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: yiwan@public2.lyptt.ha.cn
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:
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: yiwan@public2.lyptt.ha.cn
SHUN DE YI WAN COMMUNICATION EQUIPMENT PLANT CO. LTD. On January 1, 2000, we acquired 100% of the equity interest in Shun de Yi Wan Communication Equipment Plant Company, Ltd., which in 1993 was originally established as a foreign investment joint venture in China. Our telecommunications subsidiary manufactures exchange distribution frames equipment and is located at:
Shun de Yi Wan Communication Equipment Plant Co. Ltd. No 3., 5th Street Fengxiang Road, Daliang Town Shun de, Guangdong - P.R. China 528300 Tel: 86-765-222-0984, 222-2097 Fax: 86-765-223-8363 Email: gzsdywt1@pub.sdnet.gd.cn
Our wholly owned foreign telecommunications subsidiary is classified in China as a Wholly Foreign Owned Enterprise company. Both Foreign Invested Enterprise Joint Ventures and Wholly Foreign Owned Enterprise companies in China are referred to as Foreign Invested Enterprise companies.
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
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
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.
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
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
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
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.
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 -------------------------------- -----------------------------------------------
-------------------------------- ----------------------------------------------- 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.
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
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;
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
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;
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.
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.
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:
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
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.
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:
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.
------------------------------------------------------ ------------------------- 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.
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.
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 -------------------------------------- -----------------------------------------
-------------------------------------- ----------------------------------------- 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
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.
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
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.
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.
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,
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
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
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.
THE CHINESE LEGAL SYSTEM
The practical effect of the People's Republic of China legal system on our business operations in China can be viewed from two separate but intertwined considerations.
First, as a matter of substantive law, the Foreign Invested Enterprise laws provide significant protection from government interference. In addition, these laws guarantee the full enjoyment of the benefits of corporate Articles and contracts to Foreign Invested Enterprise participants. These laws, however, do impose standards concerning corporate formation and governance, which are not qualitatively different from the General Corporation Laws of the several states. Therefore, as a practical matter, a Foreign Invested Enterprise needs to retain or have ready access to a local Chinese law firm for routine compliance purposes.
Similarly, the People's Republic of China accounting laws mandate accounting practices, which are not co-existent with U.S. Generally Accepted Accounting Principles. The China accounting laws require that an annual "statutory audit" be performed in accordance with People's Republic of China accounting standards and that the books of account of Foreign Invested Enterprises are maintained in accordance with Chinese accounting laws. Article 14 of the People's Republic of China Wholly Foreign-Owned Enterprise Law requires a Wholly Foreign-Owned Enterprise to submit certain periodic fiscal reports and statements to designate financial and tax authorities, at the risk of business license revocation. As a practical matter, a Foreign Invested Enterprise must retain a local Chinese accounting firm that has experience with both the Chinese standards and U.S. Generally Accepted Accounting Principles. This type of accounting firm can serve the dual function of performing the annual Chinese statutory audit and preparing the Foreign Invested Enterprise's financial statements in a form acceptable for an independent U.S. certified public accountant to issue an audit report in accordance with Generally Accepted Accounting Auditing Standards.
Second, while the enforcement of substantive rights may appear less clear than United States procedures, the Foreign Invested Enterprises and Wholly Foreign-Owned Enterprises are Chinese registered companies which enjoy the same status as other Chinese registered companies in business-to-business dispute resolution. Because the terms of the respective Articles of Association provide that all business disputes pertaining to Foreign Invested Enterprises are to be resolved by the Arbitration Institute of the Stockholm Chamber of Commerce in Stockholm, Sweden applying Chinese substantive law, the Chinese minority partner in our joint venture companies will not assume a privileged position regarding such disputes. Any award rendered by this arbitration tribunal is, by the express terms of the respective Articles of Association, enforceable in accordance with the "United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958)." Therefore, as a practical matter, although no assurances can be given, the Chinese legal infrastructure, while different in operation from its United States counterpart, should not present any significant impediment to the operation of Foreign Invested Enterprises.
EARNINGS AND DISTRIBUTIONS OF THE FIE'S
Both the Foreign Investment Equity Joint Venture laws and the Wholly Foreign-Owned Enterprise laws provide for and guarantee the distribution of profits to foreign investors in Chinese Foreign Invested Enterprises. Article 7 of the People's Republic of China Sino-Foreign Equity Joint Venture Law requires
that profits of an equity joint venture be distributed among the parties in proportion to their respective contributions to registered capital. These distributions are made from net profits after deducting from gross profits, a reserve fund, a bonus and welfare fund for workers and staff, and a venture expansion fund, all as stipulated in the venture's Articles of Association. The Yi Wan joint venture Articles of Association provide in Chapter 7, Article 43, that allocations for these statutory funds be determined by the Board of Directors each year "...according to the actual business situation and profitability of the Joint Venture from after-tax profit."
Article 10 of the People's Republic of China Sino-Foreign Equity Joint Venture Law allows the net profit 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
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
basis. The total allocations to the Surplus Funds required as a percentage of net profits after income tax is not set by regulations for Foreign Invested Enterprise joint ventures and is to be determined by the directors on an annual basis. The allocations for each fund are recorded differently on the Foreign Invested Enterprise financial statements. The reserve fund, enterprise expansion fund and statutory public welfare fund are shown on the balance sheets as part of owners' equity.
For all Foreign Invested Enterprises, once the contributions to the statutory surplus reserve fund equal 50% of the Foreign Invested Enterprise's registered capital, no further contributions to that fund need be made. No such limitation exists for other funds. Foreign Invested Enterprises do not have to set up or contribute to an enterprise expansion fund.
In wholly-owned Foreign Invested Enterprises, income after the payment of China income taxes shall be allocated to the statutory surplus reserves and statutory public welfare fund for staff and workers. The proportion of allocation for reserve funds is no less than 10 percent of the profit after tax until the accumulative amount of allocation for statutory surplus reserve funds reaches 50 percent of the registered capital, and then no more allocation may be made. The proportion of allocation for statutory public welfare fund and enterprise expansion fund is decided by the enterprise itself. A wholly foreign-owned enterprise does not have to set up or contribute to an enterprise expansion fund.
POLITICAL AND TRADE RELATIONS WITH THE UNITED STATES
Political and trade relations between the United States and Chinese governments within the past five years have been volatile and may continue to be in the future. Major causes of volatility, the United States' considered revocation of China's Most Favored Nation trade status, illegal transshipments of textiles from China to the United States, issues surrounding the sovereignty of Taiwan, and the United States' bombing of the Chinese embassy in Yugoslavia, have had no direct connection to our operations; however, other on-going causes of volatility, including the protection of intellectual property rights within China and sensitive technology transfer from the United States to China have closer potential connection to our operations. There can be no assurance that the political and trade ramifications of these causes of volatility or the emergence of new causes of volatility will not cause difficulties in our operations in the China marketplace.
ECONOMIC REFORM ISSUES
Although the majority of productive assets in China are owned by the Chinese government, in the past several years the government has implemented economic reform measures that emphasize decentralization and encourage private economic activity. Because these economic reform measures may be inconsistent or ineffectual, there are no assurances that:
o We will be able to capitalize on economic reforms;
o The Chinese government will continue its pursuit of economic reform policies;
o The economic policies, even if pursued, will be successful;
o Economic policies will not be significantly altered from time to time; and
o Business operations in China will not become subject to the risk of nationalization.
Negative impact upon economic reform policies or nationalization could result in a total investment loss in our common stock.
Since 1978, the Chinese government has reformed its economic systems. Because many reforms are unprecedented or experimental, they are expected to be refined and improved. Other political, economic and social factors, such as political changes, changes in the rates of economic growth, unemployment or inflation, or in the disparities in per capita wealth between regions within China, could lead to further readjustment of the reform measures. This refining and readjustment process may negatively affect our operations.
Our Telecommunications Division is partially dependent upon the government's allocation of funds in its budgeting processes. These budgetary processes are not necessarily subject to fixed time schedules; accordingly, our telephone communications manufacturing company's operations, quarterly revenues, and operating results may be adversely affected by extended periods of budgeting freezes or restraints.
In addition, our Telecommunications Division is partially dependent upon the availability of bank credit to its customers as mandated by the government in China. Recently, in response to inflationary concerns and other economic factors, the Chinese government imposed restrictions on the funds available for lending by the banking system. In addition, 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.
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.