The following is a discussion of our financial condition, results of operations, liquidity and capital resources. This discussion should be read in conjunction with our audited financial statements and the notes thereto included elsewhere in this Form 10-Q and with our annual report for the year ended December 31, 2005.2006.
Some of the statements under "Description of Business," "Risk Factors," "Management's Discussion and Analysis or Plan of Operation," and elsewhere in this Report and in the Company's periodic filings with the Securities and Exchange Commission constitute forward-looking statements. These statements involve known and unknown risks, significant uncertainties and other factors what may cause actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward- looking statements. Such factors include, among other things, those listed under "Risk Factors" and elsewhere in this Report.
In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "could," "intends," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential" or "continue" or the negative of such terms or other comparable terminology.
The forward-looking statements herein are based on current expectations that involve a number of risks and uncertainties. Such forward-looking statements are based on assumptions that the Company will obtain or have access to adequate financing for each successive phase of its growth, that there will be no material adverse competitive or technological change in condition of the Company's business, that the Company's President and other significant employees will remain employed as such by the Company, and that there will be no material adverse change in the Company's operations, business or governmental regulation affecting the Company. The foregoing assumptions are based on judgments with respect to, among other things, further ec onomic,economic, competitive and market conditions, and future business decisions, all ofo f which are difficult or impossible to predict accurately and many of which are beyond the Company's control.
Although management believes that the expectations reflected in the forward-looking statements are reasonable, management cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither management nor any other persons assumes responsibility for the accuracy and completeness of such statements.
GENERAL
Yasheng Group was originally incorporated(“The Company”) is a California corporation with primary operations in the Gansu province of China in November 1988 under the name Gansu Yasheng Salt IndustrialChina. The Company Ltd. In January 2004 Yasheng reincorporated in California under the name Yasheng Group, Ltd. With its largest operationsdesigns, develops, manufactures and holdings in China, Yasheng is one of the three largest conglomerates in Gansu province with 126 operating divisions. In addition to its large diverse agricultural holdings Yasheng is diversified in other industries such as themarkets high-quality farming and sideline products; chemical materials and products; textiles; construction materials; and livestock and poultry, Chemical production, textiles,poultry. It also designs, develops and construction materials.markets new technologies related to agriculture and genetic biology.
On July 16, 2004 Yasheng Group, a California Corporation, acquired 54% of the total issued and outstanding common stock of Nicholas Investment Company, Inc. from its shareholders on a stock for stock basis determined by the relative net asset values of the two companies as of March 31, 2004. Yasheng agreed to issue one share of its common stock for every 84 shares of Nicholas common stock tendered. As of November 11, 2004 a total of 36,897,163 shares of Nicholas common stock had been tendered, representing a total of 91.7% of the total issued and outstanding and resulting in the issuance of 395,672 shares of Yasheng common stock. Subsequent to the acquisition and pursuant to Rule 12g-3(a) of the General Rules and Regulations of the Securities and Exchange Commission (the “Commission”), Yashe ng elected to become the successor issuer to Nicholas for reporting purposes under the Securities and Exchange Act of 1934, as amended, (the “Exchange Act”) and elected to report under the Exchange Act effective July 15, 2004. All financial information included in this report prior to the Acquisition Date is the financial information of Yasheng, as if Yasheng had been the registrant. The financial information since the Acquisition Date is the consolidated information of Yasheng and Nicholas.
Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations.ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued |
RESULTS OF OPERATIONS
YASHENG GROUP |
Condensed Consolidated Statements of Operations (unaudited) |
(In US Dollars) |
| | | | | | | | | | | | |
| | For The Three Months Ended Sept 30, | | | For The Nine Months Ended Sept 30, | |
| | 2006 | | | 2005 | | | 2006 | | | 2005 | |
| | | | | | | | | | | | |
Net Sales | | | 155,906,402 | | | | 142,480,082 | | | | 449,063,301 | | | | 420,381,980 | |
| | | | | | | | | | | | | | | | |
Costs of Good Sold | | | 134,523,809 | | | | 126,198,937 | | | | 395,682,323 | | | | 374,079,215 | |
| | | | | | | | | | | | | | | | |
Gross profit | | | 21,382,592 | | | | 16,281,145 | | | | 53,380,978 | | | | 46,302,765 | |
| | | | | | | | | | | | | | | | |
Operating Expenses: | | | | | | | | | | | | | | | | |
Sales & marketing | | | 212,801 | | | | 155,472 | | | | 664,526 | | | | 486,237 | |
General & administrative | | | 651,165 | | | | 473,008 | | | | 1,878,675 | | | | 1,460,387 | |
Total operaing expenses | | | 863,966 | | | | 628,480 | | | | 2,543,201 | | | | 1,946,624 | |
| | | | | | | | | | | | | | | | |
Operating Profit | | | 20,518,626 | | | | 15,652,666 | | | | 50,837,777 | | | | 44,356,141 | |
| | | | | | | | | | | | | | | | |
Interest Expense | | | 611,913 | | | | 540,325 | | | | 1,662,508 | | | | 1,850,478 | |
| | | | | | | | | | | | | | | | |
Other income (expense) | | | 313,754 | | | | 304,806 | | | | 926,135 | | | | 838,273 | |
| | | | | | | | | | | | | | | | |
Income before income tax expense | | | 20,220,467 | | | | 15,417,147 | | | | 50,101,404 | | | | 43,343,936 | |
Income tax expense | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Net Income | | | 20,220,467 | | | | 15,417,147 | | | | 50,101,404 | | | | 43,343,936 | |
| | | | | | | | | | | | | | | | |
Basic earnings per share | | | 0.13 | | | | 0.10 | | | | 0.32 | | | | 0.28 | |
Weighted average number of shares | | | 155,097,355 | | | | 155,097,355 | | | | 155,097,355 | | | | 155,097,355 | |
Comparison of the three months | | | | | | | | | | | | |
| | Three months | | | | | | Dollar | | | Percentage | |
| | Ended September 30 | | | Ended September 30 | | | Change | | | Change | |
| | 2006 | | | 2005 | | | | | | | |
| | | | | | | | | | | | |
Sales | | | 155,906,402 | | | | 142,480,082 | | | | 13,426,320 | | | | 9.40 | % |
Costs of Sales | | | 134,523,809 | | | | 126,198,937 | | | | 8,324,872 | | | | 6.60 | % |
Gross Profit | | | 21,382,592 | | | | 16,281,145 | | | | 5,101,447 | | | | 31.30 | % |
Operating Expenses | | | 863,966 | | | | 628,479 | | | | 235,487 | | | | 37.50 | % |
Interest Expense | | | 611,913 | | | | 540,325 | | | | 71,588 | | | | 13.20 | % |
Net Income | | | 20,220,467 | | | | 15,417,147 | | | | 4,803,320 | | | | 31.20 | % |
| | | | | | | | | | | | | | | | |
Comparison of the nine months | | | | | | | | | | | | | | | | |
| | Nine months | | | | | | | Dollar | | | Percentage | |
| | Ended September 30, | | | Ended September 30, | | | Change | | | Change | |
| | 2006 | | | 2005 | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Sales | | | 449,063,301 | | | | 420,381,980 | | | | 28,681,321 | | | | 6.80 | % |
Cost of Sales | | | 395,682,323 | | | | 374,079,215 | | | | 21,603,108 | | | | 5.80 | % |
Gross Profit | | | 53,380,978 | | | | 46,302,765 | | | | 7,078,213 | | | | 15.30 | % |
Operating Expenses | | | 2,543,201 | | | | 1,946,624 | | | | 596,577 | | | | 30.60 | % |
Interest Expense | | | 1,662,508 | | | | 1,850,478 | | | | (187,970 | ) | | | (10.20 | %) |
Net Income | | | 50,101,404 | | | | 43,343,936 | | | | 6,757,468 | | | | 15.60 | % |
YASHENG GROUP |
Condensed Consolidated Statements of Operations (unaudited) |
| | (In US Dollars) | | | | | | | | | | |
| | | | | | | | | | | | |
| | For The Three Months Ended September 30, | | | For The Nine Months Ended September 30, | |
| | 2007 | | | 2006 | | | 2007 | | | 2006 | |
| | | | | | | | | | | | |
Net Sales | | | 163,979,219 | | | | 155,906,402 | | | | 470,683,728 | | | | 449,063,301 | |
| | | | | | | | | | | | | | | | |
Costs of Good Sold | | | 141,192,424 | | | | 134,523,809 | | | | 414,332,506 | | | | 395,682,323 | |
| | | | | | | | | | | | | | | | |
Gross profit | | | 22,786,795 | | | | 21,382,593 | | | | 56,351,222 | | | | 53,380,978 | |
| | | | | | | | | | | | | | | | |
Operating Expenses: | | | | | | | | | | | | | | | | |
Sales & marketing | | | 300,448 | | | | 212,801 | | | | 874,362 | | | | 664,526 | |
General & administrative | | | 718,478 | | | | 651,165 | | | | 2,076,073 | | | | 1,878,675 | |
Total operaing expenses | | | 1,018,926 | | | | 863,966 | | | | 2,950,435 | | | | 2,543,201 | |
| | | | | | | | | | | | | | | | |
Operating Profit | | | 21,767,869 | | | | 20,518,627 | | | | 53,400,787 | | | | 50,837,777 | |
| | | | | | | | | | | | | | | | |
Interest Expense | | | 566,263 | | | | 611,913 | | | | 1,661,239 | | | | 1,662,508 | |
| | | | | | | | | | | | | | | | |
Other income (expense) | | | 437,673 | | | | 313,754 | | | | 1,172,461 | | | | 926,135 | |
| | | | | | | | | | | | | | | | |
Income before income tax expense | | | 21,639,278 | | | | 20,220,467 | | | | 59,912,010 | | | | 50,101,404 | |
Income tax expense | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Net Income | | | 21,639,278 | | | | 20,220,467 | | | | 59,912,010 | | | | 50,101,404 | |
| | | | | | | | | | | | | | | | |
Basic earnings per share | | | 0.14 | | | | 0.13 | | | | 0.34 | | | | 0.32 | |
Weighted average number of shares | | | 155,097,355 | | | | 155,097,355 | | | | 155,097,355 | | | | 155,097,355 | |
Comparison of the three months | | | | | | | | | | |
| | Three months | | | Dollar | | | Percentage | |
| | ended Sep 30, 2007 | | | ended Sep 30, 2006 | | | Change | | | Change | |
| | | | | | | | | | | | |
Sales | | | 163,979,219 | | | | 155,906,402 | | | | 8,072,817 | | | | 5.20 | % |
Costs of Sales | | | 141,192,424 | | | | 134,523,809 | | | | 6,668,615 | | | | 5.00 | % |
Gross Profit | | | 22,786,794 | | | | 21,382,592 | | | | 1,404,202 | | | | 6.60 | % |
Operating Expenses | | | 1,018,927 | | | | 863,966 | | | | 154,961 | | | | 17.90 | % |
Interest Expense | | | 566,263 | | | | 611,913 | | | | -45,650 | | | | -7.50 | % |
Net Income | | | 21,639,278 | | | | 20,220,467 | | | | 1,418,811 | | | | 7.00 | % |
| | | | | | | | | | | | | | | | |
Comparison of the nine months | | | | | | | | | | | | | |
| | Nine months | | | Dollar | | | Percentage | |
| | ended Sept 30, 2007 | | | ended Sept 30, 2006 | | | Change | | | Change | |
| | | | | | | | | | | | | | | | |
Sales | | | 470,683,728 | | | | 449,063,301 | | | | 21,620,427 | | | | 4.80 | % |
Costs of Sales | | | 414,332,506 | | | | 395,682,323 | | | | 18,650,183 | | | | 4.70 | % |
Gross Profit | | | 56,351,222 | | | | 53,380,978 | | | | 2,970,244 | | | | 4.60 | % |
Operating Expenses | | | 2,950,435 | | | | 2,543,201 | | | | 407,234 | | | | 16.00 | % |
Interest Expense | | | 1,661,239 | | | | 1,662,508 | | | | -1,269 | | | | -0.10 | % |
Net Income | | | 52,912,010 | | | | 50,101,404 | | | | 2,810,606 | | | | 5.60 | % |
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued |
Segments
With the exception of Baiyin Cement Plant, all other subsidiaries of the Company are agricultural enterprises. Therefore, the company has two primary reporting segments: farming and construction materials.
Statement No. 151 Inventory Costs-an mendment of ARB No. 43, Chapter 4 (Issued 11/04)
This statement amends the guidance in ARB No. 43, Chapter 4, Inventory Pricing, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Paragraph 5 of ARB 43, Chapter 4, previously stated that "...under some circumstances, items such as idle facility expense, excessive spoilage, double freight and re-handling costs may be so abnormal ass to require treatment as current period charges...." This Statement requires that those items be recognized as current-period charges regardless of whether they meet the criterion of "so abnormal." In addition, this Statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities.
Statement No. 152 Accounting for Real Estate Time-Sharing Transactions (an amendment of FASB Statements No. 66 and 67)
This Statement amends FASB Statement No. 66, Accounting for Sales of Real Estate, to reference the financial accounting and reporting guidance for real estate time-sharing transactions that is provided in AICPA Statement of Position (SOP) 04-2, Accounting for Real Estate Time-Sharing Transactions.
This Statement also amends FASB Statement No. 67, Accounting for Costs and Initial Rental Operations of Real Estate Projects, states that the guidance for (a) incidental operations and (b) costs incurred to sell real estate projects does not apply to real estate time-sharing transactions. The accounting for those operations and costs is subject to the guidance in SOP 04-2.
Statement No. 153 Exchanges of Non-monetary Assets (an amendment of APB Opinion No. 29)
The guidance in APB Opinion No. 29, Accounting for Non-monetary Transactions, is based on the principle that exchanges of non-monetary assets should be measured based on the fair value of the assets exchanged. The guidance in that Opinion, however, includes certain exceptions to the principle. This Statement amends Opinion 29 to eliminate the exception for non-monetary exchanges of similar productive assts and replaces it with a general exception for exchanges of non-monetary assets that do not have commercial substance. A non-monetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange.
Statement No. 154 - Accounting Changes and Error Corrections (a replacement of APB Opinion No. 20 and FASB Statement No. 3)
This Statement replaces APB Opinion No. 20, Accounting Changes, and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements, and changes the requirements for the accounting for and reporting of a change in accounting principle. This Statement applies to all voluntary changes in accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. When a pronouncement includes specific transition provisions, those provisions should be followed.
Statement No. 157 – Fair Value Measurements
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, to clarify how to measure fair value and to expand disclosures about fair value measurements. The expanded disclosures include the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value on earnings and is applicable whenever other standards require (or permit) assets and liabilities to be measured at fair value. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years.
The adoption of this new Statement has not had a material effect on the Company’s current financial position, results or operations, or cash flows.
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued |
RECENTLY ISSUED ACCOUNTING STANDARDS - continued
Statement No. 159 – The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115. This standard permits an entity to choose to measure many financial instruments and certain other items at fair value. This option is available to all entities. Most of the provisions in FAS 159 are elective; however, an amendment to FAS 115 Accounting for Certain Investments in Debt and Equity Securities applies to all entities with available for sale or trading securities. Some requirements apply differently to entities that do not report net income. SFAS No. 159 is effective as of the beginning of an entities first fiscal year that begins after November 15, 2007. Early adoption is permitted as of the beginning of the previous fiscal year provided that the entity makes that choice in the first 120 days of that fiscal year and also elects to apply the provisions of SFAS No. 157 Fair Value Measurements.
Statement No. 141 (revised 2007) – Business Combinations
In December 2007, the FASB revised SFAS No. 141 (revised 2007), Business Combinations. This revision changes the way the minority interest in a company is measured, recorded and reported in the parent companies financial statements to the end that a statement user can better evaluate the nature and financial effects of the business combination. The Company will adopt this statement beginning March 1, 2009.
It is not believed that this will have an impact on the Company’s consolidated financial position, results of operations or cash flows.
Statement No. 160 – Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51. A noncontrolling interest, sometimes called a minority interest, is the portion of equity in a subsidiary not attributable, directly or indirectly, to a parent. The objective of this Statement is to improve the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements related to the noncontrolling or minority interest.
The Company will adopt this statement beginning March 1, 2009. It is not believed that this will have an impact on the Company’s consolidated financial position, results of operations or cash flows.
Statement No. 161 – Disclosures about Derivative Instruments and Hedging Activities—an amendment to FASB No. 133
In March 2008, the FASB, issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133. This standard requires companies to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. This Statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged.
The Company has not yet adopted the provisions of SFAS No. 161, but does not expect it to have a material impact on its consolidated financial position, results of operations or cash flows.
Statement No. 162 – The Hierarchy of Generally Accepted Accounting Principles
In May 2008, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles. SFAS No. 162 sets forth the level of authority to a given accounting pronouncement or document by category. Where there might be conflicting guidance between two categories, the more authoritative category will prevail. SFAS No. 162 will become effective 60 days after the SEC approves the PCAOB’s amendments to AU Section 411 of the AICPA Professional Standards.
SFAS No. 162 has no effect on the Company’s financial position, statements of operations, or cash flows at this time.
Statement No. 163 – Accounting for Financial Guarantee Insurance Contracts – and interpretation of FASB Statement No. 60
In May 2008, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 163, Accounting for Financial Guarantee Insurance Contracts-and interpretation of FASB Statement No. 60. SFAS No. 163 clarifies how Statement 60 applies to financial guarantee insurance contracts, including the recognition and measurement of premium revenue and claims liabilities. This statement also requires expanded disclosures about financial guarantee insurance contracts. SFAS No. 163 is effective for fiscal years beginning on or after December 15, 2008, and interim periods within those years.
SFAS No. 163 has no effect on the Company’s financial position, statements of operations, or cash flows at this time.
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - continued |
APPLICATION OF CRITICAL ACCOUNTING POLICIES
Our financial statements and accompanying notes are prepared in accordance with U.S. GAAP. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. These estimates and assumptions are affected by management’s application of accounting policies. Critical accounting policies for us are revenue recognition and foreign currency translation.
The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sale price is fixed or determinable, and collectability is reasonably assured. Most of the sales occur within the PR China.
The accompanying financial statements are presented in United States (US) dollars. The functional currency is the Renmibi (RMB). The financial statements are translated into US dollars from RMB at year-end exchange rates for assets and liabilities, and weighted average exchange rates for revenues and expenses. Capital accounts are translated at their historical exchange rates when the capital transactions occurred.
Gains and losses resulting from foreign currency translation are recorded in a separate component of shareholders’ equity. Foreign currency translation adjustments are included in accumulated other comprehensive income in the consolidated statements of shareholders’ equity for the past years presented.
RMB is not freely convertible into the currency of other nations. All such exchange transactions must take place through authorized institutions. There is no guarantee that RMB amounts could have been, or could be, converted into US dollars at rates used in translation.