Item 1. Description of Business
General
HOW WE ARE ORGANIZED We were incorporated in Florida in May 1999. We are authorized to issue 50,000,000 shares of common stock, of which 16,506,250 shares of common stock are issued and outstanding. We are authorized to issue 20,000,000 shares of preferred stock, of which no shares are issued and outstanding.
We were incorporated to explore the feasibility of acquiring interests in several businesses located in China in which our president, Mr. Cheng Wan Ming, had an ownership interest. On January 1, 2000, we acquired controlling equity interests in three such China registered companies, which had ongoing business operations in the hotel, agriculture, and communications industries in China. Since our inception, neither we, nor any of our three subsidiaries, have ever been subject to any bankruptcy, receivership or similar proceedings. Our former agriculture subsidiary and our hotel and communications subsidiaries are described below:
Jiaozuo Yi Wan Hotel Co., Ltd. On January 1, 2000, we acquired a 90% controlling interest in Jiaozuo Yi Wan Hotel Co. Ltd., a Sino-Foreign Joint Venture company that was originally formed in China in 1996. The remaining 10% equity interest in our hotel subsidiary is owned by Shun'ao Industry and Commerce Company, a company registered in China. Our president has a 41.7% ownership interest in Shun'ao Industry and Commerce Company. Our hotel subsidiary provides upscale lodging, food and beverage, entertainment, and conference and meeting services at:
Jiaozuo Yi Wan Hotel Co., Ltd. No.189. Middle Min Zhu Road Jiaozuo, Henan - P.R. China 454150 Tel: 86-391-262-3227 Fax: 86-391-262-3767 Email: YIWAN@PUBLIC2.LYPTT.HA.CN
Quinyang Yi Wan Hotel Co., Ltd. On March 20, 2001, we entered into a joint venture agreement with the Qinyang Hotel. This agreement provides for the establishment of a Joint Venture Limited Liability Company, the Qinyang Yi Wan Hotel Co., Ltd., which operates the Quinyang Yi Wan Hotel in Qing Yang City, Henan Province, China. The joint venture agreement provides that the joint venture will provide up-scale lodging, food and beverage, entertainment and meeting and conference facility services. We entered into this 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 a building and land use right and $120,672 (RMB(Y)1,000,000) in cash, in exchange for a 20% equity interest in Quinyang Yi Wan Hotel Co. Ltd. The registered capital amount of $2,413,389 (RMB(Y)20,000,000) has been contributed by each joint venture partner. We have contributed our share of capital of $1,930,711 (RMB(Y)16,000,000) from funds generated by our Jiaozuo Yi Wan Hotel Division and proceeds generated from the sale of the assets of our agriculture subsidiary.
On June 3, 2002, the Jiaozuo Foreign Trade and Economy Cooperative Bureau issued a temporary license to Qinyang Yi Wan Hotel Co., Ltd; however, the official license will not be issued until the Jiaozuo Foreign Trade and Economy Cooperative Bureau completes an audit of the capital contribution to verify whether the full capital requirement of $2,413,389 (RMB 20,000,000) has been met. Quinyang Yi Wan Hotel Co., Ltd or the Qinyang Hotel are located at:
Quinyang Yi Wan Hotel Co., Ltd./Qinyang Hotel 53 West Huai Fu Road Road Qing Yang City Henan Province, Cbina Tel: 86-391-566-9000 Fax: 86-391-566-9006 Email: yiwan@public2.lyptt.ha.cn
Yi Wan Maple Leaf High Technology Agriculture Developing Ltd. Co. Maying Village, Zhandian Town, Wuzhi County Jiaozuo, Henan - P.R. China 454971 Tel: 86-391-759-1632 Fax: 86-391-759-1632 Email: YWCWM1@PUBLIC2.LYPTT.HA.CN
As described in more detail on page 8 of this Form 10K, our agriculture subsidiary ceased operations in December 2001. In December 2002, we sold our agriculture subsidiary to a third party.
Shun de Yi Wan Communication Equipment Plant Co. Ltd. On January 1, 2000, we acquired 100% of the equity interest in Shun de Yi Wan Communication Equipment Plant Company, Ltd., which in 1993 was originally established as a foreign investment joint venture in China. Our telecommunications subsidiary, manufactures exchange distribution frames equipment, and is located at:
Shun de Yi Wan Communication Equipment Plant Co. Ltd. No 3., 5th Street Fengxiang Road, Daliang Town Shun de, Guangdong - P.R. China 528300 Tel: 86-765-222-0984, 222-2097 Fax: 86-765-223-8363 Email: gzsdywt1@pub.sdnet.gd.cn
Our wholly owned foreign telecommunications subsidiary is classified in China as a Wholly Foreign Owned Enterprise company. Both Foreign Invested Enterprise Joint Ventures and Wholly Foreign Owned Enterprise companies in China are referred to as Foreign Invested Enterprise companies.
Each of our subsidiaries is registered as independent 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 of our two Foreign Invested Enterprise hotels and agriculture subsidiaries provide for a 30 year term while our telecommunications company provides for a 15 year term. The term of our agreements and business licenses for our two joint venture hotel companies are 30 years. The term can be extended or terminated prior to the date of expiration if unanimously decided by the board of directors of those subsidiaries and approved by the original examination and approval authority in China. We control the board of directors for our joint venture hotel companies. In addition, we have the ability to select six of the seven board members for our hotel subsidiaries. The operational, management and corporate governance decisions of the board are by a simple majority, except for the revision of the Articles of Association, the increase or assignment of the registered capital, the business combination of the joint venture and, with certain limitations, the termination of the joint venture, which require a unanimous vote.
The term of our business license for our Wholly Foreign Owned Enterprise telecommunications company is 15 years. The term of this venture may be terminated prior to the date of expiration if unanimously decided by the board of directors and approved by the original examination and approval authority. We own 100% of the equity interests of the subsidiary and control the selection of its board of directors.
Our subsidiaries operate as a separate division, as well as a separate business segment, as defined by generally accepted accounting principles. Detailed financial information concerning the revenues, income and assets of each of our business segments is provided in our financial statements and accompanying notes. Accordingly, we conveniently refer to the subsidiaries as: o hotel division or hotel company; o agriculture division or agriculture company; and o Telecommunications Division or telecommunications company.
ORGANIZATIONAL HISTORIES OF OUR SUBSIDIARY COMPANIES
Prior to our acquisition of our hotel, former agriculture, and telecommunications companies, these companies were owned by: o Shun'ao Industry and Commerce Company, a company established under the laws of the People's Republic of China; o Canadian Maple Leaf International, Inc., a company established under the laws of Canada and which had an ownership only in our agriculture company; o Marco Wan Da Construction, a company established under the laws of Macao, a Portuguese overseas territory located in the South China area; and o Shun De Zhiyuan Developing Co. (relating to Telecommunications only), a company established under the laws of the People's Republic of China.
As a result of the below-described transactions, all of the individual owners of Shun'ao Industry and Commerce Company are also our shareholders. In addition, as a result of the below-described transactions we have the following ownership interests in our subsidiaries: o 90% ownership in our Jiaozuo Yi Wan hotel company; o until December 2002, a 90% ownership in our agriculture company; and o 100% ownership in our telecommunications company. O 80% ownership in our Qinyang Yi Wan Hotel company.
Jiaozuo Yi Wan Hotel Co., Ltd. Our Jiaozuo Yi Wan Hotel division was originally formed in December 1996, as a Foreign Invested Enterprise Joint Venture in the Jiaozuo City region of Henan Province, China. Originally, Shun'ao Industry and Commerce Company, a China based company, owned a 70% equity interest in the hotel company, and Marco Wan Da Construction, a company established under the laws of Macao, owned a 30% equity interest. All of the individual owners of the China and Macao based companies are also our shareholders. In November 1999, the China and Macao based companies agreed to transfer 90% of their total equity in the hotel company to us, with 60% being transferred by the China based company and 30% being transferred by the Macao based investor. The amended articles of association, the joint venture contract and the equity transfer agreement among the original joint venture parties and us provide that we assume the total capital contribution requirement of the foreign investor in the amount of RMB 7,500,000, approximately US $906,000, and a portion of the China based company's capital contribution requirement in the amount of RMB 15,000,000, approximately US $1.8 million. In addition, the joint venture contract, the articles and the equity transfer agreement require that an additional investment of approximately US $3 million be made into the hotel company above and beyond the joint venture's registered capital and that we pay our share of the total investment (approximately US $2.7 million) within six months of the issuance of a new business license for the joint venture. These transfers were approved by the Chinese approval authorities; thereafter, the equity split has been 10% for the China based company, while we have a 90% interest. The original parties in the Hotel joint venture made the required total investment and registered capital contributions to the joint venture. Accordingly, our obligations to contribute to registered capital and the total investment in the Hotel joint venture have been satisfied by our assumption of 90% of the equity interests of the original partners. Our obligations to the original parties under the equity transfer agreement, however, amount to RMB 22,500,000 or approximately US $2.7 million owed to the original partners to the Hotel joint venture for their transfer to us of 90% of the joint venture equity interests.
The Hotel joint venture has recorded a payable of RMB 49,000,000 or approximately US $5.2 million to the original parties in the joint venture. This payable is the result of the reduction of the total investment in the joint venture from the original RMB 99,000,000 or approximately $11.9 million, which was paid in full, to RMB 50,000,000 or approximately US $6 million in the amended joint venture.
Qinyang Yi Wan Hotel Co., Ltd. On March 20, 2001 we entered into a joint venture agreement with Qinyang Hotel providing for the establishment of a Joint Venture Limited Liability company, the Qinyang Yi Wan Hotel Co., Ltd., which operates the Quinyang Yi Wan Hotel in Qing Yang City, Henan Province, China. On June 3, 2002, the Jiaozuo Foreign Trade and Economy Cooperative Bureau issued a temporary license to Qinyang Yi Wan Hotel Co., Ltd; however, the official license will not be issued until the Qinyang Yi Wan Hotel Co., Ltd. meets the registered capital requirement of $2,413,389 (RMB 20,000,000). Although the full registered capital requirement of $2,413,389 (RMB 20,000,000) has already been made, a verification report on the capital contribution must be made by the Jiaozuo Foreign Trade and Economy Bureau, which is not expected until approximately May 2003.
Jiaozuo Yi Wan Maple Leaf High Technology Agriculture Developing Ltd. Co. Our former agriculture company was originally formed in April 1997, as a Foreign Invested Enterprise Joint Venture, by Shun'ao Industry and Commerce Company, a China based company, and Canadian Maple Leaf International Inc., a company established under the laws of Canada, in the Jiaozuo City region of Henan Province, China. The China based company and the Canada based company originally received a 51% and 49% equity interest, respectively. In November 1999, both equity owners agreed to transfer 90% of the total equity of the agriculture company to us, with 41% and 49% transferred by the China based company and the Canada based company, respectively. The amended articles of association, the joint venture contract and the equity transfer agreement among the original joint venture parties and us at the time provided that we assume the total capital contribution requirement of the Canada based company in the amount of RMB 20,000,000, or approximately US $2.42 million, which was not paid by the Canadian party to the Farm joint venture. In addition, the equity transfer agreement required us to pay to the China based company a portion of the contribution to registered capital made by that company in the amount of RMB 16,900,000, or approximately US $2 million. The equity transfer agreement requires that we pay our share of the registered capital (approximately US $2.4 million) within one year of the issuance of a new business license for the joint venture. The articles and the joint venture contract, which reflect the equity transfers, were approved by the appropriate Chinese approval authorities; thereafter, the equity split of this company has been 10% for the China based investor, Shun'ao Industry and Commerce Company, while we have a 90% interest.
A new business license was issued for the agriculture company on June 7, 2000. Until June 6, 2001, we failed to make any contribution payments towards our share of the registered capital. On June 7, 2001, in accordance with a unanimous written resolution of our agriculture company's board of directors, we received an extension to June 7, 2002 to make the required payments.
During approximately October 2001, as a result of highway construction, the farm operated by our then agriculture company, had lost it sources of natural water necessary to raise and grow the farm's products. The farm ceased its operations in December 2001. In December 2002, we completed the sale of the farms assets to a third party and recorded a loss of $1,323,359. This sale transaction was approved by the Jiaozuo Foreign Trade Economic Cooperative Bureau. In connection with the sale, the parties from which we originally purchased the agriculture company were paid in full and we received $522,339 in cash and a note receivable of $1,218,792. On December 26, 2002, the agriculture subsidiary ceased to exist as one of our subsidiaries.
Shun de Yi Wan Communications Equipment Plant Co., Ltd. Our telecommunications company was originally formed in Shun de City, Guangdong Province, China, as a Foreign Invested Enterprise Joint Venture in September 1993, by Shun de Zhiyuan Developing Co., a China based company, and Marco Wan Da Construction, a Macao based company. In March 2000, both the China based investor and the Macao based company agreed to transfer 100% of the equity in the telecommunications company to us, with 35% and 65% being transferred by the China based company and the Macao based company, respectively. The articles of association provide that we assume the total capital contribution requirements of the enterprise in the amount of US $1,500,000, approximately RMB 12,4000,000. In addition, the articles require that an additional investment of approximately $500,000 be made into the telecommunications company, above and beyond that company's registered capital, and that we pay our share of the total investment within one year of the issuance of a new business license for the joint venture. The articles, which reflect the transfers and establish our telecommunications company as a Wholly Foreign Owned Enterprise, were approved by the appropriate Chinese approval authorities; thereafter, we own 100% of the telecommunications company.
The original parties in the Telecommunications joint venture made the required and registered capital contributions of US $1,500,000 to the joint venture. Accordingly, the obligation to contribute to registered capital in this joint venture has been satisfied. Pursuant to the articles of association, we have an obligation to contribute an additional investment of US $500,000 to the joint venture.
A new business license was issued for our telecommunications company on June 22, 2000. Until approximately June 21, 2001, we failed to make the required additional investment contribution to our telecommunications company. On June 22, 2001, in accordance with a unanimous written resolution of our Telecommunications Company's board of directors, we received an extension to June 22, 2002 to make this payment. On June 22, 2002, in accordance with a unanimous written resolution of our Telecommunications Company's Board of Directors, we received another extension to June 22, 2003.
BUSINESS
DESCRIPTION OF OUR BUSINESS OPERATIONS BY DIVISION
THE JIAOZUO YI WAN HOTEL CO., LTD. The Jiaozuo Yi Wan Hotel Co., Ltd., our hotel division, manages and operates an upscale hotel conference and entertainment facility in Jiaozuo City, Henan province. This division focuses on providing lodging, food and beverage, entertainment, and conference and meeting products and services.
The significant events relating to the hotel company's history include: o In September 1996, the hotel company purchased the Tengfei Hotel located in the center of Jiaozuo City from the city government of Jiaozuo
o In September 1996, the hotel company began extensive renovation and remodeling of its hotel's main building and construction of a 150,695 square foot lobby, commercial and common space addition to the main building. All renovation and construction was completed in October 1996.
o In 1997, the hotel company began recruiting personnel and developing western style operational and management training systems.
o In 1997, the Jiaozuo Yi Wan Hotel received certification from the China National Tourism board.
Products and Services Our hotel has the following primary product and service offerings: o Lodging operations (including conference and meeting facilities); o Food and beverage operations; and o Entertainment operations.
The hotel also has an on-site travel agency, bank, business center, and sundries and gift store.
Lodging Operations. The hotel has a total of 158 guest-sleeping rooms on 22 floors consisting of 131 standard guestrooms and 27 suites. All guest rooms are equipped with either double or queen size beds, two telephones, remote controlled television, full mini-bar, work station, large closets, in-room climate control, sitting area and large working desk. Bathrooms include shower and tub, western style toilet, spacious vanity, and complimentary travel sundries. Suites include larger sitting and work areas, a second television, and turn-down service. Executive suites feature all of the above as well as large partitioned living room-style sitting area, two bathrooms, including one with a Jacuzzi tub, fruit baskets, and two daily fresh flower arrangements.
The hotel also has 12 rooms dedicated to meeting and conference space. These rooms service small, medium, and large sized conferences and meetings, and include: o Nine small meeting rooms capable of seating up to 20 people. Seven of these rooms have multi-functional seating configurations. Two rooms have large, fixed position oval conference tables with side gallery space for individual chairs. All rooms have climate control and private bathrooms.
o Two conference rooms within the hotel suitable for medium sized meetings of up to 60 people. These rooms feature large fixed positioned conference tables, built-in amplification equipment, and ample side gallery space for additional meeting attendees or small group break-out space. These rooms also have climate control and private bathrooms.
o One large, 8,180 square foot, meeting room capable of seating 460 people is configured in an auditorium style with a sloping floor and large front presentation stage. The room features built-in sound system, lighting capabilities, built-in multi-lingual interpretation equipment, and rear and front screen projection capability. The room has an attached large reception room and a separate, smaller, private VIP reception room. We believe that this meeting room is the largest non-government room of its kind in the province.
Food and Beverage Operations. The hotel has four food and beverage facilities: two full service restaurants, a buffet coffee shop, and a lobby bar. The combined capacity of all food and beverage service facilities is 1,500 people, which we believe to be the largest single location of food and beverage facilities in the city of Jiaozuo. All food and beverage facilities are open to the public. o Main Floor Restaurant. The main floor restaurant serves 700 people. Its decor is considered traditional Chinese and it is comprised of a large main dining room with performance stage, stand-alone bar, two separate banquet rooms and 15 private suite dining rooms. All suites have deluxe stereo and karaoke equipment and a private bathroom. Each banquet room has a performance stage and sound system. The restaurant specializes in serving a unique blend of Cantonese and Henan style cuisine. Additionally, the restaurant has a separate dining area serving 150 people with facilities for private table hot pot dining, a style of dining that requires a table with a center gas flame burner, and overhead table exhaust fan.
o 17th Floor VIP Restaurant. We completed construction of a new restaurant in February 2002 at which time it became operational. This restaurant is located at the 17th floor of the main building of the Jiaozuo Yi Wan Hotel and offers a city view to dining guests. This restaurant is a VIP dining facility with 5 private suites ranging in capacity from 10 to 16 people. Each suite contains separate sitting areas, large color television, stereo system, karaoke equipment, and a private bathroom. Its decor is traditional Chinese. The restaurant specializes in the creation and presentation of haute culture, gourmet cuisine that is fresh, and showcases the hotel's signature culinary style of blended Cantonese and Henan flavors, with special attention to artistic and theatrical presentation of each dish.
o VIP Restaurant. The second floor restaurant is a VIP dining facility with 24 private suites ranging in capacity from 10 to 30 people. Each suite contains a separate sitting area, large color television, high quality stereo system, karaoke equipment, and private bathroom. The restaurant specializes in the creation and presentation of haute couture, gourmet cuisine that is fresh; and showcases the hotel's signature culinary style of blended Cantonese and Henan flavors. Special attention is given to artistic and theatrical presentation of each dish. Each course of the meal is presented and served to each guest individually.
o Buffet Coffee Shop. The buffet coffee shop is located on the main floor adjacent to the hotel lobby and serves 50 people. The decor is western style, with the restaurant open 24 hours a day. It offers full breakfast, lunch, and dinner buffets of western and Asian style dishes for each meal.
Entertainment Operations. Our hotel division operates the following three entertainment facilities, which are open to the public:
o Night Club. The nightclub is designed in a Las Vegas club style format with a large floor show performance area and a moveable front stage. The facility has computerized light show capabilities as well as a sound system with special effects capabilities. The floor show viewing area seats 330 people through a combination of floor seating, private booth seating, and private balcony deluxe booth seating. The nightclub is located on the third floor of the main building and specializes in floor show entertainment as well as celebrity entertainment events, which change weekly. The club offers 19 private karaoke suites suitable for 4-10 people. Each suite includes a serving area, karaoke equipment, and private bathroom.
o Bowling Alley-Game Room. A 10 lane, Canadian hardwood bowling alley is located on the second floor. The bowling alley system has automatic computerized scoring and overhead display screens for each lane. The bowling alley sponsors corporate and public tournaments; and provides lessons and items for purchase through a pro-shop. In conjunction with the bowling alley is a large game room offering snooker, pool, and ping-pong tables, and a wide variety of computer simulation games. A small snack bar provides pre-packaged food and beverage items. The bowling alley and game rooms are open 24 hours a day, seven days a week.
o Sauna-Health Center. The sauna-health center is located on the second floor of the main building. It offers beauty salon, acupuncture, and massage services, as well as self-guided health relaxation activities, such as soaking tubs, whirlpools, and saunas. The facility includes a beauty salon, waiting lounge, changing facilities, shower area, three large 15-person soaking pools, two large Jacuzzis, wet and dry multi-person saunas, 20 private resting rooms, 20 semi-private massage rooms, large quiet room, 30 private massage suites, and five executive suites consisting of private toilet and shower, sauna, Jacuzzi, massage area, and resting area. The sauna-health center has 100 massage beds and a total capacity of 150 people.
Suppliers The raw materials that our Yi Wan hotel division uses are many and varied and common to all hotel and entertainment facilities. A general sampling of these items and their sources are as follows:
------------------------------------------ ----------------------------------------------------- Item Source
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HOTEL DIVISION
Cigarette/beverage Dong Hui Wholesale Shop, Jiaozuo City ------------------------------------------ ----------------------------------------------------- ------------------------------------------ ----------------------------------------------------- Seafood Xingli Haiyang Seafood Shop, Zhengzhou City ------------------------------------------ ----------------------------------------------------- ------------------------------------------ ----------------------------------------------------- Seafood Jianwei Seafood Shop, Zhengzhou City ------------------------------------------ ----------------------------------------------------- ------------------------------------------ ----------------------------------------------------- General cooking ingredients Guangdong Lawei Shop, Zhengzhou City ------------------------------------------ ----------------------------------------------------- ------------------------------------------ ----------------------------------------------------- Gas Jiaozuo Branch Office of Henan Province Petroleum Company. Jiaozuo city ------------------------------------------ ----------------------------------------------------- ------------------------------------------ ----------------------------------------------------- Wines/Beer Henan Jinfeng Jiuhang Corporation Ltd.Zhengzhou city
------------------------------------------ ----------------------------------------------------- ------------------------------------------ ----------------------------------------------------- Seafood Haiyang Da Shi Jie Shop, Jiaozuo City ------------------------------------------ ----------------------------------------------------- ------------------------------------------ ----------------------------------------------------- General cooking ingredients Yongsheng Ganxian Shop, Jiaozuo City ------------------------------------------ ----------------------------------------------------- ------------------------------------------ ----------------------------------------------------- Seafood and cooking ingredients Nu's Shell Fish Company, Henan Province. Jiaozuo city ------------------------------------------ ----------------------------------------------------- ------------------------------------------ ----------------------------------------------------- Wine/Beer Jinshan Brewery, Henan Province. Zhengzhou city ------------------------------------------ ----------------------------------------------------- ------------------------------------------ ----------------------------------------------------- Cigarette/beverage Zhenhua Shop, Jiaozuo City ------------------------------------------ ----------------------------------------------------- ------------------------------------------ ----------------------------------------------------- General cooking ingredients Maoyuan Gahuo Shop. Jiaouao city ------------------------------------------ ----------------------------------------------------- ------------------------------------------ ----------------------------------------------------- General cooking ingredients Jiaonan Market, Jiaozuo City ------------------------------------------ ----------------------------------------------------- ------------------------------------------ ----------------------------------------------------- Seafood Wuyang Seafood Wholesale, Zhengzhou City ------------------------------------------ -----------------------------------------------------
The above suppliers to materials to our hotel division are located within an approximately 200 mile radius of the hotel
Our hotel division maintains a 10-day supply of common consumable goods, such as alcohol products, guest room sundries and similar products, which is considered standard industry practice. We believe that there are a number of alternative suppliers for all of these products.
Seasonal Variations Our hotel division experiences minor seasonal variations in overall revenue:
o Lodging Operations. Lodging revenue peaks during the period of April through October. This time coincides with peak vacation travel season and the period of April through June when many Chinese companies hold bi-annual company meetings.
o Food and Beverage Operations. Food and beverage revenues peak during the period of January through April. This is the time in the lunar calendar traditionally associated with the Chinese New Year.
o Entertainment Operations. Entertainment revenues experience no seasonal variations.
o Conference and Meeting Operations. Conference and meeting revenues peak during the periods from April through June and November through December. These periods coincide with the times when many Chinese companies hold their biannual meetings and product shows.
Prior future growth plans pertaining to the Jiaozuo Yi Wan Hotel no longer being pursued from our inception until approximately June 2002, our Jiaozuo Yi Wan Hotel Division was going to become involved in the following projects: o Athletic Club. Our hotel division was researching the construction within the existing space of the main building fifth floor, a full-service, state-of-the-art western-style athletic club, which would have included: o Handball and racquetball courts o Indoor lap pool, locker room facilities o Aerobics room with shock resistant flooring o Resistance weight training equipment o Aerobic conditioning equipment o Training center o Lounge area o Athletic pro-shop o Cafe style juice bar
o Penthouse Suite. Our hotel division was researching design options for constructing within the existing space of the 21st and 22nd floors of the main building a high quality Presidential Suite. The suite would have included: o Indoor pool o Atrium o Meeting conference room o Roof garden o Living room and dining rooms suitable for reception style entertaining o Deluxe kitchen o Jacuzzi o Wet and dry saunas o Private secured access o Private balcony o Two guest rooms
o Training Center. Our hotel division was researching the feasibility of creating a hotel and restaurant management and operation training center. The program would have utilized the proven training techniques of the Yi Wan developed training systems.
In approximately June 2002, based on our research, we decided not to further pursue any plans to construct or operate an athletic club, penthouse suite, or establish a training center, and we have no current plans to do so. We decided that in light of the costs involved in these plans and the potential returns from such operations, or lack thereof, our future growth plans were better served by: (a) establishing and thereafter operating what is now our 17th Floor VIP restaurant; and (b) pursuing the future plans detailed below under Potential Future Growth and Operations.
Potential Future Growth and Operations
Our Jiaozuo Yi Wan Hotel is involved in a number or projects scheduled for completion within the next two years. These projects are in the development stage and are subject to further research, and accordingly, may never be completed. These include:
O New Hotel Restaurant - We are in the process of constructing a new restaurant on the 16th floor of the Jiaozuo Yi Wan Hotel. We intend to complete the construction of this restaurant and begin its operations by December 2003. This restaurant will serve only traditional Chinese food.
o Restaurant Expansion. Our Jiaozuo Hotel Division is researching the feasibility of opening one restaurant in Zhengzhuo City and one restaurant in Beijing. Our hotel division is researching, and has discussed with a number of interested parties, the terms of site specific management and ownership, including acquisition, franchise, partnership, and management agreement, regarding these possible restaurant openings. Both restaurants would bear the Yi Wan name and specialize in a unique blend of Guangdong and Henan style cuisine. Both restaurants would target up-scale, urban customers. We have not entered into any specific agreements regarding a restaurant opening and there are no assurances that we will be successful in securing any agreements relating to any such opening.
o Lodging Expansion. Our hotel division is researching the feasibility of hotel expansion through franchising the Yi Wan name and our hotel-restaurant operating systems. The Jiaozuo Industrial Institute is working with hotel management to draft the initial franchise offering framework. The target market for franchise operations would be formerly government owned hotel properties in the northern central provinces.
o Lodging Association. Our hotel division is researching the feasibility of joining an international hotel association such as "Leading Luxury Hotels of the World" or similar association to increase the recognition of our hotels and our business to other countries.
If we are successful in completing these projects and implementing them into our operations, we will be required to hire the following additional employees:
Restaurant Expansion: 5 managers 60 employees
Lodging Expansion: 3 managers 3 employees
Our Market Our hotel is located in the metropolitan city of Jiaozuo, Henan province, and considers the city of Jiaozuo and all communities within a 30-mile radius to be its primary market. Information regarding this metropolitan area is contained in the Market Section relating to our Agricultural Division described above.
Our Jiaozuo hotel division has two primary target markets: o Travelers o Local professionals.
Our "travelers" market includes individual business travelers, individual leisure travelers, and group professional travelers. Our "local professionals" market includes local individual business and government professionals, and groups of professionals. In China, there are many conferences involving various groups to exchange ideas and share study results, including marketing seminars and fairs and exhibitions from different industries, city-wide, province-wide and nationwide.
Examples of conferences which were held at our Jiaozuo Yi Wan Hotel are:
Meeting held by government agencies:
o Software Development Group of the National Department of Taxation Conference, 300 people
o Northern China Postal and Telecommunication Conference, 450 people
Meetings held by companies:
o New Products News Conference by Henan Tire Corporation, 420 people
o Jiaozuo Commercial Bank Board of Directors Meeting, 80 people
Product exhibit and sales meeting:
o Guangdong Bu Bu Gao Company Products Promotion Conference, 200 people
o Henan Province Bi He Tian Yuan Company Products Sales Meeting, 350 people
Seminars:
o Henan Jin Bo Electric Cable Factory Technological Research Conference, 120 people
o Health Organization of Jiaozuo City Research Conference, 90 people
Our Jiauzuo Yi Wan Hotel Division uses a variety of methods to reach its customers, including advertising and promotional events as described below.
Advertising. Our hotel division conducts extensive product promotional advertising in several venues: o Local television advertising o Airport and train station billboards o City promotional materials o Local print media o On-site point-of-purchase
Promotional Events. Promotional events are chiefly coordinated through our Jiauzuo Yi Wan Hotel Division's sales department in conjunction with its entertainment and food and beverage operations. Primary on-going promotional events include city league bowling tournaments, corporate bowling tournaments, big name celebrity entertainment event ticket give-away, regional or national cuisine tasting, and other culinary events.
Charitable Giving and Sponsorship. Our Jiauzuo Yi Wan Hotel Division promotes its hotel by corporate sponsorship of charity events and donations to local philanthropic efforts.
Competition The hotel industry in China and, in particular, the Henan province is highly competitive. Within the primary market, there are nine hotels licensed by the government to accept foreign guests. Hotels are rated by the National Tourism Administration in the following areas: fitness, maintenance of fitness, sanitation, service level, and guest satisfaction. The highest rank is five stars. The Jiaozou Yi Wan Hotel is the only four-star-rated hotel in the primary area. There are two three-star-rated hotels in the primary area. For example, Hilton and Holiday Inn Grand are rated as five stars, which meet the international highest standard. Three star hotels are similar to Holiday Inn Express. Hotels rated with three stars and above are permitted to accept foreign tourists. The Jiaozou Yi Wan Hotel obtained the title Appointed Tourist Unit issued by the Travel & Tourism Bureau of Henan Province as early as January 1997, thereby permitting it to receive foreign travelers.
Competition Relating to our Lodging Operations Our Jiaozuo Yi Wan Hotel Division's two main competitors are the Jiaozuo Yueji Hotel and Jiaozuo Shanyang Hotel. The Jiaozuo Yueji Hotel has 110 guest rooms and the Jiaozuo Shanang Hotel has 148 guest rooms. Both of these hotels are government owned and operated and have received a three-star rating. These hotels offer the following services and products: o Full service restaurant (less than 200 person capacity) o Beauty parlor, business center o Sundries and gift store o Night club and karaoke suites (150-200 person capacity) o Massage service o Small and medium sized meeting and conference rooms (less than 100 person capacity)
These competitors engage in some advertising efforts and compete primarily for price sensitive travelers, including budget business, leisure, and group travelers. We also believe that our Hotel Division has the ability to favorably compete against these hotels within its primary markets for the following reasons: o Higher quality guest room physical condition, due to recent renovation o We believe that these competing hotels are in need of overhaul and renovation o Cleaner guest rooms o Higher number of in-guest room amenities o Higher quality peripheral hotel services (restaurants, entertainment, meeting rooms)
Our Jiaozuo Yi Wan Hotel Division believes that it would take substantial effort for these competitions to match our lodging product.
Competition Relating to our Food and Beverage Operations Our Jiaozuo Yi Wan Hotel Division offers what it considers to be a fresh and innovative fusion blend of Cantonese and Henan style cuisines. This style has become its culinary signature and all menus in each of the three food and beverage facilities reflect this central theme.
To support this strategy, this division has hired 12 chefs from Guangdong and 16 from Henan. Two chefs are designated solely for the production of dim sum, a Guangdong specialty.
To stimulate the generation of new menu items, this hotel division requires each chef to create one new menu item each month and to daily meet and greet a specific number of guests. This program is known as the Chef New Product Development Program. Chefs are motivated to create new menu items through a bonus system and promotion options. To our knowledge, no other competitor has a similar program.
Our Jiaozuo Yi Wan Hotel Division places heavy emphasis on the purchase of natural raw ingredients and operates a special purchasing program to source these raw ingredients. This division owns the only industrial size fruit juicer machine in the primary area and is the only facility to offer a wide selection of fresh fruit juices.
Competition Relating to our Entertainment Operations Night Club. Our Jiaozuo Yi Wan Hotel Division faces competition from the two- and three-star hotel nightclubs in our primary market, the Jiaozuo Yueji Hotel and Jiaozuo Hotel, respectively. Both of these competitors are physically smaller and configured in a social club format featuring a center dance area. Both of these competitors offer occasional live local entertainment. Neither of the competitors engages in wide promotion effort.
We believe that our hotel division has the ability to compete because the hotel has: o Higher quality lighting and special effects capabilities; o Higher quality sound system; o Distinctive atmosphere created through internal architectural detail and decoration; o Larger physical size; o Greater seating variations, including floor table, booth, and the deluxe balcony booth; o Unique floor show offering; o Greater variety entertainment (weekly changing floor show programs); o Unique "big name" celebrity entertainment events (no other entity in the province offers these events;and o Higher quality karaoke suites;
Trademarks, Licenses and Concessions Our Jiaozuo Yi Wan Hotel Division has registered the Jiaozuo Yi Wan Hotel Co., Ltd. name and the Yi Wan hotel operations logo with the Ministry of Administration and Trademarks. Our hotel division has a business license in China, which currently expires in December 2027. The trademark is registered in perpetuity provided yearly fees are paid.
Our Jiaozuo Yi Wan Hotel Division is considered to be a foreign investment joint venture by the government in China and receives special income tax treatment from both the provisional (Jiaozuo City) and central government in China, which concessions were granted in 1997. Under the special tax treatment, the hotel company was exempt from central and provincial government income tax for the years ended December 31, 1997 and 1998, followed by a 50% reduction in the central and provincial government income tax for the next three years ended December 31, 1999, 2000, and 2001. Because this status has expired, our hotel subsidiary will be subject to central government income tax at a rate of 30% and a 3% provincial government income tax.
The China National Tourism Board is the central government agency in China that establishes regulations and requirements for the entire nation. The Travel and Tourism Board of Henan Province is a legal government agency that governs compliance to the central government's regulations and requirements that a hotel must meet to be qualified to receive foreign travelers, as follows: o A high standard operating facility, including building and equipment; o A qualified management and service team; o A facility equipped to provide service to tourist groups; and o A facility that meets the health and fire safety standards.
An initial certification and annual review is conducted by the Travel and Tourism Board of Henan Province to be qualified to receive foreign travelers. If a hotel fails to meet the above standards, the certification may be withheld. Our hotel received its certification on January 1, 1997 which has been renewed every year up to and including January 2003. Our next annual inspection is scheduled for approximately January 2004.
Employees As of December 31, 2002, our hotel division employed a total of 650 full-time employees, comprised of approximately 52 management personnel and 598 employees.
Qinyang Yi Wan HOTEL Products and Services
Our Qinyang Yi Wan Hotel has the following primary product and service offerings:
o lodging operations (including conference and meeting facilities); o Food and beverage operations; and o Entertainment operations.
Lodging Operations. The hotel has a total of 58 guest-sleeping rooms consisting of 54 standard guestrooms and 4 suites. All guest rooms are equipped with double or queen size beds, two telephones, remote controlled television, full mini-bar, work station, large closets, in-room climate control, sitting area and large working desk. Bathrooms include shower and tub, western style toilet, spacious vanity, and complimentary travel sundries. Suites include larger sitting and work areas, a second television, and turn-down service.
The Qinyang Yi Wan Hotel also has 2 conference rooms dedicated to meeting and conference space, including:
o One small meeting rooms, 99.3 square foot, capable of seating up to 20 people, which has multi-functional seating configurations, climate control and private bathrooms.
o One large, 391.8 square foot, meeting room capable of seating 300 people which is configured in an auditorium style with a sloping floor and large front presentation stage.
Food and Beverage Operations. The Quig Yang Hotel has four food and beverage facilities composed of two Chinese restaurants, a Muslim restaurant and lobby bar.
o Main Floor Restaurant. The main floor restaurant serves 150 people. Its decor is considered traditional Chinese.
o VIP Restaurant. The second floor restaurant is a VIP dining facility with 20 private suites and serves 50 people.
o Muslim restaurant. The Muslim restaurant includes one large banquette room located on the main floor adjacent to the hotel lobby and serves 80 people and 9 VIP rooms located on the 2nd floor serving 100 people.
Entertainment Operations. Our Quig Yang Hotel operates the following three entertainment facilities, which are open to the public:
o Sauna-Health Center. The sauna-health center is located on the second floor of the main building. It offers beauty salon, acupuncture, and massage services, as well as self-guided health relaxation activities, such as soaking tubs, whirlpools, and saunas. The facility includes a beauty salon, waiting lounge, changing facilities, shower area, soaking pools, large Jacuzzis, wet and dry multi-person saunas, 33 private resting rooms, semi-private massage rooms, large quiet room, private massage suites and 9 executive suites consisting of private toilet and shower, sauna, Jacuzzi, massage area, and resting area. The sauna-health center has a total capacity of 250 people.
o Karaoke Rooms. The hotel offers 16 private karaoke suites suitable for 4-10 people. Each suite includes a serving area, karaoke equipment, and private bathroom.
Suppliers
----------------------------------- --------------------------------------------------------- Item Source ----------------------------------- --------------------------------------------------------- ----------------------------------- --------------------------------------------------------- Wine/Beer Jiaozuo City Fang Da Department Store, Jiaozuo city ----------------------------------- --------------------------------------------------------- ----------------------------------- --------------------------------------------------------- Seafood Shanghai Lu Xi Seafood Trading Market. Shanghai city ----------------------------------- --------------------------------------------------------- ----------------------------------- --------------------------------------------------------- Coal Wang Zhong Liang. Qinyang City ----------------------------------- --------------------------------------------------------- ----------------------------------- --------------------------------------------------------- Seafood Liu San. Qinyang City ----------------------------------- --------------------------------------------------------- ----------------------------------- --------------------------------------------------------- Seafood Qiu Feng. Qinyang City ----------------------------------- --------------------------------------------------------- ----------------------------------- --------------------------------------------------------- Beverage Jiaozuo City Hua Hua Dairy Products. Jiaozuo City ----------------------------------- --------------------------------------------------------- ----------------------------------- --------------------------------------------------------- General cooking ingredients Song Bao Chang. Qinyang City ----------------------------------- --------------------------------------------------------- ----------------------------------- --------------------------------------------------------- General cooking ingredients Shang Da Jun. Qinyang City ----------------------------------- --------------------------------------------------------- ----------------------------------- --------------------------------------------------------- Daily use lodging items Ding Xiang Yang. Qinyang City ----------------------------------- ---------------------------------------------------------
The above suppliers to materials to our hotel division are located within an approximately 200 mile radius of the hotel
Our Qinyang Yi Wan Hotel maintains a 10-day supply of common consumable goods, such as alcohol products, guest room sundries and similar products, which is considered standard industry practice. We believe that there are a number of alternative suppliers for all of these products.
Seasonal Variations
Our hotel division experiences minor seasonal variations in overall revenue; however, because this hotel has only 59 room and has been fully occupied since it was open, it has not experienced any major seasonal variations. The hotel's Food and Beverage Operations and Conference and Meeting revenues peak during the periods from March through July and October through December. These periods coincide with the times when many government organizations and companies hold their annual and biannual meetings and product shows.
Potential Future Growth In order to satisfy the increasing demands for the rooms, restaurants, we plan to expand this hotel by adding 60 standard rooms and 11 suites to accommodate 210 guests. The rooms expansion will occupy 3.5acres. This expansion is contingent upon receiving financing of 15 million RMB (US$1.8 million); there are no assurances that we will be successful in obtaining such financing. If we are successful in this expansion, we will be required to hire 37 employees and 3 managers.
Market
Qinyang Yi Wan Hotel has two primary target markets: o Travelers o Local professionals.
Our "travelers" market includes individual business travelers, individual leisure travelers and group professional travelers. Our "local professionals" market includes local individual business and government professionals, and groups of professionals. In Qinyang City, there are conferences involving various groups to exchange ideas and share study results, including marketing seminars and fairs and exhibitions from different industries, city-wide, province-wide and nationwide.
Examples of conferences that have been held at the Qinyang Yi Wan Hotel are:
Meetings held by government agencies:
o Conference by the Electricity Supply Bureau of Qinyang City, 220 people
o Year 2002 Annual Meeting by Qinyang City Government, 180 people
Meeting held by companies:
o Qinyang Yong Wei Group, Ltd. Products Assessment Meeting, 60 people
o Year 2002 Annual Meeting by Qinyang Branch office of China Life Insurance Company, 330 people
Product exhibit and sales meeting:
o Jiangxi Jisheng Pharmaceutical Products Exhibit Conference, 350 people
o Amway Company Exhibit and Sales Meeting, 400 people
Seminars:
o Qinyang City Hospital Research Conference, 80 people
o Guangdong Shufeng Pharmaceutical Research Conference, 270 people
Our Qinyang Yi Wan Hotel uses a variety of methods to reach its customers, including advertising and promotional events as described below.
Advertising. Our Qinyang Yi Wan Hotel Division conducts extensive product promotional advertising in several venues: o Local television advertising o Airport and train station billboards o City promotional materials o Local print media o On-site point-of-purchase
Promotional Events. These promotional events are chiefly coordinated through our hotel division's sales department in conjunction with its entertainment and food and beverage operations. Primary on-going promotional events include celebrity entertainment event ticket give-aways, regional or national cuisine tasting, and other culinary events.
Charitable Giving and Sponsorship. Our hotel division promotes its hotel by corporate sponsorship of charity events and donations to local philanthropic efforts.
Competition
Competition Relating to our Lodging Operations ----------------------------------------------
Qinyang Yi Wan Hotel's two main competitors are the Qinyang Guesthouse and Yinsha Hotel, both of which are located in Qinyang city. The Qinyang guest house is approximately two miles form the Quinyang Yi Wan Hotel, and the Yinsha Hotel is approximately 0.3 miles from the Qinyang Yi Wan Hotel. The Qinyang Guesthouse has 54 guest rooms and the Yinsha Hotel has 48 guest rooms. Both of these hotels are government owned and operated and have received a two-star rating.
These competitors engage in some advertising efforts and compete primarily fo price sensitive travelers, including budget business, leisure, and group travelers. We also believe that Qinyang Yi Wan Hotel Division has the ability to favorably compete against these hotels within its primary markets for the following reasons:
o Higher quality guest room physical condition due to recent construction of the hotel, its guest rooms and parking structure in October 2001 o Higher number of in-guest room amenities. o Higher quality peripheral hotel services, including restaurants, entertainment, and meeting rooms.
Competition Relating to our Food and Beverage Operations
The Qinyang Yi Wan Hotel offers what it considers to be a fresh and innovative fusion blend of Cantonese and Henan style cuisines. This style has become its culinary signature and all menus in each of the three food and beverage facilities reflect this central theme. To support this strategy, our Qinyang Yi Wan Hotel has hired 9 chefs specializing in Guangdong cuisine and 13 chefs specializing in Henan cuisine. Two chefs are designated solely for the production of dim sum, a Guangdong specialty. To stimulate the generation of new menu items, our Qinyang Yi Wan Hotel requires each chef to create one new menu item each month and to daily meet and greet a specific number of guests. This program is known as the Chef New Product Development Program. Chefs are motivated to create new menu items through a bonus system and promotion options. To our knowledge, no other competitor has a similar program.
Our Qinyang Yi Wan Hotel places heavy emphasis on the purchase of natural raw ingredients and operates a special purchasing program to source these raw ingredients. The Qinyang Yi Wan Hotel owns the only industrial size fruit juicer machine in the primary area of the hotel and is the only facility to offer a wide selection of fresh fruit juices.
Competition Relating to our Entertainment Operations ----------------------------------------------------
Night Club. Our Qinyang Yi Wan Hotel Division faces competition from the two-star hotel nightclubs in our primary market, the Qinyang Guesthouse and Yinsha Hotel. Both competitors are physically smaller and configured in a social club format featuring a center dance area. Both offer occasional live local entertainment. Neither of the competitors engages in wide promotion effort.
We believe that our hotel division has the ability to favorably compete because the hotel has: o Higher quality lighting and special effects capabilities o Higher quality sound system o Distinctive atmosphere created through internal architectural detail and decoration o Larger physical size o Greater seating variations, including floor table, booth, and the deluxe balcony booth o Higher quality karaoke suites
Trademarks, Licenses and Concessions ------------------------------------
Our Qinyang Yi Wan Hotel Division has registered the Qingyang Yi Wan Hotel Co., Ltd. with the Ministry of Administration and Trademarks. The trademark is registered in perpetuity provided yearly fees are paid.
The China National Tourism Board is the central government agency in China that establishes regulations and requirements for the entire nation. The Travel and Tourism Board of Henan Province is a legal government agency that governs compliance to the central government's regulations and requirements that a hotel must meet to be qualified to receive foreign travelers, as follows: o A high standard operating facility, including building and equipment; o A qualified management and service team; o A facility equipped to provide service to tourist groups; and o A facility that meets the health and fire safety standards.
An initial certification and annual review is conducted by the Travel and Tourism Board of Henan Province to be qualified to receive foreign travelers. If a hotel fails to meet the above standards, the certification may be withheld. Our hotel received its certification on October 2001 that has been renewed every year up to and including October 2002.
Employees As of December 31, 2002, our Qinyang Yi Wan Hotel Division employed a total of 265 full-time employees, comprised of approximately 18 management personnel and 247 employees.
For accounting purposes, our Hotel Operations are divided into three operating segments: o Food and Beverage also known as restaurant operations; o Lodging; and o Entertainment.
Set forth below for each of the last three fiscal years is the percentage of total revenue from each such segment within our Hotel Divisions, which collectively, accounted for more than approximately 70% of our consolidated revenues during these fiscal years.
2000: Food and Beverage Operations 47.66% Lodging Operations 25.10% Entertainment Operations 27.24% Total of our consolidated revenues $7,794,439
2001: Food and Beverage Operations 48.5% Lodging Operations 25.5% Entertainment Operations 26.0% Total of our consolidated revenues $7,752,916
2002: Food and Beverage Operations 52.3% Lodging Operations 24.7% Entertainment Operations 22.9% Total of our consolidated revenues $9,890,845
Yi Wan Maple Leaf High Technology Agriculture Developing Ltd. Co. History From January 2000 until October 2001, Yi Wan Maple Leaf High Technology Agriculture Developing Ltd. Co., our then agriculture division, raised and sold specialty aquatic products, such as perch, shrimp, crab, and soft-shelled turtles. In 1997, this agriculture company acquired a land use permit from the Jiaozuo City government for three parcels of land comprising 231 acres located near the southeastern perimeter of Jiaozuo. In 1997 and the first quarter of 1998, our then technology agriculture company recruited technical staff and constructed farming facilities. In 1998, the agriculture company entered into several research and development and training agreements with Henan Agricultural College, Zhanjiang Sea Products College, and the Shenzhen Sea Products Institute. In 1997, the agriculture company began limited cultivation of a wide variety of seasonal land-based vegetable crops.
Within our agriculture division, the following products accounted for the following percentage of revenues from 1999 to 2001:
1999 2000 2001 2002
Crab 37% 29% 21 % 0% Shrimp 31% 33% 28 % 0% Perch 15% 15% 16% 0% Soft-shell turtle 9% 13% 35% 0% Vegetables 8% 10% 0 0%
Discontinued Operations/Sale of Farm Assets 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 has ceased its operations during December 2001 and in December 2002 the farm operations were disposed of by selling our agriculture subsidiary to a third party.
Number of Employees Because we have discontinued our Farm operations in December 2001 and sold the Farm assets in December 2002, none of our employees are employed what previously was our agriculture subsidiary. Until we discontinued our Farm operations in December 2001, we had 20 full-time employees employed by our agriculture subsidiary. Those employees consisted of 5 managers and 15 employees.
Shun Di Yi Wan Communication Equipment Plant Co. Ltd. The business of Shun de Yi Wan Communication Equipment Plant Company, our Telecommunications Division , focuses on: o Designing and manufacturing telephone network switching component parts for use in telephone main distribution frames; and
o Manufacturing and selling assembled telephone main distribution frames.
A telephone main distribution frame connects a company's or an individual's internal telephone system to the telephone company's external lines.
Our Telecommunications Division's initial design and production efforts focused on developing analog switching component parts and the manufacture of a series of analog main distribution frames. Recent design and production efforts have expanded to include digital switching component parts and the manufacture of digital telephone main distribution frames.
Some of the significant events in our Telecommunications Division's history include:
o In 1995, our telecommunications company earned the award for product excellence and development from the National Ministry of Post and Telecommunications, also known as the Ministry of Information and Industry in China.
o In 1996, our telecommunications company received two patent certificates in China from the Ministry of Trademarks and Patents for design of a switching component part and a tool used in the assembly and on-going maintenance of telephone main distribution frames which provides for patent protection in China only.
o In 1996, our telecommunications company received the public verbal commendation for product excellence and contribution to the development of the nation from the Vice Minister of the Ministry of Posts and Telecommunication, Mr. Xie Gaojue.
o In 1997, our telecommunications company produced in China the telephone switching equipment industry's first intelligent management system software used for the monitoring and management of telephone distribution frame performance. Although the main distribution frame management system is not proprietary software, our telephone communications manufacturing company has encrypted the software to protect its patent on the equipment.
Products and Services Our Telecommunications Division specializes in producing communication connecting and distributing equipment called main distribution frames for telephone exchange systems. A main distribution frame is the main distribution facility of a network, often described as a main hub or central hub, which is used as the starting point of a site network. The main distribution facility is typically used where the outside telephone line connections and internal telephone line routers converge.
There are three primary types of main distribution frames: o Analog - Standard telephone line, some times referred to as plain old telephone service.
o Digital - Often referred to as integrated services digital network or referred to as ISDN, a digital line registers the human voice over the telephone network using a stream of ones and zeros. The effectiveness of ISDN allows many advanced features to be programmed on these phones, including multiple call appearances and data transmission.
o Optical - Uses fiber optic light cables that have larger capacity, higher speed, and wider bandwidth than ISDN.
Our Telecommunications Division manufactures two types of analog and one type of digital main distribution frames. In addition, this division produces its own component parts and assembles them into distribution frame configurations at its manufacturing facility. The component parts and peripheral frame parts are stored in inventory until an order is received. At the time an order is received, parts are drawn from inventory and assembled to meet the customer's specifications within existing product line parameters. The product is then transported to the customer via third party delivery. Upon arrival at the customer's site, a sales technician assists the customer in the installation of the distribution main frame and reviewing operating procedures.
Every model produced by our telephone communications manufacturing company can be specially designed to have different capacities according to the clients' requirements for the nature and quantity of the lines. All of the distribution frames can be combined, coupled, and matched to become a distribution frame system with a much larger capacity.
Our Telecommunications Division experiences seasonal variations in revenue from the sale of its products. Because the majority of this division's customers are divisions of government ministries, its revenue stream closely follows the government schedule of planning and procurement. Because ministries plan and petition the government for funds to purchase equipment during the period from March through June, revenue is at the lowest point of the year during this period. During the period of July through December ministries place orders; as a result, revenue peaks during the months of September through December. During the period of January through February, final orders are filled and revenue begins to decline.
Suppliers Our primary suppliers of materials which are used to manufacture our telecommunications equipment are located within an approximately 1300 mile radius. Seventy to eighty similar supplier companies are located in the same area as the above suppliers. Consequently, we do not believe that our telephone communications manufacturing company would have any difficulty in locating alternative suppliers. Our telecommunications parts suppliers are:
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Suppliers Yi Wan Telecommunication
Discharging Tube JiangSu ZhangJiaGang Electrical Equipment Manufacture, Inc. Zhang Jia Gran city ------------------------------------------------------- ----------------------------------------------------- ------------------------------------------------------- ----------------------------------------------------- PTC Heat Sensitive Resistor ShangHai ShunAn Communication Protector, Ltd. Shanghai City ------------------------------------------------------- ----------------------------------------------------- ------------------------------------------------------- ----------------------------------------------------- Reed, Connecter, cable FoShan No 6 Wireless Communication Manufacture, Inc.Fo Shan City ------------------------------------------------------- ----------------------------------------------------- ------------------------------------------------------- ----------------------------------------------------- Circuit board ZhongShan DongFeng TongFa Electrical Equipment Co.Zhong Shan City ------------------------------------------------------- ----------------------------------------------------- ------------------------------------------------------- ----------------------------------------------------- Anti-fire ABS, plastic SanShui JinHu Industrial Plastics Manufacture.SanShui city ------------------------------------------------------- ----------------------------------------------------- ------------------------------------------------------- ----------------------------------------------------- Silvering, Tinning ShunDe GuiZhou YuanXinLong DianDu Ltd. ShunDe City ------------------------------------------------------- ----------------------------------------------------- ------------------------------------------------------- ----------------------------------------------------- Zinc white cpper ShangHai Copper Manufacture Sales Department. Shanghai city ------------------------------------------------------- ----------------------------------------------------- ------------------------------------------------------- ----------------------------------------------------- Electronic components capacitor, Nylon belt GuangZhou SaiBo Electronic Ltd. Guanzhou city ------------------------------------------------------- ----------------------------------------------------- ------------------------------------------------------- ----------------------------------------------------- Cold board, Tri-angle Iron, Flat iron ShunDe LeCong Steel Trading Ltd. No 30 Sales Department. ShunDe City ------------------------------------------------------- ----------------------------------------------------- ------------------------------------------------------- ----------------------------------------------------- Easy Fusibility annulus GuangZhou Non-Ferrouse Matal Research and Development Institution. Guanzhou City ------------------------------------------------------- ----------------------------------------------------- ------------------------------------------------------- ----------------------------------------------------- Brass board, Bronze NanHai LianXing JinHua Hardware Manufacture. Nan Hai City ------------------------------------------------------- ----------------------------------------------------- ------------------------------------------------------- ----------------------------------------------------- Paint spray Zhongshan KeDe Paint Manufacture. Zhongshan City ------------------------------------------------------- ----------------------------------------------------- ------------------------------------------------------- ----------------------------------------------------- Cylindric plug ShunDe YongChang Hardware Manufacture. ShunDe City ------------------------------------------------------- ----------------------------------------------------- ------------------------------------------------------- ----------------------------------------------------- Slide Foshan LanShi Electrical Equipment Co. Foshan City ------------------------------------------------------- ----------------------------------------------------- ------------------------------------------------------- ----------------------------------------------------- Timber ShunDe LunJiao JieLong Furniture Manufacture. ShunDe City ------------------------------------------------------- -----------------------------------------------------
Market The level of telephone network development varies greatly among China's various regions. Generally, the level of development is highest in the southern and coastal provinces where the majority of the market for our telecommunications division is located. At present, large portions of China are not sufficiently developed from a technological standpoint to utilize telephone network distribution technologies. However, the national government has acknowledged that China's central province areas are where the next wave of economic development will occur. To this end, our Telecommunications Division has targeted the northern central provinces as a secondary target market area.
In China all public telephone communication is coordinated by the government's Ministry of Information and Industry, formerly known as the Ministry of Post and Telecommunications, through a series of municipal ministry agencies. There are no private telephone service providers. Additionally, other national ministries maintain their own separate telephone communication networks.
Our Telecommunications Division's primary customers are municipal agencies of the national Ministry of Post and Telecommunications, other national government ministries such as the Ministry of Rail Transportation, Ministry of Electric Power, the People's Liberation Army, and large government and private businesses. Its principal customers are either local or national government entities that could cancel an order or renegotiate the terms of sale at any time. However, since all production is on a per job basis and there are no long-term production agreements, the risk of cancellation or renegotiating is no greater than with any non-government customer.
In order to sell its product to government entities, our telecommunications division is required to obtain a permit from the Ministry of Information and Industry. This permit is granted each year and is based on inspection of product quality and the company's operations. Failure to obtain this permit could reduce our revenues derived from Shun de Yi Wan Communication Equipment Plant Company.
Potential customers in China are primarily obtained through sales calls or visits from its sales staff. In addition, our Telecommunications Division undertakes the following activities: o Trade Shows. Promotion of its brand name through active participation in trade shows throughout China. Participation often includes keynote seminar presentations.
o Advertising. Promotion of its brand name through on-going advertising in industry trade publications and by maintaining a listing on the Ministry of Post and Telecommunication Internet website.
o Public Relations. The sales department promotes the telecommunications division's brand name by maintaining an active and on-going "client focused" public relations effort. This effort includes frequent telephone communication, on-site visits, and complimentary entertaining and gifts to existing clients.
o Industry Trade Articles. Promotion of its brand name by frequently contributing to trade publications research articles that highlight technological trends and developments.
Our Telecommunications Division only uses in-house sales persons. Each individual sales person receives commissions of 1.5 - 2% of total sales.
Licenses, Trademarks, and Patents Our Telecommunications Division has registered its name and its logo with the Ministry of Administration and Trademarks.
The term of our Telecommunications Division's business license is from September 1993 to September 2019, which permits it to operate as a company in China for that period. Business licenses in China are granted only for a specific period of time. Upon a business license expiration date a company must make a reapplication for a new license.
Our Telecommunications Division has received two patent registrations from the Ministry of Administration and Trademarks in China; the patents are registered in perpetuity, provided yearly fees of $7,300 are paid to the Ministry of Administration and Trademarks: 1. A component part used in the assembly of analog telephone main distribution frames registered as patent number 235727. 2. A tool used by customers to simultaneously install two wire clips into a distribution frame, registered as patent number 213907.
Competition The business of our Telecommunications Division is highly competitive. Many companies that have greater capital resources and more established reputations provide the same products and services that our Telecommunications Division provides. If competitors lower their prices or our Telecommunications Division is forced to lower its prices, our revenues derived from this division may be reduced.
Moreover, our Telecommunications Division's competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements. In addition, our Telecommunications Division's competitors may be able to devote greater resources to the development, promotion, and sale of their products and services.
Nationwide, there are 60 companies in China licensed to produce telephone distribution switching equipment. Competitors compete chiefly on the basis of price and technological capabilities. Thirty of the 60 companies licensed by the government to produce and sell telephone distribution frames in China are approved by the government in China to be suppliers, one of which is our Telecommunications Division. Of these 30 companies, the four largest competitors have a combined market share of 60%. Our Telecommunications Division has an approximately 10% market share according to the China Telecommunication Industry Annual Report for the period from 1996 to 1999 published by the Ministry of Post and Telecommunications. According to the same publication, the total demand for telephone distribution switching equipment in China is 21,480,000 lines nationwide, and our Telecommunications Division's sales are approximately 2,000,000 lines.
Product Research and Development From January 1999 to December 2001, we conducted research and development in to the proposed products summarized below. During 2002, our Telecommunications Division tested tested these products internally. This testing has continued during 2003 and will continue for the remainder of 2003 and possibly thereafter. Presently, we cannot determine how long the testing of these proposed products will continue. To date, we have not decided whether we will bring any of these products to market
Digital Switching Components Our Telecommunications Division is involved in research and development projects concerning production of component parts capable of utilizing digital switching technologies and the manufacture of digital switching telephone main distribution frames. We produce a limited line of digital switching components and manufacture one digital switching telephone main distribution frame. We are also researching our building an expanded product line of digital switching telephone main distribution frames.
Optical Switching Components Our Telecommunications Division is involved in a number of research and development projects concerning the production of component parts of optical switching telephone main distribution frames. At present, our telecommunications division does not posses the technology to produce optical switching components or optical switching telephone main distribution frames.
Conference Language Interpretation System Our Telecommunications Division is in its advanced stages of research, development, and testing of equipment suitable for multi-lingual conference communication, and audience response tabulation. This product is based on existing switching component technologies and is capable of five language channel simultaneous communication, audience voting tabulation, and five category multi-choice response tabulation. The product utilizes touch pad technology and is capable of visually communicating information on each audience member's screen. There are two versions of this machine in the testing phase: one intended for audience sizes from 1-100 persons and the other intended for audience sizes from 101-400 persons. The results of these tests have been very favorable with the results of the smaller unit showing slightly fewer required modifications than the larger unit. We are proceeding with on going testing and modification of both units.
Our Telecommunications Division spent the following funds for research and development purposes: 1999 - 104,391 RMB or approximately U.S. $12,600
2000 - 61,398 RMB or approximately U.S. $7,400
2001 - 80,000 RMB or approximately U.S. $9,638
2002 - 0 RMB or U.S. $0.
In order to complete these projects, it will need to spend at least: Digital Switching Components 8,800,000.00 RMB or approximately U.S. $1,060,000.
Optical Switching Components 6,100,000.00 RMB or approximately U.S. $736,000.
Conference Language Interpretation System 8,000,000.00 RMB or approximately U.S. $970,000.
We anticipate that these funds will be provided from our telecommunications division's operating cash flow.
We anticipate hiring the following additional employees over the next 12 months to accomplish our research and development projects: 10 technical employees.
Number of Employees As of December 31, 2002 we had approximately 137 full-time employees, consisting of 18 managers and 118 employees.
DOING BUSINESS IN CHINA AND GOVERNMENT REGULATIONS IN CHINA
CHINA'S ENTRY INTO THE WORLD TRADE ORGANIZATION China became a member of the World Trade Organization (WTO) on December 11, 2001. The WTO is the only international organization dealing with the global rules of trade between nations. Its main function is to ensure that trade flows as smoothly, predictable and freely as possible. The WTO is the successor to the General Agreement on Tariffs and Trade (GATT). China's entrance into the WTO potentially will bring profits, and challenges as well, particularly for the following industries:
Telecommunications - China agreed to drop geographic restrictions on imports of pagers, mobile/cellular phones and domestic wire-line services within six years of entry into the WTO. China will also allow up to 49 percent foreign ownership of all services and 51 percent foreign ownership for value added and paging services within four years of entry.
Banking - China agreed to allow foreign banks to conduct business in local currency within two years.
Insurance - Foreign ownership of life insurance firms of up to 50 percent will be allowed upon WTO entry, increasing to 51 percent after one year. Non-life and reinsurance firms will be allowed to take a 51 percent stake in a joint venture immediately and be permitted to form wholly-owned subsidiaries in two years.
Technology - By the year 2005, China will eliminate tariffs on semiconductors, computers computer equipment, telecommunications equipment and other technology products.
Autos - Reduction in auto tariffs from their current 80-100 percent to 25 percent in 2005, with auto parts tariffs cut to an average of 10 percent. Quotas on auto imports will be phased out by 2005.
Travel and Tourism - China agreed to allow unrestricted access to the Chinese market for hotel operators immediately upon WTO entry, with 100 percent foreign ownership allowed within three years of entry.
Chemicals - China has pledged to reduce tariffs to the levels of other WTO members of around 5.5-6.5 percent.
Wood and Paper - Tariffs cut from present levels of 12-18 percent for wood and 15-25 percent for paper to between 5 and 7 percent.
China's WTO membership brings opportunities to achieve greater market share, introduce a wider range of products and services, streamline corporate structures, and gain control over distribution and after-sales services.
China's WTO membership will likely leave far-reaching influences on China's domestic industries. Chinese enterprises may benefit from multinational management experience of other countries and, as a result, change their management structure, possibly leading to business innovation and increased international business. Some industries that previously enjoyed high tariff protection, however, such as automobiles, agriculture, oil refining, chemical fibers and drugs, will experience operational difficulties as tariff rates are lowered, market access expands and intellectual property protection is tougher.
Telecommunications According to the terms of WTO membership, tariffs on IT products, such as computers, semiconductors, and all internet-related equipment will fall from the current average of 13.5% to 0% by the year 2005. Foreign participation in China's basic wireline telecom services will be permitted. Foreign participation in basic telecom services will be allowed from 25% to 49% in about six years after China's WTO entry, while geographic restrictions on different telecom services will be phased out within five or six years.
An increase in the number of network operators could bring more business opportunities to domestic equipment manufactures. Lower tariffs on telecom equipment could have a limited impact as domestic makers do not count on protection from high tariffs.
China's domestic telecom equipment manufacturers have as a whole achieved breakthroughs in their development. The digital switching systems, which enjoy independent intellectual property rights, have reached advanced international standards. The signal and command systems, network administration systems, ISDN, interfaces for various services and software functions are more suitable for the Chinese telecom network. For these enterprises, such as our Telecommunications division, China's WTO entry not only clears the way for us to march into the international market, it also brings us more opportunities for further development.
Hotel and Tourism The accession into the WTO will provide opportunities for China's tourism industry. The tourism sector in China will become more proactive in Asia and play an important part in the global tourism market. China's accession into the WTO will have a number of positive effects on inbound tourism in China. First, it will be conducive to optimizing the development of all sectors related to inbound tourism such as the financial industry, the information industry, and the auto industry. Second, it also will be conducive to establishing operational mechanisms that conform to international management practices so as to provide an ideal situation for the development of inbound tourism. Third, it will be conducive to increasing international arrivals. By becoming a WTO member, China agreed to allow unrestricted access to the Chinese market for hotel operators with the ability to see up 100 per cent foreign-owned hotels in three years, with majority ownership allowed upon accession. Thus, foreign hotels with modern management concept, service standards, by virtue of their advantage in scale, customers, brands and network, will compete with our tourist enterprises and hotel services.
GOVERNMENTAL REGULATION OF OUR OPERATIONS IN CHINA All of our subsidiary companies operate from facilities that are located in the People's Republic of China. Accordingly, our subsidiaries' operations must conform to the governmental regulations and rules of China.
Environmental Compliance Our Hotel and Telecommunications Division's are subject to the People's Republic of China's national Environmental Protection Law, which was enacted on December 26, 1989, as well as a number of other national and local laws and regulations regulating air, water, and noise pollution and setting pollutant discharge standards. Violation of such laws and regulations could result in warnings, fines, orders to cease operations, and even criminal penalties, depending on the circumstances of such violation. We believe that all manufacturing and other operations of our three operating divisions are in compliance with all applicable environmental laws, including those laws relating to air, water, and noise pollution.
Bureaucratic Review and Approvals and Applicable Laws in China Affecting Our Subsidiaries: The Chinese government's involvement and influence in the operation of joint venture companies is limited to a well defined legal/bureaucratic infrastructure in three areas operated through three separate State entities:
1. Review by Foreign Investment Commission Foreign Invested Enterprise joint ventures must be reviewed by the Foreign Investment Commission, or its delegate, for approval as a Foreign Invested Enterprise. Changes in ownership identity or registered capital of a Foreign Invested Enterprise must be reviewed and approved by the Foreign Investment Commission.
2. Industrial and Commercial Registration Administration Bureau A Foreign Invested Enterprise must have a business license to operate, which is issued by the Industrial and Commercial Registration Administration Bureau. In addition, any change in a Foreign Invested Enterprise's ownership must be reported to this bureau for a reissue of a business license.
3. Laws Associated with State-Owned Enterprises The Chinese partners in joint venture Foreign Invested Enterprise companies or Sino-Foreign Equity Joint Ventures may be State-Owned Enterprises. State-Owned Enterprises have defined rights and areas of authority regarding a joint venture as set forth in the joint venture's articles of association and the joint venture contract. As such, the Foreign Investment Commission and the Industrial and Commercial Registration Commission have a limited, defined area of operation, responsibility, and authority. As discussed below, none of these State entities has the ability to change the laws, the articles, or the contracts governing the rights, obligations, operation, or existence of joint venture companies. Further, the minority partners in our joint venture companies are not State-Owned Enterprises. As a non-State-Owned Enterprise, the minority partners have no direct relationship with the People's Republic of China government.
Sino-Foreign Invested Enterprise Laws: FIE Laws
Both of our joint venture companies are Sino-Foreign Equity Joint Ventures established under the law of the People's Republic of China in accordance with the People's Republic of China Sino-Foreign Equity Joint Ventures Law, or EJV Law. Article 2 of the EJV Law, which provides as follows: The Chinese Government, pursuant to the provisions of agreements, contracts, and articles of association that it has approved, shall protect in accordance with the law the investments, distributable profits, and other lawful rights and interests of foreign investors.
Further, the EJV Law provides: The State shall not subject joint ventures to nationalization or expropriation. In special circumstances, however, in order to meet the requirements of the public interest, the State may carry out expropriation against a joint venture in accordance with legal procedures, but corresponding compensation must be made.
The first provision set forth above reflects the principle that the State must protect the interest of the foreign investor based upon an approved Joint Venture Contract and Articles of Association. This would extend to the control provisions in the contracts and articles, as control is one of the rights and interests of the foreign investor in a majority-owned EJV. The second statement reflects the power that all national governments, including that of the United States, reserve to them.
In addition, Article 33 of the Implementing Regulations to the Equity Joint Venture Law provides that "the highest authority of a Joint Venture shall be its board of directors, which shall decide all major issues concerning the Joint Venture." Thus, control over the Joint Ventures is vested in the board of directors, not in the State. While it is true that the State retains ultimate control of State-Owned Enterprises, Equity Joint Ventures are not State-Owned Enterprises, but are an entirely separate category of enterprise under the law of the People's Republic of China. While the State can influence the operations of a joint venture where a Chinese party is a State-Owned Enterprise, legally it can do so only through the party's representatives on the Joint Venture board of directors.
Our wholly-owned subsidiary, Shun de Yi Wan Communication Equipment Plant Company Co. Ltd., exists in accordance with the People's Republic of China Wholly Foreign-Owned Enterprise Law, or WFOE Law. Article 8 of the WFOE Law provides as follows: An enterprise with foreign capital meets the conditions for being considered a legal person under Chinese law and shall acquire the status of a Chinese legal person, in accordance with the law.
Further, the WFOE Law provides in Article 4: The investments of a foreign investor in China, the profits it earns and its other lawful rights and interests are protected by Chinese law.
And, in Article 5: The state cannot nationalize or requisition any enterprise with foreign capital. Under special circumstances, when public interest requires, enterprises with foreign capital may be requisitioned by legal procedures and appropriate compensation shall be made.
As with the Equity Joint Venture Law, the first two provisions set forth above reflect the principle that the State must protect the interest of the foreign investor based upon approved Articles of Association. The third statement reflects the power of all national governments, including the United States that are reserved to them.
Finally, with respect to the potential retroactive effect of any laws passed concerning existing joint ventures, Article 40 of the Foreign Economic Contract Law, or FECL, which was adopted in 1985, provides as follows:
Even if the law makes new provisions, contracts for Sino-Foreign Joint Ventures, Sino-Foreign Cooperative Joint Ventures, and for Sino-Foreign Cooperative Exploration and Exploitation of natural resources which have already been approved by a competent authority of the State, may still be performed according to the stipulation of those contracts.
Accordingly, as the above laws indicate, the only realistic method by which the Chinese Government can effect the operation of these Foreign Invested Enterprises is provided by the respective Articles of Association. Those Articles, combined with the Foreign Invested Enterprise laws, provide that the Chinese Government does not and cannot have an intrusive role in the affairs of a Foreign Invested Enterprise company. To the contrary, those laws place a continuing duty on the government to ensure that the rights of foreign investors in Foreign Invested Enterprise companies, as expressed in the approved provisions of Articles of Association, are protected and preserved.
Foreign Companies Doing Business in China There are three standard investment vehicles for foreigners doing business in China: o Equity Joint Venture o Cooperative or contract Joint Venture o Wholly Foreign-Owned Enterprise
Each of these investment vehicles is known as a Foreign Invested Enterprise. The applicable legal framework for the establishment and continuation of Foreign Invested Enterprise laws is as follows: General - People's Republic of China Foreign Economic Contract Law
Accounting - People's Republic of China Accounting Law - Laws Concerning Enterprises with Foreign Investments - The General Accounting Standard for Enterprises - The Specific Accounting Standards
Equity Joint Venture - People's Republic of China Sino-Foreign Equity Joint Venture Law - People's Republic of China Sino-Foreign Equity Joint Venture Law Implementing Regulations
Cooperative Venture - People's Republic of China Sino-Foreign Cooperative Joint Venture Law - Detailed Rules for the Implementation of the People's Republic of China Sino-Foreign Cooperative Joint Venture Law Regulations
Wholly Foreign- Owned Enterprise - People's Republic of China Wholly Foreign-Owned Enterprise Law - Implementing Rules of the Wholly Foreign-Owned Enterprise Law - Interpretations on Various Provisions Concerning the Implementing Rules of the Wholly Foreign-Owned Enterprise Law
The Foreign Invested Enterprise laws specifically referenced in this prospectus are the People's Republic of China Sino-Foreign Equity Joint Venture Law, the People's Republic of China Wholly Foreign-Owned Enterprise Law, the People's Republic of China Foreign Economic Contract Law, and the Accounting Laws.
The Chinese Legal System The practical effect of the People's Republic of China legal system on our business operations in China can be viewed from two separate but intertwined considerations.
First, as a matter of substantive law, the Foreign Invested Enterprise laws provide significant protection from government interference. In addition, these laws guarantee the full enjoyment of the benefits of corporate Articles and contracts to Foreign Invested Enterprise participants. These laws, however, do impose standards concerning corporate formation and governance, which are not qualitatively different from the General Corporation Laws of the several states. Therefore, as a practical matter, a Foreign Invested Enterprise needs to retain or have ready access to a local Chinese law firm for routine compliance purposes.
Similarly, the People's Republic of China accounting laws mandate accounting practices, which are not co-existent with U.S. Generally Accepted Accounting Principles. The China accounting laws require that an annual "statutory audit" be performed in accordance with People's Republic of China accounting standards and that the books of account of Foreign Invested Enterprises are maintained in accordance with Chinese accounting laws. Article 14 of the People's Republic of China Wholly Foreign-Owned Enterprise Law requires a Wholly Foreign-Owned Enterprise to submit certain periodic fiscal reports and statements to designate financial and tax authorities, at the risk of business license revocation. As a practical matter, a Foreign Invested Enterprise must retain a local Chinese accounting firm that has experience with both the Chinese standards and U.S. Generally Accepted Accounting Principles. This type of accounting firm can serve the dual function of performing the annual Chinese statutory audit and preparing the Foreign Invested Enterprise's financial statements in a form acceptable for an independent U.S. certified public accountant to issue an audit report in accordance with Generally Accepted Accounting Auditing Standards.
Second, while the enforcement of substantive rights may appear less clear than United States procedures, the Foreign Invested Enterprises and Wholly Foreign- Owned Enterprises are Chinese registered companies which enjoy the same status as other Chinese registered companies in business-to-business dispute resolution. Because the terms of the respective Articles of Association provide that all business disputes pertaining to Foreign Invested Enterprises are to be resolved by the Arbitration Institute of the Stockholm Chamber of Commerce in Stockholm, Sweden applying Chinese substantive law, the Chinese minority partner in our joint venture companies will not assume a privileged position regarding such disputes. Any award rendered by this arbitration tribunal is, by the express terms of the respective Articles of Association, enforceable in accordance with the "United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958)." Therefore, as a practical matter, although no assurances can be given, the Chinese legal infrastructure, while different in operation from its United States counterpart, should not present any significant impediment to the operation of Foreign Invested Enterprises.
Earnings and Distributions of the FIE's Both the Foreign Investment Equity Joint Venture laws and the Wholly Foreign- Owned Enterprise laws provide for and guarantee the distribution of profits to foreign investors in Chinese Foreign Invested Enterprises.
Article 7 of the People's Republic of China Sino-Foreign Equity Joint Venture Law requires that profits of an equity joint venture be distributed among the parties in proportion to their respective contributions to registered capital. These distributions are made from net profits after deducting from gross profits, a reserve fund, a bonus and welfare fund for workers and staff, and a venture expansion fund, all as stipulated in the venture's Articles of Association. The Yi Wan joint venture Articles of Association provide in Chapter 7, Article 43, that allocations for these statutory funds be determined by the Board of Directors each year "...according to the actual business situation and profitability of the Joint Venture from after-tax profit."
Article 10 of the People's Republic of China Sino-Foreign Equity Joint Venture Law allows the net profit which a foreign investor receives as its share of the Foreign Investment Equity Joint Venture profit to be "remitted abroad in accordance with foreign exchange control regulations...." Logistically, when the statutory funds are allocated in accordance with Article 43, and any loans are repaid by the joint venture in accordance with the terms thereof, the after-tax profits of the joint venture are distributed based upon the ratio of each party's registered capital. The profits are decided by the board of directors, whether for distribution or for the expansion of the joint venture's business; provided, however, that where profits are used for expansion, the board of directors are required to distribute the profits that are available for distribution in an amount sufficient to enable each party to pay the tax liabilities, if any, that they each may incur with respect to the joint venture's profits.
If the joint venture has incurred losses in previous years, the profits of the current year must be first used to make up losses. The joint venture cannot distribute profits until the previous losses are made up. Remaining profits from previous years may be added to the current year for profits distribution, or for distribution after making up the current year deficit. The profits of a party may be used for further investment inside China or may be remitted outside China.
Where the joint venture has foreign currency available for profit distribution, each party can receive an amount of foreign currency in proportion to its respective contribution to registered capital. The joint venture must assist each party, upon request, in exchanging profits available for distribution in RMB into United States Dollars using the Foreign Exchange Adjustment Centers and any other reasonable methods that may be available to the joint venture or any party. The costs of cash exchanges are the responsibility of the party receiving the foreign currency profit distribution. All profits distributed to us in foreign currency are freely remittable outside of China to a bank account designated by us.
Similarly, Article 19 of the People's Republic of China Wholly Foreign Owned Enterprise Law provides that a foreign investor may remit abroad profits that are earned by a Foreign Invested Enterprise, as well as other funds remaining after the enterprise is liquidated.
Because the three Chinese businesses are controlled foreign corporations, for U.S. federal income tax purposes, we may be required to include in our gross income for U.S. tax purposes: o Those companies' "Subpart F" income, which includes certain passive income and income from certain transactions with related persons, whether or not this income is distributed to it; and
o Increases in those companies' earnings invested in certain U.S. property.
Based on the current and expected income, assets, and operations of the three Chinese businesses, we believe that it will not have significant U.S. federal income tax consequences under the controlled foreign corporation rules.
Required Statutory Reserve Funds In accordance with various regulations in China, a Foreign Invested Enterprise, such as our hotel and agriculture divisions, can distribute their after tax profit only after making transfers to certain statutory surplus reserves, collectively referred to as "Surplus Funds." The order of distribution to investors is: o Enterprise or corporate income tax payments; o Application to eliminate prior year losses; o Transfers to the three statutory funds per regulations; o Distribution to investors.
The three statutory reserve funds are: o Statutory surplus reserves are to be utilized to offset prior years' losses, or to increase its share capital. When the statutory surplus reserve fund of a limited liability company converts its surplus reserves to capital in accordance with a shareholders' resolution, the company will either distribute new shares in proportion to the number of shares held by the each shareholder, or increase the par value of each share. Except for the reduction of losses incurred, any other usage should not result in this reserve balance falling below 25% of the registered capital.
o Enterprise expansion fund is to provide for capital expenditures and working capital. When the fund is utilized, and amount equal to the lower of cost of the assets and the balance of the fund is transferred from the expansion fund to the general surplus reserve. This reserve is non-distributable other than in liquidation. When the relevant asset are disposed of or written off, the original transfers from the expansion fund are reversed.
o Public welfare fund is to be utilized for capital items for the collective benefits of a company's employees such as the construction of dormitories, cafeteria and other staff welfare facilities. This fund is non-distributable other than in liquidation. When the fund is utilized, an amount equal to the lower of cost of the assets and the balance of the fund is transferred from the statutory public welfare fund to the general surplus reserve, This reserve is non-distributable other than in liquidation. When the relevant assets are disposed of or written off, the original transfers from the statutory public welfare fund are reversed.
The separate allocation to each of the Statutory Surplus Reserve Funds are either pre-set in the articles of association or joint venture contracts, or can be determined by the board of directors of each entity. In Foreign Invested Enterprises the directors determine the separate allocations on an annual basis. The total allocations to the Surplus Funds required as a percentage of net profits after income tax is not set by regulations for Foreign Invested Enterprise joint ventures and is to be determined by the directors on an annual basis. The allocations for each fund are recorded differently on the Foreign Invested Enterprise financial statements. The reserve fund, enterprise expansion fund and statutory public welfare fund are shown on the balance sheets as part of owners' equity.
For all Foreign Invested Enterprises, once the contributions to the statutory surplus reserve fund equal 50% of the Foreign Invested Enterprise's registered capital, no further contributions to that fund need be made. No such limitation exists for other funds. Foreign Invested Enterprises do not have to set up or contribute to an enterprise expansion fund.
In wholly-owned Foreign Invested Enterprises, income after the payment of China income taxes , shall be allocated to the statutory surplus reserves and statutory public welfare fund for staff and workers. The proportion of allocation for reserve funds is no less than 10 percent of the profit after tax until the accumulative amount of allocation for statutory surplus reserve funds reaches 50 percent of the registered capital, and then no more allocation may be made. The proportion of allocation for statutory public welfare fund and enterprise expansion fund is decided by the enterprise itself. A wholly foreign-owned enterprise does not have to set up or contribute to an enterprise expansion fund.
Political and Trade Relations with the United States Political and trade relations between the United States and Chinese governments within the past five years have been volatile and may continue to be in the future. Major causes of volatility, the United States' considered revocation of China's Most Favored Nation trade status, illegal transshipments of textiles from China to the United States, issues surrounding the sovereignty of Taiwan, and the United States' bombing of the Chinese embassy in Yugoslavia, have had no direct connection to our operations; however, other on-going causes of volatility, including the protection of intellectual property rights within China and sensitive technology transfer from the United States to China have closer potential connection to our operations. There can be no assurance that the political and trade ramifications of these causes of volatility or the emergence of new causes of volatility will not cause difficulties in our operations in the China marketplace.
Economic Reform Issues Although the majority of productive assets in China are owned by the Chinese government, in the past several years the government has implemented economic reform measures that emphasize decentralization and encourage private economic activity. Because these economic reform measures may be inconsistent or ineffectual, there are no assurances that: o We will be able to capitalize on economic reforms; o The Chinese government will continue its pursuit of economic reform policies; o The economic policies, even if pursued, will be successful; o Economic policies will not be significantly altered from time to time; and o Business operations in China will not become subject to the risk of nationalization.
Negative impact upon economic reform policies or nationalization could result in a total investment loss in our common stock.
Since 1978, the Chinese government has reformed its economic systems. Because many reforms are unprecedented or experimental, they are expected to be refined and improved. Other political, economic and social factors, such as political changes, changes in the rates of economic growth, unemployment or inflation, or in the disparities in per capita wealth between regions within China, could lead to further readjustment of the reform measures. This refining and readjustment process may negatively affect our operations.
Our Telecommunications Division is partially dependent upon the government's allocation of funds in its budgeting processes. These budgetary processes are not necessarily subject to fixed time schedules; accordingly, our telephone communications manufacturing company's operations, quarterly revenues, and operating results may be adversely affected by extended periods of budgeting freezes or restraints.
In addition, our Telecommunications Division is partially dependent upon the availability of bank credit to its customers as mandated by the government in China. Recently, in response to inflationary concerns and other economic factors, the Chinese government imposed restrictions on the funds available for lending by the banking system. In addition, this company does not know whether the restrictions on the availability of credit will ease and, if so, the nature and timing of these changes. These fund restrictions could adversely affect the operations of each of our subsidiaries.
Over the last few years, China's economy has registered a high growth rate. Recently, there have been indications that rates of inflation have increased. In response, the Chinese government recently has taken measures to curb this excessively expansive economy. These measures have included devaluations of the Chinese currency, the Rennin, restrictions on the availability of domestic credit, reducing the purchasing capability of certain of its customers, and limited re-centralization of the approval process for purchases of some foreign products. These austerity measures alone may not succeed in slowing down the economy's excessive expansion or control inflation, and may result in severe dislocations in the Chinese economy. The Chinese government may adopt additional measures to further combat inflation, including the establishment of freezes or restraints on certain projects or markets. These measures may adversely affect our telephone communications manufacturing company's operations.
To date reforms to China's economic system have not adversely impacted our telephone communications manufacturing company's operations and are not expected to adversely impact operations in the foreseeable future; however, there can be no assurance that the reforms to China's economic system will continue or that we will not be adversely affected by changes in China's political, economic, and social conditions and by changes in policies of the Chinese government, such as changes in laws and regulations, measures which may be introduced to control inflation, changes in the rate or method of taxation, imposition of additional restrictions on currency conversion and remittance abroad, and reduction in tariff protection and other import restrictions.
Currency Conversion and Exchange The currency in China is designated as the Renminbi. Although the Renminbi/United States dollar exchange rate has been relatively stable in the past five years there can be no assurance that the exchange rate will not become volatile or that the Renminbi will not be officially devalued against the United States dollar by direction of the Chinese government.
Exchange rate fluctuations may adversely affect our financial performance because of our foreign currency denominated assets and liabilities, and may reduce the value, translated or converted, as applicable into United States dollars, of our net fixed assets, our earnings and our declared dividends. We do not engage in any hedging activities in order to minimize the effect of exchange rate risks.
Reports to Security Holders We are subject to the informational requirements of the Securities Exchange Act of 1934. Accordingly, we file annual, quarterly and other reports and information with the Securities and Exchange Commission. You may read and copy these reports and other information we file at the Securities and Exchange Commission's public reference rooms in Washington, D.C., New York, New York, and Chicago, Illinois. Our filings are also available to the public from commercial document retrieval services and the Internet world wide website maintained by the Securities and Exchange Commission at www.sec.gov.
Item 2.
Item 2. Properties
The PRC Land Administration Law, initially revised to reflect modern land use regulation in December 1988 and most recently revised effective January 1999, governs land use in China. This revised legislation provides for the transferability of legal term interests in land, otherwise treated under the regulatory scheme as a fee simple. The government has rights of termination similar in concept to eminent domain in common law, which can be exercised to regulate land use to satisfy public need. These term interests in land are evidenced by "Land Use Certificates" that set forth the location, size, permitted use and "owner" of the respective parcels.
OUR HOTEL FACILITIES Our Jiaozuo Yi Wan Hotel Division has a Hotel Land Use Certificate, which consists of 2.42 acres and has a term of 40 years expiring in January 2037. The land identified in this Certificate is owned by our joint venture partner Shunao Industry & Commerce Company, Ltd. and is located in Jiaozuo City. The use purpose of the land as stated in the Certificate is "commerce"; accordingly the Certificate enables us to operate hotel, entertainment, food and beverage, and conference facilities. We have paid the government in China a one-time fee of 13,000,000 RMB, approximately US $1,570,000, for this land use permit.
Our Jiaozuo Yi Wan hotel facilities are located in Jiaozuo City, Henan province at No. 189, Middle Min Zhu Road. They include: o 1 main building (approximately 22 stories/230 feet high/110,000 square feet) o 131 standard guest rooms o 25 guest suites o 2 executive guest suites o 1 (one) 500 bed employee dormitory o 2 full service restaurants (700 person capacity) o 1 buffet coffee shop (50 person capacity) o 1 lobby bar (25 person capacity) o 1 night club (334 person capacity) o 1 bowling alley (10 lanes) and game room o 1 sauna-health club (150 person capacity) o 9 small and medium size conference and meeting rooms (10-60 person capacity) o 1 large conference room (460 person capacity) o o 1 business center o 1 travel agency o 1 sundries and gift store o 1 beauty salon (four stations) o full facility smoke detectors and water sprinklers
Our Qinyang Yi Wan Hotel Division has a Hotel Land Use Certificate, which consists of 2 acres and has a term of 30 years expiring in January 2031. The use purpose of the land as stated in the Certificate is "commerce"; accordingly the Certificate enables us to operate hotel, entertainment, food and beverage, and conference facilities. The Land Used Certificated was obtained from its 20% joint venture partner as a capital contribution in the amount of approximately $316,000.
Our Qinyang Yi Wan hotel facilities are located in Qinyang City at No. 53. West Huai Fu Road Qinyang City, Henan Province, China. They include:
o 1 main building o 54 standard guest rooms o 5 guest suites
o 1 (one) 200 bed employee dormitory
o 1 Chinese restaurant (150 person capacity) with 20 VIP rooms (200 person capacity).
o 1 Muslim restaurant (80 person capacity) with 9 VIP rooms (100 person capacity).
o 1 sauna-health club (250 person capacity)
o 16 KTV rooms (150 person capacity)
o 1 small meeting room (20 person capacity)
o 1 large conference room (300 person capacity)
o 1 business center
o 1 travel agency
o sundries and gift store
o 1 beauty salon (four stations)
o full facility smoke detectors and water sprinklers
OUR TELECOMMUNICATIONS DIVISION'S FACILITIES Our Telecommunication Division has a Land Use Certificate, which consists of 676 acres of land and a building occupying 10,515.21 square feet of land, with a permitted building size of 32,024 square feet. This Land Use Certificate has a term of 50 years expiring in February 2045. The land identified in this Certificate is owned by Cen Minhong, one of our shareholders, and is located in Daliang Town, Shunde City. The permitted use of the land as stated in the Certificate is "manufacturing"; accordingly the Certificate enables us to operate our manufacturing facility. The Communications Land Use Certificate was originally purchased by Cen Minhong, one of the initial partners of our telecommunications company who granted the company the right to use the land for a period of 50 years, beginning in March 1995. The original owner has assigned the land use right to our Telecommunications Division for no additional consideration for the remaining years. The original cost of the land use right was RMB 2,300,000, or approximately US $280,000.
Our Telecommunications Division's facilities are located in Shun de City, Guangdong province at No. 3. 5th Street Fengxiang Road, Daliang Town, and include: o 1 production, management, and research building, four floors o 4 floor production facility (approximately 9750 square feet) o 1 warehouse o 50 sets of mechanical processing equipment o 150 sets of various mold and pressure tools o 40 kinds of testing and inspection equipment o 3 production lines
OUR AGRICULTURE DIVISION'S FACILITIES
Until December 2002, our agriculture division had a Land Use Certificate, which consisted of three land parcels. The first two parcels consisted of 213 acres, with 29,052 square feet being set aside for buildings. The third parcel consisted of 24.7 acres, with 5,486 square feet being set aside for buildings. This Land Use Certificate had a term of 50 years, and was due to expire in September 2046. The land for these parcels as identified in this Certificate was owned by our joint venture subsidiary, Jiaozuo Yi Wan Hotel, Ltd., and was located in Maying Village, Zhandian Town, Wuzhi County. The permitted use of the land as stated in the Certificate is "agriculture"; accordingly the Certificate enabled us to conduct our agriculture operations. Our then operating agriculture division paid 28,000,000 RMB, approximately US $3,382,000, to the government to purchase its land use permit for 50 years.
The land was allocated in the following way: o 12.4 acres crab production o 8.3 acres soft shell turtle production o 12.4 acres fish production o 39.6 acres shrimp production o 27.2 acres vegetable production o 131.2 acres idle land
Our then agriculture division's facilities included: o 3 production areas o 74 production pools consisting of: o 40 pools--shrimp o 10 pools--crab o 10 pools--turtle o 8 pools--fish o 4 pools--fish incubation o 2 pools--turtle incubation o 2 research and management buildings o 1 warehouse and storage facility o 1 company dormitory, 30 beds
In accordance with the sale of the farm, the land use certificate and rights attendant to that certificate, were transferred to the third party buyer and we have no further property rights in the farm land.
Item 3.
Item 3. Legal Proceedings
We are not a party to or aware of any pending or threatened legal lawsuits or other legal actions against us.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of our security holders during the fourth quarter of the year ended December 31, 2002.
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PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Market Information Our common stock become quoted on the OTC Bulletin Board on September 10, 2002. Below is the market information pertaining to the range of the high and low bid information of our common stock for each quarter since our common stock has been quoted on the OTC Bulletin Board. Our common stock is quoted under the symbol YIWA. The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions.
2002 Low High Fourth Quarter $0.00 $0.00 Third Quarter $0.00 $0.00
No regular trading market exists for our common stock and there is no assurance that a regular trading market will develop, or if developed will be sustained. A shareholder in all likelihood, therefore, will not be able to resell their securities should he or she desire to do so when eligible for public resales. Furthermore, it is unlikely that a lending institution will accept our securities as pledged collateral for loans unless a regular trading market develops.
Holders As of December 31, 2002, there were 16,506,250 shares of common stock outstanding, which were held of record by 63 stockholders.
Options, Warrants There are no outstanding options or warrants to purchase, or securities convertible into, our common equity.
Holders of Record As of December 31, 2001, there were 63 holders of record.
Dividend Policy
Since our inception, we have not declared or paid any dividends on our common stock, nor do we have any intentions of declaring such a dividend in the foreseeable future. The payment of dividends, if any, is within the discretion of the Board and will depend upon our earnings, our capital requirements and financial condition, and other relevant factors. Our Board of Directors does not intend to declare any dividends in the foreseeable future, but instead intends to retain all earnings, if any, for use in our operations.
Issuance of Securities We have had no unregistered securities issuances during our fiscal year 2002.
Item 6
Item 6 Selected Financial Data
SELECTED FINANCIAL DATA
The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements contained elsewhere in this prospectus. They present the results of operations from January 1, 1997 through December 31, 2002.
I. OVERVIEW As of December 31, 2002 We have three operating units each producing different products and services: o Our two hotel divisions provide up-scale lodging, food and beverage, entertainment, and conference and meeting facility services. o Our Telecommunications Division produces digital and analog telephone network main distribution frames and their component parts. o .
All of our operating units are located in the People's Republic of China.
YI WAN GROUP. INC. AND SUBSIDIARIES STATEMENT OF OPERATIONS
Combined Combined Consolidated Consolidated Consolidated December 31, December 31, December 31, December 31, December 31, 1998 1999 2000 2001 2002 ---------------- --------------- --------------- --------------- --------------- USD USD USD USD USD ---------------- --------------- --------------- --------------- ---------------
Net Sales 14,087,805 14,385,693 14,070,568 12,122,239 13,901,421
Cost of Sales 5,024,242 5,040,628 5,416,003 4,421,636 5,134,589
Gross profit 9,063,563 9,345,065 8,654,565 7,700,603 8,766,832
Operating Expenses 3,684,813 4,038,854 4,068,658 4,043,937 5,087,303
Income From Operations 5,378,750 5,306,211 4,585,907 3,656,666 3,679,529
Other Income (Expense) (52,597) (9,364) 57,592 18,560 28,432
Net Income 5,108,433 4,675,587 3,361,253 2,530,779 1,086,438
Earnings per share 0.32 0.30 0.21 0.16 0.14
BALANCE SHEET December 31, December 31, December 31, December 31, December 31, 1998 1999 2000 2001 2002 ---------------- --------------- --------------- --------------- --------------- USD USD USD USD USD ---------------- --------------- --------------- --------------- ---------------
ASSETS
Total Current Assets 3,882,488 5,144,585 5,838,988 5,608,102 6,938,058
Other Assets 26,060,098 25,114,407 23,713,156 22,412,040 21,244,171
Total Assets 29,942,586 30,258,992 29,552,144 28,020,142 28,182,229
LIABILITES & STOCKHOLDER'S EQUITY
Current Liabilities:
Accounts Payable & Accrued
Liabilities 5,514,033 3,429,983 3,567,913 3,453,778 3,795,717 Note Payable -Current
Portion -
Payable to Stockholders/other 2,616,121 4,066,546 10,114,002 5,950,739 4,847,082
Total Current Liabilities 8,130,154 7,496,529 13,681,915 9,404,517 8,642,799
Long Term Liabilities:
Note Payable - Net of Current Portion
Total Liabilities 8,130,154 7,496,529 13,681,915 9,404,517 8,746,981
Total Stockholder's Equity 21,812,432 22,762,463 14,609,796 17,151,131 17,730,938
Total Liabilities and
Stockholder Equity 29,942,586 30,258,992 29,552,144 28,020,142 28,182,229
II. RESULTS OF OPERATIONS
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation
Forward-Looking Statements:
The following discussion of the financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes thereto. The following discussion contains forward-looking statements. Yi Wan Group, Inc. is referred to herein as "we" or "our." The words or phrases "would be," "will allow," "intends to," "will likely result," "are expected to," "will continue," "is anticipated," "estimate," "project," or similar expressions are intended to identify "forward-looking statements" Such statements include those concerning our expected financial performance, our corporate strategy and operational plans. Actual results could differ materially from those projected in the forward-looking statements as a result of a number of risks and uncertainties, including: (a) those risks and uncertainties related to general economic conditions in China, including regulatory factors that may affect such economic conditions; (b) whether we are able to manage our planned growth efficiently and operate profitable operations, including whether our management will be able to identify, hire, train, retain, motivate and manage required personnel or that management will be able to manage and exploit existing and potential market opportunities successfully; (c) whether we are able to generate sufficient revenues or obtain financing to sustain and grow our operations; (d) whether we are able to successfully fulfill our primary requirements for cash which are explained below under "Liquidity and Capital Resources"; and (e) whether worldwide economic conditions and/or the Iraq war or any other armed conflict will affect the tourist industry in China and thereby affect revenues of our hotels. Statements made herein are as of the date of the filing of this Form 10-K 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 December 31, 2002, we had $1,980,836 of retained earnings. As of December 31, 2002, we had cash of $2,135,154 and reported total shareholders' equity of $18,003,894. For this same period of time, we had revenues of $13,901,421 and general, administrative and sales expenses of $5,087,303.
Consolidated results
1) SALES. Consolidated sales increased by $1,779,182, or approximately 14.7%, from $12,122,239 for the year ended December 31, 2001 to $13,901,421 for the year ended December 31, 2002. The 14.7% increase was a result of a new hotel operation and a new restaurant added to our existing hotel in 2002, and increased sales promotions to attract additional customers.
2) COST OF GOODS SOLD. Consolidated cost of goods sold increased by $712,953, from $4,421,636 for the year ended December 31, 2001 to $5,134,589 for the year ended December 31, 2002. Cost of goods sold as a percentage of sales increased to 36.9% for the year ended December 31, 2002, from 36.5% for the year ended December 31, 2001. The increase was a result of the increase in the cost of materials and increased operating costs.
(3) GROSS PROFIT. Consolidated gross profit increased by $1,066,229, from $7,700,603 for the year ended December 31, 2001 to $8,766,832 for the year ended December 31, 2002. Gross profit as a percentage of sales decreased to 63.06% for the year ended December 31, 2002 from 63.52% for the year ended December 31, 2001. This decrease in gross profit as a percentage of sales was the result of the increase in the cost of materials and increased operating costs.
(4) SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses increased by $1,043,366, from $4,043,937 for the year ended December 31, 2001 to $5,087,303 for the year ended December 31, 2002. The selling and administrative expenses as a percentage of sales increased to 36.6% for the year ended December 31, 2002 from 33.4% for the year ended December 31, 2001.The increase in selling and administrative expenses was due to the increased costs paid to performers, entertainers and consultants in our hotel operation.
(5) NET INCOME. Consolidated net income decreased $1,279,712, or approximately 20.0%, from $2,551,143 for the year ended December 31, 2001 to $1,271,431 for the year ended December 31, 2002. The decrease was mainly due to loss on disposal of operation of $1.3 million.
Segmented results
(1) SALES. An itemization of each operating unit's data and an explanation of significant changes are as follows:
Hotel operations: Sales increased by $2,137,930, or approximately 27.6%, from $7,752,915 for the year ended December 31, 2001 to $9,890,845 for the year ended December 31, 2002. The increase was a result of a new hotel operation and a new restaurant added to our existing hotel in 2002, and increased sales promotions to attract additional customers.
Telecommunication operations: Sales decreased by $358,748, or approximately 8.2%, from $4,369,324 for the year ended December 31, 2001 to $4,010,576 for the year ended December 31, 2002. The decrease was a result of lower sale prices and sale discount promotions to meet the market competition.
(2) COST OF GOODS SOLD. An itemization of each operating unit's data and an explanation of significant changes is as follows:
Hotel operations: Cost of goods sold increased by $964,810, from $2,111,853 for the year ended December 31, 2001 to $3,076,663 for the year ended December 31, 2002.Cost of goods sold as a percentage of sales increased to 31.1% for the year ended December 31, 2002 from 27.2% for the year ended December 31, 2001. The increased cost of goods sold as a percentage of sales is attributable to the increase in the cost of materials and increased operating costs.
Telecommunication operations: Cost of goods sold decreased by $251,857, from $2,309,783 for the year ended December 31, 2001 to $2,057,926 for the year ended December 31, 2002. Cost of goods sold as a percentage of sales decreased to 51.3% for the year ended December 31, 2002 from 52.9% for the year ended, 2001. The decrease was a result of better management in purchasing of raw materials for production and better control of our expenses.
(3) GROSS PROFIT. An itemization of each operating unit's data and an explanation of significant changes is as follows:
Hotel operations: Gross profit increased by $1,173,120, from $5,641,062 for the year ended December 31, 2001 to $6,814,182 for the year ended December 31, 2002. As a percentage of sales, gross profit decreased from 72.76% for the year ended December 31, 2001 to 68.89% for the year ended December 31, 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 by $106,891, from $2,059,541 for the year ended December 31, 2001 to $1,952,650 for the year ended December 31, 2002. As a percentage of sales, gross profit increased from 47.1% for the year ended December 31, 2001 to 48.7% for the year ended December 31, 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.
(4) SELLING AND ADMINISTRATIVE EXPENSES. An itemization of each operating unit's data and an explanation of significant changes are as follows:
Hotel operations: Selling and administrative expenses increased by $1,093,120, from $3,126,606 for the year ended December 31, 2001 to $4,219,726 for the year ended December 31, 2002. Selling and administrative expenses as a percentage of sales increased to 42.66% for the year ended December 31, 2002 from 40.3% for the year ended December 31, 2001. This increase was a result of increases in: (a) costs paid to performers and entertainers; (b) consulting expenses; (c) sales taxes; and (d) and wages expenses.
Telecommunication operations: Selling and administrative expenses increased by $49,754, from $912,331 for the year ended December 31, 2001 to $862,577 for the year ended December 31, 2002. Selling and administrative expenses as a percentage of sales increased to 21.5% for the year ended December 31, 2002 from 20.9% for the year ended December 31, 2001. The increase in selling and administrative expenses as a percentage of sales was a result of increased business expenses.
(5) NET INCOME. An itemization of each operating unit's data and further explanations of significant changes are as follows:
Hotel operations: Net income decreased by $395,750, from $2,108,244, or 27.19% of sales, for the year ended December 31, 2001 to $1,712,494, or 17.31% of sales, for the year ended December 31, 2002. The decrease was a combined result of an increase in cost of goods sold and increase in selling expense.
Telecommunications operations: Net income increased by $10,984, from $771,578, or 17.66% of sales, for the year ended December 31, 2001 to $782,562, or 19.51% of sales, for the year ended December 31, 2002. The increase was a result of better management in purchase and in inventory control.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2002, net cash provided by operating activities was $5,604,234, net cash used in investing activities was $3,830,682, and net cash used in financing activities was $945,690.
As of December 31, 2001, net cash provided by operating activities was $3,747,504, net cash used in investing activities was $140,237, and net cash used in financing activities was $4,182,696.
Net cash provided by operating activities increased by $1,856,730 to $5,604,234 for the year ended December 31, 2002, representing a decrease of approximately 50%. The increase in cash flow from operating activities reflects sales from our new hotel operation and a new restaurant added to our existing hotel in 2002.
Net cash used in investing activities increased by $3,690,445 to $3,830,682 for the year ended December 31, 2002, representing a 260% increase, compared to $140,237 net cash used for the same period of 2001. The increase was due to a higher level in the purchasing of improvements and equipment for the new hotel.
Net cash used in financing activities decreased by $3,237,306 to $945,390 for the year ended December 31, 2002, representing a 77.4% decrease, compared to $4,182,696 for the same period of 2001. The decrease was primarily due to the decrease in 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 Division s' existing business model in China; (2) general overhead expenses for personnel to support these business model activities; (3) continued promotional activities pertaining to our attempt to increase hotel related revenues; 4) the development costs of our hotel operations in China; (5) the payment of cash contributions to the joint ventures under the joint venture agreements; and (6) payments due to the former equity owners of our subsidiaries. We anticipate that our current operating activities will enable us to meet the anticipated cash requirements for the 2003 fiscal year.
Historically, our subsidiary companies have financed operations principally through cash generated from operations. Initial capital for each operating unit was generated by contributions of initial shareholders (Hotel operations: $11,960,000, Telecommunication operations: $1,580,000, Farm operations: $2,410,000). No bank loans were obtained for this purpose. The cash contributions required to be made by June 2002 to our subsidiaries for registered capital and the additional investment requirements of $7,371,730 and the $9,936,210 due to our former joint venture partners will be funded from the profits generated from the operations of our subsidiaries and, if necessary, equity financing; however, there are no assurances that we will be successful in obtaining equity financing. Management, however, extended the June 2002 payment date to June 2003 for capital contributions. We intend to fund the capital improvements to be made to the hotel from positive cash flow generated from hotel operations.
MANAGEMENT ASSUMPTIONS.
Management anticipates, based on internal forecasts and assumptions relating to our operations that existing cash and funds generated from operations will be sufficient to meet working capital and capital expenditure requirements for at least the next 12 months. In the event that plans change, our assumptions change or prove inaccurate or if other capital resources and projected cash flow otherwise prove to be insufficient to fund operations (due to unanticipated expense, technical difficulties, or otherwise), we could be required to seek additional financing. There can be no assurance that we will be able to obtain additional financing on terms acceptable to it, or at all.
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 7A.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Not applicable. We have no investments in market risk sensitive instruments.
Item 8
Item 8 Financial Statements and Supplementary Data
INDEPENDENT AUDITORS' REPORT
The Board of Directors Yi Wan Group, Inc. and Subsidiaries
We have audited the consolidated balance sheets of Yi Wan Group, Inc. and subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of income and other comprehensive income, shareholders' equity and cash flows for years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial positions of Yi Wan Group, Inc. and subsidiaries as of December 31, 2002 and 2001, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
February 19, 2003 Walnut, California
YI WAN GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS AND INDEPENDENT AUDITORS' REPORT
DECEMBER 31, 2002 AND 2001
YI WAN GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2002 AND 2001
ASSETS 2002 2001 ----------- --------- CURRENT ASSETS: Cash $ 2,135,154 $ 1,306,992 Accounts receivable, net of allowance for doubtful accounts of $6,455 and $6,950 at December 31, 2002 and 2001, respectively 1,284,655 943,687 Due from related parties 1,686,504 2,584,104 Note receivable 1,217,579 - Inventories 568,051 565,539 Assets of discontinued operations 1,289 186,409 Prepaid expenses 44,826 21,371 ---------- ---------- Total current assets 6,938,058 5,608,102 ---------- ----------
BUILDINGS, EQUIPMENT AND AUTOMOBILES, net 19,131,044 17,119,872 ---------- ----------
OTHER ASSETS: Intangible asset, net 1,635,958 1,372,681 Deferred tax asset 182,044 97,432 Assets of discontinued operations non-current - 3,477,601 Other non-current assets 295,125 344,454 ---------- ---------- Total other assets 2,113,127 5,292,168 Total assets $28,182,229 $28,020,142 =========== ============
LIABILITES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES: Accounts payable $370,101 $310,409 Accounts payable - related party 87,417 10,788 Accrued liabilities 763,309 663,001 Wage and benefits payable 265,580 291,077 Sales tax payable 875,510 863,671 Income taxes payable 1,279,595 1,059,695 Due to shareholders 88,800 88,804 Due to prior owners of joint ventures 4,932,273 5,773,130 Notes payable 83,107 13,649 Liabilities of discontinued operations 1,289 330,294 ---------- ---------- Total current liabilities 8,746,981 9,404,518 ---------- ----------
MINORITY INTEREST 1,704,310 1,464,493 ---------- ----------
SHAREHOLDERS' EQUITY: Common stock, no par value, authorized 50,000,000 shares, 16,506,250 shares issued and outstanding 10,078 5,078 Paid-in-capital 5,109,656 5,104,105 Statutory reserves 10,832,731 9,113,617 Retained earnings 1,707,878 2,945,701 Accumulated other comprehensive income 70,595 (17,370) ---------- ---------- Total shareholders' equity 17,730,938 17,151,131 ---------- ----------
Total liabilities and shareholders' equity $28,182,229 $28,020,142 =========== ============= 0.00 0.00
YI WAN GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
2002 2001 ------------ --------------- NET SALES $ 13,901,421 $ 12,122,239
COST OF SALES 5,134,589 4,421,636 ------------ ---------------
GROSS PROFIT 8,766,832 7,700,603
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 5,087,303 4,043,937 ------------ ---------------
INCOME FROM OPERATIONS 3,679,529 3,656,666 ------------ ---------------
OTHER INCOME (EXPENSE) : Interest income 16,716 26,017 Other income (expense) 11,716 (7,457) ------------ --------------- Total other income (expense) 28,432 18,560 ------------ ---------------
INCOME FROM CONTINUING OPERATIONS BEFORE PROVISION FOR INCOME TAXES AND MINORITY INTEREST 3,707,961 3,675,226
PROVISION FOR INCOME TAXES 1,217,905 800,404 ------------ ---------------
INCOME BEFORE MINORITY INTEREST 2,490,056 2,874,822
MINORITY INTEREST (165,446) (216,022) ------------ ---------------
NET INCOME FROM CONTINUING OPERATIONS 2,324,610 2,658,800
DISCONTINUED OPERATIONS: Income (loss) from operations of discontinued operations (net of applicable income taxes of $0) 119,745 (119,619) Loss on disposal of operations (net of applicable income taxes of $0) (1,596,317) - Minority Interest 150,435 11,962 ------------ --------------- Loss from discontinued operations (1,326,137) (107,657) ------------ ---------------
NET INCOME 998,473 2,551,143
OTHER COMPREHENSIVE INCOME: Foreign currency translation adjustment 87,965 (20,364) ------------ ---------------
COMPREHENSIVE INCOME $1,086,438 $ 2,530,779 ============ ===============
EARNINGS (LOSS) PER SHARE - BASIC AND DILUTED: From continuing operations 0.14 0.16 From discontinued operations (0.08) (0.01) ------------ ---------------
Earnings per share - basic and diluted $ 0.06 $ 0.15 ============ ===============
WEIGHTED AVERAGE NUMBER OF SHARES 16,258,990 16,123,373 ============ ===============
YI WAN GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001 Accumulated Number Common Paid-in Statutory Retained other comprehensive of shares stock capital reserves earnings income Totals ---------- --------- --------- --------- --------- ------------ --------- BALANCE, January 1, 2001 16,006,250 $ 78 $ 5,098,549 $7,833,412 $1,674,763 $ 2,994 $ 14,609,796 Net income 2,551,143 2,551,143 Issuance of common stock 250,000 5,000 5,000 Additions to paid in capital 5,556 5,556 Adjustment to statutory reserves 1,280,205 (1,280,205) - Foreign currency translation adjustments (20,364) (20,364) ---------- -------- --------- --------- --------- ------------ --------- BALANCE, December 31, 2001 16,256,250 5,078 5,104,105 9,113,617 2,945,701 (17,370) 17,151,131 =========== ======== ========== ========== ========== ========= =========== Net income 998,473 998,473 Issuance of common stock 250,000 5,000 5,000 Additions to paid in capital 5,551 5,551 Distribution of statutory reserves (517,182) (517,182) Adjustment to statutory reserves 2,236,296 (2,236,296) - Foreign currency translation adjustments 87,965 87,965 ---------- --------- --------- --------- --------- ------------ --------- BALANCE, December 31, 2002 16,506,250 $10,078 $5,109,656 $10,832,731 $1,707,878 $70,595 $ 17,730,938 ========== ======== ========== =========== ========== ========= ===========
YI WAN GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001 2002 2001 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 998,473 $ 2,551,143 Loss from discontinued operations 1,326,137 107,657 ------------ ------------ Income from continuing operations 2,324,610 2,658,800 Adjustments to reconcile net income to cash provided by operating activities: Minority interest 87,149 216,022 Depreciation 1,503,788 1,269,831 Amortization 52,445 40,670 Land use right 5,551 5,556 Deferred tax assets (84,612) (27,547) Non-cash stock issuance for consulting and legal fees 5,000 5,000 Translation adjustment 87,965 (20,364) (Increase) decrease in accounts receivable (340,968) 30,606 Decrease (increase) in due from related parties 897,600 (804,149) (Increase) decrease in inventories (2,512) 55,097 Increase in prepaid expenses (23,455) (21,371) Increase in note receivable (1,217,579) - Decrease in due from officers and employees 49,329 45,570 Increase in accounts payable 59,692 68,359 Increase (decrease) in accounts payable - related party 76,629 (11) Increase (decrease) in accrued liabilities 100,308 (19,515) (Decrease) increase in wages and benefits payable (25,497) 21,146 Increase in sales tax payable 11,839 5,141 Increase (decrease) in income taxes payable 219,900 (60,657) Decrease in due to shareholders (4) (92) Cash provided by discontinued operations 1,643,065 279,412 ------------ ------------ Net cash provided by operating activities 5,430,243 3,747,504 ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of land use right (315,722) - Purchase of buildings, equipment and automobiles (3,514,960) (140,237) ------------ ------------ Net cash used in investing activities (3,830,682) (140,237) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Distributions paid to prior owners of joint ventures (840,857) (4,163,080) Borrowings (principal payments) on notes payable 69,458 (19,616) ------------ ------------ Net cash used in financing activities (771,399) (4,182,696) ------------ ------------ INCREASE (DECREASE) IN CASH 828,162 (575,429)
CASH, beginning of year 1,306,992 1,882,421 ------------ ------------ CASH, end of year 2,135,154 1,306,992 ============== =============
YI WAN GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of significant accounting policies
The reporting entity
The financial statements of Yi Wan Group, Inc. and subsidiaries (referred to as the Company or YWG in the accompanying financial statements) reflect the activities and financial transactions of its subsidiaries, which are as follows:
Percentage Subsidiary Ownership --------------------------------------------------------- ----------------- Shun De Yi Wan Communication Equipment 100 % Plant Co., Ltd. (TELECOMMUNICATIONS) Jiao Zuo Yi Wan Hotel Co., Ltd. (HOTEL) 90 Yi Wan Maple Leaf High Technology 90 Agriculture Developing Ltd. Co. (FARM) Qinyang Yi Wan Hotel Co., Ltd. (QINYANG) 80
Yi Wan Group, Inc. was incorporated under the laws of the State of Florida in the United States in May 1999. Yi Wan Group, Inc. is authorized to issue 50,000,000 shares of no par value common stock and 20,000,000 shares of no par value preferred stock. The Company's TELECOMMUNICATIONS, HOTEL, FARM and QINYANG subsidiaries are incorporated under the laws of the People's Republic of China (PRC).
The Company's subsidiaries are classified as Foreign Invested Enterprises (FIE) in the PRC and are subject to the FIE laws of the PRC. The HOTEL, FARM and QINYANG are Foreign Invested Enterprise Joint Ventures, known as FIEJV or sino-foreign joint venture, and TELECOMMUNICATIONS is a Wholly Foreign Owned Enterprise company or WFOE. All four of these companies are Chinese registered limited liability companies, with legal structures similar to regular corporations and limited liability companies organized under state laws in the United States. The respective Articles of Association for these FIE subsidiaries provide a 30-year term for the HOTEL, FARM and QINYANG companies and 15 years for the TELECOMMUNICATIONS.
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.
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 1 - Summary of significant accounting policies, (continued)
Revenue recognition
The HOTEL's and QINYANG's revenues are recognized when the rooms are occupied or when the guests utilize the hotel's services.
The FARM recognizes its revenue when the farm products are delivered to its customers.
The TELECOMMUNICATIONS recognizes its revenue when the risk of loss for the product sold passes to the customers, which is when goods are installed at the customers' premises and testing of the product is completed and accepted by the customers.
Nature of operations and concentration of risk
The HOTEL is a four star rated hotel located in the best area of downtown of Jiao Zuo City, He Nan Province, People's Republic of China. The Hotel's income sources include income from rooms, restaurants, sauna, bowling center and nightclub. The Hotel is a sino-foreign joint venture established under the laws of the People's Republic of China on December 25, 1996. The expiration date of the joint venture is December 18, 2027. The term can be extended or terminated prior to the date of expiration if unanimously decided by the board of directors and approved by the original examination and approval authority. The board of directors is controlled by YWG, with YWG electing six of the seven board members. The operational, management and corporate governance decisions of the board are by a simple majority, except for the revision of the Articles of Association, the increase or assignment of the registered capital, the business combination of the joint venture and, with certain limitations the termination of the joint venture, which require a unanimous vote.
The FARM provides training to local farmers with its advanced technology and managerial system in farming and is located in Zhan Dian City, Wu Zhi County, He Nan Province, in the People's Republic of China. The FARM's income sources include income from the sales of seafood raised and produced in constructed ponds. The Farm is a sino-foreign joint venture established under the laws of the People's Republic of China on December 4, 1996. The expiration date of the joint venture as stated in the joint venture agreement and business license is August 5, 2028. The term can be extended or terminated prior to the date of expiration if unanimously decided by the board of directors and approved by the original examination and approval authority. The board of directors is controlled by YWG, with YWG electing six of the seven board members. The operational, management and corporate governance decisions of the board are by a simple majority, except for the revision of the Articles of Association, the increase or assignment of the registered capital, the business combination of the joint venture and, with certain limitations the termination of the joint venture, which require a unanimous vote. The FARM has discontinued its operations as of December 31, 2002.
Note 1 - Summary of significant accounting policies, (continued)
Nature of operations and concentration of risk, (continued)
The TELECOMMUNNICATIONS is an electronic equipment manufacturer located in Shun De City, Guang Dong Province, in the People's Republic of China. The Company's income sources include income from the manufacturing of communication equipment systems. The Company is a solely foreign funded company established under the laws of the People's Republic of China on June 22, 2000. The expiration date of this agreement and business license is June 22, 2015. The joint venture may be terminated prior to the date of expiration if unanimously decided by the board of directors and approved by the original examination and approval authority. YWG, owning 100% of the equity interests of this company, controls the board of directors.
The QINYANG is a four star rated hotel located in Qin Yang City, He Nan Province, People's Republic of China. The QINYANG's income sources include income from rooms, restaurants and sauna. The QINYANG is a sino-foreign joint venture established under the laws of the People's Republic of China on June 12, 2002. The expiration date of the joint venture is June 11, 2032. The term can be extended or terminated prior to the date of expiration if unanimously decided by the board of directors and approved by the original examination and approval authority. The board of directors is controlled by YWG, with YWG electing four of the five board members. The operational, management and corporate governance decisions of the board are by a simple majority, except for the revision of the Articles of Association, the increase or assignment of the registered capital, the business combination of the joint venture and, with certain limitations the termination of the joint venture, which require a unanimous vote.
Buildings, equipment and automobiles
Buildings, equipment, and automobiles are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Depreciation expense for the years ended December 31, 2002 and 2001 amounted to $1,503,788 and $1,269,831, respectively. Estimated useful lives of the assets are as follows:
Estimated Useful Life --------------------- Buildings and improvements 20 years Machinery and equipment 10 years Computer, office equipment and furniture 5 years Automobiles 5 years
Maintenance, repairs and minor renewals are charged directly to expenses as incurred. Major additions and betterment to property and equipment are capitalized.
Long-term assets of the Company are reviewed annually as to whether their carrying value has become impaired. The Company considers assets to be impaired if the carrying value exceeds the future projected cash flows from related operations. The Company also re-evaluates the periods of amortization to determine whether subsequent events and circumstances warrant revised estimates of useful lives. As of December 31, 2002, the Company expects these assets to be fully recoverable.
Note 1 - Summary of significant accounting policies, (continued)
Buildings, equipment and automobiles, (continued)
Buildings, equipment and automobiles consist of the following at December 31:
2002 2001 ------------------- ------------------ Buildings and improvements $ 21,363,578 $ 18,563,021 Furniture and equipment 5,779,747 5,126,109 Automobiles 219,264 219,274 Construction in progress 77,912 17,137 ------------------- ------------------ Totals 27,440,501 23,925,541 ------------------- ------------------ Less accumulated depreciation 8,309,457 6,805,669 ------------------- ------------------ Buildings, equipment and automobiles, net $ 19,131,044 $ 17,119,872 =================== ==================
Use of estimates
The preparation of financial statements in conformity with generally accepted accounting principles of the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Management believes that the estimates utilized in preparing its financial statements are reasonable and prudent. Actual results could differ from these estimates.
Recently issued accounting pronouncements
In September 2000, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 140 (FAS 140), "Accounting for the Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," which replaces Statement No. 125 (FAS 125) (of the same title). FAS 140 revises certain standards in the accounting for securitizations and other transfers of financial assets and collateral, and requires some disclosures relating to securitization transactions and collateral, but it carries over most of FAS 125's provisions. FAS 140 will impact the Company's accounting for any securitization transactions it may enter into the future. However, there was no material impact at adoption on the Company's financial statements.
During June of 2001, the FASB issued Statement of Financial Accounting Standards No. 141, "Business Combinations" (FAS 141) and Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" (FAS 142). FAS 141 requires use of the purchase method of accounting for all business combinations initiated after June 30, 2001, provides specific guidance on how to identify the accounting acquirer in a business combination, provides specific criteria for recognizing intangible assets apart from goodwill and requires additional financial statement disclosures regarding business combinations. There is no material impact on the Company's financial statements.
Note 1 - Summary of significant accounting policies, (continued)
Recently issued accounting pronouncements, (continued)
FAS 142 addresses the accounting for goodwill and other intangible assets after their initial recognition. FAS 142 changes the accounting for goodwill and other intangible assets by replacing periodic amortization of the asset with an annual test of impairment of goodwill at either the reporting segment level or one level below, providing for similar accounting treatment for intangible assets deemed to have an indefinite life. Assets with finite lives will be amortized over their useful lives. FAS 142 also provides for additional financial statement disclosures about goodwill and intangible assets. The Company has adopted FAS 142 during the year ended December 31, 2002 and the adoption did not have an impact on the Company's present financial condition or results of operations.
In June 2001, the FASB issued Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations" (FAS 143). Asset retirement obligations result from the acquisition, construction, development, or normal operation of long-lived assets. Examples of obligations that would be subject to the guidance in this section include decommissioning of nuclear power plants that have been radioactively contaminated, capping and closing a landfill, and removal of offshore oil drilling rigs and platforms. FAS 143 changes how the recorded amount of liabilities associated with asset retirements are computed. FAS 143 also requires additional disclosure regarding asset retirement obligations. This statement is effective for fiscal years beginning after June 15, 2002. The adoption of this statement will not have a significant impact on the financial condition or results of operations of the Company.
In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (FAS 144). FAS 144 retains the existing requirements to recognize and measure the impairment of long-lived assets to be held and used or to be disposed of by sale. However, FAS 144 changes the scope and certain measurement requirements of existing accounting guidance. FAS 144 also changes the requirements relating to reporting the effects of a disposal or discontinuation of a segment of a business. This statement is effective for fiscal years beginning after December 15, 2001. The Company has adopted FAS 144 during the year ended December 31, 2002 and the adoption of this statement did not have a significant impact on the financial condition or results of operations of the Company.
In April 2002, the FASB issued Statement of Financial Accounting Standards No. 145 "Rescission of Statements No. 4, 14 and 64, Amendment of FASB Statement No. 13 and Technical Corrections." (FAS 145). This statement rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt," and an amendment of that Statement, SFAS No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." This statement also rescinds SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers." This statement amends SFAS No. 13, "Accounting for Leases," to eliminate any inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. FAS 145 also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. This statement is effective for fiscal years beginning after May 15, 2002. The Company expects that the adoption of this statement will not have a material affect on its consolidated financial statements.
Note 1 - Summary of significant accounting policies, (continued)
Recently issued accounting pronouncements, (continued)
In June 2002, the FASB issued Statement of Financial Accounting Standards No. 146 (FAS 146), "Accounting for Costs Associated with Exit or Disposal Activities." The standard requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of commitment to an exit or disposal plan. Examples of costs covered by the standard include lease termination costs and certain employee severance costs that are associated with restructuring, discontinued operations, plant closing, or other exit or disposal activity. Previous accounting guidance was provided by Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Costs, Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." FAS No. 146 replaces EITF 94-3 and is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The Company will comply with this pronouncement beginning in 2003. The adoption of this statement is not expected to have a significant impact on the Company's consolidated financial statements.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN 45). FIN 45 requires the recognition of certain guarantees as liabilities at fair market value and is effective for guarantees issued or modified after December 31, 2002. The Company has adopted the disclosure requirement of FIN 45 and does not expect the impact of the fair market value requirement to have a material impact on its consolidated financial statements.
In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148 "Accounting for Stock-Based Compensation -- Transition and Disclosure". The statement allows for the Company's current method of accounting for stock options to continue. Effective for interim periods beginning after December 15, 2002, disclosure will be required for information on the fair value of stock options and the effect on earnings per share (in tabular form) for both interim and annual reports. The Company will comply with this pronouncement beginning in 2003.
Cash and concentration of risk
Cash includes cash on hand and demand deposits in accounts maintained with state-owned banks within the People's Republic of China. Total cash in state-owned banks at December 31, 2002 and 2001 amounted to $2,135,154 and $1,306,992, respectively of which no deposits are covered by insurance. YWG has not experienced any losses in such accounts and believes it is not exposed to any risks on its cash in bank accounts.
Inventories
Inventories are stated at the lower of cost or market using the first-in, first-out basis and consist of the following at December 31: 2002 2001 ------------------ ----------------- Hotel inventories $ 211,453 $ 216,940 Telecommunications inventories 356,598 348,599 ------------------ ----------------- Total inventories $ 568,051 $ 565,539 ================== =================
Note 1 - Summary of significant accounting policies, (continued)
Inventories, (continued)
The HOTEL inventories consist of food products, alcohol, beverages and supplies.
The TELECOMMUNICATIONS inventories consist of the following at December 31:
2002 2001 ------------------- -------------------- Raw materials $ 97,301 $ 92,686 Work in process 142,249 113,926 Finished goods 117,048 141,987 ------------------- -------------------- Total inventories $ 356,598 $ 348,599 =================== ==================== Intangible assets
All land in the People's Republic of China is owned by the government and cannot be sold to any individual or company. However, the government grants the user a "land use right" (the Right) to use the land. The HOTEL has purchased the Right to use the land for 40 years from the government for a fee in the amount of $1,570,000. The HOTEL's Right (Land Use Certificate) is registered under the name of one of the joint venture partners, Shunde Shunao Industry & Commerce Company, Ltd. The HOTEL is in the process of applying for the name change of the Right, which has not been finalized as of the date of this report.
QINYANG has obtained its land use rights from its 20% joint venture partner as a capital contribution in the amount of approximately $228,000 and purchased the other Right for the amount of approximately $88,000. The Rights to use the land are for 30 years.
The Rights for both hotels have been classified as an intangible asset on the accompanying financial statements and are being amortized using the straight-line method over the life of the Rights. Amortization expense for the years ended December 31, 2002 and 2001 amounted to $52,445 and $40,670, respectively.
In March 1995, one of the shareholders of YWG purchased the land use right for 50 years where the TELECOMMUNICATIONS' operating facilities are located. Neither the title nor the Right has been transferred to TELECOMMUNICATIONS, nor is TELECOMMUNICATIONS being charged for using the land. However, the owner has assigned the Right to TELECOMMUNICATIONS for the remaining years. The original cost of the land use right amounted to $277,800 and is being recognized as an expense annually and as a capital contribution. The Right is being amortized over 50 years and the expense for the years ended December 31, 2002 and 2001 amounted to $5,551 and $5,556, respectively.
Note 1 - Summary of significant accounting policies, (continued)
Income taxes
YWG has adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109). SFAS 109 requires the recognition of deferred income tax liabilities and assets for the expected future tax consequences of temporary differences between income tax basis and financial reporting basis of assets and liabilities. Provision for income taxes consist of taxes currently due plus deferred taxes. The deferred tax asset of $182,044 and $97,432 as at December 31, 2002 and 2001 represents taxes on expenses deducted for financial statements purposes and not for tax purposes.
The HOTEL is considered as a foreign investment joint venture by the government and receives special income tax treatment. The HOTEL is subject to central government income tax at a rate of 30% and a 3% provincial government income tax. The HOTEL is exempt from central and provincial government income tax for a period of two years (years ended December 31, 1997 and 1998); followed by a 50% reduction in the central and provincial government income tax for a period of three years (years ended December 31, 1999, 2000 and 2001). Starting from 2002, the HOTEL is being taxed at full tax rates (30% for central government income tax and 3% for provincial government).
The FARM is considered as foreign investment joint venture by the government, receiving special income tax treatment. The FARM is subject to a central government income tax at a rate of 30% and 3% provincial government income tax. However, the FARM is exempt from central and provincial government income tax for two years, starting with the first year of profitable operations (years ended December 31, 1997 and 1998), followed by a 50% reduction in central government income tax and full exemption from provincial government income tax for the next three years (years ended December 31, 1999, 2000 and 2001). Starting from 2002, the FARM is being taxed at full tax rates (30% for central government income tax and 3% for provincial government).
The TELECOMMUNICATIONS and QINYANG are subject to a central government income tax at a rate of 30% and 3% provincial government income tax.
The provision for income taxes at December 31 consisted of the following:
2002 2001 ---------------- ----------------- Provision for China Income Tax $ 1,184,112 $ 752,794 Provision for China Local Tax 118,410 75,252 Deferred taxes (84,617) (27,642) ---------------- ----------------- Total provision for income taxes $ 1,217,905 $ 800,404 ================ =================
Certain revenues of the HOTEL, FARM and TELECOMMUNICATIONS operations are subject to sales and cultural taxes ranging from 3% to 10%. This tax is shown as a reduction of sales.
Note 1 - Summary of significant accounting policies, (continued)
The following table reconciles the U.S. statutory rates to the Company's effective tax rate:
2002 2001 ----------- ------------- U.S. Statutory rates 34 % 34 % Foreign income not recognized in U.S. (34) (34) China Income taxes 33 22 ----------- ------------- Effective tax rate 33 % 22 % =========== =============
Earnings per share
YWG adopted Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS 128). SFAS 128 requires the presentation of earnings per share (EPS) as Basic EPS and Diluted EPS. There are no differences between Basic and Diluted EPS at December 31, 2002 and 2001.
Reclassification
Certain prior year amounts have been reclassified in order to conform to the current year's presentation.
Note 2 - Notes payable
Notes payable represents amounts due to construction contractors. They are due on demand, normally within one year. Notes payable at December 31, consisted of the following: 2002 2001 ---------- ----------- Notes payable to various vendors, unsecured, due on demand, no interes $ 83,107 $ 13,649 ========== ============
Note 3 - Supplemental disclosure of cash flow information
Income taxes paid amounted to $1,098,607 and $970,155 for the years ended December 31, 2002 and 2001, respectively. No interest expense payments were made for the years ended December 31, 2002 and 2001.
Note 4 - Accounts receivable and credit risk
YWG's business operations are conducted mainly in the People's Republic of China. During the normal course of business, YWG extends unsecured credit to its customers. Management reviews its accounts receivable on a regular basis to determine if the bad debt allowance is adequate at each year-end.
Note 5 - Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, as amended, "Disclosures about Fair Value of Financial Instruments," requires the disclosure of fair value information for certain assets and liabilities for which it is practicable to estimate that value. The Company's financial instruments include cash, accounts receivable, other receivables, accounts payable, accrued liabilities and other payables.
The Company considers the carrying amount of cash, accounts receivable, other receivables, accounts payable, accrued liabilities and other payables to approximate their fair values because of the short period of time between the origination of such instruments and their expected realization and their current market rate of interest. .
Note 6 - Due from related parties
YWG pays for various expenses, supplies, inventories and other goods on behalf of a related party, whose shareholders are also the shareholders of YWG. Amounts due from this related party at December 31, 2002 and 2001 amounted to $1,686,504 and $1,015,325, respectively.
A member of the Board of Directors has been advanced money for investment opportunities on behalf of the HOTEL. Amounts due from this person at December 31, 2001 amounted to $1,568,779. The balance was paid in full during the year ended December 31, 2002.
All amounts due from related parties are non-interest bearing and have no fixed repayment terms.
Note 7 - Pension contribution
Regulations in the People's Republic of China require YWG to contribute to a defined contribution retirement plan for all permanent employees. All permanent employees are entitled to an annual pension equal to their basic salary at retirement. The HOTEL and TELECOMMUNICATIONS pay an annual contribution of 33% and 20%, respectively, of the city's standard salary of their employees to an insurance company, which is responsible for the entire pension obligation payable to the retired employees. There were no contributions for the QINYANG and the FARM's employees due to their non-permanent status. For the years ended December 31, 2002 and 2001, YWG made pension contributions in the amount of $51,875 and $48,862, respectively.
Note 8 - Note receivable
At December 31, 2002, the note receivable of $1,096,888 represents the remaining balance due from the sale of FARM assets. The note receivable is non-interest bearing and is due in two installments during 2003.
Note 9 - Other non-current assets
Other non-current assets represents cash advances to officers and employees for cash based business transactions incurred for the payment of operating expenses and purchases from various vendors.
Note 10 - Distribution of income, statutory reserves and restricted retained earnings
The laws and regulations of the People's Republic of China require that before a sino-foreign cooperative joint venture enterprise distributes profits to its partners, it must first satisfy all tax liabilities, provide for losses in previous years and make allocations, in proportions determined at the discretion of the board of directors, after the statutory reserve. The statutory reserves included enterprise fund, employee benefits and general reserve. The enterprise fund may be used to acquire fixed assets or to increase the working capital in order to expend the production and operation of the joint venture; employee benefit reserve is restricted to the payment of bonus and welfare for employees and the general reserve may be used as a provisional financial cushion against the possible losses of a joint venture. The minimum percentage to be reserved for the general reserve is 10%. The board of directors decides upon the percentage to be reserved for the employee benefit reserve. There is no minimum provision required for enterprise fund.
As further discussed in Note 13, the Company has discontinued its FARM operations during 2002 and has sold all the FARM assets. Upon the dissolution of the FARM operations, statutory reserves of $517,182 was distributed to employees according to Chinese regulations, with the remaining balances distributed to the joint venture partners.
Consolidated statutory reserves at December 31, 2002 and 2001 amounted to $9,113,617 and $10,832,731, respectively. No other dividends or distributions were declared to the owners for the years ended December 31, 2002 and 2001.
The Chinese government restricts distributions of registered capital and the additional investment amounts required by the Chinese joint ventures. Approval by the Chinese government must be obtained before distributions from these amounts can be returned to their owners. There are no restricted retained earnings on the accompanying balance sheets at December 31, 2002 and 2001.
Note 11 - Due to prior owners of joint ventures
Shun'ao and Marco, were the partners in the original joint ventures from which YWG acquired its equity interests in the three FIE Chinese subsidiaries. At December 31, 2002 and 2001, Shun'ao and Marco were owed the following amounts for their respective equity interests and for the return of additional investments in the old joint ventures. All amounts due to prior owners of joint ventures are non-interest bearing and have no fixed repayment terms.
2002 2001 -------------- ---------------- Payment due for acquistion of HOTEL: Payable to Shun'ao $ 1,811,529 $ 1,811,529 Payable to Marco 905,764 905,764 -------------- ----------------- 2,717,293 2,717,293 -------------- ----------------- Payment due to Shun'ao for acquisition of FARM 2,040,989 2,040,989 -------------- ----------------- Return of investment by HOTEL: Payable to Shun'ao - 710,394 Payable to Marco - 304,454 -------------- ----------------- - 1,014,848 -------------- ----------------- Payment due to Shun'ao for return of investment 173,991 -------------- ----------------- Totals $ 4,932,273 $ 5,773,130 ============== =================
Note 12 - 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 December 31, 2001. QINYANG's entire net operating results of $(124,162) from inception (2001) to June 02, 2002 have been included in the consolidated financial statements for the year ending December 31, 2002. Details are as follows:
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 13 - Discontinued operations
During 2001, as a result of highway construction, the FARM had lost its source of natural water necessary to raise and grow the FARM's products. The FARM had ceased its operations during December 2001. In November 2002, the FARM's Board of Directors approved management's plan to dispose of all of the FARM's assets. In December 2002, the Company consummated the sale of the FARM's assets to a third party and recorded a net loss of $1,596,317. In connection with the sale, the Company received $522,327 in cash and a note receivable of $1,217,579. The proceeds from this sale will be used to satisfy YWG's capital contribution for the QINYANG joint venture.
This sale was accounted for as a disposal group under SFAS No. 144. Accordingly, amounts in the financial statements and related amounts for all periods presented have been reclassified to reflect SFAS No. 144 treatment.
Note 13 - Discontinued operations, (continued)
Operating results of the discontinued operations are as follows:
2002 2001 --------------------- --------------------- External revenue $ - $ 944,723 ===================== ===================== Intercompany revenue - 75,115 ===================== =====================
Income (loss) from discontinued operations 119,745 (119,617) before income taxes - - --------------------- --------------------- Income (loss) from discontinued operations 119,745 (119,617) Loss on disposal of discontinued operations, net of income taxes of $0 (1,596,317) - Minority interest 150,435 11,962 --------------------- --------------------- Total loss from discontinued operations $(1,326,137) $ (107,655) ===================== =====================
Loss per share from discontinued operations $ (0.08) $ (0.01) ===================== ===================== Balance sheets of the discontinued operations as of December 31 are as follows:
2002 2001 --------------------- --------------------- Cash $ 1,289 $ 84,121 Accounts receivable - 100,889 Due from related parties - 396,237 Other current assets - 1,399 --------------------- --------------------- Total current assets 1,289 582,646 --------------------- ---------------------
Building, equipment and automobiles, net - 624,249 Intangible assets, net - 2,838,408 Other non current asset - 1,623 Deferred taxes - 13,321 --------------------- --------------------- Total other assets - 3,477,601 --------------------- --------------------- Total assets $ 1,289 $ 4,060,247 ===================== =====================
Current liabilities 1,289 330,294 Shareholders' equity - 3,729,953 --------------------- --------------------- Total liabilities and shareholders' equity $ 1,289 $ 4,060,247 ===================== =====================
Note 14 - Segment information
As discussed in Note 13, 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 year ended December 31:
Restaurant Lodging Entertain Subtotals Telecommu Inter- Totals -ment nications segment 2002 elimination ------------ ----------- ------------- ----------- ----------- ----------- ------------ Net sales $ 5,175,531 $ 2,447,761 $ 2,267,553 $ 9,890,845 $ 4,010,576 $ - $13,901,421 Cost of sales 2,688,609 177,702 210,352 3,076,663 2,057,926 - 5,134,589 ------------ ----------- ------------- ----------- ----------- ----------- ----------- Gross profit 2,486,922 2,270,059 2,057,201 6,814,182 1,952,650 - 8,766,832 Operating expenses 748,617 382,728 449,132 1,580,477 861,390 2,441,867 Depreciation and amortization 1,379,759 1,187 1,380,946 Unallocated expenses 1,259,490 1,259,490 Corporate expenses 5,000 ------------ ----------- ------------- ----------- ----------- ----------- ------------ Income from operations $ 1,738,305 $ 1,887,331 $ 1,608,069 2,594,456 1,090,073 - 3,679,529 ============ =========== ============= Interest income 10,156 6,561 16,717 Other income (expense) (35,968) 47,684 11,716 Provision for income tax (856,150) (361,756) (1,217,906) ------------- ----------- ----------- ------------ Income before minority interest $ 1,712,494 $ 782,562 $ - $ 2,490,056 ============= =========== =========== ============
Total assets $ 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 ============
Note 14 - Segment information, (continued)
Restaurant Lodging Entertain Subtotals Telecommu Inter- Totals -ment nications segment elimination ------------ ----------- ------------- ----------- ----------- ----------- ------------ Net sales $ 3,770,925 $ 1,963,345 $ 2,018,645 $ 7,752,915 $ 4,369,324 $ - $12,122,239 Cost of sales 1,832,804 123,327 155,722 2,111,853 2,309,783 - 4,421,636 ------------ ----------- ------------- ----------- ----------- ----------- ----------- Gross profit 1,938,121 1,840,018 1,862,923 5,641,062 2,059,541 - 7,700,603 Operating expenses 436,983 295,734 248,636 981,353 890,504 1,871,857 Depreciation and amortization 1,141,579 21,827 1,163,406 Unallocated expenses 1,003,674 1,003,674 Corporate expenses 5,000 ------------ ----------- ------------- ----------- ----------- ----------- ------------ Income from operations $ 1,501,138 $ 1,544,284 $ 1,614,287 2,514,456 1,147,210 - 3,656,666 ============ =========== ============= Interest income 17,835 8,182 26,017 Other income (expense) (7,433) (24) (7,457) Provision for income tax (416,614) (383,790) (800,404) ------------- ----------- ----------- ------------ Income before minority interest $ 2,108,244 $ 771,578 $ - $ 2,874,822 ============= =========== =========== ============
Total assets $ 20,072,689 $5,791,885 $(1,508,442) $ 24,356,132 ============= =========== =========== 3,664,010 ------------ Total assets - consolidated financial statements $ 28,020,142 ============
Item 9.
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
There have been no disagreements with accountants on accounting and financial disclosure.
PART III
Item 10
Item 10 Directors and Executive Officers of the Registrant
DIRECTORS AND EXECUTIVE OFFICERS
The names and ages of Yi Wan Group's executive officers and directors as of March 31,2003, are as follows:
----------------- -------- --------------------------------- ------------------ ----------------------- Name Age Position Held Since Current term To expire ----------------- -------- --------------------------------- ------------------ ----------------------- Cheng Wan Ming 42 Chairman of Board and President May 1999 March 2005 ----------------- -------- --------------------------------- ------------------ ----------------------- You Yingliu 62 Director and Vice-president May 1999 March 2005 ----------------- -------- --------------------------------- ------------------ ----------------------- Luo Guanying 57 Director and Vice-president May 1999 March 2005 ----------------- -------- --------------------------------- ------------------ ----------------------- Liang Xiaogen 56 Director May 1999 March 2005 ----------------- -------- --------------------------------- ------------------ ----------------------- Wu Zeming 51 Chief Financial Officer May 1999 March 2005 Chief Accounting Officer Director ----------------- -------- --------------------------------- ------------------ ----------------------- Cheng Manli 40 Director May 1999 March 2005 ----------------- -------- --------------------------------- ------------------ ----------------------- Cen Minhong 41 Director May 1999 March 2005 ----------------- -------- --------------------------------- ------------------ ----------------------- Cheng Wanqing 34 Director May 1999 March 2005 ----------------- -------- --------------------------------- ------------------ ----------------------- Cheng Deqiang 70 Director May 1999 March 2005 ----------------- -------- --------------------------------- ------------------ -----------------------
The names and ages of our telecommunications company's executive officers and directors as of March 31,2003, are as follows:
----------------- -------- --------------------------------- --------------------- ----------------------- Name Age Position Held Since Current term to expire ----------------- -------- --------------------------------- --------------------- ----------------------- Cheng Wan Ming 42 Chairman of Board and President September 1993 March 2006 ----------------- -------- --------------------------------- --------------------- ----------------------- Wu Zeming 51 Vice-Chairman of Board September 1993 March 2006 ----------------- -------- --------------------------------- --------------------- ----------------------- You Yingliu 62 Director September 1993 March 2006 ----------------- -------- --------------------------------- --------------------- ----------------------- Luo Guanying 57 Director September 1993 March 2006 ----------------- -------- --------------------------------- --------------------- ----------------------- He Lei 36 Director April 2000 March 2006 ----------------- -------- --------------------------------- --------------------- -----------------------
DIRECTORS AND EXECUTIVE OFFICERS
The names and ages of Qinyang Yi Wan Hotel's executive officers and directors as of March 31,2003, are as follows:
------------------ -------- ------------------------------ --------------------- ----------------------- Name Age Position Held Since Current term to expire ------------------ -------- ------------------------------ --------------------- ----------------------- Cheng Wan Ming 42 Chairman of Board March 2001 March 2004 ------------------ -------- ------------------------------ --------------------- ----------------------- Guo Ruxing 41 Vice-Chairman of Board March 2001 March 2004 ------------------ -------- ------------------------------ --------------------- ----------------------- Yang Jianying 46 Director and General Manager March 2003 March 2006 ------------------ -------- ------------------------------ --------------------- ----------------------- Liu Hua 39 Director March 2001 March 2004 ------------------ -------- ------------------------------ --------------------- ----------------------- Chen Hong 38 Director March 2001 March 2004 ------------------ -------- ------------------------------ --------------------- -----------------------
Mr. Cheng Wan Ming has been our President and Chairman of the Board from May 1999 until present. Mr. Cheng Wan Ming is also responsible for our accounting and financial reporting. From September 1993 to April 2000, Mr. Wan Ming was a member of the Board of Directors and President of our telecommunicationsS company. Since May 2000, Mr. Wan Ming has served as the Chairman of the Board of Directors and President of our telecommunications company. Mr. Wan Ming joined our hotel company in December 1996 and has served as its Chairman of the Board of Directors and President from December 1996 until present. Mr. Wan Ming joined our agriculture company in January 1997 and has served as its Chairman of the Board and President from January 1997 until present. Before September 1993, Mr. Wan Ming was President of Shunao Industry and Commerce Company, in Guangdong Province. Mr. Wan Ming received a bachelor degree from Foshan Junior College in Guangdong province. Mr. Cheng Wan Ming is the husband of Ms. Cen Minhong. Mr. Cheng Wan Ming is the brother of Mr. Cheng Wanqing and Ms. Cheng Manli.
Mr. You Yingliu has been our Director and Vice President from May 1999 until present. He joined our telecommunications company in September 1993. Since September 1993, Mr. Yingliu has been a Director of our telecommunications company. Mr. Yingliu joined our hotel company in December 1996. Since then, Mr. Yingliu has been a Director of our hotel company. Mr. Yingliu joined our agriculture company in January 1997. From January 1997 to present, Mr. Yingliu has been a Director and Vice-President of our agriculture company.
Mr. Zhang Haoyu has been a member of our Board of Directors since May 1999. Mr. Haoyu has been a Vice-President of our hotel subsidiary since December 1996. Mr. Haoyu served as a Director of our telecommunications company from September 1993 until April 2000. From December 1996 to January 2000, Mr. Haoyu was a Director and Vice-President of our hotel company. Mr. Haoyu served as a Director of our agriculture company. Mr. Haoyu previously received an associate degree from the Metallurgical Junior College of Changsha City, Hunan province. From September 1991 to October 1995, Mr. Haoyu was a department manager of the Material Bureau of Qinyang City, Henan province. Mr. Zhang Haoyu is the husband of Ms. Yang Huijuan.
Ms. Yang Huijuan has been a member of our Board of Directors since May 1999. Ms. Huijuan served as a Director of our telecommunications company from September 1993 until January 2000. From June 1990 to present, Ms. Huijuan has been employed as a manager in China Agriculture Bank, Jiaozuo Branch, in the Henan province of China. From December 1996 until January 2000, Ms. Huijuan was a Director of our hotel company. Ms. Yang Huijuan also served as a Director of our agriculture company from January 1997 until January 2000. Ms. Huijuan previously received a bachelor degree from Jiaozuo University in Henan province. Ms. Yang Huijuan is the wife of Mr. Zhang Haoyu.
Ms. Luo Guanying has been a member of our Board of Directors and a Vice-President since May 1999. Ms. Guanying has been a member of the Board of Directors of our telecommunications company since September 1993. From December 1996 until January 2000, Ms. Guanying served as a member of the Board of Directors of our hotel company. Ms. Guanying also served as a Director of our agriculture company from January 1997 until January 2000. Ms. Guanying also is presently a Vice-President of Shunao Industry & Commerce Company, in Guangdong province, a position she has held since April 1993. Ms. Luo Guanying is the wife of Mr. Liang Xiaogen.
Mr. Liang Xiaogen has been a member of our Board of Directors since May 1999. He served as a Director of our telecommunications company from September 1993 to April 2000. From December 1996 until January 2000, Mr. Xiaogen also served as a Director of our hotel company. In January 1997, Mr. Xiaogen became a Director of our agriculture company and served in that capacity until January 2000. Mr. Xiaogen has been the President of Shun de Zhiyuan Developing Company, in Guangdong province, since March 1991. Mr. Xiaogen is the husband of Ms. Luo Guanying.
Mr. Wu Zeming has been our Chief Financial Officer and Chief Accounting Officer anda member of our Board of Directors since May 1999. He served as the Chairman of the Board of Directors and Vice President of our telecommunications company from September 1993 until April 2000. Since May 2000, Mr. Zeming has been the Vice-Chairman of our telecommunications company. Since December 1996, Mr. Zeming has been a Director of our hotel company. Mr. Zeming has also served as a Director of our agriculture company from January 1997 to present. Mr. Zeming has also been the Chairman of the Board of Directors of Wan Da Construction Inc., of Macao, since June 1991. Mr. Zeming is the husband of Ms. Cheng Manli.
Ms. Cheng Manli has been a member of our Board of Directors since May 1999. Ms. Manli has been the Representative of the Macao Office of our telecommunications company since January 1999. She served as a Director of our telecommunications company from September 1993 until April 2000. Ms. Manli has been a Director of our hotel company since December 1996. Ms. Manli has also been a Director of our agriculture company since January 1997. Since June 1991, Ms. Manli has been a Directors of Wan Da Construction Inc. of Macao. Ms. Manli is the wife of Mr. Wu Zeming. She is also the sister of Mr. Cheng Wan Ming and Mr. Cheng Wanqing.
Ms. Cen Minhong has been a member of our Board of Directors since May 1999. Ms. Cen Minhong has been the Director of the Administrative Office of our telecommunications company since March 2000. She served as a Director of our telecommunications company from September 1993 until April 2000. Ms. Minhong has also been a Director of our hotel company since December 1996. Ms. Minhong has also served as a Director of our agriculture company since January 1997. Ms. Minhong is the wife of Mr. Cheng Wan Ming.
Mr.Cheng Wanqing has been a member of our Board of Directors since May 1999. He served as a director of our telecommunications company from September 1993 until April 2000. From December 1996 until January 2000, Mr. Wanqing also served as a Director of our hotel company. Mr. Wanqing served as a director of our agriculture company from January 1997 until January 2000. From April 1993 to the present, Mr. Wanqing has been Vice-President of Shunao Industry & Commerce Company. Mr. Cheng Wanqing received a bachelor degree from the Television Broadcasting College, in Guangdong province. Mr. Cheng Wanqing is the brother of Mr. Cheng Wan Ming and Ms. Cheng Manli.
Mr. Cheng Deqiang has been a member of our Board of Directors since May 1999. From August 1953 to May 1993, Mr. Deqiang was a department manager of the Agriculture Bureau of Shun de City, Guangdong province. From June 1993 to the present, Mr. Deqiang has been Vice-President of Shunao Industry & Commerce Company, in Guangdong Province. Mr. Deqiang received a bachelor degree from the Zhongkai Agriculture School in Guangdong province. Mr. Deqiang is the father of Mr. Cheng Wan Ming, Mr. Cheng Wanqing, and Ms. Cheng Manli.
Mr. Chang Jufeng has been a manager of our hotel company from June 1996 until December 1999. In January 2000, Mr. Jufeng became the Vice Chairman of the Board of Directors and the Assistant General Manager of our hotel company. In January 2000, Mr. Jufeng also became the Vice Chairman of the Board of Directors of our agriculture company. Previously, between March 1992 and May 1996, Mr. Jufeng was a department manager of the Police Bureau of Jiaozuo City, Henan province. Mr. Chang Jufeng received a bachelor degree from the Technical College of Jiaozuo City, Henan province.
Ms. He Lei has been a Director of our hotel company since January 2000. Ms. Lei also has served as a Director of our agriculture company since January 2000. Ms. Lei has been a director of our telecommunications company since April 2000. Previously, from July 1995 until August 1997, Ms. Lei was a manager of the Gang'ao Entrust Investment Co., Ltd., a financial and investment consulting firm located in Beijing, P.R.China. Beijing office. Since September 1997 Ms. Lei has also been a manager of Beijing Zhongyou Huashang Trading Company. Ms. Lei received a bachelor degree from the Renmin University of China.
Item 11.
Item 11. Executive Compensation
The following table sets forth summary information concerning the compensation received for services rendered during the current year the year ended December 31, 2000 by our President/Chairman of the Board, Cheng Wan Ming. No other executive officers received aggregate compensation during our last fiscal year which exceeded, or would exceed on an annualized basis, $100,000.
-------------------------- -------------------------------------------- ------------------------------------------ Summary Compensation Chart Annual Compensation Long Term Compensation -------------------------- -------------------------------------------- ------------------------------------------ Name & Position Year Salary (US$)* Bonus ($) Other ($) Restricted Options ($) L/Tip ($) All Other Stock Awards ------------------- ------ ------------------------ --------- --------- ---------- ----------- --------- --------- Cheng Wan Ming, 2002 11,595 0 0 0 0 0 0 Chairman/President (Hotel Division) ------------------- ------ ------------------------ --------- --------- ---------- ----------- --------- --------- 3,333 0 0 0 0 0 0 (Agriculture Division) ------------------- ------ ------------------------ --------- --------- ---------- ----------- --------- --------- 0 0 0 0 0 0 0 (Communication Division) ------------------- ------ ------------------------ --------- --------- ---------- ----------- --------- ---------
*Cheng Wan Ming's salary he received from our Hotel and Agriculture Divisions reflects payment by these Divisions.
Our officers and directors, including Cheng Wan Ming, did not receive any monetary or security compensation from us during 2002. The only compensation that our officers and directors received during 2001 was from our hotel and agriculture subsidiaries, as reflected above.
China's mandatory pension system for its urban labor force is a defined-benefit, pay-as-you-go system for persons identified as "older workers" and retirees. "Older workers" are those who retired prior to the period between October and December 1997 which was the implementation of State Counsel Decision Number 26, the mandatory pension system. In August 1997, China State Council Decision adopted this unified, publicly managed system covering all urban workers. The defined system for younger workers it is designed to be multi-pillar with individual accounts, consisting of : (1) a basic benefit which is a pay-as-you-go system entitling retirees to a defined-benefit of 20% of the last year's average provincial, municipal or otherwise local monthly wage; (2) individual accounts entitling retirees to a monthly annuity equal to 1/120 of the account's notional accumulation, plus and indexation factor, (3) voluntary supplementary individual accounts entitling retirees to a phased-withdrawal. This Decision set forth the general parameters for contributions, fund accruals, service recognition for those who have contributed under both the old and new system, and benefits. In addition, the Decision provides some basis for regional variation.
The Decision mandates one of three benefits according to when the worker begins contributing to the system: (a) the so called "older men" are those who retired prior to the implementation of the Decision between October and December 1997. These workers retain the locally determined level of defined -benefit entitlements they had been receiving; (b) "middle men" are those who began contributing prior to the Decision, but who retire afterwards. Such workers are entitled to the better of the defined-benefit formula applied to "older men" in their community or the sum of the basic benefit, individual account distribution and an accrual factor applicable to the years of service prior to the Decision; and (c) "young men" are those who began contributing after the implementation of the Decision. These individuals are entitled only to the sum of the basic benefit and individual account distribution.
The State Counsel Decision and measures to adopt municipal and provincial pooling represent important steps towards gradually reducing the unfunded liability of the pension system.
Under the hotel division's pension plan, all other of the hotel's employees who began contributing after the implementation of the system are entitled only to the sum of the basic benefit and individual account distribution. This system sets out general parameters for contributions, fund accruals, and service recognition for those who have contributed under both old and new systems and benefits but left some basis for regional variation. As regulated by the local government, our hotel division pays an annual contribution of 33% of the City's standard salary, which is approximately $30 per month currently, for all of its eligible employees, to an insurance company who is responsible for the entire pension obligation payable to the retired employees.
Term of Employment Agreements. All of the above individuals have employment agreements with the entity or entities for which they work. The term of all employment agreements listed in the tables above is until March, 2004. Salaries are renegotiated each year.
Our agriculture, telecommunications, and hotel subsidiaries each have employment agreements with our President, Mr. Cheng Wan Ming. The employment agreement with the agriculture subsidiary provides that Mr. Cheng Wan Ming serve as its president from December 2001 to December 2002. The employment agreement with the telecommunications subsidiary provides that Mr. Cheng Wan Ming serve as its President from September 1999 to September 2002. The employment agreement with the Jiaozuo Yi Wan hotel subsidiary provides that Mr. Cheng Wan Ming serve as its President from December 1999 to December 2002. Each employment agreement provides that monthly salary shall be determined corresponding to the position and level of work responsibility within the respective corporation and that Mr. Cheng Wan Ming will be eligible for bonus payments according to the provisions of the respective corporation's performance and bonus program. The employment agreement with the Qinyang Yi Wan hotel subsidiary provides that Mr. Cheng Wan Ming serve as its President from March, 2001 to March, 2004. Each employment agreement provides that monthly salary shall be determined corresponding to the position and level of work responsibility within the respective corporation and that Mr. Cheng Wan Ming will be eligible for bonus payments according to the provisions of the respective corporation's performance and bonus program.
Our telecommunications subsidiary has an employment agreement with our Director, Ms. Luo Guanying, in her capacity as a Director of our telecommunications subsidiary. The employment agreement provides that Ms. Guanying shall serve as the Director of the telecommunications subsidiary from February 1, 2001 to February 1, 2006. The employment agreement further provides that monthly salary shall be determined corresponding to the position and level of work responsibility within the corporation and that Ms. Guanying shall be eligible for bonus payments according to the corporation's performance and bonus program.
Our agriculture subsidiary has an employment agreement with our Director, Mr. You Yingliu, in his capacity as a Vice President of our agriculture subsidiary. The employment agreement provides that Mr. Yingliu shall serve in a Vice-President of our agriculture subsidiary from December 10, 2001 to December 10, 2002. The employment agreement further provides that monthly salary shall be determined corresponding to the position and level of work responsibility within the corporation and that Mr. Yingliu shall be eligible for bonus payments according to the corporation's performance and bonus program. Mr. You Yingliu, in his capacity as Representative for Seafood Purchasing, also has an employment agreement with our hotel subsidiary. The employment agreement provides that Mr. Yingliu shall serve in this capacity from December 25, 2001 to December 25, 2004 under the same salary and bonus provisions descried in Mr. Yingliu's employment agreement with our agriculture subsidiary.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Related Stockholder Matters
The following table sets forth the ownership of our Common Stock as of the date of this Form 10K/A by: o Each shareholder known by us to own beneficially more than 5% of our common stock; o Each executive officer; o Each director or nominee to become a director; and o all directors and executive officers as a group.
No one other than our officers or directors hold in excess of 5% of our issued shares. The following table sets forth certain information regarding security ownership of our management as of December 31, 2002:
Security Ownership of Management ------------------------------- ---------------------------- ----------------------------- ----------------------- Title of Class Name Amount and nature Percentage of class of beneficial ownership ------------------------------- ---------------------------- ----------------------------- ----------------------- Common Cheng Wan Ming 8,462,650 52.1%* (Direct/Indirect) ------------------------------- ---------------------------- ----------------------------- ----------------------- Common Cen Minhong 8,462,650 52.1%* (Direct/Indirect) ------------------------------- ---------------------------- ----------------------------- ----------------------- Common You Yingliu 1,069,250 6.6% (Direct) ------------------------------- ---------------------------- ----------------------------- ----------------------- Common Yang Huijuan 1,527,500 9.3%** (Direct/Indirect) ------------------------------- ---------------------------- ----------------------------- ----------------------- Common Zhang Haoyu 1,527,500 9.3%** (Direct/Indirect) ------------------------------- ---------------------------- ----------------------------- ----------------------- Common Wu Zeming 1,069,250 6.6% (Direct) ------------------------------- ---------------------------- ----------------------------- ----------------------- Common Luo Guanying 763,750 4.7% (Direct) ------------------------------- ---------------------------- ----------------------------- ----------------------- Common Chang Wanqing 763,750 4.7% (Direct) ------------------------------- ---------------------------- ----------------------------- ----------------------- Common Cheng Deqiang 763,750 4.7% (Direct) ------------------------------- ---------------------------- ----------------------------- ----------------------- Common All officers and director 14,419,600 as a group (9 persons) (Direct) 88.7% ------------------------------- ---------------------------- ----------------------------- -----------------------
This table is based upon information derived from our stock records. Unless otherwise indicated in the footnotes to this table and subject to community property laws where applicable, we believe that each of the shareholders named in this table has sole or shared voting and investment power with respect to the shares indicated as beneficially owned. Applicable percentages are based upon 16,506,250 shares of common stock outstanding as of December 31, 2002.
There are two married couples in the above list of principal shareholders. *Mr.Cheng Wan Ming is the husband of Ms. Cen Minhong. Mr. Cheng Wan Ming directly owns 6,369,975 shares; his wife, Ms. Cen Minhong, directly owns 2,092,675 shares. Collectively, Mr.Cheng Wan Ming and Ms. Cen Minhong, beneficially 8,462,650 shares as reflected in the above table. **Mr. Zhang Haoyu is the husband of Ms. Yang Huijuan. Mr. Zhang Haoyu directly owns 763,750 shares; his wife, Ms. Yang Huijuan, directly owns 763,750 shares. Collectively, Mr. Zhang Haoyu and Ms. Yang Huijuan, beneficially own 1,527,500 shares as reflected in the above table.
There are no pending or anticipated arrangements that we are aware of that may cause a change in control of our company.
This table is based upon information derived from our stock records. Unless otherwise indicated in the footnotes to this table, we believe that each of the shareholders named in this table has sole or shared voting and investment power with respect to the shares indicated as beneficially owned. Except as otherwise noted, herein, we are not aware of any arrangements which may result in a change in control of our company.
Change In Control
We are not currently engaged in any activities or arrangements that we anticipate will result in a change in our control.
Item 13.
Item 13. Certain Relationships and Related Transactions
In 2001, and 2002 our Telecommunications Division purchased materials, supplies, and paid for operating expenses in the amount of $1,686,504, and $1,015,325 on behalf of Shun'ao Industry and Commerce Company, partner in our agriculture and hotel divisions. Our Telecommunications Division verbally agreed to pay for these expenses at its discretion and there are no fixed repayment terms. There is no commitment to fund current or future operating Shun'ao Industry and Commerce Company's expenses.
Our president has a 41.7% ownership interest in Shun'ao Industry and Commerce Company.
At December 31, 2002, Shun'ao Industry and Commerce Company, a partner in our hotel divisions, is owed $1,811,529 by our for acquisition of their interests in the hotel There are no repayment terms to pay principal or interest at this time. Our management intends to negotiate terms of payment and interest at a later date. These debts have been classified as a current liability and are due on demand.
At December 31, 2002, Marco Wan Da Construction, a former partner in our hotel division, is owed $905,764 for its interest in the hotel division. There are no repayment terms to pay principal or interest at this time. Our management intends to negotiate terms of payment and interest at a later date. These debts have been classified as a current liability are due on demand.
Our director, Mr. Wu Zeming, is the president of Marco Wan Da Construction and has a 51% ownership interest in that company. Our director, Ms. Cheng Manli is a director of Marco Wan Da Construction and holds a 49% ownership interest in that company.
In 2001, and 2002, we advanced Cheng Wan Ming, our president, 341,166 and $179,105 as cash advances for cash-based business transactions incurred for the payment of operating expenses and purchases from vendors. Due to the nature of conducting business in China many financial transaction are completed in cash, instead of by check or draft. Customarily, officers, managers and employees of companies located in China, including our personnel, are advanced cash on a daily basis to pay for normal business operating expenses. These advances are accounted for when the officer or employee submits the paid invoice to the accounting department to support the receipt of goods and services.
Upon formation, we issued our officers, directors, and their affiliates 15,512,500 shares for services in connection with our formation.
Item 14.
Item 14. Controls and Procedures Our Principal Executive Officer/Principal Financial Officer evaluated our disclosure controls and procedures within the 90 days preceding the filing date of this annual report. Based upon this evaluation, the Principal Executive Officer/Principal Financial Officer concluded that our disclosure controls and procedures are effective in ensuring that material information required to be disclosed is included in the reports that we file with the Securities and Exchange Commission.
There were no significant changes in our internal controls or, to the knowledge of our management, in other factors that could significantly affect these controls subsequent to the evaluation date.
Item 15.
Item 15. Exhibits, Financial Statements, Schedules, and Reports on Form 8-K
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 Transfer Of The Stock Rights Of Jiaozuo Yi Wan Maple Leaf High Technology Agricultural Development Co., Ltd. 21 List of Subsidiaries* 23.1 Consent of MOORE STEPHENS WURTH FRAZER AND TORBET, LLP for Yi Wan Group, Inc. and Subsidiaries* 23.2 Consent of MOORE STEPHENS FRAZER AND TORBET, LLP for Yi Wan Group, Inc. Reviewed Financial Statements December 31, 2001 and 2000 23.3 Consent of MOORE STEPHENS FRAZER AND TORBET, LLP for Yi Wan Group, Inc. Audited Financial Statements December 31, 2000 and 1999** 23.4 Consent of MOORE STEPHENS FRAZER AND TORBET, LLP for Yi Wan Group, Inc. Subsidiaries Audited Financial Statements December 31, 1999 and 1998** 24.5 Consent of Independent Accountants for Yi Wan Group, Inc. Audited Financial Statements December 31, 2002 and 2001 99 Form 10-12G/A filed on 03/28/02, SEC File No. 000-33119. 99.1 Application for the Transfer of the Stock Rights of Jiaozuo Yi Wan Maple Leaf High Technology Agriculture Developmeetn Co., Ltd. 99.2 Repy to the the Transfer of the Transfer of the Stock Rights of Jiaozuo Yi Wan Maple Leaf High Technology Agriculture Development Co., Ltd. 99.3 99.4 * Denotes previously filed exhibit, filed with Form 10-12G/A on 11/07/01, SEC File No. 000-33119. ** Denotes previously filed exhibit, filed with Form 10-12G/A on 5/21/02, SEC File No. 000-33119
(b) Reports on Form 8-K None
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
YI WAN GROUP, INC. (Registrant)
By /s/Cheng Wan Ming Cheng Wan Ming Date: April 15, 2003
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ----
/s/ Cheng Wan Ming Chairman of Board, President, 04/15/03 ------------------- Principal Executive Officer Cheng Wan Ming
/s/ Wu Zeming Chief Financial Officer and Director 04/15/03 ------------------ Wu Zeming
/s/ You Yingliu Director 04/15/03 ----------------- You Yingliu
/s/ Zhang Haoyu Director 04/15/03 ----------------- Zhang Haoyu
/s/ Yang Huijuan Director 04/15/03 ----------------- Yang Huijuan
/s/ Luo Guanying Director 04/15/03 ----------------- Luo Guanying
/s/ Liang Xiaogen Director 04/15/03 ------------------ Liang Xiaogen
/s/ Cheng Manli Director 04/15/03 ------------------ Cheng Manli
/s/ Cen Minhong Director 04/15/03 ------------------ Cen Minhong
/s/ Cheng Wanqing Director 04/15/03 ------------------ Cheng Wanqing
/s/ Cheng Deqiang Director 04/15/03 ------------------ Cheng Deqiang
CERTIFICATION ACCOMPANYING PERIODIC REPORT PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Cheng Wan Ming, certify that:
1. I have reviewed this annual report on Form 10-K of Yi Wan Group, Inc.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual 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 the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual 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 the registrant's auditors and the audit committee of registrant'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 the registrant'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 the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this annual 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: April 15, 2003
/s/Cheng Wan Ming Cheng Wan Ming President
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 annual report on Form 10-K of Yi Wan Group, Inc.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual 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 the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual 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 the registrant's auditors and the audit committee of registrant'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 the registrant'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 the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this annual 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: April 15, 2003
/s/Wu Zeming Wu Zeming Chief Financial Officer and Chief Accounting Officer