UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2004
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to __________________
Commission file number 000-33119
YI WAN GROUP, INC.
(Exact name of registrant as specified in its charter)
Florida 33-0960062
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
101 E. 52 Street, 9th Floor
New York, New York 10022
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 752-9700
All Correspondence to:
Kevin K. Leung, Esq.
Richardson & Patel, LLP
10900 Wilshire Blvd. Suite 500
Los Angeles, CA 90024
(310) 208-1182
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common stock, no par value
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes |_| No |X|
The aggregate market value of the voting and non-voting common equity held
by nonaffiliates computed by reference to the price at which the common equity
was last sold as of the last business day of the registrant's most recently
completed second fiscal quarter (June 30, 2004) is $3,314,025.
As of April 12, 2005, there were 16,861,250 shares of our common stock
issued and outstanding.
2
TABLE OF CONTENTS
TO ANNUAL REPORT ON FORM 10-K
FOR YEAR ENDED DECEMBER 31, 2004
Page
PART I
Item 1. Description of Business......................................... 5
Item 2. Description of Property......................................... 43
Item 3. Legal Proceedings............................................... 46
Item 4. Submission of Matters to a Vote of Security Holders............. 46
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities............... 46
Item 6. Selected Financial Data......................................... 48
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operation........................................ 50
Item 7A. Quantitative and Qualitative Disclosures about Market Risk...... 58
Item 8. Financial Statements and Supplementary Data..................... 59
Item 9. Changes in and Disagreements on Accounting and Financial
Disclosure...................................................... 83
Item 9A. Controls and Procedures......................................... 83
PART III
Item 10. Directors and Executive Officers of the Registrant.............. 83
Item 11. Executive Compensation.......................................... 87
Item 12. Security Ownership of Certain Beneficial Owners
and Management.................................................. 91
Item 13. Certain Relationships and Related Transactions.................. 93
Item 14. Controls and Procedure.......................................... 94
PART IV
Item 15. Exhibits, Financial Statements Schedules, and Reports
on Form 8-K..................................................... 94
Signatures................................................................. 96
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FORWARD-LOOKING STATEMENTS
The following discussion of our financial condition and results of operations
should be read in conjunction with the consolidated financial statements and
related notes thereto. The following discussion contains forward-looking
statements. Yi Wan Group, Inc. is referred to herein as "we" or "our." The words
or phrases "would be," "will allow," "intends to," "will likely result," "are
expected to," "will continue," "is anticipated," "estimate," "project," or
similar expressions are intended to identify "forward-looking statements." Such
statements include those concerning expected financial performance, corporate
strategy, and operational plans. Actual results could differ materially from
those projected in the forward-looking statements as a result of a number of
risks and uncertainties, including: (a) general economic conditions in China;
(b) regulatory factors in China that may lead to additional costs or otherwise
negatively affect our business; (c) whether we are able to manage our planned
growth efficiently, including whether our management will be able to: (i)
identify, hire, train, retain, motivate and manage required personnel or (ii)
successfully manage and exploit existing and potential market opportunities; (d)
whether we are able to generate sufficient revenues or obtain financing to
sustain and grow our operations; (e) whether we are able to successfully fulfill
our primary cash requirements which are explained below under "Liquidity and
Capital Resources"; (f) whether there will be continuing negative economic
effects upon China and the China hotel and tourist industries due to possible
continuing negative perceptions pertaining to SARS; and (g) whether worldwide
economic conditions will negatively affect the tourist industry in China and our
hotel related revenues. Statements made herein are as of the date of the filing
of this Form 10-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. The safe
harbors for forward-looking statements provided by the Private Securities
Litigation Reform Act of 1995 (the "Reform Act") are unavailable to issuers of
penny stock. Our shares may be considered penny stock and as a result of such
safe harbors set forth under the Reform Act are unavailable to us.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
We were incorporated under the laws of the state of Florida in the United States
in May 1999. We are authorized to issue 50,000,000 shares of common stock, no
par value, of which 16,861,250 shares of common stock are issued and
outstanding. We are authorized to issue 20,000,000 shares of preferred stock, no
par value, 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.
Our agriculture subsidiary ceased operations in December 2001. In December 2002,
we sold our agriculture subsidiary to a third party Since our inception, neither
we, nor any of our three subsidiaries, have ever been subject to any bankruptcy,
receivership or similar proceedings. Our hotel and communications subsidiaries,
and our variable interest entity 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: [email protected]
QINYANG 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 (RMB20,000,000). On June 3, 2002,
the Jiaozuo Foreign Trade and Economy Cooperative Bureau issued a temporary
license to Qinyang Yi Wan Hotel Co., Ltd. In 2003, the Jiaozuo Foreign Trade and
Economy Cooperative Bureau conducted the audit and issued the official license.
Qinyang Yi Wan Hotel Co., Ltd. and the Qinyang Hotel are located at:
5
Qinyang Yi Wan Hotel Co., Ltd./Qinyang Hotel
53 West Huai Fu Road
Qingyang City
Henan Province, China
Tel: 86-391-566-9000
Fax: 86-391-566-9006
Email: [email protected]
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: [email protected]
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.
YI WAN BEIJING HOTEL MANAGEMENT CO., LTD. In order to expand our restaurant and
food services and still be in compliance with the regulations of the People's
Republic of China ("PRC") with respect to restaurant services, in July 2004, we
established Yi Wan Beijing Hotel Management Co. Ltd. ("Yi Wan Beijing"), a
variable interest entity through two persons who are PRC citizens and who each
legally owned 50% of Yi Wan Beijing ("Yi Wan Beijing Interest Holders") to
operate our restaurant business. Pursuant to an Equity Trust Agreement, we
transferred RMB$100,000 to the Yi Wan Beijing Interest Holders which was used to
form and capitalize Yi Wan Beijing. The Equity Trust Agreement provides that the
Trustees are to hold the equity interest in Yi Wan Beijing (the "Equity
Interests") in trust for the benefit of Yi Wan Group, Inc. The Yi Wan Beijing
Interest Holders have agreed to not sell, pledge, hypothecate, encumber or
otherwise dispose of the Equity Interests. Any such transfer will result in a
breach of the Equity Trust Agreement and the Yi Wan Beijing Interest Holders
will be required to transfer the Equity Interest to the Company. Further the Yi
Wan Beijing Interest Holders have agreed to promptly distribute any and all
dividends, distributions or other payments received from Yi Wan Beijing with
respect to the Equity Interest to the Company. Finally, the Yi Wan Beijing
Interest Holders granted irrevocable proxies to two directors of the Company to
exercise all voting rights such Yi Wan Beijing Interest Holders have with
respect to their ownership interest in Yi Wan Beijing. The irrevocable proxies
further provides that if such two directors cease to be an employee of the
Company, the Yi Wan Beijing Interest Holders agree to immediately terminate the
proxy and to grant a proxy to another person designated by the Company.
BUSINESS LICENSES
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
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own 100% of the equity interests of the subsidiary and control the selection of
its board of directors.
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
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 business license for YI WAN BEIJING is twenty (20) years. YI WAN
BEIJING is a variable interest entity, through two designated shareholders who
are PRC citizens and who legally own YI WAN BEIJING. Yi Wan Group, Inc. is the
primary beneficiary of YI WAN BEIJING's business operations and qualifies to be
consolidated under FIN 46(R).
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 Telecommunications Division or Telecommunications Company; and
o Restaurant Management Company.
ORGANIZATIONAL HISTORIES OF OUR SUBSIDIARY COMPANIES
Prior to our acquisition of our hotel 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 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., a company established under the laws
of the People's Republic of China and which had an ownership interest
in only our telecommunications company.
As a result of the transactions described below, all of the former individual
owners of Shun'ao Industry and Commerce Company are also our shareholders. In
7
addition, as a result of the transactions described below we have the following
ownership interests in our subsidiaries:
o 90% ownership in our Jiaozuo Yi Wan hotel company;
o 100% ownership in our telecommunications company; and
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 (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.
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 Qinyang 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. The official license,
however, could not be issued until the Qinyang Yi Wan Hotel Co., Ltd. met the
registered capital requirement of US$2,413,389 (RMB 20,000,000). Although the
full registered capital requirement of US$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 Cooperative Bureau. In 2003, the Jiaozuo
Foreign Trade and Economy Cooperative Bureau conducted the audit and verified
the capital contribution, and issued the official license.
8
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 12,400,000). In addition, the
articles require that an additional investment of approximately US$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 of US $500,000 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, 2003 to make this payment. On June 22, 2003, in accordance with a
unanimous written resolution of our telecommunications company's Board of
Directors, we received another extension to June 22, 2004. On June 22, 2004, in
accordance with a unanimous written resolution of our telecommunications
company's Board of Directors, we received an extension to June 22, 2006.
YI WAN BEIJING HOTEL MANAGEMENT CO., LTD. In order to expand our restaurant and
food services and still be in compliance with the regulations of the People's
Republic of China ("PRC") with respect to restaurant services, in July 2004, we
established Yi Wan Beijing Hotel Management Co. Ltd. ("Yi Wan Beijing"), a
variable interest entity through two persons who are PRC citizens and who each
legally owned 50% of Yi Wan Beijing ("Yi Wan Beijing Interest Holders") to
operate our restaurant business. Pursuant to an Equity Trust Agreement, we
transferred RMB$100,000 to the Yi Wan Beijing Interest Holders which was used to
form and capitalize Yi Wan Beijing. The Equity Trust Agreement provides that the
Trustees are to hold the equity interest in Yi Wan Beijing (the "Equity
Interests") in trust for the benefit of Yi Wan Group, Inc. The Yi Wan Beijing
Interest Holders have agreed to not sell, pledge, hypothecate, encumber or
otherwise dispose of the Equity Interests. Any such transfer will result in a
breach of the Equity Trust Agreement and the Yi Wan Beijing Interest Holders
will be required to transfer the Equity Interest to the Company. Further the Yi
Wan Beijing Interest Holders have agreed to promptly distribute any and all
dividends, distributions or other payments received from Yi Wan Beijing with
respect to the Equity Interest to the Company. Finally, the Yi Wan Beijing
Interest Holders granted irrevocable proxies to two directors of the Company to
exercise all voting rights such Yi Wan Beijing Interest Holders have with
respect to their ownership interest in Yi Wan Beijing. The irrevocable proxies
further provides that if such two directors cease to be an employee of the
9
Company, the Yi Wan Beijing Interest Holders agree to immediately terminate the
proxy and to grant a proxy to another person designated by the Company.
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 February 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. Most of the renovations and construction were completed in
October 1996 and the rest was completed in February 1997;
o In 1997, the hotel company began recruiting personnel and developing
western style operational and management training systems;
o In 1997, the hotel company received certification from the Henan
National Tourism Board;
o In June 2000, the hotel company received a four-star grade title from
the Henan National Tourism Board;
o The hotel company completed construction of the 17th Floor VIP
Restaurant in February 2002 at which time it became operational;
o In November 2003, the newly renovated Sauna-Health Center was opened
to the public; and
o The hotel company completed construction of the 16th Floor VIP
Restaurant in December 2003 at which time it became operational.
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
10
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; and
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 five food and beverage facilities,
two full service restaurants, a buffet coffee shop, and a lobby bar, which are
described below. 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
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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 16th Floor VIP Restaurant. We completed construction of a new luxury
VIP restaurant in December, 2003. The grand opening of the restaurant
took place on January 15, 2004. The restaurant is located on the 16th
floor of the main building of the Jiaozuo Yi Wan Hotel and offers a
city view to dining guests. The restaurant is a VIP dining facility
with three private suites ranging in capacity from 40 to 50 people.
Each suite contains separate sitting areas, large color television,
stereo system, karaoke equipment, and a private bathroom. Its decor is
traditional Chinese with antiques. 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 Henam 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
entertainment facility, which is 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.
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SAUNA-HEALTH CENTER. The Sauna-Health Center is located on the second floor of
the main building of the Jiaozuo Yi Wan Hotel. Between September and November
2003, we undertook renovations and construction on the Sauna-Health Center. The
newly renovated center was open to the public on November 22, 2003. It includes
both a Men's and Ladies' Section offering services ranging from beauty salon,
massage, acupuncture, and pedicure to various self-guided relaxation activities,
such as full-body-massage water therapy, shower, sauna, and steam. The facility
at the Men's Section includes an ancient Egyptian style bath center, which
includes a full-body-massage water therapy pool that can accommodate 150 people,
four 10-person soaking pools, 10 jacuzzis, 14 individual showers, one 10-person
sauna, one 10-person steam room, and 20 massage beds. The facility at the
Ladies' Section includes a multi-person water therapy pool, 10 individual
showers, multi-functional wet and dry sauna, and 5 massage beds. The new
Sauna-Health Center also has a luxurious lounge, beauty salon, 70-person resting
lounge, 39 standard rooms, 6 deluxe VIP rooms, kids' playing ground, fitness
room, internet bar, deluxe table tennis room, deluxe billiard room, 12 chess
rooms, and a Japanese style food court that can accommodate 300 people. The new
Sauna-Health Center has a total capacity of 500 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
- -------------------------------- -----------------------------------------------
HOTEL DIVISION
- -------------------------------- -----------------------------------------------
Cigarette/beverage Jiaozuo Branch Office of Henan Province Tobacco
Company, 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
- -------------------------------- -----------------------------------------------
Wine/Beer Fangda Shop, Jiaozuo City
- -------------------------------- -----------------------------------------------
Seafood Haiyang Da Shi Jie Shop, Jiaozuo City
- -------------------------------- -----------------------------------------------
General cooking ingredients Yongsheng Ganxian Shop, Jiaozuo City
- -------------------------------- -----------------------------------------------
Seafood and cooking ingredients Kaifeng Zhang Da Co., Ltd., Kaifeng City
- -------------------------------- -----------------------------------------------
Wine/Beer Jinshan Brewery, Henan Province, Zhengzhou City
- -------------------------------- -----------------------------------------------
Cigarette/beverage Zhenhua Shop, Jiaozuo City
- -------------------------------- -----------------------------------------------
General cooking Maoyuan Gahuo Shop, Jiaouao City
ingredients
- -------------------------------- -----------------------------------------------
13
- -------------------------------- -----------------------------------------------
ITEM SOURCE
- -------------------------------- -----------------------------------------------
HOTEL DIVISION (CONTINUED)
- -------------------------------- -----------------------------------------------
General cooking Jiaonan Market, Jiaozuo City
ingredients
- -------------------------------- -----------------------------------------------
Seafood Xincheng Seafood Wholesale, Zhengzhou City
- -------------------------------- -----------------------------------------------
The above suppliers of 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 bi-annual meetings and product shows.
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 Restaurant Expansion. Our Jiaozuo Hotel Division is researching the
feasibility of opening one restaurant in Zhengzhou 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.
14
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.
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:
o 12 managers
o 86 employees
Lodging Expansion:
o 15 managers
o 95 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.
Our Jiaozuo hotel division has two primary target markets: travelers and 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:
Dinner parties:
1. Henan Zhanggong Group Business Reception: 280 people
2. China Unicom Jiaozuo Branch's customer appreciation party: 130 people
Conferences:
1. The Third Annual Jiaozuo International Travel News Conference: 320
people
2. McDonald's employment conference: 250 people
Products News Conferences:
1. Sichuan Quanxing Co., Ltd.'s wine promotional conference: 500 people
15
2. Volvo's product introduction conference: 200 people
Our Jiaozuo 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; and
o On-site point-of-purchase.
PROMOTIONAL EVENTS. Promotional events are chiefly coordinated through our
Jiaozuo Yi Wan Hotel Division's sales department in conjunction with its
entertainment and food and beverage operations. Primary on-going promotional
events include big name celebrity entertainment event ticket give-aways,
regional or national cuisine tasting, and other culinary events.
CHARITABLE GIVING AND SPONSORSHIP. Our Jiaozuo 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 and business center;
16
o Sundries and gift store;
o Nightclub and karaoke suites (150-200 person capacity);
o Massage service; and
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; and
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 competitors 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 four 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
17
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 engage 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 in China. 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 has been subject to central government income tax at a rate of 30%
and a 3% provincial government income tax since 2002.
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;
18
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 December, 2003. Our next annual inspection is
scheduled for approximately January 2006.
EMPLOYEES
As of December 31, 2004, our hotel division employed a total of 612 full-time
employees, comprised of approximately 95 management personnel and 517 staff.
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 guest rooms 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 room, 99.3 square feet, 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 Qin 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.
19
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 banquet
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 Qinyang 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 Fang Da Department Store, Jiaozuo City
- ---------------------------- ---------------------------------------------------
Seafood Quanhong Seafood Shop, Qinyang 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 Hui Jie Shop, Qinyang City
- ---------------------------- ---------------------------------------------------
The above suppliers 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.
20
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 bi-annual meetings and product
shows.
POTENTIAL FUTURE GROWTH. In order to satisfy the increasing demands for the
rooms and restaurants, we plan to expand this hotel by adding 60 standard rooms
and 11 suites to accommodate 210 guests. The room expansion will occupy 3.5
acres. This expansion is contingent upon receiving financing of RMB 15 million
(US$1.8 million). We have not received any binding commitments to provide such
financing and 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: travelers and 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:
Business conferences:
1. Nation Patent Project Issuance Meeting held by Henan Science and
Technology Bureau: 120 people
2. The meeting about State Enterprise Innovation held by Qinyang
Government: 95 people
Meetings held by companies:
1. Chengdu ShenGang Dealer Symposium: 100 people
2. The Ceremony of sign the continuation project agreement for Qinyang
Aluminum Company: 50 people
Product exhibits and sales meetings:
1. Anhui Huatuo Pharmaceutical Co.'s product exhibit: 150 people
2. Amway Co.'s product exhibit: 200 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:
21
o Local television advertising;
o Airport and train station billboards;
o City promotional materials;
o Local print media; and
o On-site point-of-purchase.
PROMOTIONAL EVENTS. These promotional events are mainly coordinated through our
hotel division's sales department in conjunction with its entertainment and food
and beverage operations. On-going promotional events include celebrity
entertainment event ticket give-away, 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 Guesthouse
is approximately two miles from 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 for
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 the relatively
recent construction of the hotel, its guest rooms and parking
structure in October 2001;
o Higher number of in-guest room amenities; and
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
22
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 promotional 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; and
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, which we have 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.
23
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 2003, which has been renewed
every year up to and including October 2005.
EMPLOYEES
As of December 31, 2004, our Qinyang Yi Wan Hotel Division employed a total of
235 full-time employees, comprised of approximately 34 management personnel and
201 staff.
YI WAN BEIJING HOTEL MANAGEMENT LTD.
PRODUCTS AND SERVICES
Yi Wan Beijing Hotel Management Ltd. has the following primary product and
service offerings:
o Food and Beverage Operations
FOOD AND BEVERAGE OPERATIONS
Our Yi Wan Beijing Hotel Management Co., Ltd. operates one restaurant in our new
"Diyikou" brand fast-food chain in Beijing city. The total space for the
restaurant is 429 square meters, which includes two VIP rooms and one saloon,
with a total occupancy of 180 people. The restaurant specializes in serving Hong
Kong style fast foods
SUPPLIERS.
- --------------------------------------------- ----------------------------------
ITEM SOURCE
- --------------------------------------------- ----------------------------------
Wine/Beer Yan Ping, Beijing City
- --------------------------------------------- ----------------------------------
Diesel Oil Mao Junting, Beijing City
- --------------------------------------------- ----------------------------------
General cooking ingredients Liang Juhong, Beijing City
- --------------------------------------------- ----------------------------------
Daily use lodging items Wei Jinzhou, Beijing City
- --------------------------------------------- ----------------------------------
SEASONAL VARIATIONS. Food and beverage revenues experience no seasonal
variations.
POTENTIAL FUTURE GROWTH. We expect to open similar fast-food restaurants in
Beijing and Shanghai over the next five years.
MARKET. Yi Wan Beijing Hotel Management Ltd. has two primary target markets:
travelers and local townsfolk around the restaurant.
ADVERTISING. Our restaurant conducts extensive product promotional advertising
in several venues:
24
o Local television advertising;
o City promotional materials;
o Local print media; and
o On-site point-of-purchase.
CHARITABLE GIVING AND SPONSORSHIP. Our Yi Wan Beijing Hotel Management Ltd.
promotes its restaurant by corporate sponsorship of charity events and donations
to local philanthropic efforts.
COMPETITION
Beijing's fast food industry generates approximately US$3 billion (RMB 24
billion) in annual revenue, according to the Beijing Bureau of Commerce, and the
trend is expected to accelerate during the 2008 Olympics. American fast-food
chains such as McDonald's, Pizza Hut and KFC have multiplied in Beijing in
recent years, and a few Chinese companies have started chains based on Western
business principles but offering Chinese cuisines including Yoshinori and
Sichuan food. Yi Wan Beijing Hotel Management Co., Ltd. believes it is the first
to focus on Hong Kong-style food distinguished by fresh ingredients and
high-quality preparation.
TRADEMARKS, LICENSES AND CONCESSIONS
Our Yi Wan Beijing Hotel Management Ltd. has registered the Yi Wan Beijing Hotel
Management Co., Ltd. name and the "Diyikou" brand with the Ministry of
Administration and Trademarks in China. Our Yi Wan Beijing Hotel Management Ltd.
has a business license in China, which currently expires in July 2024. The
trademark is registered in perpetuity provided yearly fees are paid.
EMPLOYEES
As of December 31, 2004, we had approximately 55 full-time employees, consisting
of 15 managers and 40 staff.
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 87% of our consolidated
revenues during these fiscal years.
25
- ------------------------------------------------------ -------------------------
2002:
- ------------------------------------------------------ -------------------------
Food and Beverage Operations 52.3%
- ------------------------------------------------------ -------------------------
Lodging Operations 24.7%
- ------------------------------------------------------ -------------------------
Entertainment Operations 22.9%
- ------------------------------------------------------ -------------------------
Total of our consolidated revenues $9,890,845
- ------------------------------------------------------ -------------------------
- ------------------------------------------------------ -------------------------
2003:
- ------------------------------------------------------ -------------------------
Food and Beverage Operations 54.0%
- ------------------------------------------------------ -------------------------
Lodging Operations 26.4%
- ------------------------------------------------------ -------------------------
Entertainment Operations 19.6%
- ------------------------------------------------------ -------------------------
Total of our consolidated revenues $9,216,576
- ------------------------------------------------------ -------------------------
- ------------------------------------------------------ -------------------------
2004:
- ------------------------------------------------------ -------------------------
Food and Beverage Operations 54.97%
- ------------------------------------------------------ -------------------------
Lodging Operations 25.13%
- ------------------------------------------------------ -------------------------
Entertainment Operations 19.9%
- ------------------------------------------------------ -------------------------
Total of our consolidated revenues $9,730,345
- ------------------------------------------------------ -------------------------
SHUN DE 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.
26
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.
o In 1999, Our Telecommunications Division had approximately a ten
percent (10%) market share.
o Our Telecommunications Division had approximately a six percent (6%)
market share for the period from 2000 to 2003.
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, sometimes 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.
27
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 1,300 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:
- -------------------------------------- -----------------------------------------
SUPPLIERS
- -------------------------------------- -----------------------------------------
Yi Wan Telecommunication
- -------------------------------------- -----------------------------------------
Discharging Tube JiangSu Zhangjiagang Electrical Equipment
Manufacture, Inc., Zhang Jia Gang City
- -------------------------------------- -----------------------------------------
PTC Heat Sensitive Resistor Shanghai Shun'an Communication Protector,
Ltd., Shanghai City
- -------------------------------------- -----------------------------------------
Reed, Connecter, cable FoShan No 6 Wireless Communication
Manufacture, Inc., FoShan City
- -------------------------------------- -----------------------------------------
Circuit board ZhongShan Dongfeng Tongfa Electrical
Equipment Co., Zhongshan City
- -------------------------------------- -----------------------------------------
Anti-fire ABS, Plastic Sanshui Jinhu Industrial Plastics
Manufacture, Sanshui City
- -------------------------------------- -----------------------------------------
28
- -------------------------------------- -----------------------------------------
SUPPLIERS (CONTINUED)
- -------------------------------------- -----------------------------------------
Silvering, Tinning Shunde Guizhou YuanXinLong DianDu Ltd.,
Shunde City
- -------------------------------------- -----------------------------------------
Zinc white copper Shanghai Copper Manufacture Sales
Department, Shanghai City
- -------------------------------------- -----------------------------------------
Electronic components capacitor, Guangzhou Saibo Electronic Ltd.,
Nylon belt Guangzhou City
- -------------------------------------- -----------------------------------------
Cold board, Tri-angle Iron, Shunde Lecong Steel Trading Ltd. No 30
Flat iron Sales Department, Shunde City
- -------------------------------------- -----------------------------------------
Easy Fusibility annulus Guangzhou Non-Ferrouse Metal Research and
Development Institution, Guangzhou City
- -------------------------------------- -----------------------------------------
Brass board, Bronze Nanhai Lianxing Jinhua Hardware
Manufacture, Nanhai 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
29
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. We have been granted a permit for each
year that our telecommunications division has been required to obtain such
permit. 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% to 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, which are listed below:
o A component part used in the assembly of analog telephone main
distribution frames registered as patent number 235727.
30
o A tool used by customers to simultaneously install two wire clips into
a distribution frame, registered as patent number 213907.
The patents are registered in perpetuity, provided yearly fees of $7,300 are
paid to the Ministry of Administration and Trademarks through December 31, 2002.
We have made all such payments.
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 50 companies in China licensed to produce telephone
distribution switching equipment. Competitors compete chiefly on the basis of
price and technological capabilities. Thirty-six of the 50 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 36 companies, the four largest competitors
have a combined market share of 50%. Our Telecommunications Division has an
approximately 6% market share according to the China Telecommunication Industry
Annual Report for the period from 2000 to 2003 published by the Ministry of Post
and Telecommunications. Our Telecommunications Division had a 2.8% market share
in 2004.
PRODUCT RESEARCH AND DEVELOPMENT
From January 1999 to December 2001, we conducted research and development in the
proposed products summarized below. During 2002, our Telecommunications Division
tested these products internally. This testing continued through 2003. We did
not perform any testing in 2004. 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 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
31
division does not possess 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:
o 2001 - RMB 80,000 or approximately US$9,638
o 2002 - RMB 0 or US$0
o 2003 - RMB 520,000 or approximately US$62,920
o 2004 - RMB 0 or approximately US$0
In order to complete these projects, it will need to spend at least the
following amounts for the specified items:
o Digital Switching Components - RMB 8,800,000.00 or approximately
US$1,060,000.
o Optical Switching Components - RMB 6,100,000.00 or approximately
US$736,000.
o Conference Language Interpretation System - RMB 8,000,000.00 or
approximately US$970,000.
We anticipate that these funds will be provided from our telecommunications
division's operating cash flow. We anticipate hiring the seven additional
technical employees over the next 12 months to accomplish our research and
development projects.
NUMBER OF EMPLOYEES
As of December 31, 2004, we had approximately 27 full-time employees, consisting
of 13 managers and 14 staff.
32
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 allowed 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 from 2002.
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% to 100% to 25% in
2005, with auto parts tariffs cut to an average of 10%. 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% 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% to 6.5%.
WOOD AND PAPER - Tariffs cut from present levels of 12% to 18% for wood and
15% to 25% for paper to between 5% and 7%.
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.
33
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 manufacturers. 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% 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,
34
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:
o 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.
o 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.
o 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, provides that 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 that 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
35
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 that 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 that the investments of a foreign
investor in China, the profits it earns and its other lawful rights and
interests are protected by Chinese law. Furthermore, Article 5 of the WFOE Law
states that 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 that 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
36
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; and
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 People's Republic of China Wholly Foreign-Owned
ENTERPRISE 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.
37
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
38
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 that 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 and 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 is 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 four 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
39
o Increases in those companies' earnings invested in certain U.S.
property.
Based on the current and expected income, assets, and operations of the four
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 division, 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; and
o Distribution to investors.
The three statutory reserve funds are described below:
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
40
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;
41
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, we do 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 Renminbi, 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.
42
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 worldwide website maintained by the
Securities and Exchange Commission at www.sec.gov.
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 and
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;
43
o 25 guest suites;
o 2 executive guest suites;
o One 500-bed employee dormitory;
o 5 full service restaurants (1,500 person capacity);
o 1 buffet coffee shop (50 person capacity)
o 1 lobby bar (25 person capacity);
o 1 nightclub (334 person capacity);
o 1 sauna-health club (500 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 1 business center;
o 1 travel agency;
o 1 sundries and gift store;
o 1 beauty salon (four stations); and
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
and 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 Use Certificate was obtained from its 20%
joint venture partner as a capital contribution in the amount of approximately
US$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 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);
44
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); and
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 YI WAN BEIJING HOTEL MANAGEMENT DIVISION'S FACILITIES
Our Yi Wan Beijing Hotel Management Ltd. Division's facilities are located in
Xicheng District, Beijing city at No. 137 of Xi-zhi Men Wai Avenue. The total
45
space for the restaurant is 429 square meters, which includes two VIP rooms and
one saloon, with a total occupancy of 180 people.
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. 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, 2004.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
MARKET INFORMATION
Our common stock became 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 for the last two fiscal years
as 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.
------------------------------- --------------- ---------------
LOW HIGH
------------------------------- --------------- ---------------
2004
------------------------------- --------------- ---------------
Fourth Quarter $0.56 $1.05
------------------------------- --------------- ---------------
Third Quarter $0.65 $1.50
------------------------------- --------------- ---------------
Second Quarter $1.20 $2.85
------------------------------- --------------- ---------------
First Quarter $1.75 $5.50
------------------------------- --------------- ---------------
------------------------------- --------------- ---------------
2003
------------------------------- --------------- ---------------
Fourth Quarter $0.40 $9.00
------------------------------- --------------- ---------------
Third Quarter $0.15 $1.50
------------------------------- --------------- ---------------
Second Quarter $0.10 $0.15
------------------------------- --------------- ---------------
First Quarter $0.01 $2.25
------------------------------- --------------- ---------------
46
A limited trading market exists for our common stock and there is no assurance
that a more significant 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 more significant
trading market develops.
HOLDERS OF RECORD
As of April 12, 2005, there were 16,861,250 shares of common stock outstanding,
which were held of record by 50 stockholders.
OPTIONS, WARRANTS
There are no outstanding options or warrants to purchase, or securities
convertible into, our common equity.
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.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
Equity Compensation Plan Information
- --------------------------- -------------------------- ------------------------- --------------------------
Plan Category Number of securities to Weighted-average Number of securities
be issued upon exercise exercise price of remaining available for
of outstanding options, outstanding options, future issuance under
warrants and rights warrants and rights equity compensation plans
- --------------------------- -------------------------- ------------------------- --------------------------
Equity compensation plans None - - - None
approved by security
holders
- --------------------------- -------------------------- ------------------------- --------------------------
Equity compensation plans 325,000 (1) - - - 470,000 (2)
not approved by security 30,000 (2)
holders
- --------------------------- -------------------------- ------------------------- --------------------------
Total 355,000 - - - 470,000
- --------------------------- -------------------------- ------------------------- --------------------------
- ----------------------
(1) In April 2004 and June 2004, our board of directors approved agreements with
Stanley Wunderlich and Yale Yu for their consulting services. The Agreements
both provide that Mr. Wunderlich and Mr. Wu will provide business and financial
47
consulting services to the Company including rendering advice, consultation,
information and services regarding marketing and general financial and business
matters including, but not limited to, mergers and acquisitions, strategic
alliances and such others as the Company shall from time to time request.
Pursuant to Mr. Wunderlich's consulting agreement, dated on or about April 15,
2004, the Company issued to Mr. Wunderlich 125,000 shares of its common stock in
exchange for his consulting services. Pursuant to Mr. Yu's consulting agreement,
dated on or about June 15, 2004, the Company issued to Mr. Yu 200,000 shares of
its common stock in exchange for his consulting services.
(2) In December 2004, our board of directors approved the 2004 Consultant Stock
Plan (the "Plan") for the issuance of our common stock to persons who provide
consulting services to the Company. The board of directors or a committee
appointed by the board has full, final and sole authority to designate eligible
persons, grant awards, interpret the Plan, and designate its authority in
relation to the plan to directors who are executive officers of the Company
subject to restrictions as the Plan committee or the board may decide to impose
on such delegate directors. The maximum number of shares that may be issued
under the Plan is 500,000 shares of our common stock. In December 2004, the
Company issued 30,000 shares to a consultant for legal services rendered under
the Plan.
RECENT SALES OF UNREGISTERED SECURITIES; USE OF PROCEEDS FROM REGISTERED
SECURITIES
We had no unregistered securities issuances during our fiscal years ended 2004,
2003 and 2002.
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, 2000 through December 31,
2004.
I. OVERVIEW
As of December 31, 2004 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 Our variable interest entity YI WAN BEIJING is a restaurant management
company serving Hong Kong style fast foods and is located in the city of
Beijing, People's Republic of China.
All of our operating units are located in the People's Republic of China.
II. RESULTS OF OPERATIONS
The following selected financial data with respect to our consolidated
statements of operations for the years ended December 31, 2000, 2001, 2002, 2003
48
and 2004 and consolidated balance sheets as of December 31, 2000, 2001, 2002,
2003 and 2004 are derived from the audited consolidated financial statements of
the Company. The following information should be read in conjunction with the
consolidated financial statements of the Company and the related notes thereto
and Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations, which is included elsewhere in this Annual Report on Form
10-K.
YI WAN GROUP. INC. AND SUBSIDIARIES
STATEMENT OF OPERATIONS
Combined Consolidated Consolidated Consolidated Consolidated
December 31, December 31, December 31, December 31, December 31,
2000 2001 2002 2003 2004
------------ ------------ ------------ ------------ ------------
USD USD USD USD USD
------------ ------------ ------------ ------------ ------------
Net Sales 14,070,568 12,122,239 13,901,421 12,495,189 11,216,720
Cost of Sales 5,416,003 4,421,636 5,134,589 4,772,291 4,163,352
Gross profit 8,654,565 7,700,603 8,766,832 7,722,898 7,053,368
Operating Expenses 4,068,658 4,043,937 5,087,303 4,371,566 5,080,471
Income From Operations 4,585,907 3,656,666 3,679,529 3,351,332 1,972,897
Other Income (Expense) 57,592 18,560 28,432 (460,559) (235,807)
Net Income 3,361,253 2,530,779 1,086,438 1,662,345 691,369
Earnings per share 0.21 0.16 0.06 0.10 0.04
BALANCE SHEET
December 31, December 31, December 31, December 31, December 31,
2000 2001 2002 2003 2004
------------ ------------ ------------ ------------ ------------
USD USD USD USD USD
------------ ------------ ------------ ------------ ------------
ASSETS
Total Current Assets 5,838,988 5,608,102 6,938,058 9,146,425 7,886,022
Other Assets 23,713,156 22,412,040 21,244,171 20,523,765 22,345,696
Total Assets 29,552,144 28,020,142 28,182,229 29,670,190 30,231,718
LIABILITIES & STOCKHOLDER'S EQUITY
Current Liabilities:
Accounts Payable & Accrued
Liabilities 3,567,913 3,453,778 3,795,717 3,814,708 2,901,303
Payable to Stockholders/other 10,114,002 5,950,739 4,847,082 4,932,273 4,932,273
Total Current Liabilities 13,681,915 9,404,517 8,642,799 8,746,981 7,833,576
Long Term Liabilities:
Total Liabilities 13,681,915 9,404,517 8,746,981 8,428,143 7,833,576
Total Stockholder's Equity 14,609,796 17,151,131 17,730,938 19,398,849 20,374,142
Total Liabilities and
Stockholder Equity 29,552,144 28,020,142 28,182,229 29,670,190 30,231,718
49
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
FORWARD-LOOKING STATEMENTS:
The following discussion of our financial condition and results of operations
should be read in conjunction with the consolidated financial statements and
related notes thereto. The following discussion contains forward-looking
statements. Yi Wan Group, Inc. is referred to herein as "we" or "our." The words
or phrases "would be," "will allow," "intends to," "will likely result," "are
expected to," "will continue," "is anticipated," "estimate," "project," or
similar expressions are intended to identify "forward-looking statements." Such
statements include those concerning expected financial performance, corporate
strategy, and operational plans. Actual results could differ materially from
those projected in the forward-looking statements as a result of a number of
risks and uncertainties, including: (a) general economic conditions in China;
(b) regulatory factors in China that may lead to additional costs or otherwise
negatively affect our business; (c) whether we are able to manage our planned
growth efficiently, including whether our management will be able to: (i)
identify, hire, train, retain, motivate and manage required personnel or (ii)
successfully manage and exploit existing and potential market opportunities; (d)
whether we are able to generate sufficient revenues or obtain financing to
sustain and grow our operations; (e) whether we are able to successfully fulfill
our primary cash requirements which are explained below under "Liquidity and
Capital Resources"; (f) although the World Health Organization on June 24, 2003
removed its recommendation that people should postpone all but essential travel
to Beijing, China due to SARS and on July 5, 2003 removed Taiwan, China from the
list of areas with recent local transmission of SARS, whether there will be
continuing negative economic effects upon China and the China hotel and tourist
industries due to possible continuing negative perceptions pertaining to SARS;
and (g) whether worldwide economic conditions will negatively affect the tourist
industry in China and our hotel related revenues. Statements made herein are as
of the date of the filing of this Form 10-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. The safe harbors for forward-looking statements provided by
the Private Securities Litigation Reform Act of 1995 (the "Reform Act") are
unavailable to issuers of penny stock. Our shares may be considered penny stock
and as a result of such safe harbors set forth under the Reform Act are
unavailable to us.
GENERAL
Yi Wan Group operates two lines of businesses, a hotel & restaurant business and
a telecommunications business, through ownership of three Chinese business
entities. We own a 90% interest in Jiaozuo Yi Wan Hotel Company Limited, an 80%
interest in Qinyang Yi Wan Hotel Company Limited, and a 100% interest in Shun De
Yi Wan Communications Equipment Plant Co., Ltd.
Our hotel & restaurant business consists of the operation and management of an
upscale hotel conference and entertainment facility in Jiaozuo City, Henan
province and in the City of Qinyang. This business line focuses on providing
lodging, food and beverage, entertainment, and conference and meeting products
and services. Recent efforts are focused on expanding the food and beverage
business which we think can generate higher profit margins.
50
Our telecommunications business focuses on designing and manufacturing telephone
network switching component parts for use in telephone main distribution frames,
and 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 business' initial design and production efforts focused on
developing analog switching component parts and the manufacture of a series of
analog main distribution frames.
In order to expand our restaurant and food services and still be in compliance
with the regulations of the People's Republic of China ("PRC") with respect to
restaurant services, in July 2004, we established Yi Wan Beijing Hotel
Management Co. Ltd. ("Yi Wan Beijing"), a variable interest entity through two
persons who are PRC citizens and who each legally owned 50% of Yi Wan Beijing
("Yi Wan Beijing Interest Holders") to operate our restaurant business. Pursuant
to an Equity Trust Agreement, we transferred RMB100,000 to the Yi Wan Beijing
Interest Holders which was used to form and capitalize Yi Wan Beijing. The
Equity Trust Agreement provides that the Trustees are to hold the equity
interest in Yi Wan Beijing (the "Equity Interests") in trust for the benefit of
Yi Wan Group, Inc. The Yi Wan Beijing Interest Holders have agreed to not sell,
pledge, hypothecate, encumber or otherwise dispose of the Equity Interests. Any
such transfer will result in a breach of the Equity Trust Agreement and the Yi
Wan Beijing Interest Holders will be required to transfer the Equity Interest to
the Company. Further the Yi Wan Beijing Interest Holders have agreed to promptly
distribute any and all dividends, distributions or other payments received from
Yi Wan Beijing with respect to the Equity Interest to the Company. Finally, the
Yi Wan Beijing Interest Holders granted irrevocable proxies to two directors of
the Company to exercise all voting rights such Yi Wan Beijing Interest Holders
have with respect to their ownership interest in Yi Wan Beijing. The irrevocable
proxies further provides that if such two directors cease to be an employee of
the Company, the Yi Wan Beijing Interest Holders agree to immediately terminate
the proxy and to grant a proxy to another person designated by the Company. The
restaurant managed by Yi Wan Beijing serves Hong Kong style fast foods and is
located in the city of Beijing, PRC.
Through our Jiaozuo Yi Wan Hotel company, we have made an investment to set up a
luxury restaurant in Zhengzhou City, the capital of Henan Province, PRC. To
comply with the PRC's regulations with respect to ownership of food and
restaurant services, the Company will set up a variable interest entity with the
same structure as Yi Wan Beijing that will legally own and operate this
restaurant.
RESULTS OF OPERATIONS
Presented below are the Company's consolidated statements of operations for the
years ended December 31, 2004 and 2003:
51
2004 2003
------------ ------------
NET SALES $ 11,216,720 $ 12,495,189
COST OF SALES 4,163,352 4,772,291
------------ ------------
GROSS PROFIT 7,053,368 7,722,898
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 5,080,471 4,371,566
------------ ------------
INCOME FROM OPERATIONS 1,972,897 3,351,332
------------ ------------
OTHER INCOME (EXPENSE):
Interest income 147,326 25,023
Other income (expense) (383,133) (485,582)
------------ ------------
Total other income (expense) (235,807) (460,559)
------------ ------------
INCOME FROM CONTINUING OPERATIONS BEFORE
PROVISION FOR INCOME TAXES AND MINORITY INTEREST 1,737,090 2,890,773
PROVISION FOR INCOME TAXES 865,137 1,155,961
------------ ------------
INCOME BEFORE MINORITY INTEREST 871,953 1,734,812
MINORITY INTEREST (180,802) (138,888)
------------ ------------
NET INCOME 691,151 1,595,924
OTHER COMPREHENSIVE INCOME:
Foreign currency translation adjustment 218 66,421
------------ ------------
COMPREHENSIVE INCOME $ 691,369 $ 1,662,345
============ ============
EARNINGS PER SHARE, BASIC AND DILUTED $ 0.04 $ 0.10
WEIGHTED AVERAGE NUMBER OF SHARES 16,672,140 16,506,250
============ ============
As of December 31, 2004, we had $3,280,289 of retained earnings. As of December
31, 2004, we had cash of $5,173,440 and total shareholders' equity of
$20,374,142. For the year ended December 31, 2004, we had revenues of $
11,216,720 and general administrative and sales expenses of $5,080,471.
CONSOLIDATED RESULTS
(1) SALES. Consolidated sales decreased by $ 1,278,469, or approximately 10.23%,
from $12,495,189 for the year ended December 31, 2003 to $11,216,720 for the
years ended December 31, 2004. The 10% decrease was a direct result of a
decrease in sales to our telecommunications business of $1,937,159, which was
partially offset by an increase in sales in our hotel and restaurant business.
The reasons for the decrease in sales related to our telecommunications business
are: (1) our telecommunication business has not yet been successful in
52
developing new products to bring to the market; and (2) a highly competitive
industry. We are in the process of evaluating our future business plan for our
telecommunications business. In addition, we are currently focusing more of our
efforts in developing and promoting the hotel and restaurant business.
(2) COST OF GOODS SOLD. Consolidated cost of goods sold decreased by $608,939
from 4,772,291 for the year ended December 31, 2003 to $ 4,163,352 for the year
ended December 31, 2004. Cost of goods sold as a percentage of sales decreased
by 1.08%, from 38.19% for the year ended December 31, 2003 to 37.12% for the
year ended December 31, 2004. The decrease in cost of sales was due to a
decrease in our cost of raw materials in our hotel and restaurant business due
to a decrease in prices for meat, eggs, vegetables and rice in comparison to
last year's prices. In addition, the downsizing of operational production and
failure to launch new products in the telecommunication sector in the fourth
quarter also contributed to the decrease in cost of sales.
(3) GROSS PROFIT. Consolidated gross profit decreased by $669,530 from
$7,722,898 for the year ended December 31, 2003 to $7,053,368 for the year ended
December 31, 2004. Gross profit as a percentage of sales increased by 1.08%,
from 61.81% for the year ended December 31, 2003 to 62.88% for the year ended
December 31, 2004. This increase in gross profit as a percentage of sales was
the result of the decreased cost of materials as discussed above.
(4) SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses
increased by $708,905 from $ 4,371,566 for the year ended December 31, 2003 to
$5,080,471 for the year ended December 31, 2004. The selling and administrative
expenses as a percentage of sales increased by 10.31% from 34.99% for the year
ended December 31, 2003 to 45.29% for the year ended December 31, 2004. For the
Hotel and Food segment, the increase in selling and administrative expenses as a
percentage of sales is attributed to an increase in corporate expenses such as
water, fuel, electricity and promotion cost. The increase in lease expense was
caused by the leasing of restaurant space by YI WAN BEIJING, which began its
operation in July 2004. The increase in salaries and employee benefits was
caused by the downsizing of the telecommunication segment, in which severance
packages were provided to the laid-off employees.
(5) NET INCOME. Consolidated net income decreased by $904,773, or approximately
56.69%, from $1,595,924 for the year ended December 31, 2003 to $691,151 for the
year ended December 31, 2004. The decrease was mainly due to: (1) a decrease in
sales and increase in expenses related to our telecommunications business; and
(2) an increase in start up costs in the YI WAN BEIJING restaurant business.
SEGMENTED RESULTS
(1) SALES. An itemization of each operating unit's data and an explanation of
significant changes are as follows:
Hotel and Restaurant Business: Sales increased by $658,690, or
approximately 7.15%, from $9,216,576 for the year ended December 31, 2003 to
$9,875,266 for the year ended December 31, 2004. The increase was a result of a
new management team and an improvement in marketing strategies, such as offering
discount cards which can be used for various discounts in the restaurants, sauna
and night club, as well as for room discounts.
Telecommunications Business: Sales decreased by $1,937,159, or
approximately 59.08%, from $3,278,613 for the year ended December 31, 2003 to
$1,341,454 for the year ended December 31, 2004. This decrease was a direct
53
result of (1) our telecommunication operation being unsuccessful in developing
new products to bring to the market, and (2) a highly competitive industry. We
are in the process of evaluating our future plans for this business.
(2) COST OF GOODS SOLD. An itemization of each operating unit's data and an
explanation of significant changes are as follows:
Hotel and Restaurant Business: Cost of goods sold increased by $294,995,
from $2,939,163 for the year ended December 31, 2003 to $3,234,158 for the year
ended December 31, 2004. Cost of goods sold as a percentage of sales increased
by 0.86%, from 31.89% for the year ended December 31, 2003 to 32.75% for the
year ended December 31, 2004. The increase is attributed to an increase in our
cost of raw material due to an increase in prices for meat, eggs, vegetables and
rice in comparison to last year's prices. In addition, due to the positive
response to our discount cards in 2003, we have offered more discount cards to
customers in 2004 for use in the restaurants, sauna and nightclub as well as for
guest rooms.
Telecommunications Business: Cost of goods sold decreased by $903,934 from
$1,833,128 for the year ended December 31, 2003 to $929,194 for the year ended
December 31, 2004. Such decrease was due to the downsizing of production in the
fourth quarter of 2004 caused by the business downturn. However, cost of goods
sold as a percentage of sales increased to 69.27% for the year ended December
31, 2004 from 55.91% for the year ended December 31, 2003. The increase in cost
of goods sold as a percentage of sales was a result of an increase in the unit
cost of raw materials and a decrease in unit sales price of the products in 2004
as compared to 2003.
(3) GROSS PROFIT. An itemization of each operating unit's data and an
explanation of significant changes is as follows:
Hotel and Restaurant Business: Gross profit increased by $363,695 from
$6,277,413 for the year ended December 31, 2003 to $6,641,108 for the year ended
December 31, 2004. As a percentage of sales, gross profit decreased from 68.11%
for the year ended December 31, 2003 to 67.25% for the year ended December 31,
2004. The decrease in gross profit as a percentage of sales was due to an
increase in the cost of goods sold and increased promotional discounts as
explained above.
Telecommunications Business: Gross profit decreased by $1,033,225 from
$1,445,485 for the year ended December 31, 2003 to $412,260 for the year ended
December 31, 2004. As a percentage of sales, gross profit decreased from 44.09%
for the year ended December 31, 2003 to 30.73% for the year ended December 31,
2004. The decrease in gross profit as a percentage of sales was due to an
increase in the cost of materials and a decrease in sales.
(4) SELLING AND ADMINISTRATIVE EXPENSES. An itemization of each operating
unit's data and an explanation of significant changes are as follows:
Hotel and Restaurant Business: Selling and administrative expenses
increased by $379,530 from $3,699,563 for the year ended December 31, 2003 to
$4,079,093 for the year ended December 31, 2004. Selling and administrative
expenses as a percentage of sales increased to 41.31% for the year ended
December 31, 2004 from 40.14% for the year ended December 31, 2003. This
increase was a result of increases in various expenses including the start-up
costs of YI WAN BEIJING, salaries and employee benefits, electricity and show
expenses for the new performance center.
54
Telecommunications Business: Selling and administrative expenses decreased
by $195,014 from $672,003 for the year ended December 31, 2003 to $476,989 for
the year ended December 31, 2004. Selling and administrative expenses as a
percentage of sales increased to 35.56% for the year ended December 31, 2004 as
compared to 20.50% for the year ended December 31, 2003. The increase in selling
and administrative expenses as a percentage of sales was a result of a decrease
in sales.
(5) NET INCOME. An itemization of each operating unit's data and further
explanations of significant changes are as follows:
Hotel and Restaurant Business: Net income increased by $218,486 from
$1,239,668 or 13.45% of sales for the year ended December 31, 2003 to $1,458,154
or 14.77% of sales for the year ended December 31, 2004. The increase as a
percentage of sales was a result of a new management team and newly applied
marketing strategies.
Telecommunications Business: Net income decreased by $556,956, from
$495,144 for the year ended December 31, 2003 to a net loss of $61,812 for the
year ended December 31, 2004. The decrease was a result of a decrease in sales
and an increase in the unit cost of raw materials, as explained in the above
paragraphs.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2004, net cash provided by operating activities was
$3,268,023, net cash used in investing activities was $1,412,994, and net cash
used in financing activities was $47,431.
As of December 31, 2003, net cash provided by operating activities was
$2,599,614, net cash used in investing activities was $1,350,872, and net cash
used in financing activities was $18,054.
Net cash provided by operating activities increased by $668,409 from $2,599,614
for the year ended December 31, 2003 to $3,268,023 for the year ended December
31, 2004, representing a increase of approximately 25.7%. The increase was
mainly due to: (1) a decrease in temporary loan related to related parties; and
(2) an increase in net withdrawal of account receivables.
Net cash used in investing activities increased by $62,122 to $(1,412,994) for
the year ended December 31, 2004, representing a 4.6% increase compared with the
$(1,350,872) net cash used for the same period ended in 2003. The increase was
due to our investment in a new restaurant of $847,000 partially offset by a
decrease in spending on equipment upgrades and an increase in proceeds from
sales of equipments.
Net cash used in financing activities increased by $29,377 to $(47,431) for the
year ended December 31, 2004, representing a 162.7% increase, compared to
$(18,054) net cash used for the same period in 2003. The increase was primarily
due to the increases in payments to a shareholder and notes payable partially
offset by an increase of paid-in capital of YI WAN BEIJING.
Going forward, our primary requirements for cash consist of: (1) the continued
implementation of our Hotel and Telecommunications Divisions' existing business
model in China and general overhead and personnel related expenses to support
these activities; (2) continued promotional activities pertaining to our attempt
to increase hotel related revenues; (3) the development costs of our hotel
55
operations in China; (4) the payment of cash contributions to the joint ventures
under the joint venture agreements; and (5) payments due to the former equity
owners of our subsidiaries. We do not have any material commitments for capital
expenditures as of December 31, 2004. We anticipate that our current operating
activities will enable us to meet the anticipated cash requirements for the 2004
year. Our Jiaozuo Yi Wan hotel expects to open one restaurant in Zhengzhou City
and one restaurant in Beijing under our "Yi Wan" brand over the next three
years. Our Yi Wan Beijing Hotel Management Co., Ltd. expects to open four or six
restaurants under our new "Diyikou" brand fast-food chain in Beijing and
Shanghai over the next five years.
Historically, our subsidiary companies have financed operations principally
through cash generated from operations. Initial capital for the Hotel and
Restaurant business and Telecommunications business came from shareholders'
contributions and are as follows: Hotel and Restaurant business: $11,960,000;
and Telecommunications business: $1,580,000. No bank loans were obtained for the
Hotel and Restaurant or Telecommunications businesses. We have made capital
contributions to our subsidiaries and met the capital registration requirements.
An investment requirement we have yet to meet is the $4,932,273 due to joint
venture's former partners. The balance is to be funded from the profits
generated from the operations of the subsidiaries and, if necessary, equity
financing. There is no assurance, however, that equity financing can be obtained
for the above purposes. The joint venture's former partners extended the
September 2004 payment date to September 2005 for capital contributions. We
intend to fund the hotel and restaurant's capital improvements from the positive
cash flow generated from hotel operations.
MANAGEMENT ASSUMPTIONS
Management anticipates, based on internal forecasts and assumptions relating to
our operations that existing cash and funds generated from operations will be
sufficient to meet working capital and capital expenditure requirements for at
least the next 12 months. In the event that plans change, our assumptions change
or prove inaccurate or if other capital resources and projected cash flow
otherwise prove to be insufficient to fund operations (due to unanticipated
expense, technical difficulties, or otherwise), we could be required to seek
additional financing. There can be no assurance that we will be able to obtain
additional financing on terms acceptable to 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.
56
OFF-BALANCE SHEET ARRANGEMENTS
None.
REORGANIZATION OF OPERATION OF RESTAURANT BUSINESS
In order to expand our restaurant and food services and still be in compliance
with the regulations of the People's Republic of China ("PRC") with respect to
restaurant services, in July 2004, we established Yi Wan Beijing Hotel
Management Co. Ltd. ("Yi Wan Beijing"), a variable interest entity through two
persons who are PRC citizens and who each legally owned 50% of Yi Wan Beijing
("Yi Wan Beijing Interest Holders") to operate our restaurant business. Pursuant
to an Equity Trust Agreement, we transferred RMB100,000 to the Yi Wan Beijing
Interest Holders which was used to form and capitalize Yi Wan Beijing. The
Equity Trust Agreement provides that the Trustees are to hold the equity
interest in Yi Wan Beijing (the "Equity Interests") in trust for the benefit of
Yi Wan Group, Inc. The Yi Wan Beijing Interest Holders have agreed to not sell,
pledge, hypothecate, encumber or otherwise dispose of the Equity Interests. Any
such transfer will result in a breach of the Equity Trust Agreement and the Yi
Wan Beijing Interest Holders will be required to transfer the Equity Interest to
the Company. Further, the Yi Wan Beijing Interest Holders have agreed to
promptly distribute any and all dividends, distributions or other payments
received from Yi Wan Beijing with respect to the Equity Interest to the Company.
Finally, the Yi Wan Beijing Interest Holders granted irrevocable proxies to two
directors of the Company to exercise all voting rights such Yi Wan Beijing
Interest Holders have with respect to their ownership interest in Yi Wan
Beijing. The irrevocable proxies further provides that if such two directors
cease to be an employee of the Company, the Yi Wan Beijing Interest Holders
agree to immediately terminate the proxy and to grant a proxy to another person
designated by the Company.
CONTRACTUAL OBLIGATIONS
Table of Contractual Obligations
- --------------------------------------- -------------------------------------------------------
CONTRACTUAL OBLIGATIONS PAYMENT DUE BY PERIOD
- --------------------------------------- -------------------------------------------------------
LESS THAN 1-3 3-5 MORE THAN
TOTAL 1 YEAR YEARS YEARS 5 YEARS
- --------------------------------------- ----------- --------- --------- --------- ---------
Long-Term Debt Obligations None -- -- -- --
- --------------------------------------- ----------- --------- --------- --------- ---------
Capital Lease Obligations None -- -- -- --
- --------------------------------------- ----------- --------- --------- --------- ---------
Operating Lease Obligations 1 $ 127,711 $ 383,133 $ 138,354 --
- --------------------------------------- ----------- --------- --------- --------- ---------
Purchase Obligations None -- -- -- --
- --------------------------------------- ----------- --------- --------- --------- ---------
Other Long-Term Liabilities Reflected None -- -- -- --
on the Registrant's Balance Sheet
under GAAP
- --------------------------------------- ----------- --------- --------- --------- ---------
Total 1 $ 127,711 $ 383,133 $ 138,354 --
- --------------------------------------- ----------- --------- --------- --------- ---------
57
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
While our reporting currency is the U.S. dollar, to date virtually all of our
revenues and costs are denominated in Renminbi and a significant portion of our
assets and liabilities are denominated in Renminbi. As a result, we are exposed
to foreign exchange risk as our revenues and results of operations may be
impacted by fluctuations in the exchange rate between U.S. Dollars and Renminbi.
If the Renminbi depreciates against the U.S. Dollar, the value of our Renminbi
revenues and assets as expressed in our U.S. Dollar financial statements will
decline. We do not hold any derivative or other financial instruments that
expose us to substantial market risk.
The Renminbi is currently freely convertible under the "current account", which
includes dividends, trade and service-related foreign exchange transactions, but
not under the "capital account", which includes foreign direct investment. To
date, we have not entered into any hedging transactions in an effort to reduce
our exposure to foreign currency exchange risk. While we may decide to enter
into hedging transactions in the future, the effectiveness of these hedges may
be limited and we may not be able to successfully hedge our exposure at all.
Accordingly, we may incur economic losses in the future due to foreign exchange
rate fluctuations, which could have a negative impact on our financial condition
and results of operations.
58
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2004 and 2003, and the related consolidated
statements of income and other comprehensive income, shareholders' equity and
cash flows for each of the two years in the period ended December 31, 2004.
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 of the Public
Company Accounting Oversight Board (United States). 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. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting for a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. 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, 2004 and 2003, and the results of their
operations and their cash flows for each of the two years in the period ended
December 31, 2004, in conformity with U.S. generally accepted accounting
principles.
/s/ Moore Stephens Wurth Frazer and Torbet, LLP
March 21, 2005
Walnut, California
59
YI WAN GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2004 AND 2003
ASSETS
2004 2003
----------- -----------
CURRENT ASSETS:
Cash $ 5,173,440 $ 3,365,842
Accounts receivable, net of allowance for
doubtful accounts of $4,600 and $8,104
at December 31, 2004 and 2003, respectively 921,920 1,612,710
Due from related parties 1,366,789 3,599,133
Inventories 354,206 513,432
Prepaid expenses 69,667 55,308
----------- -----------
Total current assets 7,886,022 9,146,425
----------- -----------
BUILDINGS, EQUIPMENT AND AUTOMOBILES, net 17,107,229 18,002,661
----------- -----------
OTHER ASSETS:
Intangible asset, net 1,540,683 1,590,561
Equipment held for sale 258,359 529,750
Deposits 33,680 --
Deferred tax asset -- 31,718
Other non-current assets 235,745 369,075
Due from related parties 2,323,000 --
Restaurant investment 847,000 --
----------- -----------
Total other assets 5,238,467 2,521,104
----------- -----------
Total assets $30,231,718 $29,670,190
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 211,574 $ 327,862
Accounts payable - related party -- 56,540
Accrued liabilities 734,784 733,261
Wage and benefits payable 196,852 301,815
Sales tax payable 889,351 873,208
Income taxes payable 774,420 1,049,331
Due to shareholders 58,715 89,044
Due to prior owners of joint ventures 4,932,273 4,932,273
Notes payable 35,607 64,809
----------- -----------
Total current liabilities 7,833,576 8,428,143
----------- -----------
MINORITY INTEREST 2,024,000 1,843,198
----------- -----------
SHAREHOLDERS' EQUITY:
Common stock, no par value, 50,000,000
shares authorized, 16,861,250 and
16,506,250 shares issued and outstanding,
respectively 10,078 10,078
Paid-in-capital 5,575,188 5,115,222
Statutory reserves 11,371,353 10,655,821
Retained earnings 3,280,289 3,480,712
Accumulated other comprehensive income 137,234 137,016
----------- -----------
Total shareholders' equity 20,374,142 19,398,849
----------- -----------
Total liabilities and shareholders' equity $30,231,718 $29,670,190
=========== ===========
The accompanying notes are an integral part of this statement.
60
YI WAN GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
2004 2003
----------- -----------
NET SALES $11,216,720 $12,495,189
COST OF SALES 4,163,352 4,772,291
----------- -----------
GROSS PROFIT 7,053,368 7,722,898
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 5,080,471 4,371,566
----------- -----------
INCOME FROM OPERATIONS 1,972,897 3,351,332
----------- -----------
OTHER INCOME (EXPENSE):
Interest income 147,326 25,023
Other income (expense) (383,133) (485,582)
----------- -----------
Total other (expense), net (235,807) (460,559)
----------- -----------
INCOME FROM CONTINUING OPERATIONS BEFORE
PROVISION FOR INCOME TAXES AND
MINORITY INTEREST 1,737,090 2,890,773
PROVISION FOR INCOME TAXES 865,137 1,155,961
----------- -----------
INCOME BEFORE MINORITY INTEREST 871,953 1,734,812
MINORITY INTEREST (180,802) (138,888)
----------- -----------
NET INCOME 691,151 1,595,924
OTHER COMPREHENSIVE INCOME:
Foreign currency translation adjustment 218 66,421
----------- -----------
COMPREHENSIVE INCOME $ 691,369 $ 1,662,345
=========== ===========
EARNINGS PER SHARE, BASIC AND DILUTED $ 0.04 $ 0.10
=========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES 16,672,140 16,506,250
=========== ===========
The accompanying notes are an integral part of this statement.
61
YI WAN GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
Accumulated
other
compre-
Number Common Paid-in Statutory Retained hensive
of shares stock capital reserves earnings income Totals
---------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCE, January 1, 2003 16,506,250 $ 10,078 $ 5,109,656 $ 9,630,799 $ 2,909,810 $ 70,595 $17,730,938
Net income 1,595,924 1,595,924
Additions to paid-in-capital
(land use right) 5,566 5,566
Adjustment to statutory
reserves 1,025,022 (1,025,022) --
Foreign currency translation
adjustments 66,421 66,421
---------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCE, December 31, 2003 16,506,250 10,078 5,115,222 10,655,821 3,480,712 137,016 19,398,849
Net income 691,151 691,151
Additions to paid-in-capital
(land use right) 5,566 5,566
Registered capital of Yi Wan
Beijing 12,100 12,100
Stock issued for future
services 325,000 422,500 422,500
Deferred charge for future
services (176,042) (176,042)
Stock issued for consultant
services 30,000 19,800 19,800
Adjustment to statutory
reserves 715,532 (715,532) --
Foreign currency translation
adjustments 218 218
---------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCE, December 31, 2004 16,861,250 $ 10,078 $ 5,575,188 $11,371,353 $ 3,280,289 $ 137,234 $20,374,142
========== =========== =========== =========== =========== =========== ===========
The accompanying notes are an integral part of this statement.
62
YI WAN GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
2004 2003
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 691,151 $ 1,595,924
Adjustments to reconcile net income to cash
provided by operating activities:
Minority interest 180,802 138,888
Depreciation 1,388,156 1,456,348
Amortization 49,878 45,397
Amortization of consulting services 246,458 --
Loss on equipment disposals 115,697 493,157
Write down of equipment held for sale 202,344 --
Land use right 5,566 5,566
Deferred tax assets 31,718 150,326
Non-cash stock issuance for consulting
and legal fees 19,800 --
Translation adjustment 218 66,421
(Increase) decrease in assets:
Accounts receivable 690,790 (328,055)
Due from related parties (90,656) (1,912,629)
Inventories 159,226 54,619
Prepaid expenses (14,359) (10,482)
Deposits (33,680) --
Note receivable -- 1,217,579
Other non-current assets 159,950 (73,950)
Increase (decrease) in liabilities
Accounts payable (116,288) (42,239)
Accounts payable - related party (56,540) (30,877)
Accrued liabilities 1,523 (30,048)
Wages and benefits payable (104,963) 36,235
Sales tax payable 16,143 (2,302)
Income taxes payable (274,911) (230,264)
----------- -----------
Net cash provided by operating activities 3,268,023 2,599,614
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment 10,636 3,756
Purchase of buildings, equipment and automobiles (576,630) (1,354,628)
Restaurant investment (847,000) --
----------- -----------
Net cash used in investing activities (1,412,994) (1,350,872)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase to paid in capital (Yi Wan Beijing) 12,100 --
(Payments to) borrowings from shareholders (30,329) 244
Repayments on notes payable (29,202) (18,298)
----------- -----------
Net cash used in financing activities (47,431) (18,054)
----------- -----------
INCREASE IN CASH 1,807,598 1,230,688
CASH, beginning of year 3,365,842 2,135,154
----------- -----------
CASH, end of year $ 5,173,440 $ 3,365,842
=========== ===========
The accompanying notes are an integral part of this statement.
63
YI WAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND DESCRIPTION OF BUSINESS
Yi Wan Group, Inc. was incorporated under the laws of the State of Florida in
the United States in May 1999. Yi Wan Group, Inc. is authorized to issue
50,000,000 shares of no par value common stock and 20,000,000 shares of no par
value preferred stock. The Company's TELECOMMUNICATIONS, HOTEL and QINYANG
subsidiaries are incorporated under the laws of the People's Republic of China
(PRC).
The Company's subsidiaries are classified as Foreign Invested Enterprises (FIE)
in the PRC and are subject to the FIE laws of the PRC. The HOTEL and QINYANG are
Foreign Invested Enterprise Joint Ventures, known as FIEJV or Sino-foreign joint
venture, and TELECOMMUNICATIONS is a Wholly Foreign Owned Enterprise company or
WFOE. All three of these companies are Chinese registered limited liability
companies, with legal structures similar to regular corporations and limited
liability companies organized under state laws in the United States. The
respective Articles of Association for these FIE subsidiaries provide a 30-year
term for the HOTEL and QINYANG companies and 15 years for the
TELECOMMUNICATIONS.
The People's Republic of China (PRC) regulations prohibit direct foreign
ownership of business entities providing food and restaurant services in the PRC
in which certain licenses are required for the provision of such services. The
Company and its subsidiaries are foreign or foreign invested enterprises under
PRC law and accordingly are ineligible for a license to operate restaurants and
food services. In order to expand the Company's restaurant and food services and
still be in compliance with these regulations, in July 2004, the Company
established YI WAN BEIJING Hotel Management Co., Ltd. (YI WAN BEIJING), a
variable interest entity, through two designated shareholders (Mr. Cheng Wan
Ming is the Company's president and Chairman of the Board and Mr. Chen Wanqing
is a member of the Board of Directors of the Company) who are PRC citizens and
legally own YI WAN BEIJING ("Yi Wan Beijing Interest Holders") to operate the
restaurant business. Pursuant to an Equity Trust Agreement, the Company
transferred RMB 100,000 to the YI WAN BEIJING (the" Equity Interests") in trust
for the benefit of the Company. The Yi Wan Beijing Interest Holders have agreed
to not sell, pledge, hypothecate, encumber or otherwise dispose of the Equity
Interests. Any such transfer will result in a breach of the Equity Trust
Agreement and the Yi Wan Beijing Interest Holders will be required to transfer
the Equity Interest to distribute any and all dividends, distributions or other
payments received from YI WAN BEIJING with respect to the Equity Interest to the
Company. Finally, the Yi Wan Beijing Interest Holders granted irrevocable
proxies to two directors of the Company to their ownership interest in YI WAN
BEIJING. The irrevocable proxies further provide that if such two directors
cease to be employees of the Company, the Yi Wan Beijing Interest Holders agree
to immediately terminate the proxy and to grant a proxy to another person
designated by the Company. Yi Wan Group, Inc. is the primary beneficiary of YI
WAN BEIJING business operations and qualifies to be consolidated under FIN
46(R).
64
YI WAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
(CONTINUED)
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 and a variable
interest entity, which are as follows:
Percentage
Subsidiaries Ownership
- ----------------------------------------------------------- ----------
Shun De Yi Wan Communication Equipment
Plant Co., Ltd. (TELECOMMUNICATIONS) 100%
Jiao Zuo Yi Wan Hotel Co., Ltd. (HOTEL) 90%
Qinyang Yi Wan Hotel Co., Ltd. (QINYANG) 80%
Variable interest entity
- ----------------------------------------------------------
Yi Wan Beijing Hotel Management Co., Ltd. (YI WAN BEIJING)
BASIS OF PRESENTATION
The financial statements represent the activities of Yi Wan Group, Inc. and its
subsidiaries and variable interest entity. The consolidated financial statements
of YWG include its subsidiaries HOTEL, TELECOMMUNICATIONS, QINYANG and its
variable interest entity, YI WAN BEIJING. All significant inter-company accounts
and transactions have been eliminated in the consolidation.
RECLASSIFICATIONS
Certain comparative amounts have been reclassified to conform with the current
year's presentation.
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.
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
65
YI WAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
(CONTINUED)
FOREIGN CURRENCY TRANSLATION, (CONTINUED)
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.
REVENUE RECOGNITION
The HOTEL's, QINYANG's and YI WAN BEIJING's revenues are recognized when the
rooms are occupied or when the guests utilize the services of the hotel and
restaurant.
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.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred and are included in
selling, general and administrative expenses in the accompanying consolidated
financial statements. Research and development costs primarily consist of
efforts to develop new products for TELECOMMUNICATIONS.
ADVERTISING COSTS
Advertising costs are expensed as incurred and are included in selling, general
and administrative expenses in the accompanying consolidated financial
statements.
NATURE OF OPERATIONS AND CONCENTRATION OF RISK
The HOTEL is a four-star rated hotel located in the center 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, 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.
66
YI WAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
(CONTINUED)
NATURE OF OPERATIONS AND CONCENTRATION OF RISK, (CONTINUED)
The TELECOMMUNICATIONS 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. In October 2004, management decided to reevaluate the business
strategies of the TELECOMMUNICATIONS. Meanwhile, TELECOMMUNICATIONS downsized
its operational work force and placed a hold on purchasing and manufacturing.
Production is expected to continue once management decides on a new business
plan.
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.
YI WAN BEIJING is a restaurant management company established on July 22, 2004
through two designated shareholders of Yi Wan Group, Inc. Yi Wan Group, Inc.,
owning 100% of the equity interests of YI WAN BEIJING, is the primary
beneficiary of this company's business operations and qualifies to be
consolidated under FIN 46R. The restaurant managed by YI WAN BEIJING serves Hong
Kong style fast foods and is located in the city of Beijing, People's Republic
of China. The expiration date of the business license of YI WAN BEIJING is July
22, 2024.
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, 2004 and 2003
amounted to $1,388,156 and $1,456,348 respectively. Estimated useful lives of
the assets are as follows:
67
YI WAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
(CONTINUED)
BUILDINGS, EQUIPMENT AND AUTOMOBILES, (CONTINUED)
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, 2004, the Company expects these assets to be
fully recoverable.
Buildings, equipment and automobiles consist of the following at December 31:
2004 2003
----------- -----------
Buildings and improvements $22,008,539 $21,603,579
Furniture and equipment 5,031,988 4,968,773
Automobiles 246,724 303,234
Construction in progress 69,504 49,681
----------- -----------
Totals 27,356,755 26,925,267
Less accumulated depreciation 10,249,526 8,922,606
----------- -----------
Buildings, equipment and
automobiles, net $17,107,229 $18,002,661
=========== ===========
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued Interpretation No. 46, CONSOLIDATION OF
VARIABLE INTEREST ENTITIES, AN INTERPRETATION OF ARB NO. 51 (FIN No. 46), which
requires the consolidation of certain variable interest entities, as defined.
FIN No. 46 is effective immediately for variable interest entities created after
January 31, 2003, and on July 1, 2003 for investments in variable interest
68
YI WAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
(CONTINUED)
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS, (CONTINUED)
entities acquired before February 1, 2003; however, disclosures are required
currently if a company expects to consolidate any variable interest entities.
The Company has adopted the consolidation and disclosure requirements of FIN 46
to include YI WAN BEIJING, a variable interest entity, on its financial
statements in 2004.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative instruments and Hedging Activities" ("SFAS No. 149"). SFAS No. 149
amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities under SFAS No. 133 "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 149 is effective for
contracts entered into or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003. The adoption of this statement did
not have a significant impact on the financial condition or results of
operations of the Company.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." SFAS No. 150
changes the accounting for certain financial instruments that, under previous
guidance, issuers could account for as equity. FASB No. 150 requires that those
instruments entered into or modified after May 31, 2002, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. The adoption of this statement is not expected to have a material impact
on the financial condition or results of operations of the Company.
In March 2004, the FASB issued EITF Issue No. 03-1, THE MEANING OF
OTHER-THAN-TEMPORARY IMPAIRMENT AND ITS APPLICATION TO CERTAIN INVESTMENTS. EITF
03-1 includes new guidance for evaluating and recording impairment losses on
debt and equity investments, as well as new disclosure requirements for
investments that are deemed to be temporarily impaired.
In September 2004, the FASB issued Staff Position EITF 03-1-1, which delays the
effective date until additional guidance is issued for the application of the
recognition and measurement provisions of EITF 03-1 to investments in securities
that are impaired; however, the disclosure requirements are effective for annual
periods ending after June 15, 2004. Although the Company will continue to
evaluate the application of EITF 03-1, management does not currently believe
adoption will have a material impact on the Company's financial position or
results of operations.
In November 2004, the FASB issued SFAS No. 151, INVENTORY COSTS, an amendment of
ARB No. 43, Chapter 4. This statement amends the guidance in ARB No. 43, Chapter
4, Inventory Pricing, to clarify the accounting for abnormal amounts of idle
facility expense, freight, handling costs, and wasted material (spoilage).
Paragraph 5 of ARB No. 43, Chapter 4, previously stated that "...under some
circumstances, items such as idle facility expense, excessive spoilage, double
69
YI WAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
(CONTINUED)
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS, (CONTINUED)
freight, and re-handling costs may be so abnormal as to require treatment as
current period charges..." SFAS No. 151 requires that those items be recognized
as current-period charges regardless of whether they meet the criterion of "so
abnormal." In addition, this statement requires that allocation of fixed
production overhead to the costs of conversion be based on the normal capacity
of the production facilities.
The provisions of SFAS 151 shall be applied prospectively and are effective for
inventory costs incurred during fiscal years beginning after June 15, 2005, with
earlier application permitted for inventory costs incurred during fiscal years
beginning after the date this Statement was issued. The Company's adoption of
SFAS No. 151 is not currently expected to have a material impact on the
Company's financial position or results of operations.
In December 2004, the FASB issued SFAS No. 123(R) (revised 2004), "Share-Based
Payment", which amends FASB Statement No. 123 and will be effective for public
companies for interim or annual periods beginning after June 15, 2005. The
revised standard requires, among other things that compensation cost for
employee stock options be measured at fair value on the grant date and charged
to expense over the employee's requisite service period for the option. Due to
the absence of observable market prices for employee stock options, the standard
indicates that the fair value of most stock options will be determined using an
option-pricing model. The Company's adoption of SFAS No. 123(R) is not currently
expected to have a material impact on the Company's financial position or
results of operations.
In December 2004, the FASB issued SFAS No. 153, EXCHANGES OF NONMONETARY ASSETS,
AN AMENDMENT OF APB OPINION NO. 29. The guidance in APB Opinion No. 29,
ACCOUNTING FOR NONMONETARY TRANSACTIONS, is based on the principle that
exchanges of nonmonetary assets should be measured based on the fair value of
assets exchanged. The guidance in that Opinion, however, included certain
exceptions to that principle. This Statement amends Opinion 29 to eliminate the
exception for nonmonetary exchanges of similar productive assets that do not
have commercial substance. A nonmonetary exchange has commercial substance if
the future cash flows of the entity are expected to change significantly as a
result of the exchange. SFAS No. 153 is effective for nonmonetary exchanges
occurring in fiscal periods beginning after June 15, 2005. The Company's
adoption of SFAS No. 153 is not expected to have a material impact on the
Company's financial position or results of operations.
CASH AND CONCENTRATIONS AND RISKS
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, 2004 and 2003 amounted to $5,095,153 and
$3,365,842, 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.
70
YI WAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
(CONTINUED)
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:
2004 2003
-------- --------
HOTEL and QINYANG inventories $206,473 $210,728
YI WAN BEIJING inventories 2,634 --
TELECOMMUNICATIONS inventories 145,099 302,704
-------- --------
Total inventories $354,206 $513,432
======== ========
The HOTEL, QINYANG, and YI WAN BEIJING inventories consist of food products,
alcohol, beverages and supplies.
The TELECOMMUNICATIONS inventories consist of the following at December 31:
2004 2003
-------- --------
Raw materials $ 60,426 $ 80,583
Work in process 39,527 103,339
Finished goods 45,146 118,782
-------- --------
Total inventories $145,099 $302,704
======== ========
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.
71
YI WAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
(CONTINUED)
INTANGIBLE ASSETS, (CONTINUED)
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, 2004 and 2003 amounted to $49,878 and $45,397,
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, 2004 and 2003
amounted to $5,566 and $5,566, respectively.
INCOME TAXES
YWG uses the asset and liability method which 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. There were no deferred items as of
December 31, 2004 and a deferred tax asset of $31,718 as at December 31, 2003
related to expenses deducted for financial statements purposes but 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 TELECOMMUNICATIONS and QINYANG are subject to a central government income
tax at a rate of 30% and 3% provincial government income tax.
YI WAN BEIJING is also 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:
72
YI WAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
(CONTINUED)
INCOME TAXES, (CONTINUED)
2004 2003
---------- ----------
Provision for China Income Tax $ 786,488 $ 914,214
Provision for China Local Tax 78,649 91,421
Deferred taxes -- 150,326
---------- ----------
Total provision for income taxes $ 865,137 $1,155,961
========== ==========
Certain revenues of the HOTEL, TELECOMMUNICATIONS, QINYANG, and YI WAN BEIJING
operations are subject to sales and cultural taxes ranging from 3% to 10%. This
tax is shown as a reduction of sales.
The following table reconciles the U.S. statutory rates to the Company's
effective tax rate:
2004 2003
---------- ----------
U.S. Statutory rates 34% 34%
Foreign income not recognized in U.S. (34) (34)
China Income taxes 33 33
---------- ----------
Effective tax rate 33% 33%
========== ==========
EARNINGS PER SHARE
The Company 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, 2004 and 2003. The weighted average number
of shares used to calculate EPS for years ended December 31, 2004 (16,672,140)
and 2003 (16,506,250) reflect only the shares outstanding for those periods.
Weighted average number of shares outstanding as of December 31, 2004 is
computed as follows:
73
YI WAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL INFORMATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
(CONTINUED)
EARNINGS PER SHARE, (CONTINUED)
Dates Shares Weighted -
Outstanding Outstanding Days Average Shares
- ----------------------------------- ----------- ---- ---------------
Year - 2004
- -----------------------------------
January 1 - December 31 16,506,250 365 6,024,781,250
June 30 - December 31 325,000 184 59,800,000
December 7 - December 31 30,000 25 750,000
---- ---------------
Totals 365 6,085,331,250
==== ===============
Weighted-average shares - Year 2004 16,672,140
===============
MINORITY INTEREST
Minority interest represents the outside shareholders' 10% ownership of the
common stock of Jiao Zuo Yi Wan Hotel Co., Ltd. and 20% of the common stock of
Qinyang Yi Wan Hotel Co., Ltd.
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:
2004 2003
---------- ----------
Notes payable to various
vendors, unsecured, due on
demand, no interest $ 35,607 $ 64,809
========== ==========
NOTE 3 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Income taxes paid amounted to $1,108,494 and $1,235,899 for the years ended
December 31, 2004 and 2003, respectively. No interest expense payments were made
for the years ended December 31, 2004 and 2003.
NON CASH TRANSACTION
The Company issued 325,000 shares of common stock valued at $422,500 for
consulting services and issued 30,000 shares of common stock valued at $19,800
as further described in Note 13.
74
YI WAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 - CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
The following is a description of the various individuals and companies
discussed in the footnotes and their relationship to the Company.
Shun'ao Industry and Commerce Company (Shun'ao) - a company established under
the laws of PRC owns 10% of HOTEL, and is owned 41.7% by Cheng Wan Ming.
Marco Wan Da Construction (Marco) - a company established under the laws of
Macao, is owned 51% by Wu Zeming and 49% by Cheng Manli.
City of Qin Yang Local Government - owns 20% of QINYANG
Cheng Wan Ming - individual - president, owns 61.1% of YWG and 41.7% of Shun'ao
Industry and Commerce Company.
Wu Zeming - individual - director, owns 6.3% of YWG and 51% of Marco Wan Da
Construction.
Cheng Manli - individual - director, owns 2.6% of YWG and 49% of Marco Wan Da
Construction.
DUE FROM RELATED PARTIES
The Company classified as due from related parties at December 31, 2004 and 2003
amounted to $3,689,789 and $3,599,133, respectively. The detail of due from
related parties is as follows:
75
YI WAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS, (CONTINUED)
DUE FROM RELATED PARTIES, (CONTINUED)
2004 2003
---------- ----------
Shun'ao Industry and Commerce Company $ 158,210 $ 118,900
Marco Wan Da Construction 3,471,079 3,480,233
City of Qin Yang Local Government 60,500 --
---------- ----------
Total 3,689,789 3,599,133
Less current portion 1,366,789 3,599,133
---------- ----------
Non-current portion $2,323,000 $ --
========== ==========
A portion of the receivables from Shun'ao and Marco are generated from the
Company making cash advances to purchase supplies, inventories and other goods
on behalf of Shun'ao and Marco. These transactions are re-occurring in nature.
Due to there short term nature the Company does not charge interest on these
receivables and they are included in the current portion of the receivable.
The receivable from the City of Qin Yang Local Government is generated from the
Company making various cash advances and the allocation of various expenses to
the City of Qin Yang. Due to the short term nature the Company does not charge
interest on this receivable and it is included in the current portion of the
receivable.
During 2003, the Company advanced Marco $2,323,000 to pay for general operating
expenses. The Company expected to be repaid this amount during 2004, thus this
amount was classified as a current asset and no interest was being charged on
this amount. As of December 31, 2004, the Company has not been repaid and is
currently negotiating with Marco for repayment of the funds. The Company has
reclassified this amount as non-current since no payment terms or interest terms
have been determined.
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 34%
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 YI WAN BEIJING employees due to their non-permanent status. For the years
ended December 31, 2004 and 2003, YWG made pension contributions in the amount
of $78,452 and $44,201, respectively.
76
YI WAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - OTHER NON-CURRENT ASSETS
Other non-current assets represents cash advances to officers and employees for
cash based business transactions incurred for the payments of operating expenses
and purchases from various vendors.
NOTE 9 - RESTAURANT INVESTMENT
The restaurant investment of $847,000 represents funds advanced from HOTEL to an
individual, on behalf of the Company, to set up a luxury restaurant located in
Zhenzhou City, the Capital of Henan Province of P.R.China. The People's Republic
of China (PRC) regulations prohibit direct foreign ownership of business
entities providing food and restaurant services in the PRC in which certain
licenses are required for the provision of such services. The Company and its
subsidiaries are foreign or foreign invested enterprises under PRC law and
accordingly are ineligible for a license to operate restaurants and food
services. In order to expand the Company's restaurant and food services and
still be in compliance with these regulations, the Company will establish a
variable interest entity with the same structure of YI WAN BEIJING Hotel
Management Co., Ltd. (YI WAN BEIJING), a variable interest entity which was
established in 2004.
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.
Consolidated statutory reserves at December 31, 2004 and 2003 amounted to
$11,371,353 and $10,655,821, respectively. No other dividends or distributions
were declared to the owners for the years ended December 31, 2004 and 2003.
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, 2004 and 2003.
77
YI WAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2004 and 2003, 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.
2004 2003
---------- ----------
Payment due for acquisition 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 QINYANG 2,040,989 2,040,989
Payment due to Shun'ao for return of investment 173,991 173,991
---------- ----------
Totals $4,932,273 $4,932,273
========== ==========
NOTE 12 - HOTEL BOWLING OPERATIONS CEASED
The HOTEL ceased its bowling operations at the end of September 2003. The
Company has sold a portion of the equipment in 2004 and 2003 and recognized a
loss of $59,440 and $493,157 on the portions sold, respectively. In addition,
management of the HOTEL wrote down the remaining bowling equipment by
approximately $202,000 in 2004. Management of the HOTEL is continuing the
process of finding a suitable buyer for the remaining equipment and believes
that the current carrying value is not greater than its expected selling price
less costs to sell. As of December 31, 2004 and 2003, the carrying value of the
equipment held for sale is $258,359 and $529,750, respectively.
NOTE 13 - YI WAN BEIJING OPERATIONS
The People's Republic of China ("PRC") regulations prohibit direct foreign
ownership of business entities providing food and restaurant services in the PRC
which certain licenses are required for the provision of such services. The
Company and its subsidiaries are foreign or foreign invested enterprises under
PRC law and accordingly are ineligible for a license to operate restaurants and
food services. In order to expand our restaurant and food services and still be
in compliance with these regulations, in July 2004, the Company established YI
WAN BEIJING Restaurants Management Ltd. ("YI WAN BEIJING"), a variable interest
entity through two persons who are PRC citizens and who each legally owned 50%
of YI WAN BEIJING ("YI WAN BEIJING Interest Holders") to operate our restaurant
business. Pursuant to an Equity Trust Agreement, we transferred RMB$100,000 to
the YI WAN BEIJING Interest Holders which was used to form and capitalize YI WAN
BEIJING. The Equity Trust Agreement provides that the Trustees are to hold the
equity interest in YI WAN BEIJING (the "Equity Interests") in trust for the
benefit of Yi Wan Group, Inc. The YI WAN BEIJING Interest Holders have agreed to
not sell, pledge, hypothecate, encumber or otherwise dispose of the Equity
78
YI WAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - YI WAN BEIJING OPERATIONS, (CONTINUED)
Interests. Any such transfer will result in a breach of the Equity Trust
Agreement and the YI WAN BEIJING Interest Holders will be required to transfer
the Equity Interest to the Company. Further the YI WAN BEIJING Interest Holders
have agreed to promptly distribute any and all dividends, distributions or other
payments received from YI WAN BEIJING with respect to the Equity Interest to the
Company. Finally, the YI WAN BEIJING Interest Holders granted irrevocable
proxies to two directors of the Company to exercise all voting rights such YI
WAN BEIJING Interest Holders have with respect to their ownership interest in YI
WAN BEIJING. The irrevocable proxies further provides that if such two directors
cease to be an employee of the Company, the YI WAN BEIJING Interest Holders
agree to immediately terminate the proxy and to grant a proxy to another person
designated by the Company.
NOTE 14 - COMMITMENTS AND CONTINGENCIES
YI WAN BEIJING leases its facilities under long term, non-cancelable operating
lease agreements expiring through January 2010. The facilities include spaces
for the restaurant and housing for employees. The non-cancelable operating lease
agreements provide that the Company pays certain operating expenses applicable
to the leased premises.
Total rent expense for the year ended December 31, 2004 amounted to $73,319. As
of December 31, 2004, the future minimum annual lease payments required under
the operating leases for the next five years are as follows:
Year Ending December 31,
2005 $ 127,711
2006 127,711
2007 127,711
2008 127,711
2009 127,711
Thereafter 10,643
NOTE 15 - CONSULTANT STOCK PLAN
On December 6, 2004, the Company adopted a Consultant Stock Plan. The purpose of
this plan is to attract, retain and motivate eligible persons whose current and
potential contributions are important to the success of the Company by offering
them an opportunity to participate in the Company's future performance through
awards of stock. A total of 500,000 shares of common stock have been registered
with the Securities and Exchange Commission under this plan.
On December 7, 2004, the Company issued 30,000 shares to non-employee
consultants at US$0.66 per share. The total shares were valued at $19,800, the
closing price of the stock at the date the shares were issued.
79
YI WAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - CONSULTANT STOCK PLAN, (CONTINUED)
The Company accounts for its employee stock option grants in accordance with the
fair value provisions of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123). SFAS 123 established a
fair-value-based method of accounting for stock-based compensation plans.
Pursuant to the transition provisions of SFAS 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure" (SFAS 148), the Company has elected
the modified prospective method and will apply the fair value method of
accounting to all equity instruments issued to employees.
Compensation expense related to stock options granted to non-employees is
accounted for under Statement of Financial Accounting Standards No. (SFAS) 123,
"Accounting for Stock-Based Compensation" and Emerging Issues Task Force ( EITF)
96-18, "Accounting for Equity Instruments that are Issued to Other than
Employees for Acquiring, or in conjunction with Selling, Goods, or Services,"
which require entities to recognize an expense, based on the fair value of the
related awards. As of December 31, 2004, total stock compensation to
non-employees has amounted to $266,258.
NOTE 16 - STOCK ISSUANCE
The Company has entered into two consulting agreements with individuals to
provide business and financial consulting services. These agreements expire May
31, 2005 and June 15, 2005. The Company has agreed to issue a total of 325,000
shares of no par value common stock pursuant to a Form S-8 in exchange for their
services. The 325,000 shares of common stock have been recorded at $1.30 per
share or $422,500 based upon the trading price of the shares at June 30, 2004.
The Company has recorded a deferred charge to shareholders' equity which
represents the future consulting services to be rendered. The Company is
amortizing the consulting services over one year using the straight line method
which amounted to $246,458 for the period ending December 31, 2004. The 325,000
shares of common stock were issued to the consultants in July 2004.
On December 7, 2004, the Company issued 30,000 shares to a consultant for legal
services rendered under the Consultant Stock Plan for 2004. The 30,000 shares of
common stock have been recorded at $0.66 per share or $19,800 based upon the
trading price of the shares at the time of issuance. The Company recorded
$19,800 expense at December 7, 2004.
NOTE 17 - SEGMENT INFORMATION
The Company aligned 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:
80
YI WAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - SEGMENT INFORMATION, (CONTINUED)
HOTEL
--------------------------------------------------- Yi Wan Inter-
Entertain- Telecommu- Beijing segment
Restaurant Lodging ment Subtotals nication restaurant elimination Totals
----------- ----------- ----------- ------------ ----------- ---------- ----------- -----------
2004
- ----
Net sales $ 5,348,445 $ 2,445,390 $ 1,936,510 $ 9,730,345 $ 1,341,454 $ 144,921 $ $11,216,720
Cost of sales 2,700,018 170,165 274,266 3,144,449 929,194 89,709 4,163,352
----------- ----------- ----------- ------------ ----------- ---------- ----------- -----------
Gross profit 2,648,427 2,275,225 1,662,244 6,585,896 412,260 55,212 7,053,368
Operating expenses 676,708 345,067 561,858 1,583,633 339,464 147,538 2,070,635
Depreciation and
amortization 1,298,863 137,525 1,646 246,458 1,684,492
Unallocated expenses 990,679 56,734 1,047,413
Corporate expenses 277,931 277,931
----------- ----------- ----------- ------------ ----------- ---------- ----------- -----------
Income from operations $ 1,971,719 $ 1,930,158 $ 1,100,386 2,712,721 (64,729) (150,706) (524,389) 1,972,897
=========== =========== ===========
Interest income 130,157 17,008 161 147,326
Other income (expense) (316,023) (14,091) (53,019) (383,133)
Provision for income tax (865,137) (865,137)
------------ ----------- ---------- ----------- -----------
Income before minority
interest $ 1,661,718 $ (61,812) $ (203,564) $ (524,389) $ 871,953
============ =========== ========== =========== ===========
Total assets $26,572,863 $ 6,129,409 $ 160,484 $(2,631,038) $30,231,718
============ =========== ========== =========== ===========
81
YI WAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - SEGMENT INFORMATION, (CONTINUED)
HOTEL
--------------------------------------------------- Yi Wan Inter-
Entertain- Telecommu- Beijing segment
Restaurant Lodging ment Subtotals nication restaurant elimination Totals
----------- ----------- ----------- ------------ ----------- ---------- ----------- -----------
2003
- ----
Net sales $ 4,974,215 $ 2,439,298 $ 1,803,063 $ 9,216,576 $ 3,278,613 $ $ $12,495,189
Cost of sales 2,538,327 179,923 220,913 2,939,163 1,833,128 4,772,291
----------- ----------- ----------- ------------ ----------- ---------- ----------- -----------
Gross profit 2,435,888 2,259,375 1,582,150 6,277,413 1,445,485 7,722,898
Operating expenses 619,177 336,487 372,356 1,328,020 650,028 1,978,048
Depreciation and
amortization 1,313,896 21,975 1,335,871
Unallocated expenses 1,057,647 1,057,647
Corporate expenses
----------- ----------- ----------- ------------ ----------- ---------- ----------- -----------
Income from operations $ 1,816,711 $ 1,922,888 $ 1,209,794 2,577,850 773,482 3,351,332
=========== =========== ===========
Interest income 13,991 11,032 25,023
Other income (expense) (485,582) -- (485,582)
Provision for income tax (866,591) (289,370) (1,155,961)
------------ ----------- ---------- ----------- -----------
Income before minority
interest $ 1,239,668 $ 495,144 $ $ $ 1,734,812
============ =========== ========== =========== ===========
Total assets $24,667,327 $6,837,457 $ $(1,834,594) $29,670,190
============ =========== ========== =========== ===========
82
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.
ITEM 9A. CONTROLS AND PROCEDURES
With the participation of management, our Chief Executive Officer and Chief
Financial Officer evaluated our disclosure controls and procedures within the 90
days preceding the filing date of this annual report. Based upon this
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures are effective in ensuring that
material information required to be disclosed is included in the reports that we
file with the Securities and Exchange Commission.
There were no significant changes in our internal control over financial
reporting to the knowledge of our management, or in other factors that have
materially affected or are reasonably likely to materially affect these internal
controls over financial reporting subsequent to the evaluation date.
PART III
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, 2005, are as follows:
Current Term
Name Age Position Held Since To Expire
- ------------------- --- ------------------------------- -------------- ------------
Cheng Wan Ming 44 Chairman of the Board and May 1999 March 2008
President
You Yingliu 64 Director and Vice-President May 1999 March 2008
Luo Guanying 59 Director and Vice-President May 1999 March 2008
Liang Xiaogen 58 Director May 1999 March 2008
Wu Zeming 53 Chief Financial Officer, Chief May 1999 March 2008
Accounting Officer and Director
Cheng Manli 42 Director May 1999 March 2008
Cen Minhong 43 Director May 1999 March 2008
Cheng Wanqing 36 Director May 1999 March 2008
Cheng Deqiang 72 Director May 1999 March 2008
The names and ages of Jiaozuo Yi Wan Hotel's executive officers and directors as
of March 31, 2005, are as follows:
83
Current Term
Name Age Position Held Since To Expire
- ------------------- --- ------------------------------- -------------- ------------
Cheng Wan Ming 44 Chairman of the Board and December 1996 January 2006
President
Chen Hong 40 Vice-Chairman of Board January 2003 January 2006
Wu Zeming 53 Director December 1996 January 2006
You Yingliu 64 Director December 1996 January 2006
Cen Minhong 43 Director December 1996 January 2006
Cheng Manli 42 Director December 1996 January 2006
He Lei 38 Director December 1996 January 2006
The names and ages of our telecommunications company's executive officers and
directors as of March 31, 2005, are as follows:
Current Term
Name Age Position Held Since To Expire
- ------------------- --- ------------------------------- -------------- ------------
Cheng Wan Ming 44 Chairman of the Board and September 1993 March 2006
President
Wu Zeming 53 Vice-Chairman of Board September 1993 March 2006
You Yingliu 64 Director September 1993 March 2006
Luo Guanying 59 Director September 1993 March 2006
He Lei 38 Director April 2000 March 2006
The names and ages of Qinyang Yi Wan Hotel's executive officers and directors as
of March 31, 2005, are as follows:
Current Term
Name Age Position Held Since To Expire
- ------------------- --- ------------------------------- -------------- ------------
Cheng Wan Ming 44 Chairman of the Board March 2001 March 2007
Guo Ruxing 43 Vice-Chairman of the Board March 2001 March 2007
Huang Peng 30 Director and General Manager January 2004 January 2007
You Yingliu 64 Director January 2004 January 2007
Chen Hong 40 Director March 2001 March 2007
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 Telecommunications
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
84
our Jiaozuo Yi Wan 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 former agriculture company in January 1997 and served as its
Chairman of the Board and President from January 1997 until 2002. Mr. Wan Ming
joined our Qinyang Yi Wan hotel company in March 2001 and has served as its
Chairman of the Board of Directors and President from March 2001 until present.
Before September 1993, Mr. Wan Ming was President of Shun'ao 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. Since July 12 2004, Mr.
Yingliu has been a Vice-General Manager of Jiaozuo Yi Wan hotel. Mr. Yingliu
joined our former agriculture company in January 1997. From January 1997 to
2002, Mr. Yingliu was a Director and Vice-President of our former agriculture
company. Since January 2004, Mr. Yingliu has been a Director of our Qinyang Yi
Wan hotel.
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
former agriculture company from January 1997 until January 2000. Ms. Guanying
also is presently a Vice-President of Shun'ao 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 Jiaozuo Yi Wan hotel company. In January 1997, Mr. Xiaogen
became a Director of our former 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
and a 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 Jiaozuo hotel company. Mr. Zeming has also served as
a Director of our former agriculture company from January 1997 to 2002. 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
85
our Jiaozuo Yi Wan hotel company since December 1996. Ms. Manli was also a
Director of our former agriculture company from January 1997 to 2002. Since June
1991, Ms. Manli has been a Director 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 was
also a Director of our former agriculture company from January 1997 until 2002.
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 former
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 Shun'ao 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.
Ms. He Lei has been a Director of our hotel company since January 2000. Ms. Lei
was also a Director of our former agriculture company from January 2000 until
2002. 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.
Mr. Chen Hong has been a manager of our Jiaozuo Yi Wan hotel company since
August 1996. In January 2003, Mr. Chen Hong became the Vice Chairman of the
Board of Directors and the Vice General Manager of our Jiaozuo Yi Wan hotel
company. In March 2001, Mr. Chen Hong became the Director of our Qinyang Yi Wan
Hotel company. Previously, between November 1989 and May 1996, Mr. Chen Hong was
a department manager of the Tengfei Hotel of Jiaozuo City, Henan province. Mr.
Chen Hong received a bachelor degree from Jiaozuo University in Henan province.
Mr. Huang Peng has been a manager of our Jiaozuo Yi Wan hotel company since July
1997. In January 2004, Mr. Huang Peng became the Director and General Manager of
our Qinyang Yi Wan hotel company. Previously, between August 1994 and May 1997,
Mr. Huang Peng was a department manager of Yueshan Branch Office of Zhengzhou
Railway Bureau, Henan province. Mr. Huang Peng received a bachelor degree from
Henan Normal School.
86
Mr. Guo Ruxing has been the Vice Chairman of the Board of our Qinyang Yi Wan
hotel company since March 2001. Previously, between June 1993 and August 1998,
Mr. Guo Ruxing was a department manager of the Government Office of Qinyang
City, Henan province. Mr. Guo Ruxing has been the General Manager of the Qinyang
Yi Wan hotel since September 1998. Mr. Guo Ruxing received a bachelor degree
from Henan Yuxi Agriculture School.
AUDIT COMMITTEE FINANCIAL EXPERT
We do not have an audit committee financial expert. We were not able to identify
a suitable nominee and our management is currently diligently pursuing such a
candidate.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires our officers and
directors, and persons who own more than ten percent of a registered class of
our equity securities, to file reports of ownership and changes in ownership
with the Securities and Exchange Commission. Officers, directors and
greater-than-ten-percent shareholders are required by SEC regulation to furnish
us with copies of all Section 16(a) forms they file. Based solely upon our
review of any such reports furnished to us, we believe that during the year
ended December 31, 2004, such persons made all required filings.
CODE OF ETHICS
We have adopted a code of ethics that applies to our principal executive
officer, principal financial officer or persons performing similar functions.
Our code of ethics is exhibited to this annual report on Form 10-K as Exhibit
14.1.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth summary information concerning the compensation
received for services rendered during the years ended December 31, 2004, 2003
and 2002 by our President/Chairman of the Board, Cheng Wan Ming. No other
executive officers received aggregate compensation during our last two fiscal
years which exceeded, or would exceed on an annualized basis, $100,000.
87
Summary Compensation Chart
- ------------------------------------------------------------------------------------------------------------
Annual Compensation Long-term compensation
--------------------------- ----------------------------------
Awards Payouts
- -------------------- ---- --------------------------- ----------------------- ------- ---------
Name & Position Year Salary * Bonus Other Restricted Securities LTIP All other
(US$) ($) ($) stock underlying payouts compens-
awards ($) options ($) ation ($)
/SARS ($)
- -------------------- ---- --------------------------- ----------------------- ------- ---------
Cheng Wan Ming, 2004 $11,595 0 0 0 0 0 0
Chairman/President (Hotel
Division)
--------------------------- ----------------------- ------- ---------
0 0 0 0 0 0 0
(Commu-
nication
Division)
--------------------------- ----------------------- ------- ---------
0 0 0 0 0 0 0
(Yi Wan
Beijing
Hotel Mgmt.
Ltd.)
--------------------------- ----------------------- ------- ---------
2003 $11,595 0 0 0 0 0 0
(Hotel
Division)
--------------------------- ----------------------- ------- ---------
0 0 0 0 0 0 0
(Commu-
ication
Division)
--------------------------- ----------------------- ------- ---------
2002 $11,595 0 0 0 0 0 0
(Hotel
Division)
--------------------------- ----------------------- ------- ---------
$3,333 0 0 0 0 0 0
(Agricul-
ture
Division)
--------------------------- ----------------------- ------- ---------
0 0 0 0 0 0 0
(Commu-
ication
Division)
- ------------------------------------------------------------------------------------------------------------
*The salary that Cheng Wan Ming received from our Hotel and Agriculture
Divisions reflects payment by these Divisions.
88
Our officers and directors, including Cheng Wan Ming, did not receive any
monetary or security compensation from us during 2004. The only compensation
that our officers and directors received during 2004 was from our hotel
subsidiaries, as reflected above. The only compensation that any of our officers
or directors received during 2004 was from our hotel subsidiaries. The amount
received by Cheng Wan Ming (the only officer or director whose compensation
exceeded $100,000 during the last two fiscal years) from each division is
reflected above.
OPTIONS/SAR GRANTS
No options or SAR grants were granted to the named executive officers during
fiscal year ended December 31, 2004.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END
None.
LONG TERM INCENTIVE PLAN ("LTIP") AWARDS
None.
PENSION PLAN
None.
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 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.
89
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, all 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
and telecommunications divisions pay annual contributions of 34% and 20%,
respectively, of the City's standard salary, for all of its eligible employees,
to an insurance company who is responsible for the entire pension obligation
payable to the retired employees.
COMPENSATION OF DIRECTORS
No Director receives any cash compensation for their service as a Director. All
directors are reimbursed for their reasonable out-of-pocket expenses incurred in
connection with their duties to us.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
All of the above individuals have employment agreements with the entity or
entities for which they work. The terms of all employment agreements are until
February 2006. Salaries are renegotiated each year.
Our telecommunications and hotel subsidiaries each have employment agreements
with our President, Mr. Cheng Wan Ming. The employment agreement with the
telecommunications subsidiary provides that Mr. Cheng Wan Ming serve as its
President from September 1, 2004 to September 1, 2007. The employment agreement
with the Jiaozuo Yi Wan hotel subsidiary provides that Mr. Cheng Wan Ming serve
as its President from December 15, 1999 to December 15, 2005. 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 1, 2004 to March 1, 2007. 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.
90
Mr. You Yingliu has an employment agreement with our Jiaozuo Yi Wan hotel
subsidiary. The employment agreement provides that Mr. Yingliu shall serve as
Vice-General Manager from July 12, 2004 to July 12, 2007 under the same salary
and bonus provisions described in Mr. Yingliu's employment agreement with our
former agriculture subsidiary.
REPORT ON REPRICINGS OF OPTIONS/SARS
None.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Our officers and directors, including Cheng Wan Ming, did not receive any
monetary or equity compensation from us during 2004. The only compensation that
our officers and directors received during 2004 was from our hotel subsidiaries,
as reflected in the executive compensation table above. We do not have a
compensation committee. Our board of directors and the board of directors of our
subsidiaries determine executive officer compensation. The officers who
participated in the deliberations of our board of directors concerning executive
officer compensation are the officers who are also members of our board of
directors, namely Cheng Wan Ming, You Yingliu, Luo Guanying and Wu Zeming. There
are no officers on the board of directors of Qinyang Yi Wan Hotel.
PERFORMANCE GRAPH
Our stock did not start trading until the latter half of 2003. As a result,
there is insufficient data for a performance graph.
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 10-K 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.
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
16,861,250 shares of common stock outstanding as of December 31, 2004.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -------------- ---------------------------- -------------------- -----------
Amount and Nature of Percentage
Title of Class Name Beneficial Ownership of Class
- -------------- ---------------------------- -------------------- -----------
Common Wise Ascent Investment 10,086,296 59.8%
Ltd. (1) (Direct/Indirect)
- -------------- ---------------------------- -------------------- -----------
Common Cheng Wan Ming (1) 10,086,296 59.8%
(Direct/Indirect)
- -------------- ---------------------------- -------------------- -----------
Common Cen Minhong (1) 10,086,296 59.8%
(Direct/Indirect)
- -------------- ---------------------------- -------------------- -----------
Common You Yingliu 400,480 2.4%
(Direct)
- -------------- ---------------------------- -------------------- -----------
Common Wu Zeming, 1,047,865 6.2%
(Direct)
- -------------- ---------------------------- -------------------- -----------
Common Luo Guanying 400,019 2.4%
(Direct)
- -------------- ---------------------------- -------------------- -----------
Common Chang Wanqing 763,750 4.5%
(Direct)
- -------------- ---------------------------- -------------------- -----------
Common Cheng Deqiang 763,750 4.5%
(Direct)
- -------------- ---------------------------- -------------------- -----------
Common Cheng Manli 427,700 2.5%
(Direct)
- -------------- ---------------------------- -------------------- -----------
Common Liang Xiaogen 422,140 2.5%
(Direct)
- -------------- ---------------------------- -------------------- -----------
Common All Officers and Directors 14,312,000 84.9%
as a Group (9 Persons)
- -------------- ---------------------------- -------------------- -----------
- -----------------
(1) 2,579,397 shares of our common stock is owned by Wise Ascent Investments
Limited through its sole officer, director and shareholder, Cheng Wan Ming, who
is also the President, Chairman of the Board of Directors and controlling
shareholder of Yi Wan. Mr.Cheng Wan Ming is the husband of Ms. Cen Minhong. Mr.
Cheng Wan Ming directly owns 5,414,224 shares; his wife, Ms. Cen Minhong,
directly owns 2,092,675 shares. Collectively, Mr.Cheng Wan Ming and Ms. Cen
Minhong, beneficially own 10,086,296 shares as reflected in the above table.
CHANGE IN CONTROL
We are not aware of any arrangements which may result in a change in control of
our company. There are no pending or anticipated arrangements that we are aware
of that may cause a change in control of our company. We are not currently
engaged in any activities or arrangements that we anticipate will result in a
change in our control.
92
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
RELATED PARTIES
The following is a description of the various individuals and companies that are
named below in Yi Wan Group, Inc.'s (the "Company") discussion regarding related
transactions:
Shun'ao Industry and Commerce Company ("Shun'ao") is a company established under
the laws of the PRC. Shun'ao owns 10% of the Company's Jiaozuo Yi Wan Hotel Co.,
Ltd. ("Jiaozuo"). Cheng Wan Ming owns 41.7% of Shun'ao.
Marco Wan Da Construction ("Marco") is a company established under the laws of
Macao. Our directors, Wu Zeming and Cheng Manli, have 51% and 49% ownership
interests, respectively, of Marco.
The City of Qin Yang Local Government owns 20% of the Qinyang Yi Wan Hotel, Co.,
Ltd. ("Qinyang")
Cheng Wan Ming, our president, owns 61.1% of the Company and 41.7% of Shun'ao.
Wu Zeming, one of our directors, owns 6.3% of the Company and 51% of Marco.
Cheng Manli, one of our directors, owns 2.6% of the Company and 49% of Marco.
RELATED TRANSACTIONS
The Company classified as "due from related parties" at December 31, 2004 and
2003 the amounts $3,689,789 and $3,599,133, respectively. The details of the
amounts "due from related parties" is as follows:
2004 2003
---------- ----------
Shun'ao Industry and Commerce Company $ 158,210 $ 118,900
Marco Wan Da Construction 3,471,079 3,480,233
City of Qin Yang Local Government 60,500 --
---------- ----------
Total 3,689,789 3,599,133
Less current portion 1,366,789 3,599,133
---------- ----------
Non-current portion $2,323,000 $ --
========== ==========
A portion of the receivables from Shun'ao and Marco are generated from the
Company making cash advances to purchase supplies, inventories and other goods
on behalf of the Company, Shun'ao and Marco. These transactions are re-occurring
in nature. Due to their short term nature, the Company does not charge interest
on these receivables and they are included in the current portion of the
receivable.
The receivable from the City of Qin Yang Local Government is generated from the
Company making various cash advances and the allocation of various expenses to
the City of Qin Yang. Due to their short term nature, the Company does not
charge interest on this receivable and it is included in the current portion of
the receivable.
93
During 2003, the Company advanced Marco $2,323,000 to pay for general operating
expenses. The Company expected to be repaid this amount during 2004, thus this
amount was classified as a current asset and no interest was being charged on
this amount. As of December 31, 2004, the Company has not been repaid and is
currently negotiating with Marco for repayment of the funds. The Company has
reclassified this amount as non-current since no payment terms or interest terms
have been determined.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
AUDIT FEES
Total annual audit fees billed for professional services rendered by Moore
Stephens Wurth Frazer and Torbet, LLP during the 2004 and 2003 fiscal years for
the audit of our annual financial statements and the review of the financial
statements included in our quarterly reports on Form 10-QSB, or services that
are normally provided by Moore Stephens Wurth Frazer and Torbet, LLP in
connection with statutory and regulatory filings or engagements for those fiscal
years, totaled $115,000 and $120,000, respectively.
TAX FEES
The total fees billed during the 2004 and 2003 for professional services
rendered by Moore Stephens Wurth Frazer and Torbet, LLP for tax compliance
services were $7,000 and $5,000, respectively. Specifically, these services
involved preparation of the consolidated tax returns.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K
(a) Exhibits
3(i) Articles of Incorporation of the Registrant*
3(ii) Bylaws of the Registrant*
3.1 Jiaozuo Yi Wan Hotel Co., Ltd. Articles of Association*
3.2 Shunde Yi Wan Communication Equipment Plant Co., Ltd. Articles of
Association*
4 Form of common stock Certificate of the Registrant*
10.1 Form of Employment Agreement Jiaozuo Yi Wan Hotel Co., Ltd.*
10.2 Form of Employment Agreement Shunde Yi Wan Communication Equipment
Plant Co., Ltd.*
10.3 Land Use Permits of Shunde Yi Wan Communication Equipment Plant Co.,
Ltd.*
10.4 Land Use Permits of Jiaozuo Yi Wan Hotel Co., Ltd.*
10.5 Joint Venture Contract Jiaozuo Yi Wan Hotel Co., Ltd.*
10.6 Agreement of Shunde Yi Wan Communication Equipment Plant Co., Ltd.*
10.7 Agreement of Jiaozuo Yi Wan Maple Leaf High Technology Agriculture
Development Ltd., Co. on the Transfer of Equity Shares**
10.8 Agreement of Jiaozuo Yi Wan Hotel Co., Ltd. on the Transfer of
Equity Shares**
10.9 Transfer of Stock Rights and Property Rights Agreement of Jiaozuo Yi
Wan Maple Leaf High Technology Agriculture Development Co., Ltd.***
10.10 Qinyang Yi Wan Hotel Co., Ltd. Joint Venture Contract***
10.11 Joint Venture Contract with Qinyang Hotel***
94
10.12 Jiaozuo Foreign Trade and Economy Cooperation Bureau Reply about
Building Qinyang Yi Wan Hotel Co., Ltd.***
10.13 Agreement with Jiaozuo Yi Wan Maple Leaf High Technology Agricultural
Development Co., Ltd.***
10.14 Reply To The Transfer Of The Transfer Of The Stock Rights Of Jiaozuo
Yi Wan Maple Leaf High Technology Agricultural Development
Co., Ltd.***
10.15 Consulting Agreement, dated as of April 15, 2004, between Yi Wan
Group, Inc. and Stanley Wunderlich, an individual*****
10.16 Consulting Agreement, dated as of June 15, 2004, between Yi Wan
Group, Inc. and Yale Yu, an individual*****
10.17 Equity Trust Agreement, dated July 30, 2004, Cheng Wan Qing, Cheng Wan
Ming and Yi Wan Group******
14.1 Code of Ethics
21 List of Subsidiaries*
23.1 Consent of Independent Registered Public Accounting Firm for Yi Wan
Group, Inc.'s Audited Financial Statements December 31, 2003 and 2004
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
99.1 Application for the Transfer of the Stock Rights of Jiaozuo Yi Wan
Maple Leaf High Technology Agriculture Development Co., Ltd.****
99.2 Reply to the Transfer of the Transfer of the Stock Rights of Jiaozuo
Yi Wan Maple Leaf High Technology Agriculture Development
Co., Ltd.****
- ----------------
* Denotes previously filed exhibit, filed with Form 10-12G/A on
11/07/01, SEC File No. 000-33119, hereby incorporated by reference.
** Denotes previously filed exhibit, filed with Form 10-12G/A on 5/21/02, SEC
File No. 000-33119
*** Denotes previously filed exhibit, filed with Form 10-K on 4/16/03, SEC File
No. 000-33119, hereby incorporated by reference.
**** Denotes previously filed exhibit, filed with Form 10-K on 3/30/04, SEC File
No. 000-33119, hereby incorporated by reference
***** Denotes previously filed exhibit, filed with Form S-8 on 6/30/04, SEC File
No. 000-33119, hereby incorporated by reference
****** Denotes previously filed exhibit, filed with Form 10-Q on 11/14/04, SEC
File No. 000-33119, hereby incorporated by reference
(b) Reports on Form 8-K
None.
95
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: April 15, 2005 YI WAN GROUP, INC.
(Registrant)
By: /s/ Cheng Wan Ming
------------------------------------------
Cheng Wan Ming
President
Pursuant to the requirements of the Securities Exchange Act of 1934, 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, 04/15/05
- -------------------------- Chief Executive Officer
Cheng Wan Ming
/s/ Wu Zeming
- -------------------------- Chief Financial Officer 04/15/05
Wu Zeming
/s/ You Yingliu
- -------------------------- Director 04/15/05
You Yingliu
/s/ Luo Guanying
- -------------------------- Director 04/15/05
Luo Guanying
/s/ Liang Xiaogen
- -------------------------- Director 04/15/05
Liang Xiaogen
/s/ Cheng Manli
- -------------------------- Director 04/15/05
Cheng Manli
/s/ Cen Minhong
- -------------------------- Director 04/15/05
Cen Minhong
/s/ Cheng Wanqing
- -------------------------- Director 04/15/05
Cheng Wanqing
/s/ Cheng Deqiang
- -------------------------- Director 04/15/05
Cheng Deqiang
96