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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 September 30, 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 September 30, 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 ............................................ 1
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ....................................... 13
Item 3. Qualitative and Quantitative Disclosures about Market Risks...... 19
Item 4. Controls and Procedures.......................................... 19
PART II
OTHER INFORMATION
Item 1 Legal Proceedings ............................................... 20
Item 2 Changes in Securities and Use of Proceeds ....................... 20
Item 3 Defaults upon Senior Securities.................................. 20
Item 4 Submission of Matters to a Vote of Securities ................... 20
Item 5 Other Information ............................................... 20
Item 6 Exhibits and Reports on Form 8-K ................................ 20
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
YI WAN GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2003 AND DECEMBER 31, 2002
A S S E T S
September 30, December 31,
2003 2002
------------------- -------------------
(Unaudited) (Audited)
------------------- -------------------
CURRENT ASSETS:
Cash $ 3,240,020 $ 2,135,154
Accounts receivable, net of allowance
for doubtful accounts of $6,455 at
September 30, 2003 and December 31,
2002 1,719,379 1,284,655
Due from related parties 2,904,105 1,686,504
Note receivable 521,142 1,217,579
Inventories 660,182 568,051
Assets of discontinued operations - 1,289
Prepaid expenses 71,614 44,826
------------------- -------------------
Total current assets 9,116,442 6,938,058
------------------- -------------------
BUILDINGS, EQUIPMENT AND AUTOMOBILES, net 17,547,218 19,131,044
------------------- -------------------
OTHER ASSETS:
Intangible asset, net 1,598,671 1,635,958
Equipment held for sale 591,007 -
Deferred tax asset 238,411 182,044
Other non-current assets 409,051 295,125
------------------- -------------------
Total other assets 2,837,140 2,113,127
------------------- -------------------
Total assets $ 29,500,800 $ 28,182,229
=================== ===================
L I A B I L I T I E S A N D S H A R E H O L D E R S' E Q U I T Y
CURRENT LIABILITIES:
Accounts payable $ 365,716 $ 370,101
Accounts payable - related party 7,475 87,417
Accrued liabilities 669,517 763,309
Wages and benefits payable 272,581 265,580
Sales tax payable 873,013 875,510
Income taxes payable 954,307 1,279,595
Due to shareholders 88,801 88,800
Due to prior owners of joint ventures 4,932,273 4,932,273
Notes payable 81,902 83,107
Liabilities of discontinued operations - 1,289
------------------- -------------------
Total current liabilities 8,245,585 8,746,981
------------------- -------------------
MINORITY INTEREST 1,850,222 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 5,113,823 5,109,656
Statutory reserves 10,832,731 10,832,731
Retained earnings 3,363,305 1,707,878
Accumulated other comprehensive income 85,056 70,595
------------------- -------------------
Total shareholders' equity 19,404,993 17,730,938
------------------- -------------------
Total liabilities and
shareholders' equity $ 29,500,800 $ 28,182,229
=================== ===================
-1-
YI WAN GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
Three months ended Nine months ended
------------------------------ ------------------------------
September 30, September 30,
------------------------------ ------------------------------
2003 2002 2003 2002
-------------- -------------- -------------- --------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
-------------- -------------- -------------- --------------
NET SALES $ 3,502,345 3,886,465 $ 9,628,827 $ 10,901,082
COST OF SALES 1,334,116 1,414,178 3,639,830 3,872,043
-------------- -------------- -------------- --------------
GROSS PROFIT 2,168,229 2,472,287 5,988,997 7,029,039
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 1,147,900 1,342,010 3,344,277 4,322,648
-------------- -------------- -------------- --------------
INCOME FROM OPERATIONS 1,020,329 1,130,277 2,644,720 2,706,391
-------------- -------------- -------------- --------------
OTHER INCOME (EXPENSE) (4,259) 558 15,463 (21,271)
-------------- -------------- -------------- --------------
INCOME FROM CONTINUING OPERATIONS BEFORE
PROVISION FOR INCOME TAXES AND MINORITY
INTEREST 1,016,070 1,130,835 2,660,183 2,685,120
PROVISION FOR INCOME TAXES 333,049 372,483 858,844 869,496
-------------- -------------- -------------- --------------
INCOME BEFORE MINORITY INTEREST 683,021 758,352 1,801,339 1,815,624
MINORITY INTEREST (58,660) (53,477) (145,912) (112,942)
-------------- -------------- -------------- --------------
NET INCOME FROM CONTINUING OPERATIONS 624,361 704,875 1,655,427 1,702,682
DISCONTINUED OPERATIONS:
Loss from discontinued operations (net of
applicable income tax of $0) - (13,734) - (35,018)
Minority interest - 1,374 - 3,502
-------------- -------------- -------------- --------------
Loss from discontinued operations - (12,360) - (31,516)
NET INCOME 624,361 692,515 1,655,427 1,671,166
OTHER COMPREHENSIVE INCOME:
Foreign currency translation adjustment 16,663 8,715 14,461 (1,997)
-------------- -------------- -------------- --------------
COMPREHENSIVE INCOME $ 641,024 701,230 $ 1,669,888 $ 1,669,169
============== ============== ============== ==============
EARNINGS (LOSS) PER SHARE - BASIC AND DILUTED:
From continuing operations 0.04 0.04 0.10 0.10
From discontinued operations - - - -
-------------- -------------- -------------- --------------
Earnings per share, basic and diluted $ 0.04 0.04 $ 0.10 $ 0.10
============== ============== ============== ==============
-2-
YI WAN GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
Nine months ended September 30,
------------------------------
2003 2002
------------ ------------
(Unaudited) (Unaudited)
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,655,427 $ 1,671,166
Income from discontinued operations - 31,516
------------ ------------
Income from continuing operations 1,655,427 1,702,682
Adjustments to reconcile net income to net cash
provided by operating activities:
Minority interest 145,912 592,147
Depreciation 572,365 1,138,127
Amortization 37,287 40,049
Land use cost 4,167 4,167
Deferred tax assets (56,367) (91,689)
Translation adjustment 14,461 (1,997)
Gain from sales of assets - 1,449
(Increase) decrease in assets:
Accounts receivable (434,724) (393,384)
Related party receivables (1,217,601) 1,846,768
Inventories (92,131) (224,299)
Prepaid expenses (26,788) (38,201)
Other non-current assets (113,926) (167,478)
Increase (decrease) in liabilities:
Accounts payable (4,385) 168,136
Accounts payable - related party (79,942) 100,920
Accrued liabilities and other
current liabilities (93,791) 37,332
Wages and benefits payable 7,001 11,783
Sales tax payable (2,497) (8,417)
Income taxes payable (325,288) (76,026)
Cash provided by discontinued operations - 90,602
------------ ------------
Net cash provided by operating activities (10,820) 4,732,671
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of assets - 13,372
Purchase of land use right - (315,722)
Purchase of improvements and equipment 420,454 (3,501,228)
------------ ------------
Net cash used in investing activities 420,454 (3,803,578)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Collections on note receivable 696,437 -
Borrowings on notes payable (1,205) 71,960
Distribution of statutory reserves
to Farm employees - (93,979)
------------ ------------
Net cash provided by financing
activities 695,232 (22,019)
------------ ------------
NET CHANGE IN CASH 1,104,866 907,074
CASH, beginning of period 2,135,154 1,306,992
------------ ------------
CASH, end of period $ 3,240,020 $ 2,214,066
============ ============
-3-
YI WAN GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 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 1,655,427 1,655,427
Additions to paid in capital 4,167 4,167
(land use right)
Foreign currency translation 14,461 14,461
adjustments
----------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCE, September 30, 2003 16,506,250 $ 10,078 $ 5,113,823 $10,832,731 $ 3,363,305 $ 85,056 $19,404,993
=========== =========== =========== =========== =========== =========== ===========
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 1,671,166 1,671,166
Additions to paid in capital 4,167 4,167
(land use right)
Distribution to Farm employees (93,979) (93,979)
Foreign currency translation (1,997) (1,997)
adjustments
----------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCE, September 30, 2002 16,256,250 $ 5,078 $ 5,108,272 $ 9,019,638 $ 4,616,867 $ (19,367) $18,730,488
=========== =========== =========== =========== =========== =========== ===========
-4-
YI WAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of significant accounting policies
The reporting entity
The financial statements of Yi Wan Group, Inc. and subsidiaries (referred to as
the Company or YWG in the accompanying financial statements) reflect the
activities and financial transactions of its subsidiaries, which are as follows:
Percentage
Subsidiary Ownership
- ----------------------------------------- ------------
Shun De Yi Wan Communication Equipment
Plant Co., Ltd. (TELECOMMUNICATIONS) 100%
Jiao Zuo Yi Wan Hotel Co., Ltd. (HOTEL) 90
Yi Wan Maple Leaf High Technology
Agriculture Developing Ltd. Co. (FARM) 90
Qinyang Yi Wan Hotel Co., Ltd. (QINYANG) 80
Yi Wan Group, Inc. was incorporated under the laws of the State of Florida in
the United States in May 1999. Yi Wan Group, Inc. is authorized to issue
50,000,000 shares of no par value common stock and 20,000,000 shares of no par
value preferred stock. The Company's TELECOMMUNICATIONS, HOTEL, 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.
-5-
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 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 September 30, 2003, the results of operations for the nine months ended
September 30, 2003 and 2002, respectively. Interim results are not necessarily
indicative of full year performance because of the impact of seasonal and
short-term variations.
-6-
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:
September 30, December 31,
2003 2002
------------- -------------
(Unaudited) (Audited)
------------- -------------
Hotel inventory $ 218,623 $ 211,453
Telecommunication inventory 441,559 356,598
------------- -------------
Total inventories $ 660,182 $ 568,051
============= =============
The HOTEL inventory consists of food products, alcohol, beverages and supplies.
At September 30, 2003, TELECOMMUNICATION's inventory consists of raw materials
($127,192), work in process ($88,943) and finished goods ($225,424).
Note 4 - Supplemental disclosure of cash flow information
Income taxes paid amounted to $1,240,028 and $1,421,736 for the nine months
ended September 30, 2003 and 2002, respectively. No interest expense was paid
for the nine months ended September 30, 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 nine months ended September 30, 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 2, 2002 have been
included in the consolidated financial statements for the three months ending
June 30, 2002. Details are as follows:
-7-
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
Farm 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 and nine
months ended September 30, 2003 and 2002 are as follows:
Three months ended Nine months ended
September 30, September 30,
2003 2002 2003 2002
-------------------------- --------------------------
External revenue $ - $ - $ - $ -
============ ============ ============ ============
Intercompany revenue - - - -
============ ============ ============ ============
Loss from discountined operations - (13,734) - (35,018)
Minority interest - 1,374 - 3,502
Total loss from discontinued operations $ - $ (12,360) $ - $ (31,516)
============ ============ ============ ============
Loss per share from discontinued operations $ 0.00 $ 0.00 $ 0.00 $ 0.00
============ ============ ============ ============
-8-
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 September 30, 2003 and
December 31, 2002 are as follows:
September 30, December 31,
2003 2002
-------------- --------------
Cash $ - $ 1,289
-------------- --------------
Total assets $ - $ 1,289
============== ==============
Current liabilities - 1,289
Shareholders' equity - -
-------------- --------------
Total liabilities and shareholders' equity $ - $ 1,289
============== ==============
Hotel Bowling operations
The HOTEL has ceased its bowling operation at the end of September 2003. The
Management of Hotel is in the process of finding potential buyers and
formalizing a plan to sell the equipment. As of September 30, 2003, the fair
market value of the bowling equipment has not been determined and no impairment
of the asset value has been calculated. As of September 30, 2003, the related
equipment with a net book value of $591,007 has been recorded as equipment held
for sale no gain or loss has been recognized in the current period.
-9-
YI WAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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- Inter-
munication segment
Restaurant Lodging Entertainment Totals equipment elimination Totals
---------- ------- ------------- ------------ ----------- ------------- -------------
Total Assets:
September 30, 2003 $ 24,047,220 $ 6,786,554 $ (1,854,116) $ 28,979,658
============ =========== ============
Assets held by parent company 521,142
------------
Total assets - consolidated financial statements $ 29,500,800
============
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
============
-10-
YI WAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 8 - Segment Information, (continued)
HOTEL
-----------------------------------------
Telecom- Inter-
Enter- munication segment
Restaurant Lodging tainment Totals equipment elimination Totals
---------- -------- -------- ------------ ---------- ----------- -----------
Three months ended September 30, 2003
Net sales $1,407,107 $627,814 $514,090 $ 2,549,011 $ 953,334 $ $ 3,502,345
Cost of sales 692,731 43,198 74,797 810,726 523,390 1,334,116
---------- -------- -------- ----------- ---------- ----------- -----------
Gross profit 714,376 584,616 439,293 1,738,285 429,944 - 2,168,229
Operating expenses 165,027 80,525 114,278 359,830 184,772 544,602
Depreciation and -
amortization 327,096 5,616 332,712
Unallocated expenses 270,586 270,586
---------- -------- -------- ----------- ---------- -----------
Income from operations $ 549,349 504,091 325,015 $ 780,773 $ 239,556 $ - $ 1,020,329
========== ======== ========
Interest income 4,239 2,916 7,155
Other income (expense) (11,393) (21) (11,414)
Provision for income tax (255,071) (77,978) (333,049)
----------- ---------- ----------- -----------
Income before minority
interest $ 518,548 $ 164,473 $ - $ 683,021
=========== ========== =========== ===========
Three months ended September 30, 2002
Net sales $1,285,514 $692,851 $691,545 $ 2,669,910 $1,216,556 $ $ 3,886,466
Cost of sales 703,201 47,562 51,448 802,211 611,967 1,414,178
---------- -------- -------- ----------- ---------- ----------- -----------
Gross profit 582,313 645,289 640,097 1,867,699 604,589 - 2,472,288
Operating expenses 259,986 135,658 131,652 527,296 228,899 756,195
Depreciation and
amortization 333,651 5,479 339,130
Unallocated expenses 246,686 246,686
---------- -------- -------- ----------- ---------- ----------- -----------
Income from operations $ 322,327 $509,631 $508,445 760,066 370,211 - 1,130,277
========== ======== ========
Interest income 2,484 1,705 4,189
Other income (expense) (3,631) - (3,631)
Provision for income tax (249,293) (123,190) (372,483)
----------- ---------- ----------- -----------
Income before minority
interest $ 509,626 $ 248,726 $ - $ 758,352
=========== ========== =========== ===========
-11-
YI WAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 8 - Segment Information, (continued)
HOTEL
-------------------------------------------
Telecom- Inter-
Enter- munication segment
Restaurant Lodging tainment Totals equipment elimination Totals
---------- ---------- ---------- ---------- ---------- ----------- -----------
Nine months ended September 30, 2003
Net sales $3,679,040 $1,778,936 $1,401,369 $6,859,345 $2,769,482 $ $ 9,628,827
Cost of sales 1,834,794 124,769 164,971 2,124,534 1,515,296 3,639,830
---------- ---------- ---------- ---------- ---------- ----------- ------------
Gross profit 1,844,246 1,654,167 1,236,398 4,734,811 1,254,186 - 5,988,997
Operating expenses 457,254 245,493 282,077 984,824 538,466 1,523,290
Depreciation and
amortization 1,003,229 16,573 1,019,802
Unallocated expenses 801,185 801,185
---------- ---------- ---------- ---------- ---------- ----------- ------------
Income from operations $1,386,992 1,408,674 954,321 1,945,573 699,147 - 2,644,720
========== ========== ==========
Interest income 10,491 7,559 18,050
Other income (expense) (2,567) (20) (2,587)
Provision for income tax (625,977) (232,867) (858,844)
---------- ---------- ----------- ------------
Income before minority
interest $1,327,520 $ 473,819 $ - $ 1,801,339
========== ========== =========== ============
Nine months ended September 30, 2002
Net sales $3,984,971 $1,957,619 $1,886,624 $7,829,214 $3,071,868 $ $ 10,901,082
Cost of sales 2,027,292 136,150 155,200 2,318,642 1,553,401 3,872,043
---------- ---------- ---------- ---------- ---------- ----------- ------------
Gross profit 1,957,679 1,821,469 1,731,424 5,510,572 1,518,467 - 7,029,039
Operating expenses 769,833 386,572 448,655 1,605,060 648,393 2,253,453
Depreciation and
amortization 1,045,387 16,436 1,061,823
Unallocated expenses 1,007,372 1,007,372
---------- ---------- ---------- ---------- ---------- ----------- ------------
Income from operations $1,187,846 $1,434,897 $1,282,769 $1,852,753 $ 853,638 $ - $ 2,706,391
========== ========== ==========
Interest income 6,207 4,723 10,930
Other income (expense) (32,201) (32,201)
Provision for income tax (594,182) (275,314) (869,496)
---------- ---------- ----------- ------------
Income before minority
interest $1,232,577 $ 583,047 $ - $ 1,815,624
========== ========== =========== ============
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation
Forward-Looking Statements:
The following discussion of our financial condition and results of operations
should be read in conjunction with the consolidated financial statements and
related notes thereto. The following discussion contains forward-looking
statements. Yi Wan Group, Inc. is referred to herein as "we" or "our." The words
or phrases "would be," "will allow," "intends to," "will likely result," "are
expected to," "will continue," "is anticipated," "estimate," "project," or
similar expressions are intended to identify "forward-looking statements" Such
statements include those concerning expected financial performance, corporate
strategy, and operational plans. Actual results could differ materially from
those projected in the forward-looking statements as a result of a number of
risks and uncertainties, including: (a) general economic conditions in China;
(b) regulatory factors in China that may lead to additional costs or otherwise
negatively affect our business; (c) whether we are able to manage our planned
growth efficiently, including whether our management will be able to: (i)
identify, hire, train, retain, motivate and manage required personnel or (ii)
successfully manage and exploit existing and potential market opportunities; (d)
whether we are able to generate sufficient revenues or obtain financing to
sustain and grow our operations; (e) whether we are able to successfully fulfill
our primary cash requirements which are explained below under "Liquidity and
Capital Resources"; (f) although the World Health Organization on June 24, 2003
removed its recommendation that people should postpone all but essential travel
to Beijing, China due to Sars and on July 5, 2003 removed Taiwan, China from the
list of areas with recent local transmission of Sars, whether there will be
continuing negative economic effects upon China and the China hotel and tourist
industries due to possible continuing negative perceptions pertaining to Sars;
and (g) whether worldwide economic conditions will negatively affect the tourist
industry in China and our hotel related revenues. Statements made herein are as
of the date of the filing of this Form 10-Q with the Securities and Exchange
Commission and should not be relied upon as of any subsequent date. Unless
otherwise required by applicable law, we do not undertake, and we specifically
disclaim any obligation, to update any forward-looking statements to reflect
occurrences, developments, unanticipated events or circumstances after the date
of such statement.
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General
RESULTS OF OPERATIONS
As of September 30, 2003, we had $3,363,305 of retained earnings. As of
September 30, 2003, we had cash of $3,240,020 and total shareholders' equity of
$19,404,993. For the nine months ending September 30, 2003, we had revenues of
$9,628,827 and general, administrative and sales expenses of $3,344,277.
Consolidated results
1) SALES. Consolidated sales decreased by $1,272,255, or approximately 11.67%,
from $10,901,082 for the nine months ended September 30, 2002 to $9,628,827 for
the nine months ended September 30, 2003. The 11.67% decrease was a result of a
decrease in hotel business due to SARS in China.
2) COST OF GOODS SOLD. Consolidated cost of goods sold decreased by $232,213,
from $3,872,043 for the nine months ended September 30, 2002 to $3,639,830 for
the nine months ended September 30, 2003. Cost of goods sold as a percentage of
sales increased to 37.80% for the nine months ended September 30, 2003, from
35.52% for the nine months ended September 30, 2002. This increase was a result
of: (a) an increase in the cost of raw materials; and (b) discounting sales
prices to promote our hotel business. This increase was also a result of an
increase in cost of raw materials and lower sale prices and additional sales
discount promotions in our communication division to meet the telecommunications
related market competition.
(3) GROSS PROFIT. Consolidated gross profit decreased by $1,040,042, from
$7,029,039 for the nine months ended September 30, 2002 to $5,988,997 for the
nine months ended September 30, 2003. Gross profit as a percentage of sales
decreased to 62.19% for the nine months ended September 30, 2003 from 64.48% for
the nine months ended September 30, 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
decreased by $978,371, from $4,322,648 for the nine months ended September 30,
2002 to $3,344,277 for the nine months ended September 30, 2003. The selling and
administrative expenses as a percentage of sales decreased to 34.73% for the
nine months ended September 30, 2003 from 39.65% for the nine months ended
September 30, 2002.The decrease in selling and administrative expenses is
attributed to the decrease in the cost of our administrative and selling
expenses in our hotel related operations.
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(5) NET INCOME. Consolidated net income decreased $15,739, or approximately
0.94%, from $1,671,166 for the nine months ended September 30, 2002 to
$1,655,427 for the nine months ended September 30, 2003. The decrease was mainly
due to: (a) a decrease in sales in our hotel business due to SARS in China; and
(b) an increase in cost of raw materials, lower sale prices, and additional
sales discount promotions pertaining to our telecommunications division.
Segmented results
(1) SALES. An itemization of each operating unit's data and an explanation of
significant changes are as follows:
Hotel operations: Sales decreased by $969,869, or approximately 12.39%,
from $7,829,214 for the nine months ended September 30, 2002 to $6,859,345 for
the nine months ended September 30, 2003. The decrease was a result of a
decrease in our hotel operations due to SARS in China.
Telecommunication operations: Sales decreased by $302,386, or approximately
9.84%, from $3,071,868 for the nine months ended September 30, 2002 to
$2,769,482 for the nine months ended September 30, 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 decreased by $194,108, from $2,318,642
for the nine months ended September 30, 2002 to $2,124,534 for the nine months
ended September 30, 2003. Cost of goods sold as a percentage of sales increased
to 30.97% for the nine months ended September 30, 2003 from 29.62% for the nine
months ended September 30, 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.
Telecommunication operations: Cost of goods sold decreased by $38,105, from
$1,553,401 for the nine months ended June 30, 2002 to $1,515,296 for the nine
months ended September 30, 2003. Cost of goods sold as a percentage of sales
increased to 54.71% for the nine months ended September 30, 2003 from 50.57% for
the nine months ended September 30, 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.
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(3) GROSS PROFIT. An itemization of each operating unit's data and an
explanation of significant changes is as follows:
Hotel operations: Gross profit decreased by $775,761, from $5,510,572 for
the nine months ended September 30, 2002 to $4,734,811 for the nine months ended
September 30, 2003. As a percentage of sales, gross profit decreased from 70.38%
for the nine months ended September 30, 2002 to 69.03% for the nine months ended
September 30, 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 $264,281, from
$1,518,467 for the nine months ended September 30, 2002 to $1,254,186 for the
nine months ended September 30, 2003. As a percentage of sales, gross profit
decreased from 49.43% for the nine months ended September 30, 2002 to 45.29% for
the nine months ended September 30, 2003. The decrease in gross profit as a
percentage of sales was the result of an increase in the 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 decreased by
$868,581, from $3,657,819 for the nine months ended September 30, 2002 to
$2,789,238 for the nine months ended September 30, 2003. Selling and
administrative expenses as a percentage of sales decreased to 40.66% for the
nine months ended September 30, 2003 from 46.72% for the nine months ended
September 30, 2002. This decrease was a result of a decrease in promotion
expense, such as entertainment expense, due to the existence of SARS in China
during this period.
Telecommunication operations: Selling and administrative expenses decreased
by $109,790, from $664,829 for the nine months ended September 30, 2002 to
$555,039 for the nine months ended September 30, 2003. Selling and
administrative expenses as a percentage of sales decreased to 20.04% for the
nine months ended September, 2003 from 21.64% for the nine months ended
September 30, 2002. The decrease in selling and administrative expenses as a
percentage of sales was a result of decrease in expenses.
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(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 $94,943, from $1,232,577, or
15.74% of sales, for the nine months ended September 30, 2002 to $1,327,520, or
19.35% of sales, for the nine months ended September 30, 2003. The increase
as a percentage of sales was a result of a decrease in cost of selling and
administrative expenses.
Telecommunications operations: Net income decreased by $109,228, from
$583,047 or 18.98% of sales, for the nine months ended September 30, 2002 to
$473,819, or 17.11% of sales, for the nine months ended September 30, 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.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2003, net cash used in operating activities was $10,820; net
cash provided by investing activities was $420,454; and net cash provided by
financing activities was $695,232.
As of September 30, 2002, net cash provided by operating activities was
$4,732,671; net cash used in investing activities was $3,803,578; and net cash
used in financing activities was $22,019.
Net cash provided by operating activities decreased by $4,743,491 to $10,820
used in operating activities for the nine months ended September 30, 2003,
representing a decrease of approximately 100.23%. The decrease in cash flow from
operating activities reflects an increase in related party receivables during
the year 2003.
Net cash used in investing activities decreased by $4,224,032 to $420,454
provided by investing activities for the nine months ended September 30, 2003,
representing a 111.05% decrease, compared to $3,803,578 net cash used for the
same 2002 period. The decrease was due to a reduction in spending on
improvements and equipment.
Net cash provided by financing activities increased by $717,251 to $695,232 for
the nine months ended September 30, 2003, representing a 32.57% increase,
compared to $22,019 used in financing activities for the same period of 2002.
The increase was primarily due to collections on a note receivable.
-17-
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 and general overhead and personnel related expenses to support
these activities; (2) continued promotional activities pertaining to our attempt
to increase hotel related revenues; (3) the development costs of our hotel
operations in China; (4) the payment of cash contributions due to the joint
ventures under the joint venture agreements; and (5) 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, as follows: (1) Hotel
operations: $11,960,000; (2) Telecommunication operations: $1,580,000; and (3)
Farm operations: $2,410,000. No bank loans were obtained for the Hotel,
Telecommunications, or Farm operations. We had cash Contributions required to be
made by June 2003 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. Since our Farm operation ceased at December 31, 2002, only
$500,000 additional investment requirement for our Telecommunication division
remains outstanding to be paid. In addition, the $9,936,210 originally due to
our former joint venture partners has been paid down to $4,932,273 as of
September 30, 2003. The balances are to be funded from the profits generated
from the operations of our subsidiaries and, if necessary, equity financing,
although there are no assurances that we will be successful in ever obtaining
equity financing for those purposes. Our former joint venture partners extended
the June 2003 payment date to June 2004 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.
-18-
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 control over
financial reporting, to the knowledge of the management of the Company, or in
other factors that have materially affected or are reasonably likely to
materially affect, these internal controls over financial reporting subsequent
to the evaluation date.
-19-
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.***
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
- -----------------------
* 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.
-20-
We hereby incorporate the following documents by reference: (a) our Form 10
Registration Statement filed on August 24, 2001 and amendments thereto filed on
November 7, 2001, January 7, 2002, February 7, 2002, March 28, 2002, and May 22,
2002; (b) our Form 10Q for the period ended September 30, 2001 filed on December
7, 2001 and an amendment thereto filed on February 6, 2002; (c) our Form 10K for
the period ended December 31, 2001 filed on April 1, 2002 and an amendment
thereto filed on May 22, 2002; (d) our Form 10Q for the period ended March 31,
2002 filed on May 14, 2002; (e) our Form 10Q for the period ended June 30,
2002 filed on August 13, 2002 and an amendment thereto filed on August 13, 2002
and August 16, 2002; (f) our Form 10Q for the period ended September 30, 2002,
filed on November 14, 2002; (g) our Form 10Q for the period ended March 31,
2003, filed on May 15, 2003; (h) our Form 10Q for the period ended June 30,
2003, filed on August 14, 2003 and an amendment thereto filed on September 23,
2003; and (i) our Form 10K for the year ended December 31, 2002, filed on April
16, 2003.
B. Reports on Forms 8-K
None
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 12, 2003 By:/s/ Cheng Wan Ming
Cheng Wan Ming, President
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