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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2002
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 September 30, 2002 was 16,256,250.
Title of Class Number of Shares Outstanding
Common Stock 16,256,250
Transitional Small Business Disclosure Format: Yes __ No X
YI WAN GROUP, INC.
TABLE OF CONTENTS
Page
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements ............................................ 3
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ....................................... 13
Item 3. Qualitative and Quantitative Disclosures about Market Risks...... 17
Item 4. Controls and Procedures.......................................... 17
PART II
OTHER INFORMATION
Item 1 Legal Proceedings ............................................... 18
Item 2 Changes in Securities and Use of Proceeds ....................... 18
Item 3 Defaults upon Senior Securities.................................. 18
Item 4 Submission of Matters to a Vote of Securities ................... 18
Item 5 Other Information ............................................... 18
Item 6 Exhibits and Reports on Form 8-K ................................ 18
2
Item 1 Financial Statements
YI WAN GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2002 AND DECEMBER 31, 2001
A S S E T S
September 30, December 31,
2002 2001
Unaudited Audited
------------ ------------
CURRENT ASSETS:
Cash $ 2,101,071 $ 1,391,113
Accounts receivable, net of allowance
for doubtful accounts of $4,742
and $6,950 at September 30, 2002
and December 31, 2001, respectively 1,144,750 1,044,576
Due to related parties 3,752,736 2,584,104
Inventories 743,374 566,938
Prepaid expenses 59,210 21,371
------------ ------------
Total current assets 7,801,141 5,608,102
------------ ------------
BUILDINGS, EQUIPMENT AND AUTOMOBILES, net 17,060,669 17,744,121
------------ ------------
OTHER ASSETS:
Intangible asset, net 4,175,741 4,211,089
Deferred tax asset 156,151 110,753
Other non-current assets 457,295 346,077
------------ ------------
Total other assets 4,789,187 4,667,919
------------ ------------
Total assets $ 29,650,997 $ 28,020,142
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 325,587 $ 330,720
Accounts payable - related party 89,406 10,788
Accrued liabilities 586,870 675,306
Wage and benefits payable 302,860 335,859
Sales tax payable 984,437 1,011,777
Income taxes payable 989,779 1,075,680
Due to shareholders 177,596 177,609
Due to prior owners of joint ventures 5,773,057 5,773,130
Notes payable 13,648 13,649
------------ ------------
Total current liabilities 9,243,240 9,404,518
------------ ------------
MINORITY INTEREST 1,594,562 1,464,493
------------ ------------
SHAREHOLDERS' EQUITY:
Common stock, no par value,
authorized 50,000,000 shares,
16,256,250 shares issued and
outstanding 5,078 5,078
Paid-in-capital 5,108,272 5,104,105
Statutory reserve 9,019,638 9,113,617
Retained earnings 4,699,377 2,945,701
Accumulated other comprehensive income (19,170) (17,370)
------------ ------------
18,813,195 17,151,131
------------ ------------
Total shareholders' equity
Total liabilities and shareholders'
equity $ 29,650,997 $ 28,020,142
============ ============
3
YI WAN GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
Three months Nine months
ended September 30, ended September 30,
2002 2001 2002 2001
----------- ----------- ----------- -----------
Unaudited Unaudited Unaudited Unaudited
----------- ----------- ----------- -----------
NET SALES $ 3,494,080 $ 3,483,690 $ 9,400,349 $ 9,776,309
COST OF SALES 1,258,892 1,489,193 3,274,954 3,791,679
----------- ----------- ----------- -----------
GROSS PROFIT 2,235,188 1,994,497 6,125,395 5,984,630
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 1,169,565 1,067,457 3,357,231 2,983,162
----------- ----------- ----------- -----------
INCOME FROM OPERATIONS 1,065,623 927,040 2,768,164 3,001,468
OTHER INCOME (EXPENSE) 15,650 7,816 22,212 (27,304)
----------- ----------- ----------- -----------
INCOME BEFORE PROVISION FOR
INCOME TAXES AND
MINORITY INTEREST 1,081,273 934,856 2,790,376 2,974,164
PROVISION FOR INCOME TAXES 361,811 231,715 906,631 635,420
----------- ----------- ----------- -----------
INCOME BEFORE MINORITY
INTEREST 719,462 703,141 1,883,745 2,338,744
MINORITY INTEREST (47,073) (22,825) (130,069) (145,737)
----------- ----------- ----------- -----------
NET INCOME 672,389 680,316 1,753,676 2,193,007
OTHER COMPREHENSIVE INCOME:
Foreign currency
translation adjustment 8,768 (25,678) (1,800) (23,824)
----------- ----------- ----------- -----------
COMPREHENSIVE INCOME $ 681,157 $ 654,638 $ 1,751,876 $ 2,169,183
=========== =========== =========== ===========
Earnings per share, basic
and diluted $ 0.04 $ 0.04 $ 0.11 $ 0.14
=========== =========== =========== ===========
4
YI WAN GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
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, 2002, audited 16,256,250 $ 5,078 $5,104,105 $9,113,617 $2,945,701 $ (17,370) 17,151,131
Net income 1,753,676 1,753,676
Additions to paid in capital
(land use right) 4,167 4,167
Distribution to Farm employees (93,979) (93,979)
Foreign currency translation
adjustments (1,800) (1,800)
---------- ---------- ---------- ---------- ---------- ------------- -----------
BALANCE, September 30, 2002 16,256,250 $ 5,078 $5,108,272 $9,019,638 $4,699,377 $ (19,170) $18,813,195
========== ========== ========== ========== ========== ============= ===========
BALANCE, January 1, 2001, audited 16,006,250 $ 78 $5,098,549 $7,833,412 $1,674,763 $ 2,994 $14,609,796
Net income 2,193,007 2,193,007
Issuance of common stock 250,000 5,000 5,000
Additions to paid in capital
(land use right) 4,167 4,167
Foreign currency translation
adjustments (23,824) (23,824)
---------- ---------- ---------- ---------- ---------- ------------- -----------
BALANCE, September 30, 2001 16,256,250 $ 5,078 $5,102,716 $7,833,412 $3,867,770 $ (20,830) $16,788,146
========== ========== ========== ========== ========== ============= ===========
5
YI WAN GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
Nine months
ended September 30,
------------------------------
2002 2001
------------ ------------
(Unaudited) (Unaudited)
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,753,676 $ 2,193,007
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation 765,381 981,293
Amortization 35,348 81,201
Non-cash stock issuance for legal fees - 5,000
Deferred income taxes (45,398) (15,784)
Land use cost 4,167 4,167
Loss from sales of assets 1,449 -
Increase in accounts receivable (100,174) (21,343)
Increase in related party receivables (1,168,632) (881,249)
(Increase) decrease in inventories (176,436) 71,576
(Increase) decrease in prepaid expenses (37,839) 1,270
Increase in due from officers and employees (111,218) (180,785)
(Decrease) increase in accounts payable (5,133) 25,572
Increase (decrease) in accounts payable
- related party 78,618 (11)
Decrease in accrued liabilities and other
current liabilities (88,436) (43,949)
Decrease in wages and benefits payable (32,999) (7,855)
Decrease in sales tax payable (27,340) (19,001)
Decrease in income taxes payable (85,901) (320,755)
Increase in minority interest 130,069 145,737
Foreign currency translation adjustment (1,888) (24,009)
------------ ------------
Net cash provided by operating activities 887,314 1,994,082
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of assets 13,372 -
Purchase of improvements and equipment (96,749) (59,727)
------------ ------------
Net cash used in investing activities (83,377) (59,727)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment to prior owner of joint venture - (970,765)
Principal payments on notes payable - (19,616)
Distribution of statutory reserves to Farm employees (93,979) -
------------ ------------
Net cash used in financing activities (93,979) (990,381)
------------ ------------
INCREASE IN CASH 709,958 943,974
CASH, beginning of period 1,391,113 2,077,002
------------ ------------
CASH, end of period $ 2,101,071 $ 3,020,976
============ ============
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)
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 FARM
subsidiaries are incorporated under the laws of the People's Republic of China
(PRC).
The Company's subsidiaries are classified as Foreign Invested Enterprises in the
PRC and are subject to the FIE laws of the PRC. The HOTEL and FARM 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 FARM companies and 15 years for the TELECOMMUNICATIONS.
Principles of consolidation
The consolidated financial statements of YWG include its subsidiaries
TELECOMMUNICATIONS, HOTEL and FARM. All significant inter-company accounts and
transactions have been eliminated in the consolidation.
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 (loss) 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.
7
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 FARM. 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,
2001 and notes thereto included in YWG's Form 10, dated March 25, 2002.
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 September 30, 2002, the results of operations for the three months and
nine months ended September 30, 2002 and 2001, 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:
September 30, December 31,
2002 2001
--------------- --------------
Unaudited Audited
--------------- --------------
Hotel inventory $ 186,471 $ 216,940
Telecommunication inventory 556,903 348,598
Others - 1,400
--------------- --------------
Total inventories $ 743,374 $ 566,938
=============== ==============
The HOTEL inventory consists of food products, alcohol, beverages and supplies.
At September 30, 2002, TELECOMMUNICATION's inventory consists of raw materials
($191,684), work in process ($87,689) and finished goods ($277,530). At December
31, 2001, TELECOMMUNICATION's inventory consists of raw materials ($92,686),
work in process ($113,926) and finished goods ($141,986).
The FARM inventory consists of fish, shrimp, soft-shelled turtles, crab, feed,
seeds, and supplies. Included as part of the inventoried costs of seafood are
direct labor and applicable overhead incurred over time to raise the seafood
products until taken to market. The quantities of live fish, shrimp,
soft-shelled turtles and crab inventories are determined monthly based upon
estimated growth from purchased hatchlings and fries in each pond and are
reduced for the actual quantities sold and estimated mortality rates. Each pond
is closed periodically and the estimated pounds adjusted to the actual harvest.
As further disclosed in Note 6. FARM has temporally ceased operations prior to
December 31, 2001 and there is no Farm inventory as of September 30, 2002 and
December 31, 2001.
8
YI WAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 4 - Supplemental disclosure of cash flow information
Income taxes paid for the nine months ended September 30, 2002 and 2001 amounted
to $1,421,736 and $1,255,166, respectively. No interest expense was paid for the
nine months ended September 30, 2002 and 2001.
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 (16,256,250 and 16,078,860
shares for the nine months ended September 30, 2002 and 2001, respectively),
Note 6 - FARM Operations
During 2001, as a result of highway construction, the FARM has lost its source
of natural water necessary to raise and grow the FARM's products. The FARM has
ceased its operations during December 2001 and management is in the process of
formalizing a plan to dispose of the FARM operations. The FARM is also in
negotiation with the local government concerning their land use right and
alternatives concerning the ultimate use of the land. Subsequent to December 31,
2001 there has been no formalized plan adopted to dispose of the FARM's
operations and no provision has been made within these financial statements for
the ultimate disposition of the FARM's operation.
The Company has adopted SFAS No. 144 "Accounting for the Impairment or Disposal
of Long-Lived Assets" during the year ending December 31, 2002 and once the
Company has adopted a formal plan to dispose of the FARM's operations the
provisions of SFAS No. 144 will be applied. As of September 30, 2002 the assets
and liabilities of the FARM consisted of the following:
Current assets $ 408,984
Buildings and equipment, net 605,792
Intangible assets 2,832,571
--------------
Total assets $ 3,847,347
==============
Current liabilities $ 246,661
==============
9
YI WAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 7 - Segment Information
YWG includes five major operating segments: restaurant, lodging, entertainment,
farm 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 total assets,
revenues and other financial information by business segment for the nine months
ended September 30:
HOTEL
-------------------------------------------- Telecommu- Inter-
Entertain- nication segment
Restaurant Lodging ment Totals Farm Equipment elimination Totals
----------- --------- ---------- ----------- ---------- ----------- ----------- -----------
Total Assets:
September 30, 2002 $ 21,428,318 $3,847,347 $ 6,272,752 $(1,897,420)$29,650,997
============ ========== =========== =========== ===========
December 31, 2001 $ 20,072,689 $4,060,246 $ 5,791,885 $(1,904,678)$28,020,142
============ ========== =========== =========== ===========
10
YI WAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 7 - Segment Information, (continued)
HOTEL
-------------------------------------------- Telecommu- Inter-
Entertain- nication segment
Restaurant Lodging ment Totals Farm Equipment elimination Totals
----------- --------- ---------- ----------- ---------- ----------- ----------- -----------
Three months ended September 30, 2002
Net sales $ 1,058,872 $ 611,191 $ 607,461 $ 2,277,524 $ $ 1,216,556 $ $ 3,494,080
Cost of sales 564,057 40,352 42,516 646,925 611,967 1,258,892
----------- --------- ---------- ----------- ---------- ----------- ----------- -----------
Gross profit 494,815 570,839 564,945 1,630,599 - 604,589 - 2,235,188
Operating expenses 203,388 122,847 87,875 414,110 22,954 228,899 665,963
Depreciation and
amortization 282,880 2,251 5,479 290,610
Unallocated expenses 212,992 212,992
----------- --------- ---------- ----------- ---------- ----------- ----------- -----------
Income from operations $ 291,427 $ 447,992 $ 477,070 $ 720,617 $ (25,205)$ 370,211 $ - $ 1,065,623
Interest income 2,474 22 1,705 4,201
Other income (expense) 11,449 11,449
Provision for
income tax (238,621) (123,190) (361,811)
----------- ---------- ----------- ----------- -----------
Income (loss) before
minority interest $ 484,470 $ (13,734)$ 248,726 $ - $ 719,462
=========== ========== =========== =========== ===========
Three months ended September 30, 2001
Net sales $ 897,178 $ 497,012 $ 605,398 $ 1,999,588 $ 193,765 $ 1,306,075 $ (15,738)$ 3,483,690
Cost of sales 484,725 32,301 37,685 554,711 265,853 684,367 (15,738) 1,489,193
---------- --------- ---------- ----------- ---------- ----------- ----------- -----------
Gross profit 412,453 464,711 567,713 1,444,877 (72,088) 621,708 - 1,994,497
Operating expenses 114,557 81,395 59,818 255,770 42,473 227,267 525,510
Depreciation and
amortization 296,067 10,196 26,759 333,022
Corporation expenses 5,000
Unallocated expenses 203,925 203,925
----------- --------- ---------- ----------- ---------- ----------- ----------- -----------
Income from operations $ 297,896 $ 383,316 $ 507,895 $ 689,115 $ (124,757)$ 367,682 $ - $ 927,040
Interest income 4,511 551 2,042 7,104
Other income (expense) (763) 1,450 25 712
Provision for
income tax (109,239) (122,476) (231,715)
----------- ---------- ----------- ----------- -----------
Income (loss) before
minority interest $ 583,624 $ (122,756)$ 247,273 $ - $ 703,141
=========== ========== =========== =========== ===========
11
YI WAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 7 - Segment Information, (continued)
HOTEL
-------------------------------------------- Telecommu- Inter-
Entertain- nication segment
Restaurant Lodging ment Totals Farm Equipment elimination Totals
----------- ---------- ---------- ----------- ---------- ----------- ----------- -----------
Nine months ended September 30, 2002
Net sales $ 3,111,983 $1,619,711 $1,596,787 $ 6,328,481 $ $ 3,071,868 $ $ 9,400,349
Cost of sales 1,502,856 99,475 119,222 1,721,553 1,553,401 3,274,954
----------- ---------- ---------- ----------- ---------- ----------- ----------- -----------
Gross profit 1,609,127 1,520,236 1,477,565 4,606,928 - 1,518,467 - 6,125,395
Operating expenses 557,743 318,283 279,269 1,155,295 37,944 648,393 1,841,632
Depreciation and
amortization 845,901 9,223 16,436 871,560
Unallocated expenses 644,039 644,039
----------- ---------- ---------- ----------- ---------- ----------- ----------- -----------
Income from operations $ 1,051,384 $1,201,953 $1,198,296 $ 1,961,693 $ (47,167)$ 853,638 $ - $ 2,768,164
Interest income 6,181 228 4,723 11,132
Other income (expense) (841) 11,921 11,080
Provision for income
tax (631,317) (275,314) (906,631)
----------- ---------- ----------- ----------- -----------
Income (loss) before
minority interest $ 1,335,716 $ (35,018)$ 583,047 $ - $ 1,883,745
=========== ========== =========== =========== ===========
Nine months ended September 30, 2001
Net sales $ 2,725,717 $1,427,889 $1,626,564 $ 5,780,170 $ 769,702 $ 3,285,623 $ (59,186)$ 9,776,309
Cost of sales 1,345,316 90,459 110,886 1,546,661 601,998 1,702,206 (59,186) 3,791,679
----------- ---------- ---------- ----------- ---------- ----------- ----------- -----------
Gross profit 1,380,401 1,337,430 1,515,678 4,233,509 167,704 1,583,417 - 5,984,630
Operating expenses 305,042 212,148 165,776 682,966 104,040 631,918 1,418,924
Depreciation and
amortization 862,012 57,302 16,349 935,663
Corporation expenses 5,000
Unallocated expenses 623,575 623,575
----------- ---------- ---------- ----------- ---------- ----------- ----------- -----------
Income from operations $ 1,075,359 $1,125,282 $1,349,902 $ 2,064,956 $ 6,362 $ 935,150 $ - $ 3,001,468
Interest income 11,170 1,337 6,240 18,747
Other income (expense) (7,525) (38,526) (46,051)
Provision for income
tax (319,644) (11,265) (304,511) (635,420)
----------- ---------- ----------- ---------- -----------
Income (loss) before
minority interest $ 1,748,957 $ (42,092)$ 636,879 $ - $ 2,338,744
=========== ========== =========== =========== ===========
12
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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; and (d) whether we are able to successfully fulfill our primary
requirements for cash which are explained below under "Liquidity and Capital
Resources." Statements made herein are as of the date of the filing of this Form
10-QSB 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 September 30, 2002, we had $4,699,377 of retained earnings. As of
September 30, 2002, we had cash on hand of $2,101,071 and reported total
shareholders' equity of $18,813,195. For this same period of time, we had
revenues of $9,400,349 and general, administrative and sales expenses of
$3,357,231.
Consolidated results
1) SALES. Consolidated sales decreased $375,960, or approximately 3.85%, from
$9,776,309 for the nine months ended September 30, 2001 to $9,400,349 for the
nine months ended September 30, 2002. The decrease was a result of ceasing our
Farm operations at the end of the year 2001. The decrease was also attributed to
the net effect of increased sales in our Hotel operations and decrease in
Telecommunication's sales.
2) COST OF GOODS SOLD. Consolidated cost of goods sold decreased $516,725 from
$3,791,679 for the nine months ended September 30, 2001 to $3,274,954 for the
nine months ended September 30, 2002. Cost of goods sold as a percentage of
sales decreased to 34.84% for the nine months ended September 30, 2002 from
38.8% for the nine months ended September 30, 2001. The decrease was a result of
our Farm operations ceasing in December 2001. The decrease was also result of
our Telecommunication Division's better management and cost control of
purchasing raw materials for production.
13
(3) GROSS PROFIT. Consolidated gross profit increased $140,765, from $5,984,630
for the nine months ended September 30, 2001 to $6,125,395 for the nine months
ended September 30, 2002. Gross profit as a percentage of sales increased to
65.16% for the nine months ended September 30, 2002 from 61.21% for the nine
months ended September 30, 2001. This increase in gross profit as a percentage
of sales was the result of our Telecommunication Division's better management in
the purchase of raw materials for production and better control of expenses. The
increase in gross profit as a percentage of sales was also attributed to the
ceasing of our Farm operations which caused lower gross profit as a percentage
of sales for the nine months ended September 30, 2001.
(4) SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses
increased $374,069 from $2,983,162 for the nine months ended September 30, 2001
to $3,357,231 for the nine months ended September 30, 2002. The selling and
administrative expenses as a percentage of sales increased to 35.7% for the nine
months ended September 30, 2002 from 30.5% for the nine months ended September
30, 2001.The increase was due to the increase of research and development cost
and business selling expense in our Telecommunication operation and increased
costs paid to performers, entertainers and consultants in our Hotel operation.
(5) NET INCOME. Consolidated net income decreased $439,331, or approximately
20.0%, from $2,193,007 for the nine months ended September 30, 2001 to
$1,753,676 for the nine months ended September 30, 2002. The decrease was due to
ceasing our Farm operations and decrease in Hotel operation's net income.
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 $548,311, or approximately 9.48%, from
$5,780,170 for the nine months ended September 30, 2001 to $6,328,481 for the
nine months ended September 30, 2002. The increase was a result of a new
restaurant added to our existing hotel in 2002, and increased sales promotions
to attract additional customers.
Telecommunication operations: Sales decreased $213,755, or approximately
6.5%, from $3,285,623 for the nine months ended September 30, 2001 to $3,071,868
for the nine months ended September 30, 2002. The decrease was a result of lower
sale prices and sale discount promotions to meet the market competition.
Farm operations: Sales decreased $769,702, or approximately 100%, from
$769,702 for the nine months ended September 30, 2001 to $0 for the nine months
ended September 30, 2002. The decrease in sales is due to ceasing our Farm
operations at the end of the year 2001.
(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 $174,892, from $1,546,661
for the nine months ended September 30, 2001 to $1,721,553 for the nine months
ended September 30, 2002.Cost of goods sold as a percentage of sales increased
to 27.2% for the nine months ended September 30, 2002 from 26.8% for the nine
months ended September 30, 2001. The increased cost of goods sold as a
percentage of sales is attributed to the increase in the cost of materials and
increased operating costs.
14
Telecommunication operations: Cost of goods sold decreased $148,805 from
$1,702,206 for the nine months ended September 30, 2001 to $1,553,401 for the
nine months ended September 30, 2002. Cost of goods sold as a percentage of
sales decreased to 50.7% for the nine months ended September 30, 2002 from 51.8%
for the nine months ended September 30, 2001. The decrease was a result of
better management in purchasing of raw materials for production and better
control of our expenses.
Farm operations: Cost of goods sold decreased $601,998, from $601,998 for
the nine months ended September 30, 2001 to $0 for the nine months ended
September 30, 2002. The decrease was result of our Farm operations ceasing in
December 2001.
(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 $373,419, from $4,233,509 for the
nine months ended September 30, 2001 to $4,606,928 for the nine months ended
September 30, 2002. As a percentage of sales, gross profit decreased from 73.2%
for the nine months ended September 30, 2001 to 72.8% for the nine months ended
September 30, 2002. The decrease in gross profit as a percentage of sales
resulted from increased cost of materials and operating costs.
Telecommunication operations: Gross profit decreased $64,950, from
$1,583,417 for the nine months ended September 30, 2001 to $1,518,467 for the
nine months ended September 30, 2002. As a percentage of sales, gross profit
increased from 48.2% for the nine months ended September 30, 2001 to 49.4% for
the September months ended September 30, 2002. The increase in gross profit as a
percentage of sales was the result of better management of purchasing materials
for production and better control of expenses.
Farm operations: Gross profit decreased $167,704, from $167,704 for the
nine months ended September 30, 2001 to $0 for the nine months ended September
30, 2002. The decreased gross profit was a result of ceasing Farm operations
prior to December 31, 2001.
(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 $476,682,
from $2,168,553 for the nine months ended September 30, 2001 to $2,645,235 for
the nine months ended September 30, 2002. Selling and administrative expenses as
a percentage of sales increased to 41.8% for the nine months ended September 30,
2002 from 37.5% for the nine months ended September 30, 2001. This increase was
a result of increases in costs paid to performers and entertainers, consulting
expenses, sales taxes and wages expenses.
Telecommunication operations: Selling and administrative expenses increased
$16,562, from $648,267 for the nine months ended September 30, 2001 to $664,829
for the nine months ended September 30, 2002. Selling and administrative
expenses as a percentage of sales increased to 21.6% for the nine months ended
September 30, 2002 from 19.7% for the nine months ended September 30, 2001. The
increase in selling and administrative expenses as a percentage of sales were a
result of increased research and development cost and business expenses.
Farm operations: Selling and administrative expenses decreased $114,175,
from $161,342 for the nine months ended September 30, 2001 to $47,167 for the
nine months ended September 30, 2002. The decrease in selling and administrative
expenses was a result of ceasing our Farm operations.
15
(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 $413,241, from $1,748,957, or 30.25%
of sales, for the nine months ended September 30, 2001 to $1,335,716, or 21.1%
of sales, for the nine months ended September 30, 2002. The decrease was a
combined result of an increase in cost of goods sold and increase in selling
expense.
Telecommunications operations: Net income decreased $53,832, from $636,879,
or 19.38% of sales, for the nine months ended September 30, 2001 to $583,047, or
18.9% of sales, for the nine months ended September 30, 2002. The decrease was a
result of higher market competition and increase in selling and research and
development cost.
Farm operations: Net loss decreased $7,074, from $42,092 for the nine
months ended September 30, 2001 to loss of $35,018 for the nine months ended
September 30, 2002. The decreased net income was a result of ceasing our Farm
operations prior to December 31, 2001.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2002, net cash provided by operating activities was
$887,314, net cash used in investing activities was $83,377, and net cash used
in financing activities was $93,979.
As of September 30, 2001, net cash provided by operating activities was
$1,994,082, net cash used in investing activities was $59,727, and net cash used
in financing activities was $990,381.
Net cash provided by operating activities decreased by $1,106,768 to $887,314
for the nine months ended September 30, 2002, representing a decrease of
approximately 55.5%. The decrease in cash flow from operating activities
reflects a decrease in gross sales due to ceasing the Farm operations.
Net cash used in investing activities increased by $23,650 to $83,377 for the
nine months ended September 30, 2002, representing a 39.6% increase, compared to
$59,727 net cash used for the same period of 2001. The increase was due to a
higher level in the purchasing of improvements and equipment.
Net cash used in financing activities decreased by $896,402 to $93,979 for the
nine months ended September 30, 2002, representing a 90.51% decrease, compared
to $990,381 for the same period of 2001. The decrease was primarily due to no
distributions being paid to the owners of the previous joint ventures of our
subsidiaries.
Going forward, our primary requirements for cash consist of: (1) the continued
implementation of our hotel and telecommunications divisions' existing business
model in China; (2) general overhead expenses for personnel to support these
business model activities; (3) continued promotional activities pertaining to
our hotel business pertaining to our attempt to increase hotel related revenues;
4) the development costs of our existing hotel 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 current operating activities will enable us to meet the anticipated cash
requirements for the 2002 fiscal year.
16
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 equity financing,
if necessary. Management, however, extended the June 2002 payment date to June
2003 for capital contributions. The capital improvements to be made to the hotel
will be funded from positive cash flow generated from hotel operations.
MANAGEMENT ASSUMPTIONS.
Management anticipates, based on internal forecasts and assumptions relating to
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, 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.
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
Chinese 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.
17
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.*
99.1 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.
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; and (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.
18
B. Reports on Forms 8-K
We filed a Form 8-K on August 16, 2002 in connection with Item 9, Regulation FD
Disclosure, with an attached exhibit, Exhibit 99.1 - the Certification of Cheng
Wan Ming, our President and Chief Executive Officer, and of Wu Zeming, our Chief
Financial Officer and Principal Accounting Officer, in response to the new
legislation that requires our Chief Executive Officer and Chief Financial
Officer to certify periodic reports that contain financial statements.
We filed a Form 8-K on October 15, 2002, in connection with Item 5, Other Events
and Regulation FD Disclosure, in response to notification we received on
October 11, 2002, from the National Association of Securities Dealers that our
common stock has been approved for quotation on the Over the Counter Bulletin
Board under the symbol "YIWA".
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: November 14, 2002 By:/s/ Chang Wan Ming
Chang Wan Ming, President
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-QSB 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: November 14, 2002
/s/ Chang Wan Ming
Chang Wan Ming
President and Chief Executive Officer
20
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-QSB 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: November 14, 2002
/s/ Wu Zeming
Wu Zeming
Chief Financial Officer and Principal Accounting Officer
21