Edgar Filing: CHINA AUTOMOTIVE SYSTEMS INC

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2006

o	TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to _________

Commission file number: 000- 33123

China Automotive Systems, Inc.

(Exact name of registrant as specified in its charter)

Delaware		33-0885775
(State or other jurisdiction of incorporation or organization)		(IRS employer identification number)

No. 1 Henglong Road, Yu Qiao Development Zone Shashi District,

Jing Zhou City, Hubei Province, People’s Republic of China

(Address of principal executive offices)

Issuer’s telephone number: (86) 716- 832- 9196

Issuer’s fax number: (86) 716- 832-9298

Not Applicable

(Former name, former address and former fiscal year, if changed since last report.)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act). (Check one):

Large accelerated filer o

Accelerated filer o

Non-accelerated filer x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

As of June 30, 2006, the Company had 23,274,495 shares of common stock issued and outstanding.

CHINA AUTOMOTIVE SYSTEMS, INC.

INDEX

		Page

Part I — Financial Information

Item 1. Financial Statements		2

Condensed Consolidated Statements of Operations for the Three Months and Six Months Ended June 30, 2006 (Unaudited) and 2005		2

Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three Months and Six Months Ended June 30, 2006 (Unaudited) and 2005		4

Condensed Consolidated Balance Sheets at June 30, 2006 (Unaudited) and December 31, 2005 (Audited)		5

Condensed Consolidated Statements of Cash Flows for the Three Months and Six Months Ended June 30, 2006 (Unaudited) and 2005		6

Notes to Condensed Consolidated Financial Statements for the Three Months and Six Months Ended June 30, 2006 (Unaudited) and 2005		10

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	34

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	53

Item 4.	Controls and Procedures	55

Part II — Other Information

Item 1.	Legal Proceedings	55

Item 1A.	Risk Factors	56

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	65

Item 3.	Defaults Upon Senior Securities.	65

Item 4.	Submission of Matters to a Vote of Security Holders.	66

Item 5.	Other Information.	66

Item 6.	Exhibits	66

Signature		67

PART 1 — FINANCIAL INFORMATION

Item 1. Financial Statements

China Automotive Systems, Inc.

Condensed Consolidated Statements of Operations (Unaudited)

	Three Months Ended June 30,
	2006			2005
Net sales from continued operations, including $794,200 and $544,935 to related parties at June 30, 2006 and 2005, respectively	$	24,747,912		$	16,763,309
Cost of sales, including $674,207 and $490,032 purchased from related parties at June 30, 2006 and 2005, respectively		15,476,767			10,796,558

Gross profit		9,271,145			5,966,751

Costs and expenses:
Selling		1,699,118			1,716,305
General and administrative (See Note 15)		3,039,936			1,602,040
R&D expenses (See Note 15)		251,394			138,239
Depreciation and amortization (See Note 15)		1,253,604			769,950
Stock-Based Compensation		—			68,850

Total costs and expenses		6,244,052			4,295,384

Income from operations		3,027,093			1,671,367

Other income (expenses):

Other non-operating income		117,887			31,702
Financial expenses		(177,477	)		(324,368	)

Other income (loss), net		(59,590	)		(292,666	)

Income before income taxes		2,967,503			1,378,701
Income taxes		850,739			302,361

Income before minority interests		2,116,764			1,076,340
Minority interests		1,365,128			574,286

Net income	$	751,636		$	502,054

Basic	$	0.03		$	0.02

Diluted	$	0.03		$	0.02
Weighted average number of common shares outstanding -
Basic		23,254,121			22,574,542
Diluted		23,267,235			22,577,958

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

China Automotive Systems, Inc.

Condensed Consolidated Statements of Operations (Unaudited)

	Six Months Ended June 30,
	2006			2005
Net sales from continued operations, including $1,377,739 and $999,860 to related parties at June 30, 2006 and 2005, respectively	$	45,712,364		$	30,739,759
Cost of sales, including $1,330,202 and $895,788 purchased from related parties at June 30, 2006 and 2005, respectively		29,496,022			19,742,667

Gross profit		16,216,342			10,997,092

Costs and expenses:
Selling		2,608,970			2,390,373
General and administrative (See Note 15)		5,660,110			3,372,325
R&D expenses (See Note 15)		441,141			495,948
Depreciation and amortization (See Note 15)		1,942,094			1,384,771
Stock-Based Compensation		—			68,850

Total costs and expenses		10,652,315			7,712,267

Income from operations		5,564,027			3,284,825

Other income (expenses):

Other non-operating income		201,227			57,021
Financial expenses		(511,863	)		(607,601	)

Other income (loss), net		(310,636	)		(550,580	)

Income before income taxes		5,253,391			2,734,245
Income taxes		1,051,450			553,323

Income before minority interests		4,201,941			2,180,922
Minority interests		2,355,907			812,685

Net income	$	1,846,034		$	1,368,237

Basic	$	0.08		$	0.06

Diluted	$	0.08		$	0.06

Weighted average number of common shares outstanding -
Basic		22,969,051			22,574,542
Diluted		22,987,095			22,594,005

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

China Automotive Systems, Inc.

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

	Three Months Ended June 30,
	2006		2005
Net income	$	751,636	$	502,054
Other comprehensive income:
Foreign currency translation gain		—		—
Comprehensive income	$	751,636	$	502,054

	Six Months Ended June 30,
	2006		2005
Net income	$	1,846,034	$	1,368,237
Other comprehensive income:
Foreign currency translation gain		601,399		—
Comprehensive income	$	2,447,433	$	1,368,237

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

China Automotive Systems, Inc.

Condensed Consolidated Balance Sheets

	June 30,			December 31,
	2006			2005
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	19,792,500		$	12,374,944
Pledged cash deposits		1,847,417			1,185,660
Accounts and notes receivable, including $3,674,374 and $1,829,075 from related parties at June 30, 2006 and December 31, 2005, respectively, net of an allowance for doubtful accounts of $3,266,725 and $2,856,025 at June 30, 2006 and December 31, 2005, respectively		53,019,759			41,580,320
Advance payments, including $898,528 and $911,765 to related parties at June 30, 2006 and December 31, 2005, respectively		3,193,548			2,126,013
Inventories		14,752,795			12,385,833

Total current assets		92,606,019			69,652,770

Long-term Assets:
Property, plant and equipment		52,961,939			52,081,669
Less: Accumulated depreciation		(15,074,532	)		(12,285,636	)

		37,887,407			39,796,033

Intangible assets, net		3,226,153			3,503,217
Other receivables, including $5,971,220 and $3,966,509 from related parties at June 30, 2006 and December 31, 2005, respectively, net of an allowance for doubtful accounts of $1,936,790 and $1,040,169 at June 30, 2006 and December 31, 2005, respectively		5,467,643			6,503,629
Long-term investments		74,074			74,074

Total assets	$	139,261,296		$	119,529,723

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank loans	$	16,229,713		$	14,814,815
Accounts and notes payable, including $331,359 and $383,578 to related parties at June 30, 2006 and December 31, 2005, respectively		35,496,530			31,375,599
Customer deposits		766,968			157,919
Accrued payroll and related costs		1,466,593			1,418,093
Accrued expenses and other payables		6,113,482			5,191,617
Accrued pension costs		2,833,938			2,653,064
Taxes payable		5,248,377			4,172,212
Amounts due to shareholders/directors		315,504			766,642

Total current liabilities		68,471,105			60,549,961
Long-term liabilities:
Advances payable		301,552			301,614

Total liabilities	$	68,772,657		$	60,851,575

Minority interests		26,150,442			21,751,043

Stockholders' equity:
Preferred stock, $0.0001 par value-
Authorized - 20,000,000 shares
Issued and outstanding - None		—			—
Common stock, $0.0001 par value-
Authorized - 80,000,000 shares
Issued and outstanding-
23,274,495 shares and 22,574,543 shares at June 30, 2006 and December 31, 2005, respectively		2,327			2,257
Additional paid-in capital		23,110,311			18,146,722
Retained earnings-
Appropriated		5,078,584			4,923,262
Unappropriated		14,212,892			12,522,180
Accumulated other comprehensive income		1,934,083			1,332,684

Total stockholders' equity		44,338,197			36,927,105

Total liabilities and stockholders' equity	$	139,261,296		$	119,529,723

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

China Automotive Systems, Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)

	Three Months Ended June 30,
	2006			2005
Cash flows from operating activities:
Net income	$	751,636		$	502,054
Adjustments to reconcile net income from continuing operations to net cash provided by operating activities:
Minority interests		1,365,128			574,286
Stock-based compensation		—			68,850
Depreciation and amortization		1,880,846			1,234,198
Allowance for doubtful accounts		576,977			103,760
Changes in operating assets and liabilities:
Increase (decrease) in:
Pledged cash deposits		1,679,246			(139,423	)
Accounts and notes receivable		(6,743,654	)		1,949,942
Advance payments		(910,362	)		(936,827	)
Inventories		(1,158,465	)		(2,112,833	)
Increase (decrease) in:
Accounts and notes payable		(5,627,862	)		2,626,270
Customer deposits		550,332			(129,414	)
Accrued payroll and related costs		(84,044	)		21,757
Accrued expenses and other payables		717,862			314,563
Accrued pension costs		65,310			402,908
Taxes payable		201,171			(465,907	)
Advances payable		(62	)		—

Net cash provided by (used in) operating activities		(6,735,941	)		4,014,184

Cash flows from investing activities:
(Increase) decrease in other receivables		1,726,035			(1,123,711	)
Cash paid to acquire property, plant and equipment		(299,718	)		(1,674,042	)
Cash paid to acquire intangible assets		(1,224	)		(118,527	)
Cash received from other investing activities		3,920			—

Net cash provided by (used in) investing activities		1,429,013			(2,916,280	)

Cash flows from financing activities:
Increase (decrease) in proceeds from bank loans		2,496,879			(3,012,048	)
Dividends be paid to the minority interest holders of Joint-venture companies		(614,742	)		—
Increase (decrease) in amounts due to
shareholders/directors		(365,120	)		(3,060	)
Proceeds from issuance of common stock		19,740			—
Capital Contribution from the minority interest holders of Joint-venture companies		1,422,075			—

Net cash provided by (used in) financing activities		2,958,832			(3,015,108	)

Increase (decrease) in cash and cash equivalents		(2,348,096	)		(1,917,204	)
Cash and cash equivalents at beginning of period		22,140,596			12,972,439

Cash and cash equivalents at end of period	$	19,792,500		$	11,055,235

China Automotive Systems, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited) (continued)

	Three Months Ended June 30,
	2006		2005
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest	$	154,787	$	95,905

Cash paid for income taxes	$	556,212	$	457,845

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

China Automotive Systems, Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)

	Six Months Ended June 30,
	2006			2005
Cash flows from operating activities:
Net income	$	1,846,034		$	1,368,237
Adjustments to reconcile net income from continuing operations to net cash provided by operating activities:
Minority interests		2,355,907			812,685
Stock-based compensation		—			68,850
Depreciation and amortization		3,334,319			2,292,439
Allowance for doubtful accounts		1,263,545			197,321
Changes in operating assets and liabilities:
(Increase) decrease in:
Pledged deposits		(661,757	)		(1,023,340	)
Accounts and notes receivable		(11,818,049	)		3,874,257
Advance payments		(1,067,535	)		(2,508,300	)
Inventories		(2,366,961	)		(2,028,977	)
Increase (decrease) in:
Accounts and notes payable		4,120,931			1,771,307
Customer deposits		609,049			(74,350	)
Accrued payroll and related costs		48,500			21,493
Accrued expenses and other payables		2,282,869			(312,355	)
Accrued pension costs		180,874			654,136
Taxes payable		1,076,165			(200,424	)
Advances payable		(62	)		(156	)

Net cash provided by (used in) operating activities		1,203,829			4,912,823

Cash flows from investing activities:
(Increase) decrease in other receivables		94,383			(1,265,964	)
Cash paid to acquire property, plant and equipment		(952,502	)		(2,226,932	)
Cash paid to acquire intangible assets		(139,462	)		(194,145	)
Cash received from other investing activities		3,920			—

Net cash provided by (used in) investing activities		(993,661	)		(3,687,041	)

Cash flows from financing activities:
Increase (decrease) in proceeds from bank loans		1,414,898			(602,410	)
Dividends be paid to the minority interest holders of Joint-venture companies		(739,586	)		(787,321	)
Increase (decrease) in amounts due to shareholders/directors		(451,138	)		54,545
Proceeds from issuance of common stock		4,959,740			—
Capital Contribution from the minority interest holders of Joint-venture companies		1,422,075			—

Net cash provided by (used in) financing activities		6,605,989			(1,335,186	)

Effect of exchange rate fluctuations on cash and cash equivalents		601,399			—

Increase (decrease) in cash and cash equivalents		7,417,556			(109,404	)
Cash and cash equivalents at beginning of period		12,374,944			11,164,639

Cash and cash equivalents at end of period	$	19,792,500		$	11,055,235

China Automotive Systems, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited) (continued)

	Six Months Ended June 30,
	2006			2005
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest	$	347,886		$	381,283

Cash paid for income taxes	$	686,927		$	673,345

SUPPLEMENTAL DISCLOSURE OF INVESTING AND FINANCING ACTIVITIES ON A CASHLESS BASIS:
Issuance of common shares on a cashless basis	$	4		$	—
Financing services fee related to issuance of common shares	$	(4	)	$	—
Increase in capital by minority shareholder of Joint-venture	$	921,784		$	—

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

China Automotive Systems, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

June 30, 2006

1. ORGANIZATION AND BASIS OF PRESENTATION

Organization - Effective March 5, 2003, Visions-In-Glass, Inc., a United States company incorporated in the State of Delaware, “Visions”, entered into a Share Exchange Agreement to acquire 100% of the shareholder interest in Great Genesis Holding Limited, a company incorporated on January 3, 2003 under the Companies Ordinance in Hong Kong as a limited liability company, “Great Genesis”, as a result of which Great Genesis became a wholly-owned subsidiary of Visions. At the closing, the former directors and officers of Visions resigned, and new directors and officers were appointed. Visions subsequently changed its name to China Automotive Systems, Inc.

China Automotive Systems, Inc., including, when the context so requires, its subsidiaries and the subsidiaries’ interests in the Sino-foreign Joint-ventures described below, is referred to herein as the “Company”. The Company, through its Sino-foreign Joint-ventures described below, is engaged in the manufacture and sale of automotive systems and components in the People’s Republic of China, the “PRC” or “China”, as described below.

Ji Long Enterprise Investment Limited was incorporated on October 8, 1992 under the Companies Ordinance in Hong Kong as a limited liability company, “Ji Long”. Ji Long is an investment holding company. Effective March 4, 2003, all of the shareholders of Ji Long exchanged their 100% shareholder interest for a 100% shareholder interest in Great Genesis, as a result of which Ji Long became a wholly-owned subsidiary of Great Genesis.

In exchange for the acquisition of 100% of the shareholder interest in Great Genesis, the shareholders of Great Genesis were issued 20,914,250 shares of common stock of Visions. In addition, the shareholders of Great Genesis paid $320,000 to the former officer, director and controlling shareholder of Visions in two installments for the cancellation of 17,424,750 shares of common stock.

The acquisition of Great Genesis by the Company was accounted for as a recapitalization of Great Genesis, pursuant to which the accounting basis of Great Genesis remained unchanged subsequent to the transaction date. Accordingly, the pre-transaction financial statements of Great Genesis are the historical financial statements of the Company.

As of June 30, 2006 and 2005, Great Genesis owns the following aggregate net interests in seven Sino-foreign Joint-ventures organized in the PRC:

	Percentage Interest
	June 30,
Name of Entity	2006			2005

Shashi Jiulong Power Steering Co. Limited ("Jiulong")		81.0	%		81.0	%

Jingzhou Henglong Automotive Parts Co. Limited ("Henglong")		44.5	%		44.5	%

Shenyang Jinbei Henglong Automotive Steering System Co. Limited ("Shenyang")		70.0	%		70.0	%

Zhejiang Henglong & Vie Pump-Manu Co. Limited ("Zhejiang")		51.0	%		51.0	%

Universal Sensor Application, Inc. (“USAI”)		60.0	%		60	%

Wuhan Jielong Electric Power Steering Co., Ltd. (“Jielong”)		85.0	%		—

Wuhu HengLong Auto Steering System Co., Ltd. (“Wuhu”)		77.33	%		—

Jiulong was established in 1993 and mainly engaged in the production of integral power steering gears for heavy-duty vehicles.

Henglong was established in 1997 and mainly engaged in the production of rack and pinion power steering gears for cars and light duty vehicles.

Shenyang was established in 2002 and focuses on power steering parts for light duty vehicles.

Zhejiang was established in 2002 to focus on power steering pumps.

On April 12, 2005, the wholly-owned subsidiary of the company, Great Genesis entered into a Joint-venture agreement with Shanghai Hongxi Investment Inc., “Hongxi”, a company controlled by Mr. Hanlin Chen, the Company’s Chairman, and Sensor System Solution Inc., “Sensor”, to establish a joint venture, Universal Sensor Application Inc., “USAI”, in the Wuhan East Lake development zone. The registered capital of the Joint-venture is $10 million. Great Genesis and Hongxi will invest $6 million and $1 million, respectively, including cash and land and building, which will account for 60% and 10% of the total registered capital, respectively. Sensor invested $3 million in technology, accounting for 30% of the total registered capital. The registered capital is required to be paid in three installments within one year after signing of the Joint-venture agreement, April 12, 2005. As of June 30, 2006, Great Genesis and Sensor have contributed $900,337, the equivalent of RMB7,200,000 and $3,000,000 respectively, including cash and technology. Hongxi has contributed $436,954 in cash, the equivalent of RMB3,500,000.

On April 14, 2006, the wholly-owned subsidiary of the company, Great Genesis entered into a Joint-venture agreement with Hong Kong Tongda, “Tongda”, to establish a joint venture, Wuhan Jielong Electric Power Steering Co., Ltd., “Jielong”, in the Wuhan East Lake development zone. Jielong is mainly engaged in the production and sales of electric power steering, “EPS”. The registered capital of the Joint-venture is $6 million, the equivalent of RMB48,000,000. Great Genesis and Tongda will invest $5,100,000 and $900,000, respectively, amounting to 85% and 15% of the total registered capital, respectively. As of June 30, 2006, Great Genesis and Tongda have contributed $766,146 and $135,034 in cash, the equivalent of RMB6,120,000 and RMB1,080,000 respectively.

On March 31, 2006, as amended on May 2, 2006, Great Genesis, the wholly-owned subsidiary of the Company, entered into a Joint-venture agreement with Wuhu Chery Technology Co., Ltd., “Chery Technology”, to establish a Joint-venture, Wuhu Henglong Automotive Steering System Co., Ltd in the Wuhu Technological Development Zone. Wuhu is mainly engaged in the production and sales of automobile steering system. The registered capital of the Joint-venture is $3,750,387, the equivalent of RMB30,000,000. Great Genesis and Chery Technology will invest $2,900,300 and $850,087, respectively, which will account for 77.33% and 22.67% of the total registered capital, respectively. As of June 30, 2006, the capital of $3,750,387, the equivalent of RMB30,000,000, has been totally contributed in Wuhu.

Basis of Presentation - For the three months ended June 30, 2006 and 2005, the accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. The subsidiaries include the seven Sino-foreign Joint-ventures mentioned in Note 1. Significant inter-company balances and transactions have been eliminated upon consolidation. The consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America.

Foreign Currencies - The Company maintains its books and records in Renminbi, “RMB”, the currency of the PRC, its functional currency. Foreign currency transactions in RMB are reflected using the temporal method. Under this method, all monetary items are translated into the functional currency at the rate of exchange prevailing at the balance sheet date. Non-monetary items are translated at historical rates. Income and expenses are translated at the rate in effect on the transaction dates. Transaction gains and losses, if any, are included in the determination of net income (loss) for the period.

In translating the financial statements of the Company from its functional currency into its reporting currency in United States dollars, balance sheet accounts are translated using the closing exchange rate in effect at the balance sheet date and income and expense accounts are translated using an average exchange rate prevailing during the reporting period. Adjustments resulting from the translation, if any, are included in cumulative other comprehensive income (loss) in stockholders’ equity.

Exchange rate used in translating the financial statements of the Company from its functional currency, “Renminbi”, into its reporting currency, “US Dollars”:

Reporting Period	Renminbi		US Dollars
Prior to July 1, 2005		1		0.1205
From July 1, 2005 to December 31, 2005		1		0.1233
From January 1, 2006 to June 30, 2006		1		0.1248

Comments - The accompanying interim condensed consolidated financial statements are unaudited, but in the opinion of management of the Company, contain all adjustments, which include normal recurring adjustments, necessary to present fairly the financial position, the results of operations and cash flows for the three months and six months ended June 30, 2006.

The consolidated balance sheet as of December 31, 2005 is derived from the Company’s audited financial statements.

Certain information and footnote disclosures normally included in financial statements that have been prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission, although the Company’s management believes that the disclosures contained in these financial statements are adequate to make the information presented therein not misleading. For further information, refer to the financial statements and the notes thereto included in the Company’s 2005 Annual Report on Form 10-K, as filed with the Securities and Exchange Commission.

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

The results of operations for the three months and six months ended June 30, 2006 are not necessarily indicative of the results of operations to be expected for the full fiscal year ending December 31, 2006.

Income Per Share - Basic income per share is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted income per share is calculated assuming the issuance of common shares, if dilutive, resulting from the exercise of warrants.

Actual weighted average shares outstanding used in calculating basic and diluted earnings (loss) per share were:

	Three Months Ended June 30,
	2006		2005
Weighted average shares outstanding		23,254,121		22,574,542
Effect of dilutive securities		13,114		3,416
Diluted shares outstanding		23,267,235		22,577,958

	Six Months Ended June 30,
	2006		2005
Weighted average shares outstanding		22,969,051		22,574,542
Effect of dilutive securities		18,044		19,463
Diluted shares outstanding		22,987,095		22,594,005

The 156,250 shares underlying warrants issued to Cornell Capital Partners, LP on March 20, 2006 has not been included in the computation of diluted earnings (loss) per share because such inclusion would have had an anti-dilutive effect:

	Three Months Ended June 30,
	2006		2005
Anti-dilutive securities		119,389		—

	Six Months Ended June 30,
		2006	2005
Anti-dilutive securities		109,206	—

Stock-Based Compensation - The Company may periodically issue stock options to employees and stock options or warrants to non-employees in non-capital raising transactions for services and for financing costs.

A summary of option activities under the plans to June 30, 2006 was as follows:

	Shares			Weighted-Average Exercise Price		Weighted-Average Contractual Term (years)
Granted to independent directors, July 21, 2004		22,500		$	4.50		2
Balance, December 31, 2004		22,500		$	4.50		2
Granted to independent directors, June 28, 2005		22,500		$	6.83		5
Balance, December 31, 2005		45,000		$	5.67		3.5
Granted to investors, March 20, 2006		86,806		$	14.40		3
Granted to investors, March 20, 2006		69,444		$	18.00		3
Exercised, May 17, 2006		(7,500	)	$	4.50		—
Balance, June 30, 2006		193,750		$	14.04		3.2

The characteristics of outstanding stock options at June 30, 2006 were as follows:

		Outstanding Options		Exercisable Options
Exercise Price		Shares	Remaining Life (Years)	Shares	Exercise Price
$	4.50	15,000	0.06	15,000	$	4.50
	6.83	22,500	3.99	22,500		6.83
	14.40	86,806	2.22	—		—
$	18.00	69,444	2.22	—	$	—

The Company has adopted Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Accounting for Stock-Based Compensation”, which establishes a fair value method of accounting for stock-based compensation plans.

In accordance with SFAS No. 123R, the cost of stock options and warrants issued to employees and non-employees is measured at the grant date based on the fair value of the award. The fair value of the stock-based award is determined using the Black-Scholes option pricing model. The resulting amount is charged to expense on the straight-line basis over the period in which the Company expects to receive benefit, which is generally the vesting period.

The weighted-average fair value of options granted during the periods 2006, 2005 and 2004 was $5.30, $3.06 and $2.45, respectively. The fair value of each option grant was estimated on the date of grant using option valuation model and assumptions noted in the table:

	2006			2005			2004
Expected volatility		82.0	%		46.0	%		121.6	%
Risk-free rate		4.7	%		3.6	%		4.0	%
Expected term (years)		3			5			2
Dividend yield		0.0	%		0.0	%		0.0	%

The Company may periodically issue shares of common stock for services rendered or for financing costs. Such shares will be valued based on the market price on the transaction date.

On March 20, 2006, the Company issued 37,863 shares of common stock to Cornell Capital Partners, LP and a placement agent, collectively at an exercise price of $11.885 per share as a commitment fee and a placement agent fee in connection with the establishment of a $15,000,000 equity line of credit under a Standby Equity Distribution Agreement with Cornell Capital Partners, LP.

Comprehensive Income - The Company has adopted the provisions of Statement of Financial Accounting Standards No. 130, “Reporting Comprehensive Income” (“SFAS No. 130”). SFAS No. 130 establishes standards for the reporting and display of comprehensive income, its components and accumulated balances in a full set of general purpose financial statements. SFAS No. 130 defines comprehensive income to include all changes in equity except those resulting from investments by owners and distributions to owners, including adjustments to minimum pension liabilities, accumulated foreign currency translation, and unrealized gains or losses on marketable securities.

For the three months and six months ended June 30, 2006, the Company’s only component of other comprehensive income is foreign currency translation gain of $0 and $601,399. These amounts have been recorded as a separate component of stockholders’ equity. The Company did not have any other comprehensive income during three months and six months ended June 30, 2005.

Reclassifications —certain reclassifications have been made to the Consolidated Statement of Operations for the three months and six months ended June 30, 2005 to conform to the current year presentation. (See Note 15)

2. CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES

The Company is subject to the consideration and risks of operating in the PRC. These include risks associated with the political and economic environment, foreign currency exchange and the legal system in the PRC.

The economy of the PRC differs significantly from the economies of the “western” industrialized nations in structure, level of development, gross national product, growth rate, capital reinvestment, resource allocation, self-sufficiency, rate of inflation and balance of payments position, among others. Only recently has the PRC government encouraged substantial private economic activities. The Chinese economy has experienced significant growth in the past several years, but such growth has been uneven among various sectors of the economy and geographic regions. Actions by the PRC government to control inflation have significantly restrained economic expansion in the recent past. Similar actions by the PRC government in the future could have a significant adverse effect on economic conditions in the PRC.

Many laws and regulations dealing with economic matters in general and foreign investment in particular have been enacted in the PRC. However, the PRC still does not have a comprehensive system of laws, and enforcement of existing laws may be uncertain and sporadic.

The Company’s operating assets and primary sources of income and cash flows are the interests of its subsidiaries in Sino-foreign Joint-ventures in the PRC. The PRC economy has been, for many years, a centrally-planned economy, operating on the basis of annual, five-year and ten-year state plans adopted by central PRC governmental authorities, which set out national production and development targets. The PRC government has been pursuing economic reforms since it first adopted its “open-door” policy in 1978. There is no assurance that the PRC government will continue to pursue economic reforms or that there will not be any significant change in its economic or other policies, particularly in the event of any change in the political leadership of, or the political, economic or social conditions in the PRC. There is also no assurance that the Company will not be adversely affected by any such change in governmental policies or any unfavorable change in the political, economic or social conditions, the laws or regulations, or the rate or method of taxation in the PRC.

As many of the economic reforms, which have been or are being implemented by the PRC government, are unprecedented or experimental, they may be subject to adjustment or refinement, which may have adverse effects on the Company. Further, through state plans and other economic and fiscal measures such as the level of exchange rate, it remains possible for the PRC government to exert significant influence on the PRC economy.

The Company’s financial instruments that are exposed to concentration of credit risk consist primarily of cash and cash equivalents, and accounts receivable from customers. Cash and cash equivalents are maintained with major banks in the PRC. The Company’s business activity is with customers in the PRC. The Company periodically performs credit analysis and monitors the financial condition of its clients in order to minimize credit risk.

Any devaluation of the RMB against the United States dollar would have adverse effects on the Company’s financial performance and asset values when measured in terms of the United States dollar. Should the RMB significantly devalue against the United States dollar, such devaluation could have a material adverse effect on the Company’s earnings and the foreign currency equivalent of such earnings. The Company does not hedge its RMB - United States dollar exchange rate exposure.

On July 21, 2005, the People's Bank of China changed its exchange rate system from its previous fixed exchange rate announced on January 1, 1994 to a unitary and well-managed floating exchange rate based on market supply and demand. No representation is made that the RMB amounts could be freely converted into other foreign currencies. All foreign exchange transactions continue to take place either through the Bank of China or other banks authorized to buy and sell foreign currencies at the exchange rate quoted by the People’s Bank of China. Approval of foreign currency payments by the People’s Bank of China or other institutions requires submission of a payment application form together with suppliers’ invoices, shipping documents and signed contracts.

3. RECENT ACCOUNTING PRONOUNCEMENTS

In 2003, the FASB issued SFAS No. 132R, “Employers’ Disclosures about Pensions and Other Postretirement Benefits (Revised in December 2003)”—an amendment of FASB Statements No. 87, 88, and 106 (Issued 12/03). This Statement revises employers’ disclosures about pension plans and other postretirement benefit plans. It does not change the measurement or recognition of those plans required by FASB Statements No. 87, Employers’ Accounting for Pensions, No. 88, Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits, and No. 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions. SFAS 132R is effective for fiscal years beginning after December 15, 2003. The adoption of SFAS No. 132R did not have a significant effect on the Company’s financial statement presentation or disclosures.

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs—An Amendment of Accounting Research Bulletin No. 43, Chapter 4” (SFAS 151). SFAS 151 clarifies that abnormal amounts of idle facility expense, freight, handling costs and spoilage should be expensed as incurred and not included in overhead as an inventory cost. The new statement also requires that allocation of fixed production overhead costs to conversion costs should be based on normal capacity of the production facilities. The provisions in SFAS 151 must be applied prospectively and became effective for the Company beginning January 1, 2006. The Company adopted this statement beginning in the first quarter of 2006.

In December 2004, the FASB issued SFAS No. 152 “Accounting for Real Estate Time-Sharing Transactions - an amendment of FASB Statements No. 66 and 67” (“SFAS 152”). 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 04-2 “Accounting for Real Estate Time-Sharing Transactions” (“SOP 04-2”). SFAS 152 also amends FASB Statement No. 67 “Accounting for Costs and Initial Rental operations of Real Estate Projects” to state that the guidance for incidental operations and costs incurred to sell real estate projects does not apply to real estate time-sharing transactions, with the accounting for those operations and costs being subject to the guidance in SOP 04-2. The provisions of SFAS 152 are effective in fiscal years beginning after June 15, 2005. The Company adopted this statement beginning in the first quarter of 2006.

In December 2004, the FASB issued SFAS No. 123 (Revised 2004), “Share-Based Payment” (SFAS 123R). This statement requires financial statement recognition of compensation cost related to share-based payment transactions. Share-based payment transactions within the scope of SFAS 123R include stock options, restricted stock plans, performance-based awards, stock appreciation rights, and employee share purchase plans. The provisions of SFAS 123R are effective for the first fiscal year beginning after June 15, 2005. However, in April 2005, the SEC deferred the effective date of SFAS 123R for SEC registrants to the first interim period beginning after June 15, 2005. Accordingly, the Company adopted this statement beginning in the first quarter of 2006.

In December 2004, the FASB issued SFAS No. 153 “Exchanges of Nonmonetary Assets, an amendment of Accounting Principles Board Opinion No. 29” (SFAS 153). This statement amends Accounting Principles Board Opinion (APB) No. 29, “Accounting for Nonmonetary Transactions” to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that have no commercial substance. Under SFAS 153, if a nonmonetary exchange of similar productive assets meets a commercial-substance criterion and fair value is determinable, the transaction must be accounted for at fair value resulting in recognition of any gain or loss. SFAS 153 was effective for nonmonetary transactions in fiscal periods beginning after June 15, 2005. The Company adopted this statement beginning in the first quarter of 2006.

In March 2005, the FASB issued Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations, an Interpretation of FASB Statement No. 143” (FIN 47). Under FIN 47, we are required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. Any uncertainty about the amount and/or timing of future settlement should be factored into the measurement of the liability when sufficient information exists. FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value. The provisions of FIN 47 were required to be applied no later than the end of fiscal years ending after December 15, 2005. The Company adopted this statement beginning in the first quarter of 2006.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections—a replacement of APB Opinion No. 20 and FASB Statement No. 3” (SFAS 154). This statement changes the requirements for the accounting for and reporting of a change in accounting principle and 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. APB No. 20 required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. This statement requires retrospective application to prior period financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. The provisions of SFAS 154 are effective for fiscal years beginning after December 15, 2005. The Company adopted this statement beginning in the first quarter of 2006.

In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments”. This Statement amends FASB Statements No. 133, Accounting for Derivative Instruments and Hedging Activities, and No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. This Statement resolves issues addressed in Statement 133 Implementation Issue No. D1, “Application of Statement 133 to Beneficial Interests in Securitized Financial Assets.” SFAS No. 155 permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, clarifies which interest-only strips and principal-only strips are not subject to the requirements of Statement 133, and establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation. It also clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives and amends Statement 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. This Statement is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The Company has not yet determined the impact of the adoption of SFAS No. 155 on its financial statements, if any.

In 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets”. This Statement amends FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, with respect to the accounting for separately recognized servicing assets and servicing liabilities. This Statement requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract in indicated situations; requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable; permits an entity to choose relevant subsequent measurement methods for each class of separately recognized servicing assets and servicing liabilities; at its initial adoption, permits a one-time reclassification of available-for-sale securities to trading securities by entities with recognized servicing rights, without calling into question the treatment of other available-for-sale securities under Statement 115, provided that the available-for-sale securities are identified in some manner as offsetting the entity’s exposure to changes in fair value of servicing assets or servicing liabilities that a servicer elects to subsequently measure at fair value; and requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair value in the statement of financial position and additional disclosures for all separately recognized servicing assets and servicing liabilities. The adoption of SFAS No. 156 did not have a material impact on our Consolidated Financial Statements.

4. ACCOUNTS AND NOTES RECEIVABLE

The Company’s accounts and notes receivable at June 30, 2006 (unaudited) and December 31, 2005 are summarized as follows:

	June 30, 2006			December 31, 2005
Accounts receivable	$	37,729,888		$	31,866,156
Notes receivable		18,556,596			12,570,189
		56,286,484			44,436,345
Less: allowance for doubtful accounts		(3,266,725	)		(2,856,025	)
	$	53,019,759		$	41,580,320

Notes receivable represent accounts receivable in the form of bills of exchange whose acceptances and settlements are handled by banks.

5. OTHER RECEIVABLES

The Company’s other receivable at June 30, 2006 (unaudited) and December 31, 2005 are summarized as follows:

	June 30,			December 31,
	2006			2005

Other receivable, including $5,971,220 and $3,966,509 from related parties	$	7,404,433		$	7,543,798
at June 30, 2006 and December 31, 2005, respectively
Less: allowance for doubtful accounts		(1,936,790	)		(1,040,169	)
	$	5,467,643		$	6,503,629

Other receivables consist of amounts advanced to both related and unrelated parties, primarily as unsecured demand loans, with no stated interest rate or due date.

Included in other receivable from related parties as of June 30, 2006 were the following:

Description	Advances Receivable

Amounts advanced to related parties, controlled by Mr. Hanlin Chen, the Company’s Chairman	$	4,488,910	*
Amounts advanced to investee of Jiulong		553,494	**
Amounts advanced to minority shareholder of Joint-venture Companies		928,816	***
Total	$	5,971,220

*	This balance is non-interest bearing and will be due on demand on or before December 31, 2006.

**	This amount is deemed uncollectible and the company has recorded an appropriate allowance for doubtful accounts.

***	This balance is non-interest bearing and will be due on demand on or before December 31, 2006.

6. INVENTORIES

Inventories at June 30, 2006 (Unaudited) and December 31, 2005 consisted of the following:

	June 30, 2006			December 31, 2005

Raw materials	$	4,243,510		$	3,025,467
Work-in-process		2,796,097			2,559,626
Finished goods		8,279,043			7,295,082

		15,318,650			12,880,175
Less: provision for loss		(565,855	)		(494,342	)

	$	14,752,795		$	12,385,833

7. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment at June 30, 2006 (unaudited) and December 31, 2005 are summarized as follows:

	June 30, 2006			December 31, 2005

Land use rights and buildings	$	17,065,896		$	16,825,598
Machinery and equipment		31,553,903			30,980,053
Electronic equipment		2,115,455			2,023,457
Motor vehicles		2,114,340			2,179,161
Construction in progress		112,345			73,400

		52,961,939			52,081,669
Less: Accumulated depreciation		(15,074,532	)		(12,285,636	)

	$	37,887,407		$	39,796,033

8. INTANGIBLE ASSETS

The activities in the Company’s intangible asset account at June 30, 2006 (unaudited) and December 31, 2005 are summarized as follows:

	June 30, 2006			December 31, 2005

Balance at beginning of year,	$	3,503,217		$	392,552
Add: Additions during the period -
Management software license		61,798			3,147,867
Mapping design software license		38,301			93,827
Foreign currency translation gain		39,362			9,693
		3,642,678			3,643,939
Less: Amortization during the period		(416,525	)		(140,722	)
Balance at the end of the period	$	3,226,153		$	3,503,217

9. ACCOUNTS AND NOTES PAYABLE

Accounts and notes payable at June 30, 2006 (unaudited) and December 31, 2005 are summarized as follows:

	June 30, 2006		December 31, 2005
Accounts payable	$	20,993,263	$	15,615,402
Notes payable		14,503,267		15,760,197
	$	35,496,530	$	31,375,599

Notes payable represent accounts payable in the form of bills of exchange whose acceptances and settlements are handled by banks.

The Company has pledged cash deposits, notes receivable and certain plant and machinery to secure trade financing granted by banks.

10. BANK LOANS

At June 30, 2006, the Company through its Sino-foreign Joint-ventures had outstanding fixed-rate short-term bank loans of $16,229,713. The weighted average interest rate for the six months ended June 30, 2006 was 5.90% per annum. Henglong, one of the Company’s joint ventures, provided Jiulong, another of the Company’s Joint-ventures, with loan guarantees covering bank loans of $6,242,197. The remaining bank loan of $9,987,516 was secured by mortgages on certain plant and equipment of the Company.

At December 31, 2005, the Company through its Sino-foreign Joint-ventures had outstanding fixed-rate short-term bank loans of $14,814,815. The weighted average interest rate for the year ended December 31, 2005 was 5.92% per annum. Jiulong, one of the Company’s Joint-ventures, provided Henglong, another of the Company’s Joint-ventures, with loan guarantees covering bank loans of $3,086,420. Henglong provided Jiulong with loan guarantees covering bank loans of $4,938,272. The remaining bank loan of $6,790,123 was secured by mortgages on certain plant and equipment of the Company.

11. AMOUNTS DUE TO SHAREHOLDERS/DIRECTORS

The activities in the amounts due to shareholders/directors at June 30, 2006 (unaudited) and December 31, 2005 are summarized as follows:

Balance, December 31, 2004	$	589,594
Cash advances from shareholders		177,048
Balance, December 31, 2005	$	766,642
Cash repaid to shareholder		(451,138	)
Balance, June 30, 2006	$	315,504

As of June 30, 2006 and December 31, 2005, the amounts due to shareholders/directors were unsecured, interest-free and repayable on demand.

12. MINORITY INTERESTS

The activities in respect of the amounts of the minority interests’ equity at June 30, 2006 (unaudited) and December 31, 2005 are summarized as follows:

Balance, December 31, 2004	$	17,571,838
Add: contribution by minority shareholders		3,066,000
Minority interests’ income		2,680,318
Additional interest to the minority interest holders in connection with disposal of property, plant and equipment	$	93,168
Less: dividends declared to the minority stockholders’ equity of Joint-venture companies		(1,660,281	)

Balance, December 31, 2005	$	21,751,043
Add: contribution by minority shareholders		2,343,859
Minority interests’ income		2,355,907
Less: dividends paid to the minority stockholders’ equity of Joint-venture companies		(300,367	)
Balance, June 30, 2006	$	26,150,442

On February 25, 2006, Jiulong, one of the Joint-ventures of the Company, held a meeting of the board and approved an increase in its capital stock of $1,897,628 , the equivalent of RMB15,200,000, of which the Company subscribed $1,537,079, the equivalent of RMB12,312,000, and capital stock of $360,548, the equivalent of RMB2,888,000, subscribed by the minority shareholder was deducted from dividends payable.

On February 25, 2006, Henglong, one of the Joint-ventures of the Company, held a meeting of the board and approved an increase in its capital stock of $1,011,236, the equivalent of RMB8,100,000, of which the Company subscribed $450,000, the equivalent of RMB3,604,500, and the capital stock of $561,236, the equivalent of RMB4,495,500 subscribed by the minority shareholder was deducted from dividends payable.

On February 20, 2006, Shengyang, one of the Joint-ventures of the Company, held a meeting of the board and approved distribution of dividends of $1,001,223, the equivalent of RMB 8,019,803, of which $700,856, the equivalent of RMB4,900,599, was distributed to the Company and $300,367, the equivalent of RMB3,119,204, was distributed to the minority shareholder.

On April 6, 2006, USAI, one of the Joint-ventures of the Company, its minority stockholders distributed capital stock of $436,954 in cash, the equivalent of RMB3,500,000.

13. STOCKHOLDERS’ EQUITY

The activities in respect of the amounts of the stockholders’ equity at June 30, 2006 (unaudited) and December 31, 2005 are summarized as follows:

	Common Stock				Preferred Stock				Additional Paid-
	Shares		Par Value		Shares		Par Value		in Capital

Balance, December 31, 2004		22,574,543	$	2,257		—	$	—	$	18,003,168
Foreign currency translation gain		—		—		—		—		—
Deemed distribution to shareholders		—		—		—		—		74,704
Issuance of options for independent directors		—		—		—		—		68,850
Net income for the year ended December, 31, 2005		—		—		—		—		—
Appropriation of retained earnings		—		—		—		—		—
Balance, December 31, 2005		22,574,543	$	2,257		—	$	—	$	18,146,722
Issuance of common stock		662,089		66		—		—		4,959,673
Issuance of common shares related to financing services		37,863		4		—		—		(4)
Foreign currency translation gain		—		—		—		—		3,920
Net income for the period ended June 30, 2006		—		—		—		—		—
Balance, June 30, 2006		23,274,495	$	2,327		—	$	—	$	23,110,311

	Retained Earnings					Accumulated Other Comprehensive
	Appropriated		Unappropriated			Income (Loss)		Total

Balance, December 31, 2004	$	4,396,339	$	9,733,625		$	3,060	$	32,138,449
Foreign currency translation gain		—		—			1,329,624		1, 329,624
Deemed distribution to shareholders		—		—			—		74,704
Issuance of options for independent directors		—		—			—		68,850
Net income for the year ended December, 31, 2005		—		3,315,478			—		3,315,478
Appropriation of retained earnings		526,923		(526,923	)		—		—
Balance, December 31, 2005	$	4,923,262	$	12,522,180		$	1,332,684	$	36,927,105

Sale of common stock		—		—			—		4,959,740
Issuance of common shares related to financing services		—		—			—		—
Foreign currency translation gain		—		—			601,399		605,319
Net income for the period ended June 30, 2006		—		1,846,034			—		1,846,034
Appropriation of retained earnings		155,322		(155,322	)		—		—
Balance, June 30, 2006	$	5,078,584	$	14,212,892		$	1,934,083	$	44,338,198

14. INCOME TAXES

The Company’s Sino-foreign Joint-ventures are subject to PRC state and local income taxes at the applicable tax rate on the taxable income as reported in their PRC statutory financial statements in accordance with the relevant income tax laws applicable to foreign invested enterprises. In accordance with the Income Tax Law of the PRC for Enterprises with Foreign Investments and Foreign Enterprises, enterprises with foreign investments and foreign enterprises meeting certain criteria are entitled to full exemption from income tax for the first two years and a 50% reduction for the next three years, commencing from the first profit-making year after offsetting all tax losses carried forward from the previous five years.

Two of the Company’s Sino-foreign Joint-ventures, Henglong and Jiulong, were subject to a tax rate of 15% during 2005 and 2006. Shenyang was entitled to and was certified for a two-year tax holiday commencing in 2003, the first profit-making year. Therefore, Shenyang was income tax exempted in 2004 and is subject to a tax rate of 7.5% in 2005 and 2006. The tax rate for Zhejiang has not yet been approved by tax authorities, but in accordance with the relevant income tax laws as mentioned above, Zhejiang is also entitled to two-year tax exemption in 2004 and 2005, and is subject to a tax rate of 16.5% in 2006. USAI, Jielong and Wuhu did not have any operating income in 2006.

No provision for Hong Kong profits tax has been made as Ji Long and Great Genesis are investment holding companies and did not have any assessable profits in Hong Kong during three months and six months ended June 30, 2006 and 2005.

No provision for U.S income taxes has been made as the Company did not have any assessable profits in United States during three months and six months ended June 30, 2006 and 2005.

15. RECLASSIFICATIONS

Certain reclassifications have been made to the Consolidated Statement of Operations for the three months and six months ended June 30, 2005 to conform to the current year presentation.

	Three months ended June 30, 2005
Item	Original Classification		Present Classification
General and administrative expenses	$	2,337,603	$	1,602,040
R&D expenses		—	$	138,239
Depreciation and amortization	$	172,626	$	769,950

		Six months ended June 30, 2005
Item		Original Classification		Present Classification
General and administrative expenses	$	4,899,754	$	3,372,325
R&D expenses		—	$	495,948
Depreciation and amortization	$	353,290	$	1,384,771

16. SIGNIFICANT CONCENTRATIONS

The Company grants credit to its customers, generally on an open account basis. The Company’s customers are all located in the PRC.

During the three months ended June 30, 2006, the Company’s ten largest customers accounted for 79.3% of the Company’s consolidated net sales, with each of three customers individually accounting for more than 10% of consolidated net sales, i.e. 18.2%, 15.7% and 13.1% individually, or an aggregate of 46.9%. At June 30, 2006, approximately 29.7% of accounts receivable were from trade transactions with the aforementioned three customers.

During the six months ended June 30, 2006, the Company’s ten largest customers accounted for 75.3% of the Company’s consolidated net sales, with each of four customers individually accounting for more than 10% of consolidated net sales, i.e. 16.2%, 14.1%, 12.3% and 11.1% individually, or an aggregate of 53.7%. At June 30, 2006, approximately 36.0% of accounts receivable were from trade transactions with the aforementioned four customers.

During the three months ended June 30, 2005, the Company’s ten largest customers accounted for 85.4% of the Company’s consolidated net sales, with four customers individually accounting for more than 10% of consolidated net sales, i.e. 17.5%, 16.3%, 12.2% and 10.8% individually, or an aggregate of 56.8%. At June 30, 2005, approximately 38.5% of accounts receivable were from trade transactions with the aforementioned four customers.

During the six months ended June 30, 2005, the Company’s ten largest customers accounted for an aggregate of 77.9% of its consolidated net sales, with four customers individually accounting for more than 10% of consolidated net sales, i.e. 15.6%, 13.0%, 12.6% and 11.9% individually, or an aggregate of 53.1%. At June 30, 2005, approximately 38.5% of accounts receivable were from trade transactions with the aforementioned four customers.

17. RELATED PARTY TRANSACTIONS

During early 2004, the Company commenced construction of seven buildings dedicated to research and administrative for its operations in Wuhan. In December 2005, the Company disposed two of the seven buildings to Wuhan Geological University Information S&T Development Co., Ltd., “WuHan Information”, a Chinese company controlled by Mr. Hanlin Chen, the Chairman of the Company, at fair market value of $2,636,444, which was determined by an independent appraisal firm. As of June 30, 2006, such amount together with its conventional bank interest has not been repaid.

During the three months and six months ended June 30, 2006 and 2005, the Joint-ventures entered into related party transactions with companies with common directors as shown below:

	Three Months Ended June 30,
	2006		2005

Sales	$	794,200	$	544,935
Purchases	$	674,207	$	490,032

	Six Months Ended June 30,
		2006		2005

Sales	$	1,377,739	$	999,860
Purchases	$	1,330,202	$	895,788

18. OFF-BALANCE SHEET ARRANGEMENTS

At June 30, 2006 and 2005, the Company did not have any transactions, obligations or relationships that could be considered off-balance sheet arrangements.

19. COMMITMENTS AND CONTINGENCIES:

The Company has the following material contractual obligations and capital expenditure commitments:

Date	Parties Involved	Description of Commitments and Contingencies

October 30, 2001	Henglong & Bishop Steering Technology Limited, “Bishop”, an Australian company	Ten year license agreement for the design of power steering systems. Henglong is obligated to pay Bishop a technical assistance fee of approximately $200,000 per year during the first two years and $110,000 per year during the remaining eight years of the agreement.

July 21, 2003	Henglong & Namyang Industrial Co. Ltd., “Namyang”, a Korean manufacturer of steering assemblies for automobiles	Five year license and technical assistance agreement. Henglong paid Namyang an initial payment of $100,000 and is further obligated to pay a royalty of 3% of the sales price of products sold, which includes the licensed columns and universal joint technology.

March to December, 2004	Henglong & some equipment manufacturers	Have entered into equipment contracts with total value approximately $4,719,967. Henglong paid $1,743,201 and $2,606,332 during 2004 and 2005. The Company paid $130,542 in the six months ended June 30, 2006 and $239,892 remains outstanding. The Company will pay $146,265 and $93,627 in the six months ended December 31, 2006 and in 2007, respectively.

March to December, 2004	Jiulong & some equipment manufacturers	Have entered into equipment contracts with total value of approximately $2,752,479. Jiulong paid $1,021,021 and $1,117,318 during 2004 and 2005. The Company paid $92,658 in the six months ended June 30, 2006 and $521,482 remains outstanding. The Company will pay $279,940 and $241,542 in the six months ended December 31, 2006 and in 2007, respectively.

April to December, 2005	Henglong & some equipment manufacturers	Have entered into equipment contracts with total value approximately $1,163,650. Henglong paid $1,039,442 in 2005 and $7,388 in the six months ended June 30, 2006, respectively, and $116,820 remains outstanding. The Company will pay $110,916 and $5,904 in the six months ended December 31, 2006 and in 2007, respectively.

April to December, 2005	Jiulong & some equipment manufacturers	Have entered into equipment contracts with total value approximately $637,108. Jiulong paid $350,542 in 2005 and $30,723 in the six months ended June 30, 2006, respectively, and $255,843 remains outstanding. The Company will pay $232,157 and $23,686 in the six months ended December 31, 2006 and in 2007, respectively.

April to December, 2005	USAI & some equipment manufacturers	Have entered into equipment contracts with total value approximately $238,577 in 2005. USAI paid $141,346 in 2005 and $45,277 in the six months ended June 30, 2006, respectively, and will pay off the remaining $51,954 during the six months ended December 31, 2006.

20. OPERATING INFORMATION OF THE COMPANY’S SINO-FOREIGN JOINT-VENTURES

The Company has no operations independent of those of Great Genesis and its subsidiaries, and the principal assets are its investments in Great Genesis and its subsidiaries. The operational results of Company’s Sino-foreign Joint-ventures for the three months and six months ended June 30, 2006 and 2005 were summarized as follows:

	Parent Company						Henglong
	Three Months Ended June 30,
	(Unit: US Dollars, except ownership percentage)
	2006			2005			2006			2005

Proportionate ownership interest at end of year		100	%		100	%		44.5	%		44.5	%
Net sales		—			—			14,103,726			9,038,423
Cost of sales and operating expenses		718,917			197,087			11,593,529			8,076,493

Operating earnings (losses)		(718,917	)		(197,087	)		2,510,197			961,930
Other income (expenses), net		15,029			(932	)		(70,388	)		(145,990	)

Pretax earnings		(703,888	)		(198,019	)		2,439,809			815,940
Income tax		—			—			506,831			188,000

Income (expenses) before minority interest		(703,888	)		(198,019	)		1,932,978			627,940
Minority interest income (expenses)		—			—			1,056,258			349,545

Net earnings (expenses)		(703,888	)		(198,019	)		876,720			278,395

	Jiulong						Shenyang
	Three Months Ended June 30,
	(Unit: US Dollars, except ownership percentage)
	2006			2005			2006			2005
Proportionate ownership interest at end of year		81	%		81	%		70	%		70	%
Net sales		7,199,830			5,789,758			4,330,357			3,322,133
Cost of sales and operating expenses		6,902,731			5,417,938			3,793,943			2,815,240

Operating earnings (losses)		297,099			371,820			536,414			506,893
Other income (expenses), net		(18,372	)		(141,819	)		7,875			8,625

Pretax earnings		278,727			230,001			544,289			515,518
Income tax		132,323			69,202			43,674			45,159

Income (expenses) before minority interest		146,404			160,799			500,615			470,359

Minority interest income (expenses)		51,937			1,089			150,184			141,109

Net earnings (expenses)		94,467			159,710			350,431			329,250

	Zhejiang						USAI
	Three Months Ended June 30,
	(Unit: US Dollars, except ownership percentage)
	2006			2005			2006			2005
Proportionate ownership interest at end of year		51	%		51	%		60	%		0	%
Net sales		2,948,212			1,672,660			109,456			—
Cost of sales and operating expenses		2,238,701			1,491,652			514,186			—

Operating earnings (losses)		709,511			181,008			(404,730	)		—
Other income (expenses), net		6,247			(12,550	)		19			—

Pretax earnings		715,758			168,458			(404,711	)		—
Income tax		167,911			—			—			—

Income (expenses) before minority interest		547,847			168,458			(404,711	)		—

Minority interest income (expenses)		268,633			82,543			(161,884	)		—

Net earnings (expenses)		279,214