from continuing operations for the year
ended December 31, 2002 (5%)
=================
Note 7 - Discontinued operations
During 2001, as a result of highway construction, the FARM had lost its source
of natural water necessary to raise and grow the FARM's products. The FARM had
ceased its operations during December 2001. In November 2002, the FARM's Board
of Directors approved management's plan to dispose of all of the FARM's assets.
In December 2002, the Company consummated the sale of the FARM's assets to a
third party and recorded a net loss of $1,596,317. In connection with the sale,
the Company received $522,327 in cash and a note receivable of $1,217,579. The
proceeds from this sale will be used to satisfy YWG's capital contribution for
the QINYANG joint venture.
This sale was accounted for as a disposal group under SFAS No. 144. Accordingly,
amounts in the financial statements and related amounts for all periods
presented have been reclassified to reflect SFAS No. 144 treatment.
Operating results of the discontinued operations for the three months ended
March 31, 2003 and 2002 are as follows:
2003 2002
------------- -------------
External revenue $ - $ -
============= =============
Intercompany revenue - -
============= =============
Loss from discontinued operations
before income taxes - (17,065)
------------- -------------
Loss from discontinued operations - (17,065)
Minority interest - 1,707
------------- -------------
Total loss from discontinued operations $ - $ (15,358)
============= =============
Loss per share from discontinued operations $ - $ -
============= =============
-10-
YI WAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 7 - Discontinued operations, (continued)
Balance sheets of the discontinued operations as of March 31, 2003 and December
31, 2002 are as follows:
March 31, December 31,
2003 2002
------------- ------------
Cash $ - $ 1,289
------------- ------------
Total assets $ - $ 1,289
============= ============
Current liabilities - 1,289
Shareholders' equity - -
------------- ------------
Total liabilities and shareholders' equity $ - $ 1,289
============= ============
-11-
YI WAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(See Accountant's Review Report)
Note 8 - Segment Information
As discussed in Note 7, during the fourth quarter of 2002, the Company sold its
FARM business. Accordingly, the Company realigned its business into the
following four reportable 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. As a result of the changes discussed above, historical amounts
previously reported have been restated to conform to the Company's current
operating segment presentation. The following table presents revenues and other
financial information by business segment for the periods presented:
HOTEL
-----------------------------------------------
Telecom-
Entertain- munication Intersegment
Restaurant Lodging ment Totals Equipment elimination Totals
----------- --------- ---------- ----------- ---------- ------------ -----------
Total Assets:
March 31, 2003 $22,716,303 $6,702,967 $ (1,172,533) $28,246,737
=========== ========== ============
Assets held by parent company 521,142
-----------
Total assets - consolidated
financial statements $28,767,879
===========
December 31, 2002 $22,900,326 $6,433,060 $ (2,370,025) $26,963,361
=========== ========== ============
Assets held by parent company 1,217,579
Assets of discontinued
operations 1,289
-----------
Total assets - consolidated
financial statements $28,182,229
===========
-12-
YI WAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(See Accountant's Review Report)
Note 8 - Segment Information, (continued)
HOTEL
-----------------------------------------------
Telecom-
Entertain- munication Intersegment
Restaurant Lodging ment Totals Equipment elimination Totals
----------- --------- ---------- ----------- ---------- ------------ -----------
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 10,930 10,930
Provision for income tax (206,990) (72,000) (278,990)
----------- ---------- ------------ -----------
Income before minority
interest $ 467,955 $ 142,445 $ - $ 610,400
=========== ========== ============ ===========
Three months ended March 31, 2002
Net sales $ 961,526 $ 435,196 $ 505,164 $ 1,901,886 $ 898,004 $ $ 2,799,890
Cost of sales 481,468 29,053 37,268 547,789 442,570 - 990,359
----------- --------- ---------- ----------- ---------- ------------ -----------
Gross profit 480,058 406,143 467,896 1,354,097 455,434 - 1,809,531
Operating expenses 97,444 63,005 72,503 232,952 220,546 453,498
Depreciation and
amortization 279,585 5,479 285,064
Unallocated expenses 272,251 272,251
----------- --------- ---------- ----------- ---------- ------------ -----------
Income from operations $ 382,614 $ 343,138 $ 395,393 569,309 229,409 - 798,718
Interest income 1,428 1,669 3,097
Other income (expense) (300) (300)
Provision for income tax (170,439) (67,396) (237,835)
----------- ---------- ------------ -----------
Income before minority
interest $ 399,998 $ 163,682 $ - $ 563,680
=========== ========== ============ ===========
-13-
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation
Forward-Looking Statements:
The following discussion of the 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 our expected financial performance, our
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) those risks and uncertainties related
to general economic conditions in China, including regulatory factors that may
affect such economic conditions; (b) whether we are able to manage our planned
growth efficiently and operate profitable operations, including whether our
management will be able to identify, hire, train, retain, motivate and manage
required personnel or that management will be able to manage and exploit
existing and potential market opportunities successfully; (c) whether we are
able to generate sufficient revenues or obtain financing to sustain and grow our
operations; (d) whether we are able to successfully fulfill our primary
requirements for cash which are explained below under "Liquidity and Capital
Resources"; (e) the possible negative economic effects of SARS upon China and
the China hotel and tourist industries; and (f) whether worldwide economic
conditions will affect the tourist industry in China and thereby affect revenues
of our hotels. 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, 2003, we had $2,267,190 of retained earnings. As of March 31,
2003, we had cash of $2,897,739 and reported total shareholders' equity of
$18,290,238. For this same period of time, we had revenues of $3,159,617 and
general, administrative and sales expenses of $1,130,403.
Consolidated results
1) SALES. Consolidated sales increased by $359,727, or approximately 12.8%, from
$2,799,890 for the three months ended March 31, 2002 to $3,159,617 for the three
months ended March 31, 2003. The 12.8% increase was a result of our new joint
venture hotel being in operation since June, 2002 and increased sales promotions
to attract additional customers.
-14-
2) COST OF GOODS SOLD. Consolidated cost of goods sold increased by $164,745,
from $990,359 for the three months ended March 31, 2002 to $1,155,104 for the
three months ended March 31, 2003. Cost of goods sold as a percentage of sales
increased to 36.56% for the three months ended March 31, 2003, from 35.37% for
the three months ended March 31, 2002. The increase was a result of our new
joint venture hotel being in operation since June 2002 and an increase in the
cost of materials and operating costs.
(3) GROSS PROFIT. Consolidated gross profit increased by $194,982, from
$1,809,531 for the three months ended March 31, 2002 to $2,004,513 for the three
months ended March 31, 2003. Gross profit as a percentage of sales decreased to
63.44% for the three months ended March 31, 2003 from 64.63% for the three
months ended March 31, 2002. This decrease in gross profit as a percentage of
sales was the result of an increase in the cost of materials and operating
costs.
(4) SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses
increased by $119,590, from $1,010,813 for the three months ended March 31, 2002
to $1,130,403 for the three months ended March 31, 2003. The selling and
administrative expenses as a percentage of sales decreased to 35.78% for the
three months ended March 31, 2003 from 36.10% for the three months ended March
31, 2002.The decrease in selling and administrative expenses was due to the
decrease in the cost of our administrative and selling expenses in our
telecommunication's operations which was offset by increase in expenses due to
our new hotel operations.
(5) NET INCOME. Consolidated net income increased $57,652, or approximately
11.5%, from $501,660 for the three months ended March 31, 2002 to $559,312 for
the three months ended March 31, 2003. The increase was mainly due to an
increase in sales from our new hotel operations and a decrease in selling and
administrative expenses of our telecommunication operations.
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 $429,021, or approximately 22.56%,
from $1,901,886 for the three months ended March 31, 2002 to $2,330,907 for the
three months ended March 31, 2003. The increase was a result of our new hotel
operations and increased sales promotions to attract additional customers.
Telecommunication operations: Sales decreased by $69,294, or approximately
7.7%, from $898,004 for the three months ended March 31, 2002 to $828,710 for
the three months ended March 31, 2003. The decrease was a result of lower sale
prices and increased sales discount promotions to meet market competition.
(2) COST OF GOODS SOLD. An itemization of each operating unit's data and an
explanation of significant changes is as follows:
Hotel operations: Cost of goods sold increased by $158,631, from $547,789
for the three months ended March 31, 2002 to $706,420 for the three months ended
March 31, 2003. Cost of goods sold as a percentage of sales increased to 30.3%
for the three months ended March 31, 2003 from 28.8% for the three months ended
March 31, 2002. The increase in cost of goods sold as a percentage of sales is
attributable to an increase in the cost of materials and operating costs.
-15-
Telecommunication operations: Cost of goods sold increased by $6,114, from
$442,570 for the three months ended March 31, 2002 to $448,684 for the three
months ended March 31, 2003. Cost of goods sold as a percentage of sales
increased to 54.14% for the three months ended March 31, 2003 from 49.3% for the
three months ended March 31, 2002. The increase was a result of an increase in
cost of raw materials and lower sale prices and additional sales discount
promotions to meet the market competition.
(3) GROSS PROFIT. An itemization of each operating unit's data and an
explanation of significant changes is as follows:
Hotel operations: Gross profit increased by $270,390, from $1,354,097 for
the three months ended March 31, 2002 to $1,624,487 for the three months ended
March 31, 2003. As a percentage of sales, gross profit decreased from 71.2% for
the three months ended March 31, 2002 to 69.7% for the three months ended March
31, 2003. The decrease in gross profit as a percentage of sales resulted from
lower selling prices and increases in the cost of materials and operating costs.
Telecommunication operations: Gross profit decreased by $75,408, from
$455,434 for the three months ended March 31, 2002 to $380,026 for the three
months ended March 31, 2003. As a percentage of sales, gross profit decreased
from 50.7% for the three months ended March 31, 2002 to 45.9% for the three
months ended March 31, 2003. The decrease in gross profit as a percentage of
sales was the result of an increase in cost of raw materials and lower sale
prices and an increase in sales discount promotions to meet the market
competition
(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 increased by
$178,354, from $784,788 for the three months ended March 31, 2002 to $963,142
for the three months ended March 31, 2003. Selling and administrative expenses
as a percentage of sales increased to 41.32% for the three months ended March
31, 2003 from 41.26% for the three months ended March 31, 2002. This increase
was a result of as a result of our new joint venture hotel being in operation
since June 2002.
Telecommunication operations: Selling and administrative expenses decreased
by $58,764, from $226,025 for the three months ended March 31, 2002 to $167,261
for the three months ended March 31, 2003. Selling and administrative expenses
as a percentage of sales decreased to 20.2% for the three months ended March 31,
2003 from 25.17% for the three months ended March 31, 2002. The decrease in
selling and administrative expenses as a percentage of sales was a result of a
decrease in expenses.
(5) NET INCOME. An itemization of each operating unit's data and further
explanations of significant changes are as follows:
Hotel operations: Net income increased by $67,957, from $399,998, or 21.03%
of sales, for the three months ended March 31, 2002 to $467,955, or 20.08% of
sales, for the three months ended March 31, 2003. The decrease as a percentage
of sales was a combination of lower selling prices and an increase in cost of
goods sold and selling expense.
Telecommunications operations: Net income decreased by $21,237, from
$163,682 or 18.2% of sales, for the three months ended March 31, 2002 to
$142,445, or 17.2% of sales, for the three months ended March 31, 2003. The
decrease was a result of an increase in cost of raw materials, lower sale
prices, and increased sales discount promotions to meet the market competition.
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LIQUIDITY AND CAPITAL RESOURCES
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.
As of March 31, 2002, net cash provided by operating activities was $645,232,
net cash used in investing activities was $30,742, and net cash used in
financing activities was $0
Net cash provided by operating activities decreased by $559,669 to $85,563 for
the three months ended March 31, 2003, representing a decrease of approximately
86.7%. The decrease in cash flow from operating activities reflects payments on
related party receivables made during the year 2003.
Net cash used in investing activities decreased by $4,001 to $26,741 for the
three months ended March 31, 2003, representing a 13.0% decrease, compared to
$30,742 net cash used for the same period of 2002. The decrease was due to a
reduction in spending on improvements and equipment.
Net cash provided by financing activities increased by $703,763 to $703,763 for
the three months ended March 31, 2003, representing a 100% increase, compared to
$0 for the same period of 2002. The increase was primarily due to collections on
a note receivable.
Going forward, our primary requirements for cash consist of: (1) the continued
implementation of our Hotel and Telecommunications Division s' existing business
model in China; (2) general overhead expenses for personnel to support these
business model activities; (3) continued promotional activities pertaining to
our attempt to increase hotel related revenues; 4) the development costs of our
hotel operations in China; (5) the payment of cash contributions to the joint
ventures under the joint venture agreements; and (6) payments due to the former
equity owners of our subsidiaries. We anticipate that our current operating
activities will enable us to meet the anticipated cash requirements for the 2003
fiscal year.
Historically, our subsidiary companies have financed operations principally
through cash generated from operations. Initial capital for each operating unit
was generated by contributions of initial shareholders (Hotel operations:
$11,960,000, Telecommunication operations: $1,580,000, Farm operations:
$2,410,000). No bank loans were obtained for this purpose. The cash
contributions required to be made by June 2002 to our subsidiaries for
registered capital and the additional investment requirements of $7,371,730 and
the $9,936,210 due to our former joint venture partners will be funded from the
profits generated from the operations of our subsidiaries and, if necessary,
equity financing; however, there are no assurances that we will be successful in
obtaining equity financing. , however, our former joint venture partners
extended the June 2002 payment date to June 2003 for capital contributions. We
intend to fund the capital improvements to be made to the hotel from 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 it, or at all.
-17-
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.
Item 3. Qualitative and Quantitative Disclosures about Market Risks
Not applicable.
Item 4. Controls and Procedures
With the participation of management, the Company's Chief Executive Officer and
Chief Financial Officer evaluated the Company's 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 the Company's disclosure controls and
procedures are effective in ensuring that material information required to be
disclosed is included in the reports that it files with the Securities and
Exchange Commission.
There were no significant changes in the Company's internal controls or, to the
knowledge of the management of the Company, in other factors that could
significantly affect these controls subsequent to the evaluation date.
-18-
Part II: Other Information
Item 1: Legal Proceedings
Not applicable.
Item 2: Changes in Securities and Use of Proceeds
Not applicable.
Item 3. Defaults 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* Organizational Documents of:
3.1 Jiaozuo Yi Wan Hotel Co., Ltd. Articles of Association*
3.2 Shunde Yi Wan Communication Equipment Plant Co., Ltd. Articles of
Association*
3.3 Yi Wan Maple Leaf High Technology Agriculture Developing Ltd. Co.
Articles of Association*
4 Form of common stock Certificate of the Registrant*
10.1 Form of Employment Agreement Yi Wan Maple Leaf High Technology
Agriculture Developing Ltd. Co.*
10.2 Form of Employment Agreement Jiaozuo Yi Wan Hotel Co., Ltd.*
10.3 Form of Employment Agreement Shunde Yi Wan Communication Equipment
Plant Co., Ltd.*
10.4 Land Use Permits of Yi Wan Maple Leaf High Technology Agriculture
Developing Ltd. Co.*
10.5 Land Use Permits of Shunde Yi Wan Communication Equipment Plant Co.,
Ltd.*
10.6 Land Use Permits of Jiaozuo Yi Wan Hotel Co., Ltd.*
10.7 Joint Venture Contract Yi Wan Maple Leaf High Technology Agriculture
Developing Ltd. Co.*
10.8 Joint Venture Contract Jiaozuo Yi Wan Hotel Co., Ltd.*
10.9 Agreement of Shunde Yi Wan Communication Equipment Plant Co., Ltd.*
10.10 Agreement of Jiaozuo Yi Wan Maple Leaf High Technology Agriculture
Development Ltd., Co. on the Transfer of Equity Shares**
10.11 Agreement of Jiaozuo Yi Wan Hotel Co., Ltd. on the Transfer of
Equity Shares**
10.12 Transfer of Stock Rights and Property Rights Agreement of Jiaozuo Yi
Wan Maple Leaf High Technology Agriculture Development Co.,Ltd.***
10.13 Qinyang Yi Wan Hotel Co., Ltd. Joint Venture Contract***
10.14 Joint Venture Contract with Qinyang Hotel***
10.15 Jiaozuo Foreign Trade and Economy Cooperation Bureau Reply about
Building Qinyang Yi Wan Hotel Co., Ltd.***
10.16 Agreement with Jiaozuo Yi Wan Maple Leaf High Technology Agricultural
Development Co., Ltd.***
10.17 Reply To The Transfer Of The Stock Rights Of Jiaozuo Yi Wan Maple
Leaf High Technology Agricultural Development Co., Ltd.***
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
* 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
*** Denotes previously filed exhibit, filed with Form 10-K on 04/16/03, 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; and (g) our Form 10K for the year ended December 31,
2002, filed on April 16, 2003.
B. Reports on Forms 8-K
None
-19-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
YI WAN GROUP, INC.
Date: May 15, 2003 By:/s/ Chang Wan Ming
Chang Wan Ming, President
-20-
CERTIFICATION ACCOMPANYING PERIODIC REPORT PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Chang Wan Ming, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Yi Wan Group, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of
Yi Wan Group, Inc. as of, and for, the periods presented in this quarterly
report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for Yi Wan Group, Inc. and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to Yi Wan Group, Inc., including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of Yi Wan Group, Inc.'s disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to Yi Wan Group, Inc.'s auditors and the audit
committee of Yi Wan Group, Inc.'s board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect Yi Wan Group, Inc.'s ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in Yi Wan Group, Inc.'s internal controls;
and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: May 15, 2003
/s/ Chang Wan Ming
Chang Wan Ming
President and Chief Executive Officer
-21-
CERTIFICATION ACCOMPANYING PERIODIC REPORT PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Wu Zeming, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Yi Wan Group, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of
Yi Wan Group, Inc. as of, and for, the periods presented in this quarterly
report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for Yi Wan Group, Inc. and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to Yi Wan Group, Inc., including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of Yi Wan Group, Inc.'s disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to Yi Wan Group, Inc.'s auditors and the audit
committee of Yi Wan Group, Inc.'s board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect Yi Wan Group, Inc.'s ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in Yi Wan Group, Inc.'s internal controls;
and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: May 15, 2003
/s/ Wu Zeming
Wu Zeming
Chief Financial Officer and Principal Accounting Officer
-22-