10-Q 1 yasheng_10q-093006.htm YASHENG GROUP 10-Q 09-30-06 yasheng_10q-093006.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
FORM 10-Q
 
 
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2006
 
o           TRANSITION REPORT PURSUANT TO SECITON 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ___________ to _____________
 
Commission File Number: 000-27557


YaSheng Group

(Exact name of registrant as specified in its charter)
 
California
 
33-0788293
(State or Other Jurisdiction of  Incorporation or Organization)  
 
(I.R.S. Employer Identification No.)
 
805 Veterans Blvd., Suite 228, Redwood City, CA
94063
(Address of Principal Executive Offices) 
(Zip Code)

(650) 363-8345
(Registrant's telephone number, including area code)
 
Indicate by check mark whether the Registrant (l) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
x Yes     o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
o Yes     o No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer 
o
 
Accelerated filer 
o
         
Non-accelerated filer 
o
(Do not check if smaller reporting company)     
Smaller reporting company
x
 
 
 
 
 
1

 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
o Yes     x No
 
State issuer’s revenues for its most recent fiscal year (12/31/05).  $ 567,363,643.
 
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked price of such common equity, as of a specified dated within the past 60 days.  We are a smaller reporting company as determined pursuant to Rule 12b-2 of the Securities and Exchange Act of 1934 and Regulation S-K thereunder because the public float of our common stock is less than $75 million.

 
(APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
o Yes     o No

 
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.  155,097,355 (12-31-09).
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
2

 

YASHENG GROUP
TABLE OF CONTENTS
 
PART I
FINANCIAL INFORMATION
 
 
   
Item 1
Financial Statements
4
 
   
 
Report of Independent Registered Public Accounting Firm
4
     
 
Condensed Consolidated Balance Sheets
5
 
   
 
Condensed Consolidated Statements of Operations
6
 
   
 
Condensed Consolidated Statements of Cash Flows
7
 
   
 
Notes to Condensed Consolidated Financial Statements
8
 
   
Item 2
Management’s Discussion and Analysis of Financial Condition and Results of Operations
15
 
   
Item 3
Quantitative and Qualitative Disclosures About Market Risk
17
     
Item 4 Controls and Procedures 20
 
   
PART II
OTHER INFORMATION
 
 
   
Item 1
Legal Proceedings
20
     
Item 1A Risk Factors  20
 
   
Item 2
Unregistered Sales of Equity Securities and Use of Proceeds
20
 
   
Item 3
Defaults Upon Senior Securities
20
 
   
Item 4
(Removed and Reserved)
20
 
   
Item 5
Other Information
20
 
   
Item 6
Exhibits
21
     

 
 
 
 
 
 

 
3

 
 
PART I           FINANCIAL INFORMATION
 
 
Item 1.           Financial Statements
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Board of Directors and Stockholders Yasheng Group
Redwood City, California
 
We have reviewed the accompanying condensed consolidated balance sheet of Yasheng Group and subsidiaries (the “Corporation”) as of September 30, 2006, and the related condensed consolidated statements of income, stockholders’ equity, and cash flows for the three-month period and nine month periods ended September 30, 2006 and 2005. These interim financial statements are the responsibility of the Corporation’s management.
 
We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
 
Based on our reviews, we are not aware of any material modifications that should be made to such consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
 
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Yasheng Group and subsidiaries as of December 31, 2005, and the related consolidated statements of income, stockholders’ equity, and cash flows for the year then ended and in our report dated March 8, 2010 we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2005 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
 
 
/S/ Gansu Hongxin CPA
Lanzou, China
 
April 4, 2010



 
4

 
 
YENSHENG GROUP
Condensed Consolidated Balance Sheets (Unaudited)
             
    As of  
   
September 30, 2006
   
December 31, 2005
 
   
(unaudited)
   
(audited)
 
             
ASSETS
           
Current Assets:
           
Cash & Cash equivalents
    18,096,631       20,917,440  
Accounts Receivable, net
    59,408,271       57,364,922  
Inventories
    68,634,263       65,699,513  
Prepaid & other current assets
    1,637,535       385,854  
                 
Total current assets
    147,776,700       144,367,729  
                 
Equity & other investments
    278,047       598,605  
                 
Property, plant & equipment, net
    382,387,088       363,997,911  
Construction in progress
    5,122,987       5,782,797  
Intangible assets, net
    773,013,814       701,049,019  
Other long term assets
    95,860,191       96,564,559  
                 
Total Assets
    1,404,438,827       1,312,360,620  
                 
LIABILITIES & STOCKHOLDERS' EQUITY
         
Current Liabilities
               
Accounts Payable & accrued expenses
    65,642,371       64,378,506  
Short term loans
    42,504,836       49,448,093  
VAT Tax payable
    1,173,588       1,102,070  
Current portion of long term debt
    25,638,561       25,092,306  
Other current liabilities
    1,297,661       1,517,042  
                 
Total current liabilities
    136,257,017       141,538,017  
                 
Long term debt
    25,375,500       34,155,534  
Long term payable
    69,275,917       36,082,504  
                 
Total liabilities
    230,908,434       211,776,055  
                 
Stockholders' equity
               
Common stock,  US$1.00 par value
               
800,000,000 shares authorized
               
155,097,355 shares issued & outstanding
    155,097,355       155,097,355  
Accumulated other comprehensive income
    48,734,462       25,890,040  
Retained earnings
    969,698,575       919,597,171  
                 
Total stockholders' equity
    1,173,530,392       1,100,584,566  
                 
Total liabilities & stockholders' equity
    1,404,438,826       1,312,360,621  
                 
The accompanying notes are an integral part of these consolidated financial statements

 
 
 
 

 
5

 

 
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  
                                 
The accompanying notes are an integral part of these consolidated financial statements




 




 
6

 

YASHENG GROUP
Condensed Consolidated Statements of Cash Flows (unaudited)
(In US Dollars)
             
   
For The Nine Months Ended September 30,
 
   
2006
   
2005
 
             
Cash flows from operating activities:
           
Net income
    50,101,404       43,343,936  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation & amortization
    5,756,093       5,896,200  
Allowance fro doubtful accounts
    45,794       866,568  
Others
    32,456,589       26,408,688  
Changes in assets & liabilities:
               
Accounts receivable
    (917,720 )     (17,366,102 )
Inventories
    (1,593,130 )     883,236  
Prepaid & other current assets
    (1,243,802 )     379,735  
Accounts payable
    (83,155 )     5,802,775  
Tax payables
    49,013       40,752  
Accrued expenses & other current liabilities
    (217,984 )     (719,355 )
Net cash provided by operating activities
    84,353,102       65,536,433  
                 
Cash flows from investing activities:
               
Purchase of assets
    (70,907,053 )     (65,907,545 )
Investments
    332,782       (98,756 )
Net cash used in investing activities
    (70,574,271 )     (66,006,301 )
                 
Cash flows from financing activities:
               
Issuance of common stock
               
Dividens paid
               
Increase (decrease) in debt
    (17,396,666 )     60,660  
Net cash provided by financing activities
    (17,396,666 )     60,660  
                 
Effect of exchange rate change on cash & cash equivalents
    797,026       1,091,228  
                 
Net increase (decrease) in cash & cash equivalents
    (2,820,809 )     682,021  
                 
Cash & cash equivalents at beginning of period
    20,917,440       20,200,248  
Cash & cash equivalents at end of period
    18,096,631       20,882,269  
                 
Supplemental Disclosures:
               
Cash paid for interest
    1,662,508       1,850,478  
Cash paid for income taxes
               
                 
The accompanying notes are an integral part of these consolidated financial statements

 
 
 
 
 


 
7

 
YASHENG GROUP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
1.
Basis of Presentation, Organization and Business

The accompanying unaudited condensed consolidated financial statement (statements) have been prepared in accordance with generally accepted accounting principles for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the period are not necessarily indicative of the results that may be expected for the full year. These statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in Yasheng Group's Form 10-K. The statements are prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP). This basis differs from that used in the statutory accounts of the Company, which were prepared in accordance with the accounting principles and relevant financial regulations applicable to enterprises in the People's Republic of China (PRC). All necessary adjustments have been made to present the financial statements in accordance with US GAAP.

The statements include those of Yasheng Group and its subsidiaries: Gansu Yasheng Industrial Group Co., Ltd., Gansu Tiaoshan Agricultural-Industrial-Commercial Co., Ltd., Gansu Xiaheqing Co., Ltd., Gansu Yanguoxia Chemicals General Plant, Lanzhou Vinylon Group Co., Ltd., Nicholas Investment Company, Inc., and other smaller subsidiaries (collectively referred to as Yasheng or the Company). All significant intercompany balances have been eliminated.

Yasheng Group (“The Company”) is a California corporation with primary operations in China. The Company designs, develops, manufactures and markets high-quality farming and sideline products; chemical materials and products; textiles; construction materials; and livestock and poultry. It also designs, develops and markets new technologies related to agriculture and genetic biology.

2.
Summary of Significant Accounting Policies

(a)
Accounting standards

The consolidated financial statements have been prepared on a historical cost basis to reflect the financial position and results of operations of the Company in accordance with accounting principles generally accepted in the United States of America.

(b)
Fiscal year

The Company’s fiscal year ends on the 31st of December of each calendar year.

(c)
Consolidation
 
The consolidated financial statements include the accounts of the Company and its subsidiaries. All material intercompany balances and transactions have been eliminated.

(d)
Use of estimates

The Company’s discussion and analysis of its financial condition and results of operations are based upon its consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

(e)
Revenue recognition

The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collectability is reasonably assured.

(f)
Shipping and handling costs

The Company records outward freight, purchasing and receiving costs in selling expenses; inspection costs and warehousing costs are recorded as general and administrative expenses.

(g)
Cash and cash equivalents

Cash and cash equivalents include cash on hand, demand deposits held by banks, and securities with maturities of three months or less. The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. Cash equivalents are composed primarily of investments in money market accounts stated at cost, which approximates fair value.

(h)
Inventories

Inventories are recorded using the weighted average method and are valued at the lower of cost or market.
 
 

 
8

 
YASHENG GROUP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
2.
Summary of Significant Accounting Policies - continued
 
(i)
Accounts receivable, net

The carrying amount of accounts receivable is reduced by a valuation allowance that reflects the Company’s best estimate of the amounts that will not be collected. In addition to reviewing delinquent accounts receivable, the Company considers many factors in estimating its general allowance, including aging analysis, historical bad debt records, customer credit analysis and any specific known troubled accounts.
 
(j) 
Property, plant and equipment
 
Property, plant and equipment are carried at cost less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets. Amortization of leasehold improvements is calculated on a straight-line basis over the life of the asset or the term of the lease, whichever is shorter. Major renewals and betterments are capitalized and depreciated; maintenance and repairs that do not extend the life of the respective assets are charged to expense as incurred. Upon disposal of assets, the cost and related accumulated depreciation are removed from the accounts and any gain or loss is included in income. Depreciation related to property and equipment used in production is reported in cost of sales. Property and equipment are depreciated over their estimated useful lives as follows:

Buildings and improvements 
20 - 40 years
Farming facilities 
10 years
Machinery and equipment 
7 years
Transportation and other facilities 
3 years

Long-term assets of the Company are reviewed annually to assess whether the carrying value has become impaired, according to the guidelines established in Statement of Accounting Standards (SFAS) No. 144, "Accounting for the Impairment of Disposal of Long-Lived Assets." The Company also evaluates the periods of amortization to determine whether subsequent events and circumstances warrant revised estimates of useful lives. No impairment of assets was recorded in the periods reported.

(k)
Intangible assets

Intangible assets consist of mainly land use rights and are recorded at cost. The Company has over 40,000 acres of arable land that are cultivated using the latest scientific technologies to produce a wide variety of agricultural products.

Under PRC’s current property rights regime, use rights for specified periods (e.g., 40 to 70 years) can be obtained from the state through the up-front payment of land use fees. The fees are determined by the location, type and density of the proposed development. This separation of land ownership and use rights allows the trading of land use rights while maintaining state ownership of land.

Land use rights are amortized over 70 years using the straight-line method.

(l)
Impairment of long-lived assets

The carrying amounts of long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is evaluated by a comparison of the carrying amount of assets to future undiscounted net cash flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amounts of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less cost to sell.
 
(m) 
Investments

Investments consist primarily of less than 20% equity positions in non-marketable securities and are recorded at lower of cost or market.
 
 

 
9

 
YASHENG GROUP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
2.
Summary of Significant Accounting Policies - continued
 
(n)
Foreign currency translation

The accompanying financial statements are presented in United States (US) dollars. The functional currency is the Renminbi (RMB). The financial statements are translated into US dollars from RMB at year-end exchange rates for assets and liabilities, and weighed 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 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 the RMB amounts could have been, or could be, converted into US dollars at rates used in translation.

(o)
Income taxes

As a state-owned agricultural enterprise, the Company and all of its agricultural subsidiaries are exempted from enterprise income taxes with approval from the Gansu Provincial Bureau of Local Taxation. The only non-agricultural subsidiary, Baiyin Cement Plant, has suffered net loss for the years shown and therefore has no applicable taxable income. Because of the uncertainty of future profits, no deferred tax assets have been set up at this time.

(p)
Earnings per share

Basic earnings per share are computed using the weighted average number of common shares outstanding during the year. Diluted earnings per share are computed using the weighted average number of common and, if dilutive, potential common shares outstanding during the year. The Company has no potentially dilutive shares for the periods shown.

(q)
Economic and Political Risks

The Company faces a number of risks and challenges as a result of having primary operations and markets in the PRC. Changing political climates in the PRC could have a significant effect on the Company's business.

(r)
Advertising expense

The Company expenses advertising as incurred.
 
(s) 
Comprehensive income

Comprehensive income is defined as the change in equity of a company during a period from transactions and other events and circumstances excluding transactions resulting from investments from owners and distributions to owners. Accumulated other comprehensive income, as presented on the accompanying consolidated balance sheets, consists of mainly the cumulative foreign currency translation adjustment.

(t)
Value added tax (VAT)

Value added tax is a consumption tax levied on value added. While the standard VAT rate in PRC is 17%, the Company's agricultural subsidiaries enjoy a reduced VAT rate of 4%.

(u)
RECENTLY ISSUED ACCOUNTING STANDARDS

Statement No. 150 Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (Issued 5/03)

This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity.
 
 
 

 
10

 
YASHENG GROUP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
2.
Summary of Significant Accounting Policies - continued
 
Statement No. 151 Inventory Costs-an amendment 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.
 
Statement No. 159The 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.
 
 
 

 
11

 
YASHENG GROUP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
2.
Summary of Significant Accounting Policies - continued
 
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. 161Disclosures 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. 162The 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. 163Accounting 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.
 
 
 

 
12

 
YASHENG GROUP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
3.
Inventories

The major classes of inventory: raw materials, packaging materials, products in process, finished goods, stocks, low-value consumable goods, materials in transit as well as others.

The following is a breakdown of the major categories of inventories.

As of
9/30/2006
Raw material
            14,331,944
Finished goods
            35,317,131
Low value consumable goods
              9,330,867
Packaging material
              6,371,757
Maintenance material
              3,282,564
Total
            68,634,263

4.
Other long term assets

The Company invests every year in windbreaks and sand-breaks to provide shelterbelts for many of the farms located near the Gobi Desert. These investments are recorded as other long term assets.

5.
China contribution plan

The Company’s subsidiaries in China participate in a government-mandated multi-employer defined contribution plan pursuant to which certain retirement, medical and other welfare benefits are provided to employees. Chinese labor regulations require the Company’s subsidiaries to pay to the local labor bureau a monthly contribution at a stated contribution rate based on the monthly basic compensation of qualified employees. The relevant local labor bureau is responsible for meeting all retirement benefit obligations; the Company has no further commitments beyond its monthly contribution.

6.
Profit appropriation

Pursuant to the laws applicable to China’s Foreign Investment Enterprises, each of the Company’s subsidiaries in China must make appropriations from its after-tax profit to non-distributable reserve funds as determined by the Board of Directors. These reserve funds include a (i) general reserve, (ii) enterprise expansion fund and (iii) staff bonus and welfare fund. The general reserve fund requires annual appropriations of 10% of after-tax profit (as determined under PRC GAAP) until these reserves equal 50% of the amount of paid-in capital; the other fund appropriations are at the Company’s discretion.

7.
Concentration of risks

The operations of the Company are substantially located in the PRC and accordingly, investing in the shares of the Company is subject to among others, the PRC’s political, economic and legal risks.

8.
Income taxes

The Company and all of its agricultural subsidiaries are exempt from income taxes in the PRC. The Company has not filed an income tax return in the US.

9.
Debt

The Company obtains secured lending from the banks using the following two types of arrangements, collateral and guarantee. Collateral is loans secured against the assets of the Yasheng Group, while guarantee is loans provided with the guarantee from a third party.
 
 
 

 
13

 
YASHENG GROUP
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
10.
Employee benefit plans

The Company provides the following benefits for all employees:

A. Employee Welfare Fund: An amount equal to 14% of payroll is set aside by the Company for standard employee benefits. This fund is managed and controlled by the Company. All required payments current.

B. Open Policy Pension: The Company pays to national and community insurance agents an amount equal to 20% of payroll. This insurance continues to cover the employee subsequent to retirement.

C. Unemployment Insurance: The Company pays to the national employment administrative entities an amount equal to 1% of payroll. Any dismissed employee thereby receives a specified amount of family-support funds for a designated period.
 
D. Housing Surplus Reserve: The Company pays to the national housing fund administrative entities an amount equal to 10% of payroll for deposit into the employees' future housing allowance accounts.

The aforesaid items are for employee's benefits and should be accounted for as the Company's expenses.

11.
Operating leases

The Company has no operating leases for the periods shown.

12.
Segments
 
With the exception of the Baiyin Cement Plant, all other subsidiaries of the Company are agricultural/food based enterprises.  Therefore, the Company has two primary reporting segments: farming and construction materials.  Following is selected financial information for each segment:
 
   
3 months
   
3 months
 
   
ended September 30,
   
ended September 30,
 
   
2006
   
2005
 
             
Construction Materials
    1,277,634       1,709,760  
Agriculture/Food
    154,628,768       140,770,322  
Total Sales
    155,906,402       142,480,082  
 
 
 
14

 
 
Item 2.            Management's Discussion and Analysis of Financial Condition and Results of Operations.
 
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
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.

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 economic, competitive and market conditions, and future business decisions, all of 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 in the Gansu province of China in November 1988 under the name Gansu Yasheng Salt Industrial Company, Ltd.  In January 2004 Yasheng reincorporated in California under the name Yasheng Group, Ltd.  With its largest operations 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 the livestock and poultry, Chemical production, textiles, and construction materials.

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”), Yasheng 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.
 
 
 
15

 
 
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 %
 
 
 
 
16

 
 
Item 3.            Quantitative and Qualitative Disclosures about Market Risk

Our international sales accounted for very little of our net sales from 2003 through 2005 and 2006.  As a result, we have exposure to foreign exchange risk with respect to a minor portion of our sales.  Fluctuations in exchange rates, particularly in the U.S. dollar to yuan (RMB) exchange rate, do not affect materially affect our gross and net profit margins even though they could result in foreign exchange and operating losses.

Our primary foreign currency exposures are transaction, cash flow and translation:

Transaction Exposure:  We have certain asset and liabilities, primarily receivables, investments and accounts payable that are denominated in currencies other than the relevant entity's functional currency.  In certain circumstances, changes in the functional currency value of these assets and liabilities create fluctuations in our reported consolidated financial position, results of operations and cash flows.  We may enter into foreign exchange forward contracts or other instruments to minimize the short-term foreign currency fluctuations on such assets and liabilities.  The gains and losses on the foreign forward contracts offset the transaction gains and losses on certain foreign currency receivables, investments and payables recognized in earnings.

Cash Flow Exposure:  We have forecasted future cash flows, including revenues and expenses, denominated in currencies other than the relevant entity's functional currency.  Our primary cash flow exposures include future customer collections and vendor payments.

Earnings Translation Exposure:  Fluctuations in foreign currency exchange rates do not create volatility in our reported results of operations because we are required to consolidate the financial statement of all of our subsidiaries and most of our sales are in China.  We decide to purchase forward exchange contracts or other instruments to offset the impact of currency fluctuations.  Such contracts would be marked-to-market on a monthly basis and any unrealized gain or loss would be reported in interest and other income, net.  We do not edge translation exposure at this time but may do so in the future.

Interest Rate Risk

We are exposed to interest rate risk because some of our distributors and other vendees depend on debt financing to purchase our products and some of our subsidiaries depend on debt financing to construct facilities and to improve the farms.  Although the useful life of our farm products is short, our distributors and vendees still have to pay the entire cost of their purchases at the time of shipment.  As a result, many of our distributors and vendees rely on debt financing to fund their up-front cash flow needs and expenditures.  An increase in interest rates could make it difficult for our distributors and vendee to secure the financings necessary to purchase, hold and resell our products, and thus lower and postpone demand for our products and reduce our net sales.

Commodity Risk

We are exposed to price risks associated with raw material purchases and sales into the domestic and foreign commodities markets.

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.

RECENTLY ISSUED ACCOUNTING STANDARDS

Statement No. 150 Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (Issued 5/03)

This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity.

Statement No. 151 Inventory Costs-an amendment 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.
 
 
 
 
17

 
 
Item 3.            Quantitative and Qualitative Disclosures about Market Risk - continued
 
RECENTLY ISSUED ACCOUNTING STANDARDS - continued
 
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.
 
Statement No. 159The 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.
 
 
 
 
18

 
 
Item 3.            Quantitative and Qualitative Disclosures about Market Risk - continued
 
RECENTLY ISSUED ACCOUNTING STANDARDS - continued
 
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. 161Disclosures 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. 162The 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. 163Accounting 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.
 
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.
 
 
19

 
 
Item 4.             Controls and Procedures.
 
Changsheng Zhou and HaiYun Zhuang, our Chief Executive Officer and Chief Financial Officer, respectively, have concluded that our disclosure controls and procedures are appropriate and effective. They have evaluated these controls and procedures as of the date of this report on Form 10-Q. There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Our management, including our Chief Executive Officer and Chief Financial Officer, believes that our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives and are effective at the reasonable assurance level. However, our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost effective control system, misstatements due to error or fraud may occur and not be detected.
 
 
PART II.   OTHER INFORMATION

Item 1.             Legal Proceedings
 
The Company is not presently a party to any legal actions.
 
 
Item 1A.          Risk Factors
 
There have been no material changes from the risk factors previously disclosed and this smaller reporting company is not required to provide the information required by this item.
 
 
Item 2.            Unregistered Sales of Equity Securities and Use of Proceeds
 
None
 
 
Item 3.            Defaults Upon Senior Securities
 
None
 
 
Item 4.            (Removed and Reserved)
 
 
Item 5.            Other Information
 
None
 
 
 
20

 
 
Item 6.            Exhibits
 
 
 
SIGNATURES

In accordance with Section 12 of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
       
Date: April 4, 2010
By:
/s/  Zhou Chang Sheng  
    Zhou Chang Sheng  
    Chief Executive Officer  
    YaSheng Group, Ltd.  
 
       
Date: April 4, 2010
By:
/s/  Hai Yun Zhuang  
    Hai Yun Zhuang  
    Chief Financial Officer  
   
YaSheng Group, Ltd.
 

 
 
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