SORL Auto Parts Inc
SORL Auto Parts, Inc. (the “Registrant” or the “Company”) is engaged in the business of manufacturing and distributing automotive air brake valves and related components for commercial vehicles weighing more than three tons, such as trucks and buses. The Company distributes products both in China and internationally under the SORL trademarks. The Company’s product range includes 40 categories of brake valves with over 800 different specifications.  In terms of revenues, the Company ranks among the top 100 automotive component suppliers in China.  COMPANY HISTORY            GENERAL            The Company was incorporated in Delaware in March 1982 under the name The Enchanted Village, Inc.  As of May 2004, prior to the acquisition of Fairford Holdings Limited, the Company had no revenues and limited assets.  In July 2004, the Registrant changed its name from The Enchanted Village, Inc. to SORL Auto Parts, Inc. The Registrant also effected a one (1) for fifteen (15) reverse stock split.              ACQUISITION OF FAIRFORD           In May 2004, pursuant to the terms of a Share Exchange Agreement (the “Exchange Agreement”) dated as of April 4, 2004, among the Registrant, Keating Reverse Merger Fund, LLC, Xiao Ping Zhang, Xiao Feng Zhang and Shuping Chi (collectively, the “Fairford Sellers”); and Fairford Holdings Limited, a Hong Kong corporation (“Fairford”), the Registrant acquired from the Sellers (the “Acquisition”) all of the issued and outstanding equity interests of Fairford (the “Fairford Shares”).  As consideration for the Fairford Shares, the Registrant issued 1,000,000 shares of its Series A Convertible Preferred Stock, which were convertible into an aggregate of the 194,305,800 shares of common stock.  In July 2004, the Fairford Sellers converted their shares of Preferred Stock into shares of common stock.  The consideration for the Acquisition was determined through arm’s length negotiations between the management and the Fairford Sellers.  As a result of the Acquisition, the Fairford Sellers held approximately 97.5% of our common stock on an as converted basis.            Upon the closing of the Acquisition, Kevin R.  Keating resigned as President, Secretary Chief Financial Officer and sole Director of the Registrant.  Effective May 7, 2004, Xiao Ping Zhang, Xiao Feng Zhang, and Jung Kang Chang began serving their terms as members of the Registrant’s Board of Directors.  The newly elected directors appointed Xiao Ping Zhang as the Chairman and Chief Executive Officer, Xiao Feng Zhang as the Chief Operating Officer and Zong Yun Zhou as the Chief Financial Officer.            All references in this report to “SORL,” the “Registrant,” the “Company,” “we,” “our” and “us” mean, unless the context indicates otherwise, (i) our predecessor, the Enchanted Village, Inc., for the periods prior to May 10, 2004, the date the Acquisition was consummated, and (ii) the successor and registrant, SORL Auto Parts, Inc. and subsidiaries that now owns and operates the automotive components manufacturing business of Fairford as a result of the Acquisition.  In addition, when the context so requires, we use the term “predecessor” to refer to the historical operations of our predecessor prior to the Acquisition and “successor” to refer to our historical operations following the Acquisition, and we use the terms “we,” “our” and “us” to refer to the predecessor and the successor collectively.  The historical financial statements for the periods prior to the Acquisition and summaries thereof appearing in this report are those of our predecessor and represent the financial statements of the Transferred Business (defined below).     BUSINESS            As a result of the Acquisition, through Fairford’s 90% ownership of the Ruili Group Ruian Auto Parts Co., Ltd., a sino-foreign joint venture (the “Joint Venture”), the Company develops, manufactures and distributes automotive air brake valves and related components to automotive original equipment manufacturers, or OEMs, and the related aftermarket both in China and internationally. Installed on the chassis, air brake valves include a collection of various air brake components using compressed air and functioning as the execution device for service braking and parking braking.  The Company’s products are principally used in commercial vehicles weighing over three tons, such as trucks and buses.  Air brake valves are critical components that ensure driving safety.            The Joint Venture was formed in China as a sino-foreign joint venture on January 17, 2004, pursuant to the terms of a Joint Venture Agreement (the “JV Agreement”) between the Ruili Group Co., Ltd. (the “Ruili Group”) and Fairford.  The Ruili Group was incorporated in the PRC in 1987 and specialized in the development, production and sale of various kinds of automotive parts.  Fairford and the Ruili Group contributed 90% and 10%, respectively, of the paid-in capital of the Joint Venture, which totaled $7,100,000.            Effective January 19, 2004 the Joint Venture acquired the business segment of the Ruili Group relating to the manufacture and sale of various kinds of valves for automotive brake systems and related operations (the “Transferred Business”).  The Ruili Group began the automotive air brake valve business in 1987.  The acquisition was accomplished by the transfer from the Ruili Group to Fairford of the relevant assets and liabilities of the Transferred Business including trade receivables, inventories and machinery, and the assumption of short and long term borrowings for a purchase price of $6,390,000.  The consideration was based on a valuation provided by Ruian Ruiyang Assets Valuation Co., Ltd., an independent PRC valuation firm.  Fairford then transferred these assets and liabilities to the Joint Venture as consideration for its 90% ownership interest of the Joint Venture.  The Ruili Group transferred inventory as its capital contribution for its 10% interest in the Joint Venture.  The assets and liabilities transferred to the Joint Venture by Fairford and the Ruili Group represented all the assets and liabilities of the Transferred Business.  Certain historical information of the Transferred Business is based on the operation of the Transferred Business when it was owned by the Ruili Group.           The Company is located in Ruian City, Wenzhou, Zhejiang Province, People’s Republic of China.  Wenzhou is a southeast coastal city and is a center of automotive parts manufacturing in China.  The Company’s main products include spring brake chambers, clutch servos, air dryers, and main valves and manual valves, all of which are widely used in the brake systems for various types of commercial vehicles weighing more than three tons such as trucks and buses. Reliable functioning of those valves is critical to safety both when driving and parking.            MANAGEMENT OF THE JOINT VENTURE             Pursuant to the terms of the JV Agreement, the Board of Directors of the Joint Venture consists of three directors; Fairford has the right to designate two members of the board and the Ruili Group has the right to designate one member and Fairford has the authority to appoint the Chairman of the Board.  The majority of the Board has decision-making authority with respect to operating matters.  As a result, Fairford maintains operating control over the Joint Venture.  The term of the Joint Venture will expire on March 4, 2019.             PRODUCTS            Through the Joint Venture, the Company manufactures and distributes commercial vehicle air brake valves and related components in China and internationally. Installed on the chassis, air brake valves include a collection of various air brake components using compressed air and functioning as the execution device for service braking and parking braking.  The products are principally used in commercial vehicles weighing over three tons, such as trucks and buses. Air brake valves are critical components that ensure driving safety.  - 2 -                The Joint Venture makes an extensive range of air brake valves and related products covering forty categories and over eight hundred specifications which are widely used in different types of commercial vehicles.  The Joint Venture is continually engaged in designing and developing new products to meet the Company’s customers’ requirements.           The Joint Venture’s principal products are as follows:          RL3530 Series Spring Brake Chamber – A spring brake chamber executes the   service, parking and emergency braking, when the brake system malfunctions, the   products can automatically provide emergency braking force. In 2005, the   Joint Venture produced 700,000 units of spring brake chambers, the largest   output in China, which were supplied to OEM customers such as FAW Qingdao and   Dongfeng Group.                       RL351 Series Air Dryer –   Air dryers dry and purify the compressed air. Combined with unloader valves   and the heating components, this new type of air dryer requires no separate   installation of certain other components.  The product has a compact structure and multiple functions.  Furthermore, it improves the reliability of   the use of other air brake system components, enhancing safe driving.  Annual output of these series of products   reached 150,000 units in 2005.  The   products are supplied to OEM customers such as FAW Qingdao and Dongfeng   Group.                       Electric Control Exhaust Relay Valves – Electric control exhaust relay valves greatly shorten the length of pipeline between the air storing tank and the brake chamber, and, as a result, enhance the speed to operate the brake system. They are widely used in different types of commercial vehicles.                      Clutch Boosters -   Clutch boosters, which are innovative clutch empower devices developed by the   Joint Venture, was awarded a patent in China.  They are used for controlling the performance of brake system   clutches by means of a pneumatic-driven hydraulic operation.  The features of this product are simpler   structure, smaller size, higher durability and improved effectiveness. With   an annual output of 500,000 units, clutch boosters are currently supplied to   OEM customers such as FAW Qingdao.                       Foot Brake Valves –   Foot brake valves serve as the key devices for service braking. Annual output   is approximately 200,000 units. This product is currently supplied to many OEM   customers including FAW Qingdao.                       Hand Brake Valves –   Hand brake valves serve as an auxiliary device for parking brakes.  Current annual output is about 200,000   units. They are supplied to many OEM customers including FAW Qingdao.               The Joint Venture obtained ISO9001/QS9000/VDA6.1 System Certifications in 2001.  In 2004, the Joint Venture passed the ISO/TS 16949 System Certification conducted by the TUV CERT Certification Body of TUV Industrie Service GmbH, and passed the annual review in 2005. The ISO/TS 16949 system, a higher standard compared to and the replacement for ISO9001/QS9000/VDA6.1 System, was enacted by the International Automotive Task Force and is recognized by the world’s main automobile makers.  Because we hold the above certifications, we are qualified to sell our products worldwide.           CHINA AUTOMOBILE AND AUTO PARTS INDUSTRY            The automobile industry is one of China’s key industries, contributing significantly to the growth of China’s economy.  Mr. Changming Xu, head of Economic Consulting Center under the State Information Center. predicted that the continued growth of the Chinese economy will in turn result in the growth of the Chinese automotive industry for at least another decade.  It is expected that, during the Eleventh “Five-Year Plan” period (2006 – 2010), China’s GDP will maintain a high growth rate of at least 7% per annum.  China Machine Industry Institute indicates that in 2006 total automobile purchases in China will have a 10% share of the overall global consumption, an increase from 8.7% in 2005, and by 2010, total automobile output in China will reach 10 million units per annum. Industry experts estimate that by 2007 China will become the third largest automobile manufacturing country, and by 2020 the largest one in the world.  - 3 -                As for the commercial vehicles segment, for the five-year period between 1999 and 2004, the compounded annual growth rate (CAGR) for China’s truck sales was 16.75%.  By the end of 2010, the output for all types of trucks in China is expected to reach 2.2 million units per year, of which the output for heavy duty trucks by 2010 is expected to be 0.65 million units per year, with CAGR anticipated between 10% and 15% during this period.  This forecast is based on the prediction that Chinese government will continue its active fiscal policy, development plan for western China, restoration of the Northeastern China traditional industrial base, investment in infrastructure projects, and strict enforcement of the ban on overloading of trucks, all of which would boost demand for heavy duty trucks, as well as for medium trucks.             In 2004, China’s automobile output and sales volume both reached their highest levels of 5 million units, increasing by 14.1% and 15.5%, respectively, compared to 2003 figures. In 2004, China’s total automotive parts market value was $55 billion, of which 40% was from the aftermarket. In 2005, China’s automobile output and sales volume was 5.78 million and 5.76 million units, increasing by 12.6% and 13.5%, respectively, compared to 2004.  The 2005 automotive parts output in China reached $74 billion, of which $46 billion was for OEM’s.  It is forecasted that the total China auto parts market value would expand to $177 billion in 2010, of which $82.5 billion will be for sales to original equipment manufacturers (“OEM’s”).           The overall Chinese auto parts industry is highly fragmented.  Management believes that the future trends of China’s auto parts industry will be:          •    To keep pace   with the rapid development of new automobile technologies.                            •    To meet the   requirements from increasingly demanding OEM customers, such as zero defects,   and cost reduction.                            •    To partner   with OEM customers in the entire process from product design, development and   production to costing, quality control and final delivery.                           •    To implement   industry restructuring through integration to form several large sized auto   parts manufacturing groups capable of competing with international   manufacturers.               MARKET AND CUSTOMERS            The Joint Venture is the largest commercial vehicle air brake system manufacturer in China.  In general, customers are divided into three groups:  OEM in China, aftermarket distributors in China, and international customers, accounting for approximately 32%, 32% and 36%, respectively, of the Company’s annual sales for 2005.              OEM Market - The Joint Venture has established long term business relationships with most of the major automobile manufacturers in China.  The Joint Venture sells its products to thirty-nine (39) vehicle manufacturers, including all of the key truck manufacturers in China.  In addition to heavy duty trucks, the valves are also widely used in air brake systems for buses.  Typically, bus manufacturers purchase a chassis from truck chassis manufacturers which already have the Joint Venture’s air brake valves incorporated.  In 2005, our three largest OEM customers represented 12.7% of our total sales.  - 4 -                The following table sets forth information regarding the output and market share of the major heavy duty truck manufacturers in China in 2005:     Automobile   Manufacturers        FAW   Qingdao   Automobile Works        FAW   Jiefang   Changchun   Automobile Works        Dongfeng   Motor Corporation        Liuzhou   Special Auto    Manufacturing   Co., Ltd        China   Nat’l    Heavy Duty   Truck Group   Co., Ltd                                                    Heavy Duty Trucks Output         55,970        71,797        14,000        45,000          Market Share in China                 23.7%                  30%                  5.8%               31.6%           % Valves Supplied by SORL         40%        22%                  18%                   50%                    5%                   The table below presents comparative information for 2004 and 2005 on the Company’s top 5 OEM customers.     Ranking    2005        Ranking    2004        Customer        % of 2005   Sales        % of 2004   Sales                                              1         1         FAW Qingdao Automobile   Works         5.07    %    15.18    %      2         2         First Auto Group Purchase   Dept.         4.38    %    5.6    %      3         4         Dongfeng Axle Co., Ltd.         3.25    %    2.8    %     4         3         Liuzhou Special Auto   Manufacturing Co. Ltd         3.04    %    4.42    %      5         7         Beiqi Foton Motor Co., Ltd.   Beijing Auman Heavy-Duty Vehicle Works         2.65    %    1.92    %               The Company’s principal OEM customers are as follows:           China FAW Group: Established in 1953, FAW is the largest automobile manufacturer in China.  During the past 50 years, its product line has expanded from a single product for trucks to a full range of light, medium and heavy vehicles, sedans and buses, with output reaching 6.4 million units.  FAW has established joint ventures with major international firms such as Volkswagen and Toyota, while expanding within China through a merger with Tianjin Automobile Industry (Group) Co., Ltd.             Dongfeng Automobile Corporation: Established in 1969, Dongfeng ranks among the top three groups in China’s automotive industry. Its main products include commercial vehicles, passenger cars and auto parts.              China Heavy Duty Vehicles Group:  Established in the 1950s, China Heavy Duty Vehicles Group Co., Ltd. made China’s first heavy-duty truck in 1964. It is known for its “Steyr” brand heavy-duty trucks.  In 2003, it signed a joint venture agreement with Volvo and now is Volvo’s manufacturing and supplying arm in Asia.   - 5 -                Aftermarket – Together with the Ruili Group, the Joint Venture has established a sales networks of twenty-seven authorized distributors covering the following seven regions nationwide:          •    Northeast Region   (Harbin, Changchun, Shenyang)                           •    North Region   (Beijing, Shijiazhuang, Datong, Tianjin)                            •    Northwest Region   (Urumchi, Xi’an)                            •    Southwest Region   (Chongqing, Liuzhou, Kunming, Chengdu)                            •    Central Region   (Zhengzhou, Wuhan, Shiyan)                           •    East Region   (Ji’nan, Qingdao, Hefei, Hangzhou, Nanchang, Quanzhou, Shanghai, Xuzhou)                            •    South Region   (Guangzhou, Changsha)               The 27 distributors sell only “SORL” products and in turn channel the products through over 800 sub-distributors. In 2005 the Joint Venture’s share in the air brake valves aftermarket for China increased to approximately 30%.            International Market – Management views the export market as the most important growth area.  In 2005, export sales accounted for 36% of total revenue. With the exception of OEM sales to TATA in India, export sales are to the overseas aftermarket.  The Company participates in international exhibitions such as Beijing and Shanghai International Auto Expo, China Export Commodities Fair in Canton (Spring & Fall), International Auto Parts Expo in Paris, France and Dubai, UAE, and International Auto Expo in Frankfurt, Germany and in Las Vegas, USA, through which the Company has been able to expand its export business.  Products are exported to more than 60 countries and regions in the world. Total export sales in 2005 increased by 83% compared to that in 2004.                                                         Top 7 International   Customers                                      Ranking        Country        Customer   Name        % of    2004 Sales         % of    2005 Sales        Increase   of    sales YOY                                                      1         United Arab Emirates         GOLDEN DRAGAN AUTO SPARE   PARTS         4.74    %    6.46    %    87    %      2         South Africa         MICO         1.25    %    1.57    %    72    %     3         Canada         F.P.         0.87    %    1.21    %    93    %      4         Taiwan, China         MITA         0.30    %    0.94    %    333    %     5         South Africa         POLMO         0.47    %    0.77    %    125    %      6         Spain         AIR-FREN         0.34    %    0.66    %    164    %     7         USA         KTC         0.75    %    0.61    %    11    %               COMPETITION            The automotive parts industry in China is fragmented.  There are many small manufacturers who mainly target the aftermarket.  However, there are not many companies who have established nationwide aftermarket sales networks as well as close relationships with leading OEM manufacturers.  Management believes that the key success factors in the commercial vehicle air brake valves segment are product performance, cost competitiveness, reliability, timely delivery and efficient customer service.            Domestic Competition – The Joint Venture has three major competitors in China; VIE, Weiming and CAFF. - 6 -              •    China VIE   Group: Its principal products are main valves and unloader/governors, with a   majority supplied to OEM’s, such as Anhui Jianghuai Automobile Co., Ltd., and   the remaining portion for aftermarket and export.                            •    China   Shandong Weiming Automotive Products Co. Ltd.:  This is a joint venture with WABCO of Germany, and mainly   produces spring brake chambers, air dryers, and ABS, primarily supplying to   truck and bus OEM’s such as FAW and North-Benz.                            •    Chongqing   CAFF Automobile Braking and Steering Systems Co., Ltd.: Its main products are   air dryers and main valves.  Its   principal customer is Chongqing Heavy Vehicle Group Co., Ltd.                           Management   believes the Company has the following advantages:                            •    Brand Name:   As the largest commercial vehicle air brake valves manufacturer, the Joint   Venture’s “SORL” brand is widely known in China.                            •    Technology:   the Joint Venture views technological innovation and leadership as the   critical means to enhance its core competence. It owns a technology center,   including a laboratory specializing in the research of automotive brake   controlling technologies and development of air brake system products.                           •    Product   Development: Through its international sales offices in the US, Australia and   the Middle East, the Joint Venture is able to promptly collect information   about the current trends in automotive technologies, which in turn is applied   to our new product development. In addition, IT application and strict   implementation of ISO/TS16949 standards in the development process greatly   shorten the development lead time and improve new product quality.                            •    Sales   Networks: The Joint Venture has contracted with 27 authorized distributors   covering 7 regions of China, who in turn channel “SORL” products through over   800 sub-distributors throughout China.               International Competition - In the international market, our largest competitors are WABCO and Knorr. While management believes our current advantage over WABCO and Knorr is lower pricing, management also believes that the Company’s product quality and brand awareness are improving.  The Joint Venture’s competitive advantages over other competitors in the world market are:         •    Performance-Cost   Ratio: “SORL” products enjoy a much lower production costs leveraging on the   low labor costs in China.  Through the   Company’s improved product line as a result of technology and manufacturing   improvements, the Joint Venture products’ performance-cost advantage is   increasing.                            •    Quick   Adaptation to Local Market: Through its international sales channels in the   US, Australia and Middle East, the Joint Venture has been able to respond to   local market needs.                            •    Diversified   Auto Products: In addition to its air brake valve products, to fully support   existing export customers, the Joint Venture also distributes a wide range of   non-valve products which are sourced from the Ruili Group.  This reduces customers’ transaction costs.     - 7 -               SALES AND MARKETING            The in-house sales and marketing team consists of forty-five (45) individuals, of which twenty-two (22) are for domestic (PRC) sales and twenty-three (23) for international sales.  Products are sold under the “SORL” trademark, which the Joint Venture licenses on a royalty free basis from the Ruili Group.  The license expires in 2019.             In China, the commercial vehicle air brake valve market can be divided into 2 segments: OEM market and aftermarket.             OEM Market - The Joint Venture sells its products to thirty nine (39) vehicle manufacturers, most of which the Joint Venture has established long-term relationships.  Normally, annual sales contracts with key customers are signed at the beginning of the calendar year and are revised as needed.            For 2005, China’s heavy duty trucks output decreased by 35.7% compared to that in 2004, in contrast to a 45% increase in 2004 from 2003.  This decrease was primarily due to the Chinese Government’s macroeconomic regulation policy for 2005.  Despite the sluggish OEM market, the Joint Venture’s sales revenue for this market segment dropped relatively slightly by 6.6% from $22 million in 2004 to $20.5 million in 2005.  Management promptly took several measures in response to such market change.  First, the Company increased its marketing efforts and developed new products to meet its OEM customers’ requirements.  Second, it granted extended credit terms to a selected number of OEM customers, such as FAW and Dongfeng Group, on a temporary basis, so as to maintain market share and strengthen long term relationships.  Third, it re-evaluated and restructured its customer base, and phased out certain problem accounts.            Aftermarket - The Joint Venture’s products are also sold in the aftermarket for replacement purposes.  With the rapid growth of commercial vehicles output in the past years and the increasing amount of used vehicles, demand for parts have become stronger. Currently SORL has 27 authorized distributors covering 7 regions nationwide as listed above.  These distributors sell only the Joint Venture’s and the Ruili Group’s products under the “SORL” trademark to over 800 distributors. The Joint Venture provides product technical services to these distributors.  The Joint Venture also conducts periodic performance evaluations, and reserves the right to terminate the distributorship of those with frequent delinquencies or poor sales records, and to replace them by other selected firms.  For 2005, the Company achieved total revenue of $20.2 million in domestic aftermarket sales, an increase of 65.7% from 2004.           International Markets – Export expansion is the most important objective in the Company’s marketing strategy.  The Joint Venture has signed agreements with three distributors in UAE, Australia and the US. It also actively participates in international trade shows at Paris, Frankfurt, Dubai and Las Vegas, to update its knowledge on automobile technology and local market trends and to acquire new customers and new orders.  The Joint Venture has sold products to over sixty (60) countries.  Export sales grew approximately by 83%, from $12.6 million in 2004 to $23.3 million in 2005.             DISTRIBUTION            The Joint Venture ships finished products directly to OEM customers.  The products are distributed to aftermarket customers in China through a network of twenty-seven (27) authorized distributors, which also function as the distribution centers for their respective region.  Shipments are delivered directly to international customers.              TECHNOLOGY            The Joint Venture currently employs forty-four (44) technical staff members, with thirty-two (32) holding Engineer or Senior Engineer qualifications.  Among which, 2 staff members are for intelligence, 28 for new product development and technique designing, 4 for testing, 5 for MIS and the remaining for on-site quality management.   - 8 -                In addition to its in-house technical force, the Joint Venture has cooperation arrangements with leading universities in automotive engineering industry, including:         •    Beijing   Jiaotong University: Contract for co-development of electronic control air   brake valves and research for automotive master cable technology;                            •    Tsinghua   University E-Tech Technology Co., Ltd. and Zhejiang University: Contract for   MIS projects, including the development of application software for product   design innovation and production management;                            •    Huazhong   University of Science and Technology: in discussion on cooperation for   computer aided manufacturing systems and applications in mold production.               Innovation Capability:  The Joint Venture’s technology center frequently interacts with other research institutes in the auto industry in China, such as Changchun Automotive Research Institute under FAW Group and Dongfeng Automotive Research Institute under Dongfeng Group, as well as with experts from leading universities.  In addition, the Joint Venture also interacts with international firms such as Knorr, WABCO and TRW. Capitalizing on these resources, the Joint Venture has successfully developed numerous new technologies and innovative products including the new type clutch servo for automatic transmissions; the combined air dryer with build-in temperature-control device and unloader thereby providing multifunction and saving space; and the inner-breath spring chamber that enables internal air circulation thereby greatly reducing incoming dirt and therefore enhancing the product’s reliability and durability.           The Joint Venture is currently focusing on developing the following new products:          •    Clutch Servo with Inductive Displacement Transducer:  The special transducer triggers an   automatic alarm before the clutch gets burned, and also prevents shifting of   the transmission without separateness of the clutch, thereby enabling   harmonious shifting.                            •    Automatic Slack Adjuster:  It automatically adjusts the abrasion   clearance between the brake shoe and the brake drum, thereby keeping the   clearance of different wheels within prescribed limits and ensuring the   highest level balance of braking force among wheels.                            •    Loading Sensor Proportion Valve:  It automatically adjusts the input air   pressure in the brake chamber in line with changes in load, hence matching   braking strength with auto load.                           •    New Type Foot Brake Valve:  The alarming switch and braking switch   added give new features to the traditional foot brake valves.               The Joint Venture owns a full range of processing equipment required for development of new auto part products, including machines for molding, die casting and cutting processes. Furthermore, the Joint Venture is capable of designing and making over 90% of the technical devices such as tools, jigs and molds that are required for producing prototypes. In addition, the partnership with Tsinghua University and Zhejiang University in developing software for application in new product design system has resulted in substantial savings in the cycle time for new product development.            Patented Technologies: Currently the Joint Venture owns one (1) patent, has licenses under two (2) patents, and has applied for another nine (9) utility patents.  The two licensed patents are for air brake valve related technologies owned by the Ruili Group, which, due to historical reasons, has been held in name of the Ruili Group before the spin-off of the Company’s air brake valve related business.  The licenses are on a royalty free basis.  These patented technologies have assisted the Joint Venture to enhance its core competence.  - 9 -                Know-how: Based on the many years of manufacturing experience, the Joint Venture has accumulated a substantial amount of know-how.  For instance, the special formula for aluminum alloy acquired over years of repeating tests considerably improves the compactness of alloy, hence the strength of casting. The Joint Venture also keeps a secret “protection film” processing technique to enhance the sealability of products.            The Joint Venture has taken numerous steps to protect its proprietary technologies.  Specific staff is assigned to safe keep documents and filings.  Critical employees are required to sign a confidentiality agreement with the Joint Venture.            PRODUCTION            The Joint Venture owns the largest commercial vehicle air brake valve products manufacturing base in China, consisting of fifteen (15) production / assembly lines.  The production process includes fixture, jig and die making, aluminum alloy die casting, metal sheet stamping, numerical control cutting, melding, numerical control processing, surface treatment, filming, rubber/plastic processing, final assembly and packaging.  The Joint Venture possesses state-of-the-art manufacturing and testing facilities sourced from the US, Korea, Taiwan as well as mainland China, including CNC processing centers, CNC lathes, casting, stamping and cutting machines, automatic spraying and electroplating lines, cleaning machines, automatic assembly lines and 3D COMERO and projectors, etc.            There are currently 1,138 production staff, most of whom are experienced and skilled workers and mechanics.             The Joint Venture leases from Ruili Group the plant building as its production facility and warehouse, for a total area of approximately 271,713 square feet.  The lease began in March 2004 for a term of ten years. Annual rental is approximately $439,540.            ENVIRONMENT            The Joint Venture has adopted ISO 14001 standards and is seeking certification of its environmental management system by an external third party organization.             The Joint Venture carries out staff training to enhance awareness of environment protection.  It effects controls from the beginning to adopt environment friendly production, reducing or preventing pollution, as well as saving energy consumption and manufacturing costs. For example, intensity of noise is listed as one of the criteria in selection of new equipment; Waste water is stored, purified and recycled in the production process; and compressing machines are used in disposal of aluminum and steel scraps, thereby saving both storage space and power consumption.            RAW MATERIALS            The Joint Venture purchases various components and raw materials for use in its manufacturing processes.  The principal raw materials are aluminum and steel.             Prices for aluminum and steel increased significantly in 2004.  Aluminum price increases continued in 2005.  Steel prices peaked in March 2005 and then started decreasing to a level even lower than before 2004, but appeared to climb from the end of 2005.  Experts predict that aluminum and steel prices will continue to climb slowly in 2006. The increases have had an adverse impact on gross profit, since some of the increases cannot be passed onto the customers. This negatively impacted our gross margin by 1.2% for 2005, or approximately $800,000. This adverse impact on gross margin was largely offset by economy of scale and improvements in production technique optimization.  - 10 -                The Joint Venture maintains relationships with over twenty material suppliers.  The three largest suppliers are Shanghai Jinshi Materials Company Limited, Shanghai Lutie Metals Trading Company Limited and Wenzhou Yupeng Foreign Trade Company Limited, which in the aggregate accounted for 20.7% of all components and raw materials purchased in 2005.  The Joint Venture manages its suppliers in strict accordance with the requirements of the TS16949 quality assurance system.  It enters into warranty agreements and/or technology agreement with each qualified supplier. The quality inspection department controls the quality of purchased products by means of statistic analyses and periodic on-site evaluations and follow-ups.            When planning a purchase order, with such other terms as quality, delivery and credit terms being substantially the same, the Joint Venture compares prices quoted by different suppliers in an attempt to receive the lowest price.  In order to secure a purchase price and subsequently a predictable cost of sales, the Joint Venture generally makes a down payment to suppliers.           Normally, the annual purchase plan for raw materials, such as aluminum ingot and steel sheet, is determined at the beginning of the calendar year according to our OEM customer’s orders and our own forecast for the aftermarket and international sales.  Such purchase plans with key suppliers can be revised quarterly.  Our actual requirements are based on monthly production plans.  Management believes that this arrangement prevents us from excess inventory when the orders from customers change.            For raw materials other than steel and aluminum, we normally maintain from five to seven days of inventory at our warehouse.            All components and raw materials are available from numerous sources.  We have not, in recent years, experienced any significant shortages of manufactured components or raw materials and normally do not carry inventories of these items in excess of what is reasonably required to meet our production and shipping schedules.            STRATEGIC PLAN            The Joint Venture’s strategic plan is to enhance its core competences, maintain steady business growth and increase its market share both in China and internationally through the following:          •    FOCUS ON   QUALITY CONTROL AND COST REDUCTION.    We believe that our products offer higher quality compared with our   competitors in the commercial vehicle air brake valve market in China, and a   superior performance-cost advantage in the international market.  We have been able to grow at more than 30%   per year in sales for the past three years and to maintain what management   believes is a leading position in the industry.  To sustain this competitive advantage and at the same time   obtain higher profit margins, the Joint Venture plans, based on its efficient   manufacturing base in China, to continue focusing on quality control and cost   reduction, including, for example, reduction in spoilage and improvement in   manufacturing techniques.                           •    IMPLEMENT   THE BRAND STRATEGY.  The Joint Venture   plans to focus efforts on promotion of the “SORL” brand name based on   technological innovation.                            •    INVEST IN   THE NEXT GENERATION VALVE TECHNOLOGY.    We plan to invest in the next generation of valve technology such as   electronic air brake valves, which management believes has significant market   potential.  For example, we are   undergoing the final testing for the newly developed clutch servo with   inductive displacement transducer, expected to be placed in mass production   in 2006. We are also in the process of developing new products such as   automatic slack adjusters, loading sense proportion valves and a new type   foot brake valve, all of which are believed to have considerable market   potentials.     - 11 -             •    EXPAND   PRODUCTION FACILITIES TO MEET FURTHER DEMANDS.  Anticipating the increasing demands for our products,   management plans to acquire new facilities and procure new equipment, and   also to increase the Joint Venture’s sales force.                            •    FURTHER   EXPANSION IN THE INTERNATIONAL MARKET.    During 2005, the Joint Venture achieved approximately 83% growth in   export sales, which accounted for 36% of sales.  Management believes our products are competitive in the   international market.  We plan to set   up additional authorized sales distributors internationally.  We also plan to actively seek strategic   partnerships with international distributors and manufacturers.                            •    EXPAND   THROUGH STRATEGIC ALLIANCES AND ACQUISITIONS.  We are exploring opportunities to create long-term growth   through new joint ventures or acquisitions of other automotive parts   manufacturers in China, and of auto parts distributors or repair factories   with established sales networks outside of China.  We will seek synergistic acquisition targets which can be   easily integrated into our product manufacturing and corporate management, or   companies that have strong joint-venture partners that would become major   customers.    DOING BUSINESS IN CHINA            CHINA’S ECONOMY            Management believes that the most important factor to understand the Chinese automobile industry is the country’s rapid economic growth. According to China’s Statistics Bureau, China’s GDP growth rate for 2003, 2004 and 2005 was 9.3%, 9.5% and 9.4% respectively.             Looking forward, GDP growth in the region is forecasted between 8% and 9% in 2006. 2006 is the first year of Chinese government’s “Eleventh Five-Year Plan”, during which period China’s national economy is expected to maintain its high growth rate. Over the long term, China’s accession to the World Trade Organization (WTO) has accelerated the capital flow to China from other developed countries.            THE CHINESE LEGAL SYSTEM            The practical effect of the People’s Republic of China legal system on our business operations in China can be viewed from two separate but intertwined considerations.  First, as a matter of substantive law, the Foreign Invested Enterprise laws provide significant protection from government interference.  In addition, these laws guarantee the full enjoyment of the benefits of corporate Articles and contracts to Foreign Invested Enterprise participants.  These laws, however, do impose standards concerning corporate formation and governance, which are not qualitatively different from the general corporation laws of the several states.  Similarly, the People’s Republic of China accounting laws mandate accounting practices, which are not consistent with US Generally Accepted Accounting Principles.  The China accounting laws require that an annual “statutory audit” be performed in accordance with People’s Republic of China accounting standards and that the books of account of Foreign Invested Enterprises are maintained in accordance with Chinese accounting laws.           Second, while the enforcement of substantive rights may appear less clear than United States procedures, the Foreign Invested Enterprises and Wholly Foreign- Owned Enterprises are Chinese registered companies which enjoy the same status as other Chinese registered companies in business-to-business dispute resolution.  Because the terms of the respective Articles of Association provide that all business disputes pertaining to Foreign Invested Enterprises are to be resolved by the Arbitration Institute of the Stockholm Chamber of Commerce in Stockholm, Sweden applying Chinese substantive law, the Chinese minority partner in the Joint Venture will not assume a privileged position regarding such disputes.  Any award rendered by this arbitration tribunal is, by the express terms of the respective Articles of Association, enforceable in accordance with the “United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958).” Therefore, as a practical matter, although no assurances can be given, the Chinese legal infrastructure, while different in operation from its United States counterpart, should not present any significant impediment to the operation of Foreign Invested Enterprises.  - 12 -                ECONOMIC REFORM ISSUES            Although the Chinese government owns the majority of productive assets in China, in the past several years the government has implemented economic reform measures that emphasize decentralization and encourage private economic activity.  Because these economic reform measures may be inconsistent or ineffectual, there are no assurances that:         •    We will be   able to capitalize on economic reforms;                            •    The Chinese   government will continue its pursuit of economic reform policies;                            •    The economic   policies, even if pursued, will be successful;                            •    Economic   policies will not be significantly altered from time to time; and                           •    Business operations   in China will not become subject to the risk of nationalization.               Negative impact upon economic reform policies or nationalization could result in a total investment loss in our common stock.            Since 1979, the Chinese government has reformed its economic systems.  Because many reforms are unprecedented or experimental, they are expected to be refined and improved.  Other political, economic and social factors, such as political changes, changes in the rates of economic growth, unemployment or inflation, or in the disparities in per capita wealth between regions within China, could lead to further readjustment of the reform measures.  This refining and readjustment process may negatively affect our operations.            To date reforms to China’s economic system have not adversely impacted our operations and are not expected to adversely impact operations in the foreseeable future; however, there can be no assurance that the reforms to China’s economic system will continue or that we will not be adversely affected by changes in China’s political, economic, and social conditions and by changes in policies of the Chinese government, such as changes in laws and regulations, measures which may be introduced to control inflation, changes in the rate or method of taxation, imposition of additional restrictions on currency conversion and remittance abroad, and reduction in tariff protection and other import restrictions. EMPLOYEES AND EMPLOYMENT AGREEMENTS            The Company currently employs 1295 employees, all of whom are employed full time:  32 for quality control, 44 technical staff, 45 sales and marketing staff, 1138 production workers and 36 administrative staff.  There are employment agreements with all of the employees whereby administrative staff workers agree to five years of employment and hourly workers agree to three years.  Employment contracts with all employees comply with relevant laws and regulations of China.            The Joint Venture is subject to the Sino-foreign Equity Joint Venture Enterprise Labour Management Regulations.  In compliance with those regulations, the Joint Venture’s management may hire and discharge employees and make other determinations with respect to wages, welfare, insurance and discipline of employees.  The Joint Venture has, as required by law, established special funds for enterprise development, employee welfare and incentives, as well as a general reserve.  In addition, the Joint Venture is required to provide its employees with facilities sufficient to enable the employees to carry out trade union activities..  - 13 -      JV DISTRIBUTION OF PROFITS            After provision for social welfare funds for employees and provision for taxation, the profits, if any, of the Joint Venture will be available for distribution to the parties in proportion to their respective capital contributions.  Any such distributions must be authorized by the Joint Venture’s Board of Directors.  JV ASSIGNMENT OF INTEREST            Any assignment of an interest in the Joint Venture must be approved by the Chinese government.  The Chinese joint venture laws also provide for preemptive rights and the consent of the other joint venture party for any proposed assignments by one party to a third party. JV LIQUIDATION            Under the Chinese joint venture laws, the Joint Venture may be liquidated in certain limited circumstances, including expiration of the ten-year term or any term of extension, the inability to continue operations due to severe losses, force majeure, or the failure of a party to honor its obligations under the joint venture agreement or the Articles Of Association in such a manner as to impair the operations of the joint venture.  The Chinese joint venture laws provide that, upon liquidation, the net asset value (based on the prevailing market value of the assets) of a joint venture shall be distributed to the parties in proportion to their respective registered capital in the joint venture.  JV RESOLUTION OF DISPUTES            In the event of a dispute between the parties, attempts will be made to resolve the dispute through friendly consultation or mediation.  In the absence of a friendly resolution, the parties have agreed that the matter will first be referred to the China International Economic and Trade Arbitration Commission in Beijing, whose decisions are final and enforceable in Chinese courts.    JV EXPROPRIATION            The Chinese joint venture laws provide that China will not nationalize or requisition enterprises in which foreign funds have been invested.  However, under special circumstances, when public interest requires, enterprises with foreign capital may be legally requisitioned and appropriate compensation will be made.
Our business faces many risks.  The risks described below may not be the only risks we face.  Additional risks that we do not yet know of, or that we currently think are immaterial, may also impair our business operations or financial results.  If any of the events or circumstances described in the following risks actually occurs, our business, financial condition or results of operations could suffer and the trading price of our common stock could decline. - 14 -      Risks Related to Our Business  Our ability to effectively implement our business strategy depends upon, among other factors, the successful recruitment and retention of additional highly skilled and experienced management and other key personnel and we cannot assure that we will be able to hire or retain such employees.            We must attract recruit and retain a sizeable workforce of technically competent employees.  Our ability to effectively implement our business strategy  will depend upon, among other factors,  the successful recruitment and retention of additional  highly skilled and  experienced  management and other key personnel.  These  individuals  are  difficult to find in China.  We cannot  assure that we will be able to find, hire or retain such employees.  Certain of our officers and directors have existing responsibilities to other businesses in addition to our company and as a result, conflicts of interest between us and the other activities of those persons may occur from time to time.            Certain persons serving as our officers and directors have existing responsibilities and, in the future, may have additional responsibilities, to provide management and services to other entities in addition to us.  In particular, Mr. Xiao Ping Zhang, our Chief Executive Officer, and Mr. Xiao Feng Zhang, our Chief Operating Officer, are officers and principal shareholders of Ruili Group Co. Ltd. which is engaged in the development, production and sale of various kinds of automotive parts.  The Ruili Group also provides certain services to the Company in the form of bank guaranties, licensing of technology and sells certain non-valve products to the Company to fill out the Company’s product lines.  As a result, conflicts of interest between us and the other activities of those persons may occur from time to time.  We will attempt to resolve any such conflicts of interest in our favor.  Our officers and directors are accountable to us and our shareholders as fiduciaries, which requires that such officers and directors exercise good faith and integrity in handling our affairs.  However, the existing responsibilities limit the amount of time such officers and directors can spend on our affairs. We are and will continue to be under downward pricing pressures on our products from our customers and competitors.            We face downward pricing pressures from our customers and competitors, especially in the sales of replacement parts.  To retain our existing customers and gain new ones, we must continue to keep our unit prices low.  In view of our need to maintain low prices on our products, our growth, profit margins and net income will suffer if we cannot effectively continue to control our manufacturing and other costs.  Our contracts with our customers are generally short-term and do not require the purchase of a minimum amount.            Our customers generally do not provide us with firm, long-term volume purchase commitments.  Although we enter into manufacturing contracts with certain of our customers who have continuing demand for a certain product, these contracts state terms such as payment method, payment period, quality standard and inspection and similar matters rather than provide firm, long-term commitments to purchase products from us.  As a result of the absence of the long term contracts, we could have periods during which we have no or only limited orders for our products, but will continue to have to pay the costs to maintain our work force and our manufacturing facilities and to service our indebtedness without the benefit of current revenues.  - 15 -      We consistently face short lead times for delivery of products to customers.  Failure to meet delivery deadlines in our production agreements could result in the loss of customers and damage to our reputation and goodwill.            We enter into production agreements with our customers prior to commencing production, which reduces our risk of cancellations.  However, these production agreements typically contain short lead times for delivery of products, leading to production schedules that can strain our resources and reduce our profit margins on the products produced.  Although we have increased our manufacturing capacity, we may lack sufficient capacity at any given time to meet all of our customers’ demands if they exceed the production capacity of levels.  We strive for rapid response to customer demand, which can lead to reduced purchasing efficiency and increased material costs.  If we are unable to sufficiently meet our customers’ demands, we may lose our customers.  Moreover, failure to meet customer demands may damage our reputation and goodwill.  Because of the short lead times in our production agreements, we may not be able to accurately or effectively plan our production or supply needs.            We make significant decisions, including determining the levels of business that we will seek and accept, production schedules, component procurement commitments, facility requirements,  personnel needs, and other resource requirements, based on our production agreements with our customers.  Short lead times of our customers’ commitments to their own customers and the possibility of rapid changes in demand for their products reduce our ability to estimate accurately the future requirements of those customers for our products.  Because many of our costs and operating expenses are fixed, a reduction in customer demand can harm our gross margins and operating results.  We may also occasionally acquire raw materials without having customer orders based on a customer’s forecast or in anticipation of an order and to secure more favorable pricing, delivery or credit terms in view of    the short lead times we often have under our customers’ orders.  These purchases can expose us to losses from inventory carrying costs or inventory obsolescence.  Our operations depend highly on Messrs. Xiao Ping Zhang, our Chief Executive Officer and Xiao Feng Zhang, our Chief Operating Officer and a small number of other executives.            The success of our operations depends greatly on a small number of key managers, including Messrs. Xiao Ping Zhang and Xiao Feng Zhang.  The loss of the services of either Mr. Zhang, or any of the other senior executives could adversely affect our ability to conduct our business.  Although we believe we would be able to find other managers to replace any of these managers, the search for such managers and the integration of such managers into our business will inevitably occur only over an extended period of time.  During that time the lack of senior leadership could affect adversely our sales and manufacturing, as well as our research and development efforts.   We may not be able to effectively respond to rapid growth in demand for our products and of our manufacturing operations.            If we continue to be successful in obtaining rapid market growth of our products, we will be required to deliver large volumes of quality products to customers on a timely basis at a reasonable cost to those customers.  Meeting such increased demands will require us to expand our manufacturing facilities, to increase our ability to purchases of raw materials, to increase the size of our work force, to expand our quality control capabilities and to increase the scale upon which we produce products.  Such demands would require more capital and working capital than we currently have available.  We extend relatively long payment terms for accounts receivable.            As is customary in China, we extend relatively long payment terms to certain of our China based customers.  As a result of the size of many of our orders, these extended terms adversely affect our cash flow and our ability to fund our operations out of our operating cash flow.  In addition, although we attempt to establish appropriate reserves for our receivables, those reserves may not prove to be adequate in view of actual levels of bad debts.  The failure of our customers to pay us timely would negatively affect our working capital, which could in turn adversely affect our cash flow.   - 16 -                Our customers often place large orders for products, requiring fast delivery, which impacts our working capital.  If our customers do not incorporate our products into their products and sell them in a timely fashion, for example, due to excess inventories, sales slowdowns or other issues, they may not pay us in a timely fashion, even on our extended terms.  This failure to pay timely may defer or delay further product orders from us, which may adversely affect our cash flows, sales or income in subsequent periods. We may not be able to finance the development of new products.             Our future operating results will depend to a significant extent on our ability to continue to provide new products that compare favorably on the basis of cost and performance with the products of our competitors.  Some of our competitors have design and manufacturing capabilities and technologies that compete well with our products, particularly in markets outside of China.  We are currently conducting research and development on a number of new products, activities requiring a substantial outlay of capital.  To remain competitive, we must continue to incur significant costs in product development, equipment, facilities and invest in research and development of new products.  These costs may increase, resulting in greater fixed costs and operating expenses.  All of these factors create pressures on our working capital and ability to fund our current and future manufacturing activities and the expansion of our business.  We receive a significant portion of our revenues from a small number of customers.            Although no customer individually accounted for more than 6% of our revenues for the fiscal year ended December 31, 2005, our three largest customers accounted for approximately 16% and 32% of our revenues in 2005 and 2004, respectively.  Dependence on a few customers could make it difficult to negotiate attractive prices for our products and could expose us to the risk of substantial losses if a single dominant customer stops purchasing our products.  Our business depends on our ability to protect our intellectual property effectively.            The success of our business depends in substantial measure on the legal protection of proprietary rights in technology we hold.  We hold only one patent in China and have a license in two other patents.  We claim proprietary rights in various unpatented  technologies, know-how, trade secrets and trademarks relating to products and manufacturing processes.  We protect our proprietary rights in our products and operations through contractual obligations, including nondisclosure agreements.  If these contractual measures fail to protect our proprietary rights, any advantage those proprietary rights provided to us would be negated.  Monitoring infringement of intellectual property rights is difficult, and we cannot be certain that the steps we have taken will prevent unauthorized use of our intellectual property and know-how, particularly in China and other countries in which the    laws may not protect our proprietary rights as fully as the laws of the United States.  Accordingly, other parties,  including competitors, may duplicate our products using our proprietary technologies.  Pursuing legal remedies against persons infringing our patents or otherwise improperly using our proprietary information is a costly and time consuming process that would divert management’s attention and other resources from the conduct of our other business, could cause delays and other problems with the marketing and sales of our products, as well as delays in deliveries. Risks Related to Doing Business in China            We operate from facilities that are located in China.  Accordingly, our operations must conform to the governmental regulations and rules of China.  - 17 -      The PRC legal system has inherent uncertainties that could limit the legal protections available to us.            The Chinese legal system is a civil law system based on written statutes.  Unlike common law systems, it is a system in which decided legal cases have little precedential value.  In the late 1970s, the Chinese government began to promulgate a comprehensive system of laws and regulations governing commercial matters.  The overall effect of legislation enacted over the past 20 years has significantly enhanced the protections afforded to foreign invested enterprises in China.  However, these laws, regulations and legal requirements are relatively recent and are evolving rapidly, and their interpretation and enforcement involve uncertainties.  These uncertainties could limit the legal protections available to foreign investors.            The practical effect of the PRC’s legal system on our business operations in China can be viewed from two separate but intertwined considerations.  First, as a matter of substantive law, the Foreign Invested Enterprise laws provide significant protection from government interference.  In addition, these laws guarantee the full enjoyment of the benefits of corporate articles and contracts to Foreign Invested Enterprise participants.  These laws, however, do impose standards concerning  corporate formation and governance,  which are not qualitatively different from the corporation laws found in the United States.            Second, while the enforcement of substantive rights may appear less clear than enforcement procedures in the United States, Foreign Invested Enterprises and Wholly Foreign-Owned Enterprises are Chinese registered companies that enjoy the same status as other Chinese registered companies in business-to-business dispute resolution.  The Chinese legal infrastructure is significantly different in operation from its United States counterpart, and may present a significant impediment to the operation of Foreign Invested Enterprises.  Our principal operating subsidiary, Ruili Group Ruian Auto Parts Co., Ltd., is a sino-foreign joint venture organized under the laws of the PRC and is governed by its articles of association.  These uncertainties could impact our ability to enforce our rights or to defend ourselves against the claims of third parties.  PRC accounting laws mandate accounting practices which may not be consistent with U.S. generally accepted accounting principles and therefore our financials and their interpretation involve uncertainties.            PRC accounting laws mandate accounting practices which may not be consistent with U.S. Generally Accepted Accounting Principles.  The China accounting laws require that an annual “statutory audit” be performed in accordance with PRC accounting standards and that the books of account of Foreign Invested Enterprises be maintained in accordance with Chinese accounting laws.  The translation of the financial statement from the requirements of the PRC to US GAAP, requires interpretation and the exercise of judgment.   PRC economic reform policies or nationalization could result in a total investment loss in our common stock.            Since 1979, the Chinese government has reformed its economic systems.  Because many reforms are unprecedented or experimental, they are expected to be refined and improved.  Other political, economic and social factors, such as political changes, changes in the rates of economic growth, unemployment or inflation, or in the disparities in per capita wealth between regions within China, could lead to further readjustment of the reform measures.  This refining and readjustment process may negatively affect our operations.            Although the Chinese government owns the majority of the productive assets in China, including mines and quarrying sites, in the past several years the government  has  implemented  economic  reform  measures  that  emphasize decentralization and encourage private economic activity.  Because these economic reform measures may be inconsistent or ineffectual, there are no assurances that:         •    We will be   able to capitalize on economic reforms;                            •    The Chinese   government will continue its pursuit of economic reform policies;                            •    The economic   policies, even if pursued, will be successful;                            •    Economic   policies will not be significantly altered from time to time; and                           •    Business  operations in China will not become   subject  to nationalization.     - 18 -      Over the last few years, China’s economy has registered a high growth rate.  Recently, there have been indications that rates of inflation have increased.  In response, the Chinese government recently has taken measures to curb this excessively expansive economy.  These measures have included restrictions on the availability of domestic credit, reducing the purchasing capability of certain of its customers, and limited re-centralization of the approval process for purchases of some foreign products.  These austere measures alone may not succeed in slowing down the economy’s excessive expansion or control inflation, and may result in severe dislocations in the Chinese economy.  The Chinese government may adopt  additional  measures to further combat  inflation,  including the establishment of freezes or restraints on certain projects or markets.  These measures may adversely affect our operations.            There can be no assurance that the reforms to China’s economic system will continue or that we will not be adversely affected by changes in China’s political, economic, and social conditions and by changes in policies of the Chinese government, such as changes in laws and regulations, measures which may be introduced to control inflation, changes in the rate or method of taxation, imposition of additional restrictions on currency conversion and remittance abroad, and reduction in tariff protection and other import restrictions.  A material change in reforms on economic policy could cause instability or other harmful effects. Because our principal operating company is incorporated under the laws of China, and substantially all of our assets are located in China.  You may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing original actions in China based on U.S. or other foreign law against our management and us.             Ruili Group Ruian Auto Parts Co., Ltd., our operating company, is incorporated under the laws of China, and substantially all of our assets are located in China.  In addition, substantially all of our directors, managers, and executive officers reside within China, and substantially all of the assets of these persons are located within China.  As a result, it may not be possible to effect service of process within the United States or elsewhere outside China upon certain directors, supervisors or executive officers, including with respect to matters arising under U.S.  federal securities laws or applicable state securities laws.  Moreover, China does not have treaties providing for the reciprocal recognition and enforcement of judgments of courts with the United States, the United Kingdom, Japan or many other countries.  As a result, recognition and enforcement in China of judgments of a court in the United States and any of the other jurisdictions mentioned above in relation to any matter may be difficult or impossible.  Furthermore, an original action may be brought in China against us, our directors, managers, or executive officers only if the actions are not required to be arbitrated by Chinese law and only if the facts alleged in the complaint give rise to a cause of action under PRC law.  In connection with any such original action, a Chinese court may award civil liability, including monetary damages.  Because we receive a substantial portion of our revenue in Renminbi, which currently is not a freely convertible currency, and the government controls the currency conversion and the fluctuation of the Renminbi, we are subject to changes in China’s’ political and economic decisions.            We receive a substantial portion of our revenues in Renminbi, which currently is not a freely convertible currency.  The Chinese government may, at its discretion, restrict access in the future to foreign currencies for current account transactions.  The value of the Renminbi against the U.S.  dollar and other currencies fluctuates and is affected by, among other things, changes in China’s political and economic conditions.  Recently, China has introduced a price-finding mechanism in the interbank foreign exchange market.  The Renminbi exchange rate is no longer pegged to the single US dollar, but rather, a number of principal currencies are chosen and given appropriate weight to form a package of currencies.   - 19 -      The conversion of Renminbi into foreign currencies is based on rates set by the People’s Bank of China, which are set daily based on Renminbi-US dollar prices quoted by market makers in each morning before the interbank foreign exchange market opens, and the current exchange rates of the basket of currencies against the US dollar on the world financial markets.  Since 1994, the official exchange rate for the conversion of Renminbi to U.S.  Dollars generally has been stable.  Any appreciation of the Renminbi may adversely affect our gross margin and net income, since nearly all of our expenses are denominated in Renminbi, while any exchange gains as a result of appreciation of Renminbi-denominated assets are not recognized in our income statement.  Any devaluation of the Renminbi, however, may materially and adversely affect the value of, and any dividends payable on, our shares in foreign currency terms, since we will receive substantially    all of our revenues, and express our profits, in Renminbi.  Our financial condition and results of operations also may be affected by changes in the value of certain currencies other than the Renminbi.  Our results may be adversely affected by changes in the political and social conditions in China, and changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.  Any occurrence of serious infectious diseases, such as recurrence of severe acute respiratory syndrome (SARS) causing widespread public health problems, could adversely affect our business and results of operations.            A renewed outbreak of SARS or other widespread public health problems in China, where a substantial portion of our revenue is derived, and in Ruian City, where our operations are headquartered, could have a negative effect on our operations.  Our operations may be impacted by a number of public health-related factors, including the following:          •    quarantines   or closures of our factories or subsidiaries which would severely disrupt its   operations;                            •    the sickness   or death of the key officers and employees; and                            •    general   slowdown in the Chinese economy resulting from an outbreak.     Any of the foregoing events or other unforeseen consequences of public health problems could result in reduction in net sales of our products.  Because it is likely that China will adopt additional environmental regulations and additional or modified regulations relating to the manufacture, transportation, storage, use and disposal of materials used to manufacture our products or restricting disposal of any waste will increase our operating costs.           National, provincial and local laws impose various environmental controls on the manufacture of automotive parts and/or of certain materials used in the manufacture of automotive parts.  Although we believe that our operations are in substantial compliance with current environmental regulations, there can be no assurance that changes in such laws and regulations will not impose costly compliance requirements on us or otherwise subject us to future liabilities.  In addition,  China is experiencing  substantial problems with environmental pollution.  Accordingly, it is likely that the national, provincial and local governmental  agencies will adopt stricter pollution controls.  Any such regulation relating to the manufacture, transportation, storage, use and disposal of materials used to manufacture our products or restricting disposal of any waste will increase our operating costs.   - 20 -      Risks Related to Our Common Stock  The market price for our common stock may be volatile which could result in a complete loss of your investment.            The market price for our common stock is likely to be highly volatile and subject to wide fluctuations in response to factors including the following:           •    actual or   anticipated fluctuations in our quarterly operating results,                           •    announcements   of new products by us or our competitors,                            •    changes in   financial estimates by securities analysts,                            •    conditions   in the automotive market,                            •    changes in   the economic performance or market valuations of other companies involved in   the production of automotive parts,                           •    announcements  by our    competitors of significant    acquisitions, strategic partnerships, joint ventures or capital   commitments,                            •    additions or   departures of key personnel, or                            •    potential   litigation.     In addition, the securities markets have from time to time experienced significant price and volume fluctuations that are not related to the operating performance of particular companies.  These market fluctuations may also materially and adversely affect the market price of our common stock.   We may issue additional shares of our capital stock to raise additional cash for working capital.  If we issue additional shares of our capital stock, our stockholders will experience dilution in their respective percentage ownership in us.            We may issue additional shares of our capital stock to raise additional cash for working capital.  If we issue additional shares of our capital stock, our stockholders will experience dilution in their respective percentage ownership in us.  A large portion of our common stock is controlled by a small number of stockholders and as a result, these stockholders are able to influence the outcome of stockholder votes on various matters.            A large portion of our common stock is held by a small number of stockholders.  Mr. Xiao Ping Zhang, our Company’s Chief Executive Officer, and his brother, Xiao Feng Zhang, our Chief Operating Officer, hold approximately 68% and 8.5%, respectively of the Company’s common stock.  As a result, these stockholders are able to control the outcome of stockholder votes on various matters, including the election of directors and other corporate transactions including business combinations.  The occurrence of sales of a large number of shares of our common stock, or the perception that these sales could occur, may affect our stock price and could impair our ability to obtain capital through an offering of equity securities.            The occurrence of sales of a large number of shares of our common stock, or the perception that these sales could occur, may affect our stock price and could impair our ability to obtain capital through an offering of equity securities.  This will have an adverse affect on the business by restricting access to working capital to fund growth and operations.  Furthermore, the current ratios of ownership of our common stock reduce the public float and liquidity of our common stock which can in turn affect the market price of our common stock. - 21 -      We are responsible for the indemnification of our officers and directors which could result in substantial expenditures, which we may be unable to recoup.            Our Bylaws provide for the indemnification of our directors, officers, employees, and agents, under certain circumstances, against attorney’s fees and other expenses incurred by them in any litigation to which they become a party arising from their association with or activities on behalf of us.  This indemnification policy could result in substantial expenditures, which we may be unable to recoup.  Compliance with the Sarbanes-Oxley act could cost hundreds of thousands of dollars, require additional personnel and require hundreds of man hours of effort, and there can be no assurance that we will have the personnel, financial resources or expertise to comply with these regulations.            The US Public Company Accounting Reform and Investor Protection Act of 2002, better known as Sarbanes-Oxley, is the most sweeping legislation to affect publicly traded companies in 70 years. Sarbanes-Oxley created a set of complex and burdensome regulations.  Compliance with such regulations requires hundreds of thousands of dollars, additional personnel and hundreds of man hours of effort.  There can be no assurance that we will have the personnel, financial resources or expertise to comply with these regulations.
Not Applicable.
Our facilities are located in Ruian District of Wenzhou City in the Zhejiang Province, which is the center of automotive parts production in China.  The facilities include 271,713 square feet of factory and warehouse, which we rent from the Ruili Group under a ten-year lease.  The annual rent is approximately $439,540 the terms of which are at least as favorable as those that could have been obtained from an unrelated party.  We also share office space of 10,764 square feet with the Ruili Group which we utilize free of charge.  At the production facility, the Company has production equipment, which is imported from the United States, Korea, Taiwan as well as mainland China. ITEM 3.  LEGAL PROCEEDINGS            We are not a party to any pending litigation and none is contemplated or threatened.
LEGAL PROCEEDINGS    22
There were no matters submitted to the stockholders in the fourth quarter of 2005.  PART II
Our shares are quoted on the Over-The-Counter Bulletin Board.  Our trading symbol is “SAUP.”  The table shows the high and low bid price of our stock for 2004 and 2005.  These prices represent prices between dealers; they do not include retail markup, markdown or commission.  These are bid prices only and do not represent actual transactions and are adjusted for dividends and splits.  - 22 -         QUARTER ENDED            HIGH            LOW                                             2004                                       March 31              6.00              3.00          June 30              4.80              3.75           September 30              13.50              4.80           December 31              6.50              6.00          2005                                       March 31              8.00              6.50           June 30              7.00              3.00          September 30              6.75              5.25           December 31              6.60              5.00          Stockholders            At March 18, 2005, we had approximately 515 registered stockholders of record of our common stock.  This number does not include shares held by brokerage clearing houses, depositories or otherwise in unregistered form.  Dividends            We have not declared any cash dividends, nor do we intend to do so.  We are not subject to any legal restrictions respecting the payment of dividends, except that they may not be paid to render us insolvent. Securities Authorized For Issuance Under Equity Compensation Plans            The following table summarizes the securities authorized for issuance under our 2005 Stock Compensation Plan, the number of shares of our common stock issuable upon the exercise of outstanding options, warrants and rights, the weighted average exercise of such options and the number of additional shares of our common stock remaining available for issuance.     Plan   Category        Number of   securities to   be issued upon exercise   of outstanding options,    warrants and rights        Weighted   average   exercise price of    outstanding option    warrants and rights        Number of   securities    available for future    issuance under equity    compensation plans                                       Equity Compensation plans   not approved by securityholders              0            n/a            1,650,500                                                     Total              0                        1,650,500                    A description of the 2005 Stock Compensation Plan is set forth in ITEM 10 “EXECUTIVE COMPENSATION.”  RECENT SALES OF UNREGISTERED SECURITIES            None.  - 23 -
The following selected consolidated financial data should be read in conjunction with the Consolidated Financial Statements and Notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results or Operation” appearing elsewhere in this report.             Years ended December 31,                          (in thousands, of US dollars except per share data)        2005        2004        2003        2002        2001                                                                    RESULTS OF   OPERATIONS                                                                                 Revenues              64,183              46,815              33,121              24,250              14,284          Income (loss) before income   tax benefit              5,500              5,341              3,844              1,807              716           Income tax benefit              —                —                (546    )                                                                                                    Net income (loss)              4,950              4,807              1,150              1,626              644                                                                             Earnings per share:                                                                                Basic              0.37              0.37              0.09              .12              .04           Diluted              0.37              0.37              0.09              .12              .04          FINANCIAL   POSITION                                                                                 Cash, cash equivalents and   restricted cash              961              730              —                —                —            Total assets              39,301              22,520              12,903              7,852              4,887           Long term debt, net of   current portion              —                —                1,208              605              605         - 24 -      SELECTED UNAUDITED QUARTERLY RESULTS OF OPERATIONS            In the opinion of management, the accompanying unaudited quarterly financial information presented below includes all adjustments which management considers necessary to present fairly the results of its operations for the periods presented below in conformity with accounting principles generally accepted in the United States of America.  This quarterly financial information has been prepared consistently with the accounting policies described in the accompanying audited consolidated financial statements for the year ended December 31, 2005.  The results of operations for the periods presented below are not necessarily indicative of the results of operations to be expected in the future.            Fiscal   Quarters Ended,                                   2005        2004                                  (in thousands,of US dollars except per share data)        Mar. 31        Jun. 30        Sep. 30        Dec. 31        Mar. 31        Jun. 30        Sep. 30        Dec. 31                                                                                                  Revenues              14,516              14,924              16,377              18,366              9,091              11,340              12,595              13,789                                                                                                             Operating expenses:              (1,481    )         (1,607    )         (1,673    )         (1,351    )         (1,196    )         (1,227    )         (1,143    )         (1,949    )                                                                                                        Income (loss) from   operations              1,738              1,756              1,794              940              1,039              1,427              1,745              1,472          Interest income (expense),   net              (60    )         (126    )         (145    )         (358    )         (80    )         (76    )         (78    )         (53    )     Other income (expense)              (9    )         (66    )         (13    )         49              —                (36    )         (13    )         (6    )                                                                                                        Pre-tax income (loss)              1,669              1,563              1,636              631              959              1,314              1,654              1,413                                                                                                             Income tax benefit              —                —                —                —                —                —                —                —                                                                                                               Net income              1,502              1,407              1,473              568              863              1,183              1,489              1,272                                                                                                             Net income per common   share, diluted              0.11              0.11              0.11              0.04              0.07              0.09              0.11              0.10                                                                                                            - 25 -
The following is management’s discussion and analysis of certain significant factors that have affected our financial position and operating results during the periods included in the accompanying consolidated financial statements, as well as information relating to the plans of our current management.  This report includes forward-looking statements.  Generally, the words “believes,” “anticipates,” “may,” “will,” “should,” “expect,” “intend,” “estimate,” “continue,” and similar expressions  or the negative thereof or comparable terminology are intended to identify forward-looking statements.  Such statements are subject to certain risks and uncertainties, including the matters set forth in this report or other reports or documents we file with the Securities and Exchange Commission from time  to time, which could cause actual results or outcomes to differ materially from those projected.  Undue reliance should not be placed on these forward-looking statements that speak only as of the date hereof.  We undertake no obligation to update these forward-looking statements.            The following discussion and analysis should be read in conjunction with our consolidated financial statements and the related notes thereto and other financial information contained elsewhere in this Form 10K.  OVERVIEW            On May 10, 2004, we acquired all of the issued and outstanding equity interests of Fairford Holdings Limited, a Hong Kong limited liability company (“Fairford”).  Until we acquired Fairford, we had only nominal assets and liabilities and limited business operations.  Although Fairford became a wholly-owned subsidiary following the acquisition, because the acquisition resulted in a change of control, the acquisition was recorded as a “reverse merger” whereby Fairford is considered to be the accounting acquirer.  As such, the following results of operations are those of Fairford.           Fairford was organized in Hong Kong as a limited liability company on November 3, 2003.  Fairford owns 90% of the equity interest of Ruili Group Ruian Auto Parts Co., Ltd., a Sino-foreign joint venture (the “Joint Venture”) established pursuant to the laws of the People’s Republic of China (“PRC” or “China”).  The Joint Venture is a joint venture between Fairford and Ruili Group Co., Ltd.  (the “Ruili Group”).            The Ruili Group was incorporated in the PRC in 1987 to specialize in the development, production and sale of various kinds of automotive parts.  Its headquarters are located in Ruian City of Wenzhou Area, one of the leading automotive parts manufacturing centers of China with more than 1400 auto parts manufacturing companies.  Its major product lines include valves for air brake systems, auto metering products, auto electric products, anti-lock brake systems and retarders.  Some of those products were developed and are manufactured through affiliated companies of Ruili Group.  Due to its leading position in the industry, the Chairman of the Ruili Group, Mr.  Xiao Ping Zhang, has been elected as the Chairman of Wenzhou Auto Parts Association, one of the leading auto parts trade associations in China.  Mr.  Zhang is also Chairman and Chief Executive Officer of the Company.  The Joint Venture was established in the PRC as a Sino-foreign joint venture company with limited liability by the Ruili Group and Fairford.  Fairford and Ruili Group contributed 90% and 10%, respectively, of the paid-in capital in the aggregate amount of $7,100,000.            In connection with its formation, effective January 19, 2004 the Joint Venture acquired the business of the Ruili Group relating to the manufacture and sale of various kinds of valves for automotive brake systems and related operations (the “Transferred Business”).  This was accomplished by the transfer from the Ruili Group to Fairford of the relevant assets and liabilities of the Transferred Business including trade receivables, inventories and machinery, and the assumption of short and long term borrowings, at a consideration of US$6,390,000.   - 26 -      The consideration was based on a valuation by an independent PRC valuation firm.  Fairford then contributed these assets and liabilities as a capital contribution for its 90% interest in the Joint Venture.  The Ruili Group also transferred inventory as its capital contribution for its 10% interest in the Joint Venture.  The assets and liabilities transferred to the Joint Venture by Fairford and the Ruili Group represented all the relevant assets and liabilities of the Transferred Business.  Certain historical information of the Transferred Business is based on the operation of the Transferred Business when it was owned by the Ruili Group.            Pursuant to the formation of the Joint Venture, on January 17, 2004, the Ruili Group and Fairford signed a binding Joint Venture agreement (the “JV Agreement”).  Pursuant to the JV Agreement, the Board of Directors consists of three directors; Fairford has the right to designate two members of the board and the Ruili Group has the right to designate one member.  The majority of the Board has decision making authority with respect to operating matters.  As a result, Fairford maintains operating control over the Joint Venture.            The transactions were accounted for as a reverse spin-off in accordance with EITF 02-11 “Accounting for Spin-offs.”  Accordingly SORL Auto Parts, Inc.  was deemed to be the “spinnor” for accounting purposes.            As a result of the foregoing, through Fairford’s 90% interest in the Joint Venture, the Company manufactures and distributes automotive air brake valves and related components in China and internationally for use primarily in vehicles weighing over three tons, such as trucks and buses.  There are forty categories of valves with over eight hundred different specifications.  Management believes that it is the largest manufacturer of automotive brake valves in China. CRITICAL ACCOUNTING POLICIES AND ESTIMATES            Below is a description of accounting policies, which we consider critical to the preparation and understanding of our financial statements.  In addition, certain amounts included in or affecting our financial statements and related disclosure must be estimated, which requires us to make assumptions with respect to values or conditions which cannot be known with certainty at the time the financial statements are prepared.  Actual results may differ from these estimates under different assumptions or conditions.  The selection of critical accounting policies, the judgments and other uncertainties affecting the application of those policies and the sensitivity of reported results to changes in conditions and assumptions are factors to be considered when reviewing our consolidated financial statements.              We believe that the following critical accounting policies set forth below involve the most significant judgments and estimates used in the preparation of our consolidated financial statements.  We evaluate these policies on an ongoing basis, based upon historical results and experience, consultation with experts, trends and other methods we consider reasonable in the particular circumstances, as well as our forecasts as to how these might change in the future.  ACCOUNTING METHOD            The Company uses the accrual method of accounting which recognizes revenues when earned and expenses when incurred.  ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS            The Company presents accounts receivable, net of allowance for doubtful accounts.  The allowance is calculated based on review of individual customer accounts.  - 27 -     INVENTORIES            Inventories are stated at the lower of cost or net realizable value.  Cost is calculated on the weighted-average basis and includes all costs to acquire and other costs incurred in bringing the inventories to their present location and condition.  The Company evaluates the net realizable value of its inventories on a regular basis and records a provision for loss to reduce the computed weighted-average cost if it exceeds the net realizable value.  INCOME TAXES            Taxes are calculated in accordance with taxation principles currently effective in the PRC.  Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income in the period that includes the enactment date.  A valuation allowance is provided for the amount of deferred tax assets and liabilities that, based on available evidence, are not expected to be realized.            Under a Tax Holiday in PRC, the Company is granted an exemption from income taxes for two years commencing from the first cumulative profit-making year and a 50% reduction in the income tax rates for the following three years.  Fiscal year ended December 31, 2004 was the first accumulative profit-making year.  SORL is entitled to a 50% income tax reduction in the fiscal years ended December 31, 2006, 2007 and 2008.  The applicable income tax rate is 26.4% in Ruian City which is located in the coastal economic development zones.  REVENUE RECOGNITION            In accordance with the provisions of Staff Accounting Bulletin No.  103, revenue is recognized when merchandise is shipped and title passes to the customer and collectibility is reasonably assured.  Revenues consist of the invoice value of the sale of goods and services net of value added tax, rebates and discounts.  The Company is subject to the following surtaxes, which are recorded as deductions from gross sales: Education Tax.           The Company does not receive revenue for shipping and handling costs to customers.  Shipping and handling expenses incurred by the Company are included in selling and administrative expenses in the accompanying consolidated statements of income.  CONCENTRATION OF CREDIT RISK            Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of accounts receivable.  The Company performs ongoing credit evaluations with respect to the financial condition of its creditors, but does not require collateral.  In order to determine the value of the Company’s accounts receivable, the Company records a provision for doubtful accounts to cover probable credit losses.  Management reviews and adjusts this allowance periodically based on historical experience and its evaluation of the collectibility of outstanding accounts receivable.  RESULTS OF OPERATIONS            Year ended December 31, 2005 as compared to year ended December 31, 2004:  - 28 -      SALES    Sales        2005        2004                                                           Air brake valves &   related components         $    47.9M              74.6    %    $    35.9M              76.70    %     Non-valve products         $    16.3M              25.4    %    $    10.9M              23.30    %                                                             Total         $    64.2M              100    %    $    46.8M              100    %               Sales contain air brake valves and related components manufactured by SORL and sold to domestic OEM and aftermarket customers and international customers; as well as distribution of non-valve auto parts sourced from related parties.            Total net sales were $64,182,544 and $46,815,037 for the fiscal years ended on December 31, 2005 and 2004, respectively.  Net sales in 2005 increased by $17.4 million or 37% to $64.2 million, compared with 2004, despite an approximately 36% decrease in the output of heavy duty trucks in China.  The increase in sales was primarily due to the expansion in the international market and in China’s aftermarket as a result of improvement in the Company’s China sales network.             A breakdown of net sales revenue for our three market segments, domestic OEM market, domestic aftermarket and international market, in 2005 and 2004 were as follows:             Years   Ended December 31,                                   2005        %        2004        %                                                                   (U.S.  dollars in million)          China OEM market         $    20.6              32    %    $    22.0              47    %     China Aftermarket         $    20.2              32    %    $    12.2              26    %      International market         $    23.4              36    %    $    12.6              27    %                                                             Total         $    64.2              100    %    $    46.8              100    %              For 2005, China’s heavy duty trucks output decreased by 35.7% compared to that in 2004, in contrast to a 45% increase in 2004 from 2003, primarily due to the Chinese Government’s macroeconomic regulation policy for 2005.  Notwithstanding the decrease in output, sales revenue for this market segment dropped relatively slightly by 6.4% from $22 million in 2004 to $20.6 million in 2005, principally because of the introduction of new products to satisfy the OEM customers’ requirements, and the granting of extended credit terms to a selected number of OEM customers, such as FAW and Dongfeng Group, on a temporary basis, so as to maintain market share and strengthen long term relationships.            Currently SORL has 27 authorized distributors covering nearly all regions in China, who in turn sell the products to over 800 sub-distributors.  Based on the well established and continuously improving sales networks, SORL achieved total revenue of $20.2 million in domestic aftermarket sales, an increase of $8 million, or 65.7% from 2004.  During the year, the Company adjusted its compensation plan for distributors to incentitize sales growth.            Export sales grew by approximately 83%, from $12.6 million in 2004 to $23.4 million in 2005.  The increase in sales was attributable to the introduction of new products and greater focus on participation in international trade shows leading to increased awareness of the Company’s products.  Additionally, the Company has been able to offer a more complete product line including non-valve products which are sourced from the Ruili Group.  Such outsourced non-valve products include power steering pumps and other pumps, automobile electrical components and auto meters.  They accounted for approximately 20% of total export sales in both 2005 and 2004.    - 29 -      COST OF SALES            Cost of sales for the fiscal year ended December 31, 2005 increased to $49.9 million from $35.9 million for the fiscal year ended December 31, 2004, or a 39% increase consistent with the increase in revenues.  Gross margin decreased by approximately 1% from 23.3% in 2004 to 22.3%.           We purchase various components and raw materials for use in our manufacturing processes.  The principal raw materials we purchase are aluminum and steel.  The price of aluminum and steel has increased significantly in 2004, with aluminum prices continuing to increase in 2005.  Steel prices peaked in March 2005 and then started to decrease until they reached levels even lower than prices incurred during 2004.  Experts predict that aluminum and steel prices will increase in 2006.            The Company’s average purchase price (net of VAT) for steel materials (including stainless steel sheets) in 2005 was approximately $600 per ton, compared with $465 per ton on average in 2004, and $480 per ton at the end of 2005.  The average purchase price (net of VAT) for aluminum ingot in 2005 was approximately $1,865 per ton, in contrast to the levels of $1,680 per ton on average in 2004, and $1,950 per ton at the end of 2005.            Total purchases of steel and aluminum materials in 2005 were 20,371 tons and 3,614 tons, respectively.  GROSS PROFIT            Gross profit for the fiscal year ended December 31, 2005 increased by $3.4 million or 31% to $14.3 million from $10.9 million for the fiscal year ended December 31, 2004, while gross margin decreased by approximately 1% from 23.3% in 2004 to 22.3%.            The approximately 2% appreciation of RMB against USD in late July 2005 had a certain negative impact on the gross margin, since in 2005, about 36% of total revenue was denominated in US Dollars, while nearly all costs were denominated in RMB.  However, this impact was minimal as this resulted in an impact of approximately 0.3% on Gross Margin.            The materials price increases have had an adverse impact on gross margin, since some of the increases cannot be passed on to our customers.  This negatively impacted our gross margin by 1.2% in 2005, or approximately $0.8 million.           This negative impact on Gross Margin was largely offset by economies of scale and consistent efforts in production technique optimization.  For example, in 2005, we replaced the machining approach with a molding process, thereby reducing processing steps and materials consumption and increasing hourly output.  Meanwhile, in the process of removing impurities from liquid aluminum, historically we used the high-temperature method.  The adoption of a new technique of using a low-temperature method helped save power consumption.    SELLING, GENERAL AND ADMINISTRATIVE EXPENSES            Selling, general and administrative expenses for the fiscal year ended December 31, 2005 was $8.1 million or 12.6% of net sales compared to $5.2 million or 11.2% of net sales for the fiscal year ended December 31, 2004.    - 30 -                The Company incurred $3.9 million in selling and distribution expenses for 2005, a 43% increase from 2004.  In addition to the increase in sales, the higher selling expenses were mainly attributable to the Company’s increased focus in international sales and marketing, including active participation in various trade shows and fairs, in an attempt to gather industry information, keep up with world market trends and acquaint and acquire more new customers.              General and administrative expenses for the fiscal year ended December 31, 2005 amounted to $4.2 million, increasing by 68% from 2004.  The major increase came from the increase in the provision of bad debt expense of $0.85 million in 2005, since we had experienced prolonged account receivable cycles from some of our customers.  The remaining general and administrative expenses as a percentage of sales decreased as compared to 2004 as most of these expenses are fixed in nature, and coupled with the increase in revenues, we experienced economies of scale. DEPRECIATION AND AMORTIZATION            Depreciation and amortization expense increased to $0.86 million for the fiscal year ended December 31, 2005, compared with depreciation and amortization expense of $0.55 million for the fiscal year ended December 31, 2004.            The increase in depreciation expense was primarily due to new investment in fixed assets, mainly production equipment and tools in 2005 for the amount of $2.6 million, to upgrade the processing techniques and increase output.    FINANCIAL EXPENSE            Financial expense for the fiscal year ended December 31, 2005 increased by $401,378 to $688,811 from $287, 433 for the fiscal year ended December 31, 2004.  Financial expenses consists of mainly interest expense. The increase in interest expense was due to the higher outstanding debt balance during the year, reaching $16 million as of December 31, 2005, an increase of $11.2 million from $4.8 million at the end of 2004.  The new drawdown of bank loans in 2005 was primarily for purpose of working capital use, as well as new equipment purchase, to support the sales growth.            Interest rates ranged between 4.964% and 6.003% per annum.  INCOME TAX            There was no income tax expense for the fiscal year ended December 31, 2005 and 2004.  As a result of the Joint Venture obtaining its sino-foreign joint venture status in 2004, per applicable PRC tax regulations, the Company is exempted from PRC income tax in both fiscal 2004 and 2005.  MINORITY INTEREST            Minority interest represents a 10% non-controlling interest in the company.  Minority interest in income amounted to US$549,957 and US$534,105 for the fiscal year ended December 31, 2005 and 2004, respectively. FOURTH QUARTER ADJUSTMENT            During the fourth quarter of 2005, a significant adjustment in the amount of $794k was made to provide for potentially uncollectible accounts.  That change was necessitated by the extension of temporary special credit terms to certain customers.  Those special credit terms extended payment arrangements for certain customers for up to one year.  - 31 -      NET INCOME            The net income for the fiscal year ended December 31, 2005 increased by approximately $142,666, to a net income of $4,949,610 from a net income of $4,806,944 for the fiscal year ended December 31, 2004 due to the factors discussed above.  Earnings per share (“EPS”) for basic and diluted for 2005 and 2004, was $0.37 per share.    RESULTS OF OPERATIONS            Year ended December 31, 2004 compared to year ended December 31, 2003.  SALES    Sales        2004        2003                                                         Brake Valves         $    35.9M              76.7    %    $    25.4M              76.7    %     Non-Valve Products         $    10.9M              23.3    %    $    7.7M              23.3    %                                                             Total         $    46.8M              100    %    $    33.1M              100    %               Sales for the year ended December 31, 2004 increased by $13,694,037 or 41.4% to $46,815,037 from $33,121,000 for the year ended December 31, 2003, primarily as a result of the increase in the volume of our products shipped.  The total number of units of valves we shipped increased by 36.6%, from 2,572,000 units to 3,513,000 units between these two periods.  The average price of our products per unit increased modestly from $9.88 per unit to $10.23 per unit.            Two factors contribute to the increase in the sales:  (1) There was an increase in export sales by 105.1% from $6,143,016 to $12,601,492 between the two years and (2) There was an increase in domestic auto sales in China due to the increase in demand from the repair market and from OEM manufacturers.  Total sales from domestic market increased by 26.9% from $26,966,082 to $34,213,545 between these two years. COST OF SALES            Cost of sales for the year ended December 31, 2004 increased to $35,904,232 from $26,263,000 for the year ended December 31, 2003.  The increase in cost of sales was due to the increase in sales.  Material costs for the year ended December 31, 2004 was $24,349,164 or 52.0% of sales compared to $18,406,876 or 55.6% of sales for the year ended December 31, 2003.  Raw material prices for steel and aluminum increased approximately 20% from 2003 to 2004.  this negatively impacted our gross margin by 4.8% for 2004.  The decrease in material costs as a percentage of sales occurred because we have successfully implemented several measures to reduce cost, such as strengthening internal management, optimizing the production process and improving product structural design.  GROSS PROFIT            Gross profit for the year ended December 31, 2004 increased by $4,052,805 or 59.1 % to $10,910,805 from $6,858,000 for the year ended December 31, 2003.  This improvement in gross profit was primarily due to the increase in the sales both in the domestic and international market.  Gross margin improved slightly from 20.7% for the year ended December 31, 2003 to 23.3% for the year ended December 31, 2004.  The improvement in the gross margin, despite the increase in the raw material pricing, was due to modest increase in the selling price, and better cost management, such as optimizing production process and better structural design of our products.  - 32 -      SELLING, GENERAL AND ADMINISTRATIVE EXPENSES            Selling, general and administrative expenses for the year ended December 31, 2004 was $5,227,256 or 11.2% of sales compared to $3,156,825 or 9.5% of sales for the year ended December 31, 2003.  The increase in selling, general and administrative expenses as a percentage of sales was due primarily to the legal and accounting costs ($0.7M or 1.6% of sales) incurred in connection with the corporate restructuring and registration with the Securities Exchange Commission. DEPRECIATION AND AMORTIZATION            Depreciation and amortization expense decreased by $1,243,739 to $554,261 during the year ended December 31, 2004 from $1,798,000 for year ended December 31, 2003.  The decrease was primarily attributable to the fact that during 2003, the Company incurred depreciation expense in connection with the building owned by the Company’s predecessor.  Starting in 2004, SORL Auto Parts, Inc. signed a rental agreement with Ruili Group to rent a total of 25,443 square meters of factory and warehouse from Ruili Group for 15 years at an annual rental of US$439,000, resulting in rental expenses amounting to less than the depreciation expense.  FINANCIAL EXPENSE            Financial expense for the year ended December 31, 2004 decreased by $4,742 to $287,433 from $292,175 for the year ended December 31, 2003.  The decrease in financial expense is due to the decrease in total debt.  OTHER INCOME            There was no other income for the year ended December 31, 2004.  For the year ended December 31, 2003, the other income was $435,000.  This was primarily due to the tax rebate and interest expense subsidy from the local government to SORL Auto Parts, Inc. for its investments in upgrading its technology.  INCOME TAX            There was no income tax for the year ended December 31, 2004 compared with income tax of $546,000 for the year ended December 31, 2003.  As a result of the Joint Venture (i.e.  Ruili Group Auto Parts Co., Ltd.) obtaining its foreign joint-venture status in 2004, it is exempted from PRC income tax.  MINORITY INTEREST            Minority Interest represents a 10% non-controlling interest in the company.  Minority Interest in income amounted to $534,105 and US$-0- for year ended December 31, 2004 and 2003, respectively. NET INCOME            The net income for the year ended December 31, 2004 increased by $4,191,049, or 364.4% to a net income of $5,341,049 from a net income of US$1,150,000 for the year ended December 31, 2003 due to the factors discussed above.  - 33 -      FINANCIAL CONDITION   (1)     LIQUIDITY AND CAPITAL RESOURCES            OPERATING -The Company’s operations utilized cash resources of $7,356,277 for the fiscal year ended December 31, 2005, as compared to generating cash resources of $2,466,267 for the fiscal year ended December 31, 2004, primarily as a result of the following:            1.        For the year ended December 31, 2005, cash flow provided by sales was $7,631,346 as compared to $5,963,694 for the year ended December 31, 2004, an increase of $1,667,652.  The increase was primarily as a result of the increase in sales.              2.        For the year ended December 31, 2005, account receivables increased by $13,590,206, primarily due to the temporary extension of credit terms to selected OEM customers as well as certain domestic aftermarket distributors as discussed above.  Management believes this situation will be largely mitigated in 2006 through the Company’s strategically move of its sales focus from its domestic OEM market to international markets, therefore providing the Company with the ability to restructure its OEM customer base by gradually phasing out customers with lower return and higher credit risks.            3.        For the year ended December 31, 2005, inventory increased by $637,283.  The Company maintains a low level of inventory with an Inventory Conversion Period of approximately 19 days for 2005, the same as that for 2004, which largely reduced working capital requirements.  Because of the strong demands for its products, the Company maintains less than one week of finished goods inventory.  A low level of raw materials for approximately four to five days of production requirements are maintained in stock.  Raw materials are readily available, given our access to different suppliers and efficient and timely delivery available.  The majority of the WIP balances are incurred during later steps in manufacturing.  The Company effectively adopts a “pull” system in its production.             4.        For the year ended December 31, 2005, account payables decreased by $970,989, or 20.5%, compared to the year ended December 31, 2004, mainly due to suppliers’ reluctance to extend long credit terms given the increased material prices.  Prepayments at December 31, 2005 primarily represented advance payments for raw materials and equipment purchases.  Prepayments as of December 31, 2005 increased by 28% to $1.8 million from $1.4 million as of December 31, 2004.              At December 31, 2005, the Company had cash and cash equivalents of $961,131, as compared to cash and cash equivalents of $729,875 at December 31, 2004.  The Company had working capital of $10,571,086 at December 31, 2005, as compared to working capital of $6,092,799 at December 31, 2004, reflecting current ratios of 1.49:1 and 1.55:1, respectively.            INVESTING - During the fiscal year ended December 31, 2005, the Company expended net cash of $3,982,703 in the investing activities, including $2,623,151 for acquisition of property and equipment to support the growth of business, and $1,358,429 in the issuance of notes receivable.  For the fiscal year ended December 31, 2004, the Company utilized $768,310 in investing activities.              FINANCING – During the fiscal year ended December 31, 2005, the Company made new net drawdowns amounting to $11,195,799 from banks.  During the fiscal year ended December 31, 2004, the Company paid off $968,082 on its outstanding debt.  Net proceeds from bank loans were utilized primarily to cover the increasing working capital requirements in line with the rapid business growth, as well as cash requirements for new equipment acquisition given the growing demand for products and the limited production capacity buffer of the existing equipment.    - 34 -               Management of the Company has taken a number of steps to restructure its customer base and phase out accounts which frequently fail to make prompt payments and bring lower returns in long run, placing more efforts on receivables collection, and continuing development of high profit margin new product, as well as adopting steps for further cost saving such as improving material utilization rate.  Meanwhile, the Company maintains good relationships with local banks.  In addition, the Company actively seeks opportunities for fund raising from the capital markets to finance further expansion of production, the building of international sales networks in new markets, strengthening of R&D force, and to supplement the working capital.              At December 31, 2005, the Company does not have any material commitments for capital expenditures or have any transactions, obligations or relationships that could be considered off-balance sheet arrangements.  - 35 -
The Company does not have any market risk with respect to such factors as commodity prices, equity prices, and other market changes that affect market risk sensitive investments.             With respect to foreign currency exchange rates, the 2% appreciation or fluctuation of the RMB against the USD in July 2005 did not have a material adverse effect on the Company’s operations, even though the Company has over one third of its total revenue denominated in USD, because of the relatively small change and the ability to absorb such effects by other cost saving approaches.  It is believed that further RMB appreciation against USD, if any, would be on a prudent, gradual basis with relatively small adjustments, so as to avoid drastic impacts on the Chinese economy as a whole.             As the Company’s debt obligations are primarily short-term in nature, with fixed interest rates, the Company does not have any risk from an increase in market interest rates.  However, to the extent that the Company arranges new borrowings in the future, an increase in market interest rate would cause a commensurate increase in the interest expense related to such borrowings.  - 36 -
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM  To the Board of Directors and Stockholders of SORL Auto Parts, Inc. Ruian City, Zhejiang Province People’s Republic of China            We have audited the accompanying consolidated balance sheets of SORL Auto Parts, Inc. as of December 31, 2005 and 2004, and the related consolidated statements of income, changes in stockholders’ equity and cash flows for the years then ended.  These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audit.              We conducted our audits in accordance with The Public Company Accounting Oversight Board Standards.  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes  assessing the accounting  principles  used and  significant estimates made by management,  as well as  evaluating  the  overall  financial statement  presentation.  We believe that our audits provides a reasonable basis for our opinion.           In our opinion, the financial statements referred to above present fairly, in all  material  respects,  the  consolidated  financial  position of SORL Auto Parts, Inc as of December  31, 2005 and 2004 and the results of its  operations  and its cash  flows for the years then ended in  conformity  with  generally  accounting principles accepted in the United States of America.     /s/   Rotenberg and Co. LLP             ROTENBERG   AND COMPANY, LLP      Rochester,   New York      March   9, 2005     - 37 -      SORL Auto Parts, Inc. and Subsidiaries Consolidated Balance Sheets December 31, 2005 and 2004            2005        2004                                            Assets                                      Current Assets                                       Cash and cash equivalents         US$    961,131              729,875           Accounts receivable, net of allowance              25,339,774              12,595,905          Notes receivable              1,488,104              129,675           Inventory              2,512,583              1,875,300           Prepayments              1,801,829              1,404,710          Other current assets              48,115              393,300                                             Total Current Assets              32,151,536              17,128,765          Fixed Assets                                       Property, plant and equipment              10,140,947              7,517,796           Less: Accumulated depreciation              (3,024,281    )         (2,165,142    )                                       Fixed Assets, Net              7,116,666              5,352,654           Other Assets                                      Intangible assets              44,297              43,174           Less: Accumulated amortization              (11,873    )         (4,454    )                                      Intangible Assets, Net              32,424              38,720                                            Total Other Assets              32,424              38,720                                           Total Assets         US$    39,300,626              22,520,139                                           Liabilities and Shareholders’   Equity                                       Current Liabilities                                       Accounts payable and other payables         US$    3,746,666              4,717,655          Deposits received from customers              1,324,085              861,624           Short term bank loans              16,026,717              4,830,918           Accrued expenses              482,982              625,768                                           Total Liabilities              21,580,450              11,035,967           Minority Interest              1,735,818              1,148,417          Shareholders’ Equity                                       Common stock, $0.002 par value, 50,000,000   authorized, 13,346,555 and 13,282,253 issued and outstanding, respectively              26,693              26,565           Additional Paid-In capital              4,444,118              4,082,246          Accumulated other comprehensive income              336,993              —             Retained earnings              11,176,554              6,226,944                                                          15,984,358              10,335,755                                             Total Liabilities and   Shareholders’ Equity         US$    39,300,626              22,520,139                                          - 38 -      SORL Auto Parts, Inc. and Subsidiaries Consolidated Statements of Income  Years Ended December 31, 2005, 2004, and 2003             2005        2004        (Rounded)    2003                                                      Sales         US$    64,182,544              46,815,037              33,121,000          Cost   of Sales              49,865,235              35,904,232              26,263,000                                                       Gross   Profit              14,317,309              10,910,805              6,858,000           Expenses:                                                    Selling and Distribution Expenses              3,919,996              2,737,652              1,610,000           General and Administrative Expenses              4,169,460              2,489,604              1,547,000          Financial Expenses              688,811              287,433              292,000                                                                     8,778,267              5,514,689              3,449,000           Operating   Income              5,539,042              5,396,116              3,409,000          Other   Income              52,592              —                435,000           Non-Operating   Expenses              (92,067    )         (55,067    )         —                                                         Income   Before Provision for Income Taxes              5,499,567              5,341,049              3,844,000          Provision   for Income Taxes              —                —                546,000                                                       Income   From Continuing Operations              5,499,567              5,341,049              3,298,000           Loss   From Discontinued Operations              —                —                2,148,000          Minority   Interest              549,957              534,105              —                                                         Net   Income Attributable to Shareholders              4,949,610              4,806,944              1,150,000           Other   Comprehensive Income                                                    Foreign   Currency Translation Adjustment              374,437              —                —             Minority   Interest’s Share              37,444              —                —                                                         Comprehensive   Income (Loss)         US$    5,286,603              4,806,944              1,150,000                                                       Earnings   per Share From Continuing Operations                                                    Basic         $    0.37         $    0.37         $    0.25           Diluted         $    0.37         $    0.37         $    0.25          Earnings   per Share From Discontinued Operations                                                     Basic         $    —           $    —           $    (0.17    )     Diluted         $    —           $    —           $    (0.17    )      Weighted   average common shares - Basic              13,302,763              13,165,241              12,953,720          Weighted   average common shares - Diluted              13,302,763              13,165,241              12,953,720          - 39 -      SORL Auto Parts, Inc. and Subsidiaries Consolidated Statements of Changes in Shareholders’ Equity Years Ended December 31, 2005, 2004, and 2003            Number   of Shares        Common   Stock        Additional   Paid-in   Capital        Retained   Earnings        Accumulated   Other   Comprehensive   Income        Shareholders’   Equity        Minority   Interest                                                                                                  Balance - January 1, 2003              12,953,720              25,908              17,122,092              270,000              —                17,418,000              —            Capital   Contribution              —                —                9,736,000              —                —                9,736,000              —            Net   Income              —                —                —                1,150,000                            1,150,000              —                                                                                                    Balance - December 31, 2003              12,953,720              25,908              26,858,092              1,420,000              —                28,304,000              —            Corporate   Reorganization:                                                                                                             Distribution of discontinued operations to   shareholders              —                —                (22,775,189    )         —                —                (22,775,189    )         —            Acquisition   of Enchanted Village              328,533              657              (657    )         —                —                —                —            Capital   contributed by Minority Shareholder              —                —                —                —                —                              614,312          Net   Income              —                —                —                4,806,944              —                4,806,944              534,105                                                                                                  Balance - December 31, 2004              13,282,253              26,565              4,082,246              6,226,944              —                10,335,755              1,148,417          Adjustment   for fractional shares              4802              9              (9    )         —                —                —                          Common   Stock issued to consultants              10,000              20              64,980              —                —                65,000              —            Common   Stock issued to employees              49,500              99              296,901              —                —                297,000              —            Net   Income              —                —                —                4,949,610              —                4,949,610              549,957          Other   Comprehensive Income              —                —                —                —                336,993              336,993              37,444                                                                                                  Balance - December 31, 2005              13,346,555              26,693              4,444,118              11,176,554              336,993              15,984,358              1,735,818                                                                                                 - 40 -      SORL Auto Parts, Inc. and Subsidiaries Consolidated Statements of Cash Flows Years Ended December 31, 2005, 2004, and 2003             2005        2004        (Rounded)   2003                                                      Cash Flows from Operating Activities                                                     Net   Income         US$    4,949,610              4,806,944              1,150,000          Adjustments to reconcile net   income to net cash flows from operating activities:                                                     Minority Interest              549,957              534,105              12,000          Bad Debt Expense              846,337              68,384              —             Depreciation and Amortization              866,558              554,261              1,798,000          Stock compensation - employees              297,000              —                —             Stock compensation - financial advisory              65,000              —                —            Changes in Assets and   Liabilities:                                                     Accounts Receivable              (13,590,206    )         (9,507,289    )         (1,782,000    )     Other Receivables              345,184              (393,300    )         —             Inventory              (637,283    )         (38,300    )         726,000          Prepayments              (397,119    )         1,197,290              (2,602,000    )      Account Payables              (970,989    )         4,717,655              (12,000    )     Deposits Received from Customers              462,461              861,624              —             Accrued Expenses              (142,787    )         625,769              —            Net Working Capital from Discontinued Operations              —                (960,876    )         (11,630,000    )                                                                (7,356,277    )         2,466,267              (12,340,000    )      Cash Flows from Investing Activities                                                    Acquisition of Property and Equipment              (2,623,151    )         (593,488    )         (2,016,000    )      Investments in Intangible Assets              (1,123    )         (28,720    )         —            Notes Receivables              (1,358,429    )         (129,675    )         —             Investing activities - Discontinued operations              —                (16,427    )         (14,924,000    )                                                                (3,982,703    )         (768,310    )         (16,940,000    )     Cash Flows from Financing Activities                                                     Proceeds from (Repayment of) Bank Loans              11,195,799              (968,082    )         2,174,000          Financing Activities - Discontinued Operations              —                —                17,370,000           Capital Contribution - Owners              —                —                9,736,000                                                                     11,195,799              (968,082    )         29,280,000          Effects on changes in foreign exchange rate              374,437              —                —             Net   Change in Cash and Cash Equivalents              231,256              729,875              —            Cash   and Cash Equivalents- Beginning of the year              729,875              —                —                                                         Cash and cash Equivalents - End of the year         US$    961,131              729,875              —                                                         Supplemental Cash Flow Disclosures:                                                     Interest Paid         $    513,776         $    287,433         $    1,245,000                                                       Income Taxes Paid         $    —           $    —           $    435,000                                                       Supplemental Disclosures of Non-Cash Investing and   Financing Activities:                                                    Common stock Issued in Exchange for Preferred   Stock         $    —           $    25,908         $    —                                                         Distribution of Discontinued Operations         $    —           $    (22,775,189    )    $    —                                                         Common stock issued for advisory service         $    65,000         $    —           $    —                                                         Common stock issued to key employees         $    297,000         $    —           $    —                                                        - 41 -      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  NOTE 1 - DESCRIPTION OF BUSINESS            SORL Auto Parts, Inc.  is principally engaged in the manufacture and distribution of automotive air brake valves and related components for commercial vehicles weighing more than three tons, such as trucks, and buses, through its 90% ownership of Ruili Group Ruian Auto Parts Company Limited (“Ruian”, or “the Company”) in the People’s Republic of China (“PRC” or “China”).  The Company distributes products both in China and internationally under SORL trademarks.  The Company’s product range includes 40 categories of brake valves with over 800 different specifications.  NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES            ACCOUNTING METHOD            The Company uses the accrual method of accounting for financial statement and tax return purposes.            PRINCIPLES OF CONSOLIDATION            The consolidated financial statements include the accounts of SORL Auto Parts, Inc.  and its majority owned subsidiaries.  All significant intercompany balances and transactions have been eliminated in the consolidation.            USE OF ESTIMATES            The preparation of financial statements in conformity with U.S.  generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and 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.  Management makes its best estimate of the outcome for these items based on historical trends and other information available when the financial statements are prepared.  Changes in estimates are recognized in accordance with the accounting rules for the estimate, which is typically in the period when new information becomes available to management.  Actual results could differ from those estimates.             FAIR VALUE OF FINANCIAL INSTRUMENTS            For certain of the Company’s financial instruments, including cash and cash equivalents, trade receivables and payables, prepaid expenses, deposits and other current assets, short-term bank borrowings, and other payables and accruals, the carrying amounts approximate fair values due to their short maturities.            RELATED PARTY TRANSACTIONS            A related party is generally defined as (i) any person that holds 10% or more of the Company’s securities and their immediate families, (ii) the Company’s management, (iii) someone that directly or indirectly controls, is controlled by or is under common control with the Company, or (iv) anyone who can significantly influence the financial and operating decisions of the Company.  A transaction is considered to be a related party transaction when there is a transfer of resources or obligations between related parties.  The Company’s policy is that all related party transactions must be in arm’s length.  - 42 -                FINANCIAL RISK FACTORS AND FINANCIAL RISK MANAGEMENT            The Company is exposed to the following risk factors:                                (i)          Credit risks - The Company has policies in place to ensure that sales of products are made to customers with an appropriate credit history.  The Company has two customers that respectively account for more than 5% of its total revenues for the period.  The Company also has a concentration of credit risk due to geographic sales as a majority of its products are marketed and sold in the PRC.                               (ii)         Liquidity risks - Prudent liquidity risk management implies maintaining sufficient cash, the availability of funding through an adequate amount of committed credit facilities and ability to close out market positions.                                (iii)         Interest rate risk - The interest rate and terms of repayments of short-term and long-term bank borrowings are approximately 5.58% per annum.  The Company’s income and cash flows are substantially independent of changes in market interest rates.  The Company has no significant interest-bearing assets.  The Company’s policy is to maintain all of its borrowings in fixed rate instruments.            CASH AND CASH EQUIVALENTS            The Company considers all highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents.            INVENTORIES            Inventories are stated at the lower of cost or net realizable value, with cost computed on a weighted-average basis.  Cost includes all costs of purchase, cost of conversion and other costs incurred in bringing the inventories to their present location and condition.  Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.            PROPERTY, PLANT AND EQUIPMENT           Property, plant and equipment are stated at cost less accumulated depreciation and impairment losses.  The initial cost of the asset comprises its purchase price and any directly attributable costs of bringing the asset to its working condition and location for its intended use.  Depreciation is provided using the straight-line method over the assets estimated useful life for periods ranging from five to ten years.  Significant improvements and betterments are capitalized where it is probable that the expenditure resulted in an increase in the future economic benefits expected to be obtained from the use of the asset beyond its originally assessed standard of performance.  Routine repairs and maintenance are expensed when incurred.  Gains and losses on disposal of fixed assets are recognized in the income statement based on the net disposal proceeds less the carrying amount of the assets.            IMPAIRMENT OF LONG-LIVED ASSETS            Long-lived assets, such as property, plant and equipment and other non-current assets, including intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable.  An impairment loss is recognized when the estimated undiscounted cash flows associated with the asset or group of assets is less than their carrying value.  If impairment exists, an adjustment is made to write the asset down to its fair value, and a loss is recorded as the difference between the carrying value and fair value.  Fair values are determined based on quoted market values, discounted cash flows or internal and external appraisals, as applicable.  Assets to be disposed of are carried at the lower of carrying value or estimated net realizable value.  - 43 -                INTANGIBLE ASSETS            Intangible assets represent mainly the patent of technology, plus the computer software.  Intangible assets are measured initially at cost.  Intangible assets are recognized if it is probable that the future economic benefits that are attributable to the asset will flow to the enterprise and the cost of the asset can be measured reliably.  After initial recognition, intangible assets are measured at cost less any impairment losses.  Intangible assets with definite useful lives are amortized on a straight-line basis over their useful lives.           ACCOUNTS RECEIVABLES AND ALLOWANCE FOR BAD DEBTS            The Company presents accounts receivables, net of allowances for doubtful accounts and returns, to ensure accounts receivable are not overstated due to uncollectibility.  Accounts receivables generated from credit sales have general credit terms of 90 days for domestic aftermarket customers.  However, the Company has extended credit terms to certain custoemers for a period of 1 year or more.            The allowances are calculated based on detailed review of certain individual customer accounts, historical rates and an estimation of the overall economic conditions affecting the Company’s customer base.  The Company reviews a customer’s credit history before extending credit.  If the financial condition of its customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.              The Company will write off the uncollectible receivables once the customers are bankrupt or there is a remote possibility that the Company will collect the outstanding balance.  The write-off must be reported to the local tax authorities and get the official approval from them.  To date, the Company has not written off any account receivable.              NOTES RECEIVABLE            Notes receivable are issued by some customers to pay certain outstanding receivable balances to the Company with specific payment terms and definitive due dates.  Notes receivable do not bear interest.              REVENUE RECOGNITION            Revenue from the sale of goods is recognized when the risks and rewards of ownership of the goods have transferred to the buyer.  Revenue consists of the invoice value for the sale of goods and services net of value-added tax (“VAT”), rebates and discounts and returns.  The Company is subject to the Education Surtax (levied at 4% of net VAT payable) until August 31, 2005, which is recorded as deductions from gross sales.  The Company nets sales return in gross revenue, i.e., the revenue shown in the income statement is the net sales.             INCOME TAXES  The Company accounts for income taxes under the provision of Statement of Financial Accounting Standards (“SFAS” No.  109), “Accounting for Income Taxes,” whereby deferred income tax assets and liabilities are computed for differences between the financial statements and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future, based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect  taxable income.  Valuation allowances are established when necessary; to reduce deferred income tax assets to the amount expected to be realized.  - 44 -                FOREIGN CURRENCY TRANSLATION            The Company maintains its books and accounting records in Renminbi (“RMB”), the currency of the PRC, The Company’s functional currency is also RMB.  The Company has adopted SFAS 52 in translating financial statement amounts from RMB to the Company’s reporting currency, United States dollars (“US$”).  All assets and liabilities are translated at the current rate.  The shareholders’ equity accounts are translated at appropriate historical rate.  Revenue and expenses are translated at the weighted average rates in effect on the transaction dates.              Foreign currency gains and losses, if any, are included in the Consolidated Statements of Income as a component of other comprehensive income.            STOCK-BASED COMPENSATION            In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No.  123R, “Share-Based Payment” (“SFAS 123R”).  SFAS 123R revises FASB Statement No.  123 “Accounting for Stock-Based Compensation” and supersedes APB Opinion No.  25 “Accounting for Stock Issued to Employees”.  SFAS 123R requires all public and non-public companies to measure and recognize compensation expense for all stock-based payments for services received at the grant-date fair value, with the cost recognized over the vesting period (or the requisite service period).  The Company has adopted SFAS 123R as of January 1, 2005.           RESEARCH AND DEVELOPMENT EXPENSES            Research and development costs are classified as general and administrative expenses and are expensed as incurred.            SHIPPING AND HANDLING COSTS            Shipping and handling cost are classified as selling expenses and are expensed as incurred.            ADVERTISING COSTS            Advertising costs are classified as selling expenses and are expensed as incurred.            WARRANTY CLAIMS            The Company offers product warranties for certain products.  Warranty claims are classified as selling expenses and are expensed as incurred.  The Company accrues the costs of unsettled product warranty claims based on the historical claims made in previous years.            PURCHASE DISCOUNTS            Purchase discounts, if applicable, are netted in the cost of goods sold.            LEASE COMMITMENTS            The Company has adopted SFAS No. 13, “Accounting for Leases”.  If the lease terms meet one or all of the following four criteria, it will be classified as a capital lease, otherwise, it is an operating lease: (1) The lease transfers the title to the lessee at the end of the term; (2) the lease contains a bargain purchase option; (3) the lease term is equal to 75% of the estimated economic life of the leased property or more; (4) the present value of the minimum lease payment in the term equals or exceeds 90% of the fair value of the leased property.  The current lease agreement with Ruili Group Co.  Ltd.  does not meet any of the above criteria, so it is classified and recorded as an operating lease.   - 45 -                RECENTLY ISSUED ACCOUNTING STANDARDS            In January 2003, and subsequently revised in December 2003, the FASB issued Interpretation No.  46 “Consolidation of Variable Interest Entities, an Interpretation of ARB No.  51” (FIN 46).  FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties.  FIN 46 is effective for all new variable interest entities created or acquired after January 31, 2003.  For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003.  FIN 46 does not have any  impact on the financial position or results of operations of the Company.            In April 2003, the FASB issued SFAS No.  149, “Accounting for Amendment of statement 133 on Derivative Instruments and Hedging Activities,” which amends and clarifies financial accounting and reporting for derivative instruments, including  certain derivative instruments embedded in other contracts and for hedging  activities under FASB Statement No.  133, Accounting for Derivative Instruments and Hedging Activities.  This Statement is generally effective for contracts entered into or modified after June 30, 2003, and all provisions should be applied prospectively.  This statement does not affect the Company.            In May 2003, the FASB issued SFAS No.  150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity,” which establishes  standards for how an issuer classifies and measures certain financial instruments with  characteristics of both liabilities and equity.  It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances).  This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003.  It is to be implemented by reporting the cumulative effect of a change in an accounting principle for financial instruments created before the issuance date of the Statement and still existing at the beginning of the interim period of adoption.  Restatement is not permitted.  This statement does not affect the Company.           In November 2004, the FASB issued SFAS No. 151 “Inventory Costs - an amendment of ARB No.  43, Chapter 4” (“SFAS 151”).  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).  SFAS 151 requires that those items be recognized as current-period charges.  In addition, this Statement requires that allocation of fixed production overheads to costs of conversion be based upon the normal capacity of the production facilities.  The provisions of SFAS 151 are effective for fiscal years beginning after June 15, 2005.  As such, the Company is required to adopt these provisions at the beginning of the fiscal year ended December 31, 2006.  The Company is currently evaluating the impact of SFAS 151 on its consolidated financial statements.            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.  As such, the Company is required to adopt these provisions at the beginning of the fiscal year ended December 31, 2006.  The Company is currently evaluating the impact of SFAS 152 on its consolidated financial statements. - 46 -                In December 2004, the FASB issued SFAS No.  153, “Exchanges of Nonmonetary Assets - an amendment of APB Opinion No.  29” (“SFAS 153”).  SFAS 153 replaces the exception from fair value measurement in APB Opinion No.  29 for nonmonetary exchanges of similar productive assets with a general exception from fair value measurement for exchanges of nonmonetary assets that do not have commercial substance.  A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange.  SFAS 153 is effective for all interim periods beginning after June 15, 2005.  As such, the Company is required to adopt these provisions at the beginning of the fiscal quarter ended September 30, 2005.  This statement has had no effect on the Company.            In March 2005, the FASB issued Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations – an interpretation of FASB Statement No. 143” (“FIN 47”).  FIN 47 clarifies that the term conditional asset retirement obligation refers to a legal obligation to perform and asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity.  Accordingly, an entity is 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.  FIN 47 is effective for fiscal years that end after December 15, 2005.  As such, the Company is required to adopt these provisions for the fiscal year ended December 31, 2005.  This statement has had no effect on the Company.            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”).  SFAS 154 changes the requirements for the accounting for and reporting of a change in accounting principle.  These requirements apply to all voluntary changes and changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions.  SFAS 154 is effective for fiscal years beginning after December 15, 2005.  As such, the Company is required to adopt these provisions at the beginning of the fiscal year ended December 31, 2006.  The Company is currently evaluating the impact of SFAS 154 on its consolidated financial statements.           In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments – an amendment of FASB Statement No. 133 and 140” (“SFAS 155”).  SFAS 155 resolves issues addressed in Statement 133 Implementation Issue No. D1, “Application of Statement 133 to Beneficial Interests in Securitized Financial Assets.”  SFAS 155 is effective for all financial instruments acquired or issued after the beginning of the first fiscal year that begins after September 15, 2006.  As such, the Company is required to adopt these provisions at the beginning of the fiscal year ended December 31, 2007.  The Company is currently evaluating the impact of SFAS 155 on its consolidated financial statements.  NOTE 3 - RELATED PARTY TRANSACTIONS            The Company continued to purchase non-valve automotive components, raw materials and packaging materials from the Ruili Group Co., Ltd., which is the minority shareholder of the JV, and also has the common controlling party, i.e.  the Zhang family; as well as some non-valve parts from Ruian Ruili Haizhiguan Auto Part Co., Ltd., a subsidiary of Ruili Group.              The following related party transactions occurred for the fiscal year ended December 31, 2005 and 2004:              December   31,                                  2005        2004                                  PURCHASES FROM:                                      Ruili   Group Co., Ltd.         $    16,780,670         $    6,566,232           Ruian   Ruili Haizhiguan Auto Part Co., Ltd.              283,024              555,927           Total Purchases         $    17,063,694         $    7,122,159                                            SALES TO:                                       Ruili   Group Co., Ltd.         $    4,471,022              —            Total Sales         $    4,471,022              —                                              - 47 -                The total purchases from Ruili Group in 2005 consisted of $15.2 million finished products of non-valve auto parts, $0.3 million raw materials, and $1.2 million packaging materials.       ACCOUNTS PAYABLE AND OTHER   PAYABLES                                       Ruili   Group Co., Ltd.         $    1,060,193         $    2,239,054          Ruian   Ruili Haizhiguan Auto Part Co., Ltd.              —                11,862           Xiaofeng   Zhang, Board Director              —                265,701           Shuping   Chi              273,559              —            Total Related Parties   included in Accounts Payable              1,333,752              2,516,617                                            NOTE 4 - ACCOUNTS RECEIVABLE            The changes in the allowance for doubtful accounts at December 31, 2005 and 2004 are summarized as follows:            2005        2004                                            Beginning   balance         $    68,384         $    —            Add:   Increase to allowance              846,337              68,384           Less:   Accounts written off              —                —                                              Ending   balance         $    914,721         $    68,384                                                      The company’s receivables are summarized as follows:            2005        2004                                            Balance   before allowance         $    26,254,495         $    12,664,289          Less:   Allowance for doubtful accounts              (914,721    )         (68,384    )                                       Account   receivable balance, net         $    25,339,774         $    12,595,905                                           NOTE 5 – INVENTORIES              On December 31, 2005 and 2004, inventories consist of the following:             2005        2004                                          Raw   Material         $    747,858         $    222,800           Work   in process              1,057,740              966,170          Finished   Goods              706,985              686,330                                            Total   Inventory         $    2,512,583         $    1,875,300                                          - 48 -      NOTE 6 - PROPERTY, PLANT AND EQUIPMENT             Property, plant and equipment consisted of the following, on December 31, 2005 and 2004:             2005        2004                                           Machinery         $    8,706,639         $    6,361,447           Molds              1,080,291              1,015,016          Office   equipment              185,088              42,755           Vehicle              169,529              98,578           Sub-Total              10,140,947              7,517,796                                           Less:  Accumulated depreciation              (3,024,281    )         (2,165,142    )                                      Fixed   Assets, net         $    7,116,666         $    5,352,654                                                      Depreciation expense charged to operations was $859,139 and $535,620 for the years ended December 31, 2005 and 2004, respectively.    NOTE 7 – INTANGIBLE ASSETS            Gross intangible assets were $44,297, less accumulated amortization of $11,873 for net intangible assets of $32,424 as of December 31, 2005.  Gross intangible assets were $43,174, less accumulated amortization of $4,454 for net intangible assets of $38,720 as of December 31, 2004.  Amortization expenses were $7,419 and $4,454 for the fiscal years ended December 31, 2005 and 2004 respectively.             Future estimated amortization expense is as follows:     2006        2007        2008        2009        2010        Thereafter                                             $5,076        $3,617        $3,617        $3,617        $3,617        $12,880     NOTE 8 – PREPAYMENT            Prepayment consisted of the following as of December 31, 2005 and 2004:             2005        2004                                           Raw   material suppliers         $    1,584,193         $    1,372,000           Equipment   purchase              217,637              32,710          Total   prepayment         $    1,801,829         $    1,404,710                                            NOTE 9 – ACCRUED EXPENSES            Accrued expenses consisted of the following as of December 31, 2005 and 2004:            2005        2004                                            Accrued   payroll         $    297,928         $    206,594          Accrued   rent              —                365,842           Accrued   legal              —                43,524           Other   accrued expenses              185,054              9,808                                           Total   accrued expenses         $    482,982         $    625,768                                           - 49 -      NOTE 10 - BANK BORROWINGS            Bank borrowings represent the following as of December 31:             2005        2004                                          Secured              16,026,717              4,830,918                                            Less:   Current portion              16,026,717              4,830,918                                           Non-current   portion              —                —                                                      These loans were from two banks, Bank of China and CITIC Bank, to finance the general working capital as well as urgent new equipment acquisition. Corporate or personal guarantees are provided for those bank loans as follows:          $10.25M    Guaranteed by Ruili Group   Co., Ltd., a related party;           $2.43M    Guaranteed by Ruili Group   Co., Ltd., a related party, and Mr. Xiao Ping Zhang and Ms. Shu Ping Chi,   both principal shareholders;           $3.35M    Guaranteed by Shenghuabo   Group Co., Ltd., a non-related party.               The Company does not provide any sort of guarantee to any other parties. Interest rates for the loans ranged between 4.964% and 6.003% per annum.   NOTE 11 - INCOME TAXES            The Company is registered in the PRC, and is therefore subject to state and local income taxes within the PRC at the applicable tax rate on the taxable income as reported in the PRC statutory financial statements in accordance with relevant income tax laws.  According to applicable tax laws regarding Sino-Foreign Joint Venture Manufacturers, the Company is exempted from income taxes in the PRC for the fiscal years ended December 31, 2005 and 2004.  Thereafter, the Company is entitled to a tax concession of 50% of the applicable income tax rate of 26.4%, for the following three years ended December 31, 2006, 2007, and 2008.           Had the Company not been entitled to the “tax holiday”, income tax expense computed for the years ended December 31, 2005 and 2004 would have been approximately $1,395,000 and $1,269,000 respectively.  Provision for income taxes consists of the following for the year ended December 31, 2003:     (In Thousands)                                           Income tax expense                        Current   year         $    444           Prior   year              102                                  Total         $    546         - 50 -                The reconciliation of the applicable tax rate to the effective tax rate is as follows:     (In Thousands)                                           Expected PRC income tax   charge at Statutory tax rate of 33% (i)              619          Non-taxable income (ii)              (201    )      Non-deductible expenses              26                                  Current year income tax   expense         $    444                   (i)          The provision of PRC income tax is calculated based on the statutory rate of 33% in accordance with the relevant PRC income tax rules and regulations for all periods presented.            (ii)         Non-taxable income represented a goverament grant for the Company’s investment in research and development of new products.            No provision for deferred tax liabilities has been made, since the Company had no material temporary differences between the tax bases of assets and liabilities and their carrying amounts.  NOTE 12 - LEASES            The Company has a lease agreement with Ruili Group Co., Ltd., a related party, for the rental of a manufacturing plant.  The lease is for a ten year term ending in February 2014.  Rent expense for the fiscal years ended December 31, 2005 and 2004, was $439,009 and $439,009 respectively.            Future minimum rental payments for the years ended December 31 are as follows:    2006        2007        2008        2009        2010        Thereafter                                              $439,540        $439,540        $439,540        $439,540        $439,540        $1,321,620    NOTE 13 - ADVERTISING COSTS            Advertising costs are expensed as incurred and are classified as selling expenses.  Advertising costs were $19,622 and $1,661 for the fiscal years ended December 31, 2005 and 2004, respectively.  NOTE 14 - RESEARCH AND DEVELOPMENT EXPENSES              Research and development costs are expensed as incurred and were $361,503 and $79,962 for the fiscal years ended December 31, 2005 and 2004, respectively.  NOTE 15 – WARRANTY CLAIMS            Warranty claims were $778,763 and $205,314 for the fiscal years ended on December 31, 2005 and 2004 respectively. The movement of accrued warranty expenses for fiscal year 2005 is as follows:     Accrued in 2005:         $    778,763          Less: Actual Paid in 2005:         $    (598,831    )      Ending balance at 2005:         $    179,932          - 51 -      NOTE 16 – STOCK COMPENSATION PLAN             The Company established a stock compensation plan in October 2005 for the purpose of enhancing its ability to attract, retain and provide incentives to directors, officers, employees and independent contractors who are crucial to the future growth and success of the Company.  The plan outlined that over the next ten years the Company will issue approximately 1,700,000 common shares to qualified directors, officers, employees and independent contractors.  During 2005, the Company issued 49,500 shares of common stock to employees valued at $6 per share.  SUBSEQUENT EVENT            On January 5, 2006, the Company signed the Financial Advisory Agreement with Maxim Group LLC (“Maxim”) and Chardan Capital Markets, LLC (“Chardan”) to provide general financial advisory and investment banking services to the Company on an exclusive basis for a period of twelve months.             Effective February 2006, the Company shall pay to Maxim and Chardan (i) a monthly retainer of $5,000 at the beginning of each month for the term of this Agreement and (ii) issue to Maxim and Chardan a warrant (“Warrant”) to purchase 100,000 shares of the Company’s common stock. - 52 -
Not applicable.
As of December 31, 2005, the end of the period covered by this report, our Chief Executive Officer and our Chief Financial Officer reviewed and evaluated the effectiveness of the our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) and 15d-15(e)), which are designed to ensure that material information we are required to disclose in our reports filed or submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized, and reported within required time periods.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed is accumulated and communicated to the Company’s management including its Chief Executive Officer and Chief Financial Officer as appropriate to allow timely decision regarding required disclosures.  We have concluded, based on that evaluation, that as of the end of the period covered by this report, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is accumulated and communicated to our Chief Executive Officer and Chief Financial Officer as appropriate to allow timely decisions regarding required disclosure. CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING            There was no change in our internal controls over financial reporting that occurred during the fourth fiscal quarter of the fiscal year covered by this Annual Report on Form 10-K that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
None.
The following table sets forth our executive officers, directors and key employees, their ages and the positions they held as of December 31, 2005.     Name         Age         Position                          Xiao Ping   Zhang         43         Chief   Executive Officer and Chairman      Xiao Feng   Zhang         38         Chief Operating   Officers and Director      Zong Yun   Zhou         51         Chief   Financial Officer      Li Min Zhang         50         Director(1)      Zhi Zhong   Wang         61         Director(1),(2)     Yi Guang Huo         63         Director(1),(2)      Jiang Hua   Feng         40         Director(2)      Jung Kang   Chang         40         Director      David Ming   He         35         Senior   Manager, Investor Relations             (1)    Member of   Audit Committee      (2)    Member of   Compensation Committee     - 53 -                All directors have a term of office expiring at the next annual general meeting, unless re-elected or earlier vacated in accordance with the Bylaws.  All officers have a term of office lasting until their removal or replacement by the Board of Directors.  Executive Officers and Directors            XIAO PING ZHANG - CHAIRMAN OF THE BOARD OF DIRECTORS AND CEO            Xiao Ping Zhang has served as CEO and chairman of the board since our inception. He founded the Ruili Group, a company specializing in a variety of automotive parts and components, in 1987, and has served as chairman of Ruili Group since then. In 2003, he was elected the President of Wenzhou Auto Parts Association, and Vice-President of China Federation of Industry and Commerce Auto & Motorbike Parts Chamber of Commerce. Mr. Zhang is also a member of the Standing Committee of the People’s Congress in Rui’an City, Zhejiang, China. He is also currently engaged as a mentor in entrepreneurship for graduate students of Zhejiang University. Mr. Zhang graduated from Zhejiang Radio and TV University in 1986 with a major in Industrial Management.            XIAO FENG ZHANG - CHIEF OPERATING OFFICER AND DIRECTOR           Xiao Feng Zhang has served as COO and a member of the board of directors since our inception. He is responsible for sales and marketing. Mr. Zhang co-founded the Ruili Group with his brother, Mr. Xiao Ping Zhang, in 1987, and served as the General Manager of Ruili Group until March 2004. Mr. Zhang received his diploma in economics from Shanghai Fudan University in 1994.             ZONG YUN ZHOU - CHIEF FINANCIAL OFFICER            Zong Yun Zhou has served as our CFO since our inception. Between April 2002 and May 2004, Ms. Zhou served as the Financial Controller of Shanghai Huhao Auto Parts Manufacturing Company Limited, a joint venture between Ruili Group and Shanghai Automotive Industry Corporation. From January 1996 until April 2002, Ms. Zhou worked for the Auditing Department of Anhui Province, China, in charge of auditing state-owned companies in Anhui Province. Ms. Zhou is a Chinese Certified Public Accountant, and a member of the Institute of Internal Auditors (IIA). Ms. Zhou completed her undergraduate studies at Anhui University.            JUNG KANG CHANG - DIRECTOR            Jung Kang Chang has served as a member of our board of directors since our inception. He is also in charge of our international sales. From January 1998 to May 2004, Mr. Chang served as the General Manager of JieXiangHao Enterprise Company Limited based in Taipei, Taiwan; before taking office as the general manager, he was the sales engineer and sales manager with JieXiangHao in Taipei. Mr. Chang graduated from Taiwan Taoyuan Longhua Industry College in 1986.            LI MIN ZHANG – DIRECTOR            Dr. Li Min Zhang has served as a member of our board of directors since August 2004. He chairs the audit committee of our board. Dr. Zhang currently is a professor at Sun Yat-Sen University Management School in Guangdong, China, coaching PhD candidates with an accounting major. During 1994 and 1995, Dr. Zhang conducted academic research at the University of Illinois at Urbana-Champaign, and practiced at Mok & Chang CPAs in USA. In 1986, he conducted academic research at the Office of Auditor General of Canada.  Dr. Zhang currently also serves as vice chairman of China Audit Society, and secretary of China Association of Chief Financial Officers. He is a member of American Accounting Association.  Also, Dr. Zhang is involved with the China CPA Society Auditing Principles Task Force and China Audit Society Training Committee. Dr. Zhang earned his Ph.D. in Economics in January 1991. - 54 -                ZHI ZHONG WANG – DIRECTOR            Zhi Zhong Wang has served as a member of our board of directors, as well as a member of both audit and compensation committees since August 2004. From 1980 untill present, Mr. Wang has served as instructor and professor at Beijing Jiaotong University (formerly Northern Jiaotong University), Department of Electrical Engineering. Before 1980, he was an electrical engineer with Science and Technology Institute of the Qiqihaer Railway Administration, Heilongjiang, China. Mr. Wang has led over twenty research projects such as novel pneumatic generator and streamer discharging, and corona power supply for desulphurization. His numerous publications include Research on the Novel AC Voltage Stabilized Power Supply in Power Electronics. Mr. Wang received his bachelor degree in electrical engineering from Northern Jiaotong University in 1968.            YI GUANG HUO – DIRECTOR            Yi Guang Huo has served as a member of our board of directors, as well as a member of the audit committee and chairman of the compensation committee under the board since August 2004. Mr. Huo has been engaged in scientific and technological work and has been responsible for various national key research projects, such as designing and conducting experiments for automotive products, drafting ministry standards and econo-technological policies, etc. He has been awarded ministry-level First Prize for Technology Innovation. Mr. Huo has also served as President of China Federation of Industry and Commerce Auto & Motorbike Parts Chamber of Commerce, a board member and visiting professor of Wuhan University of Technology, and secretary of Society of Auto Engineering – China. Between 1995 and 1996, Mr. Huo conducted academic research as a visiting researcher at Tokyo University Economics Department. During 1987 and 1988, he studied Scientific Research and Management with Japan Automobile Research Institute as well as Japanese automobile companies including Nissan, Hino, Isuzu and Mitsubishi. Mr. Huo earned his B.S. degree from Jilin University Automobile Department in 1965.           JIANG HUA FENG – DIRECTOR            Jiang Hua Feng has served as a member of our board of directors as well as a member of the compensation committee under the board since August 2004. Since 1988, Mr. Feng has also served as chief lawyer at Yuhai Law Firm, Rui’an, Zhejiang. Mr. Feng is a member of China Lawyers Association.  He was elected People’s Congress representative for Wenzhou area, Zhejiang. Mr. Feng received his bachelor degree in law from East China University of Politics and Law.            DAVID MING HE, CFA, CPA, SENIOR MANAGER INVESTOR RELATIONS             David Ming He joined us in November 2004 as a Senior Manager in charge of investor relations and capital market strategies.  Mr. He, who speaks fluent English, holds the designations of Chartered Financial Analyst and Illinois Certified Public Accountant. Between July 1994 and June 2001, he served as credit analyst and senior manager in corporate banking at Credit Agricole Indosuez (now Calyon) Shanghai Branch. Mr. He received his Bachelor’s degree in Economics from Shanghai Institute of Foreign Trade, China, and Master of Science degree in Accountancy and Master of Business Administration degree in Finance from University of Illinois at Urbana-Champaign, U.S.A.  Committees of the Board of Directors            Audit Committee.  The members of our audit committee are Professor Zhang and Messrs. Wang and Huo. Professor Zhang chairs the audit committee. Our audit committee assists our board of directors in its oversight of:         •    the   integrity of our financial statements;                            •    our   independent auditors’ qualifications and independence; and                            •    the   performance of our independent auditors.     - 55 -                The audit committee has the sole and direct responsibility for appointing, evaluating and retaining our independent auditors and for overseeing their work. All audit services and all non-audit services, other than de minimis non-audit services, to be provided to us by our independent auditors must be approved in advance by our audit committee.  We believe that the composition of our audit committee meets the requirements for independence under the current Nasdaq Capital Market and SEC rules and regulations.  We believe that the functioning of our audit committee complies with the applicable requirements of the Nasdaq National Market and SEC rules and regulations.  We intend to comply with future requirements as applicable.           Compensation Committee.  The members of our compensation committee are Messrs. Wang, Feng and Huo.  Mr. Huo chairs the compensation committee.  The purpose of our compensation committee is to discharge the responsibilities of our board of directors relating to compensation of our executive officers.  Specific responsibilities of our compensation committee include:          •    reviewing   and recommending approval of compensation of our executive officers;                            •    administering   our stock incentive and employee stock purchase plans; and                            •    reviewing   and making recommendations to our board with respect to incentive   compensation and equity plans.    Director Compensation            Directors are reimbursed for travel, lodging and other reasonable out-of-pocket expenses incurred in attending meetings of our board of directors and for meetings of any committees of our board of directors on which they serve.  Our directors do not currently receive cash compensation for attending board or committee meetings however we will be evaluating providing cash compensation to our board and committee members.  Compensation Committee Interlocks and Insider Participation            As noted above, the compensation committee of our board of directors consists of Messrs. Wang, Feng and Huo.  None of our executive officers serve as a member of the board of directors or compensation committee of any entity that has one or more executive officers who serve on our board of directors or compensation committee.
The following table set forth information with respect to compensation paid by us to the Company’s Chief Executive Officer.  No other executive officer received compensation in excess of $100,000 for the fiscal year ended December 31, 2005  Summary Compensation Table                        ANNUAL   COMPENSATION        AWARDS        PAYOUTS                                                     (A)            (B)            (C)            (D)            (E)            (F)            (G)            (H)            (I)         NAME ANDPRINCIPALPOSITION        YEAR        SALARY ($)        BONUS  ($)        OTHER ANNUALCOMPENSATION ($)        RESTRICTEDSTOCKAWARD(S) ($)        SECURITIESUNDERLYINGOPTIONS/SARS(#)        LTIPPAYOUTS($)        ALL OTHERCOMPENSATION($)                                                                          Xiao Ping Zhang, CEO              2005              50,000            —            —            —            —            —            —                         2004              50,000                                                                                  - 56 -      Stock Option Grant Exercises in 2005           None of our executive officers received any grants of options or other stock compensation during 2005.  Additionally, none of our executive officers exercised any stock options or other rights to stock compensation in 2005.  Employment Agreements            The Company does not have employment agreements with any of its executive officers.  Severance and Change of Control Arrangements            There are no severance or change of control arrangements.  Equity Benefit Plans            2005 Stock Compensation Plan            Our 2005 Stock Compensation Plan was adopted by our board of directors in July 2005.            Share Reserve.  We have reserved 1,700,000 shares for issuance under the 2005 Stock Compensation Plan.            Administration.  The Compensation Committee of our board of directors administers the 2005 Compensation Plan and has complete discretion to make all decisions relating to our 2005 Compensation Plan.  Our compensation committee may also re-price outstanding options and modify outstanding awards in other ways.            Eligibility.  Employees, non-employee members of our board of directors, advisors and consultants are eligible to participate in our 2005 Stock Compensation Plan.             Types of Awards.  Our 2005 Stock Compensation Plan provides for awards of stock options to purchase shares of our common stock and awards of restricted shares of our common stock, stock appreciation rights and performance shares.           Change in Control.  If we are merged or consolidated with another company, and such merger or consolidation results in a change in control of SORL, an award under the 2005 Stock Compensation Plan will be subject to the terms of the merger agreement, which may provide that the option continues, is assumed or substituted, fully vests or is settled for the full value of such option in cash, followed by the cancellation of such option.            Amendments or Termination.  Our board of directors may amend, suspend or terminate the 2005 Stock Compensation Plan at any time.  If our board amends the plan, it does not need to seek stockholder approval of the amendment unless required to comply with any applicable tax or regulatory environment.  No award may be made under the 2005 Stock Compensation Plan after the tenth anniversary of the effective date of the Plan.            Options The Board may determine the number of shares covered by each option, the exercise price therefore, the conditions and limitations on the exercise and any restrictions on the shares issuable.  Optionees may pay the exercise price by using cash, shares of common stock that the optionee already owns or, at the election of the Board, a promissory note, an immediate sale of the option shares through a broker designated by us , or other property.  - 57 -                Performance Shares.  The Board may make performance share awards entitling recipients to acquire shares of Common Stock upon the attainment of specified performance goals.            Stock Appreciation Rights.  A participant who exercises a stock appreciation right receives the increase in fair market value of our common stock over the fair market value on the date of grant.           Restricted Shares.  Restricted shares may be awarded under the 2005 Stock Compensation Plan.  Restricted shares vest at the times and payment terms therefor shall be determined by our compensation committee.            Adjustments.  If there is a subdivision of our outstanding shares of common stock, a dividend declared in stock or a combination or consolidation of our outstanding shares of common stock into a lesser number of shares, corresponding adjustments will be automatically made in each of the following:  (a) the number of shares of common stock available for future awards under the 2005 Stock Compensation Plan; (b) any limitation on the maximum number of shares of common stock that may be subject to awards in a fiscal year; (c) the number of shares of common stock covered by each outstanding option or stock appreciation right, as well as the exercise price under each such award; (d) the number of shares of common stock covered by the options to be granted under the automatic option grant program; or (e) the number of stock units included in any prior award that has not yet been settled.  Limitation of Liability and Indemnification of Officers and Directors            As permitted by Delaware law, we have adopted provisions in our amended and restated certificate of incorporation and bylaws, both of which will become effective upon the closing of this offering, that limit or eliminate the personal liability of our directors and officers to the fullest extent permitted by Delaware law, as it now exists or may in the future be amended, and against all expenses and liabilities reasonably incurred in connection with their service for or on behalf of SORL.  In addition, the new amended and restated certificate of incorporation provides that our directors will not be personally liable for monetary damages to us for breaches of their fiduciary duty as directors, unless they violated their duty of loyalty to us or our stockholders, acted in bad faith, knowingly or intentionally violated the law, authorized illegal dividends or redemptions or derived an improper personal benefit from their action as directors.  We maintain liability insurance which insures our directors and officers against certain losses and which insures us against our obligations to indemnify our directors and officers.           In addition, we have entered into separate indemnification agreements with each of our directors and officers.  These agreements, among other things, require us to indemnify each director and officer to the fullest extent permitted by Delaware law, including indemnification of expenses such as attorneys’ fees, judgments, fines and settlement amounts incurred by the director or officer in any action or proceeding, including any action or proceeding by or in right of us, arising out of the person’s services as a director or officer.  At present, we are not aware of any pending or threatened litigation or proceeding involving any of our directors, officer, employees or agents in which indemnification would be required or permitted.  We believe provisions in our new amended and restated certificate of incorporation and indemnification agreements are necessary to attract and retain qualified persons as directors and officers.
The following table sets forth certain information known to us regarding beneficial ownership of our common stock as of December 31, 2005 and as adjusted to reflect the sale of the shares of common stock in this offering and the conversion of all outstanding shares of our convertible preferred stock by:          •    each person   known by us to be the beneficial owner of more than 5% of any class of our   voting securities;                           •    our named   executive officers;                            •    each of our   directors; and                            •    all   executive officers and directors as a group.     - 58 -                Beneficial ownership is determined according to the rules of the SEC and generally means that a person has beneficial ownership of a security if he or she possesses sole or shared voting or investment power of that security, and includes options and warrants that are currently exercisable within 60 days.  Information with respect to beneficial ownership has been furnished to us by each, director, executive officer or 5% or more stockholder, as the case may be.  Unless otherwise indicated, to our knowledge, each stockholder possesses sole voting and investment power over the shares listed, except for shares owned jointly with that person’s spouse.           This table lists applicable percentage ownership based on 13,346,555 shares of common stock outstanding as of December 31, 2005.            The address for each of the stockholders in the table is c/o of the Company.      NAME OF   BENEFICIAL OWNER        AMOUNT AND      NATURE    BENEFICIAL    OWNER        POSITION        PERCENT   OF CLASS                                       Xiao Ping Zhang         9,087,527         Chief Executive Officer and   Chairman         68.1%           Xiao Feng Zhang         1,135,938         Chief Operating Officer and   Director         8.5%           Zong Yun Zhou         —         Chief Financial Officer         *          Jung Kang Chang         —         Director         *           Zhang Li Min         —         Director         *           Wang Zhizhong         —         Director         *          Huo Yiguang         —         Director         *           Jianghua Feng         —         Director         *           Officers and Directors as a   Group (8 persons)         10,223,465                   76.6%          PRINCIPAL SHAREHOLDERS                                       Shu Ping Chi         1,135,938                   8.55%                   *    Less than 1%
Capital Stock Issuances in the Reverse Acquisition            Pursuant to the reverse acquisition, Mr. Xiao Ping Zhang, our Chief Executive Officer, and Mr. Xiao Feng Zhang, our Chief Operating Officer, received 9,087,527 shares and 1,135,938 shares, respectively, of our Common Stock representing 68.4% and 8.55% respectively, of our outstanding shares.  - 59 -      Ruili Group            Mr. Xiao Ping Zhang and Mr. Xiao Feng Zhang are the principal shareholders of the Ruili Group which was the owner of the assets contributed to the Joint Venture in the reverse acquisition.  The Joint Venture purchases non-valve automotive products and packaging material from the Ruili Group.  The Ruili Group also guarantees certain bank loans to the Joint Venture and licenses two patents and the trademark “SORL” to the Joint Venture on a royalty free basis..  The Company believes that the prices charged are at least as favorable to the Joint Venture as would be obtained from a third party.
Rotenberg & Co. LLP, Certified Public Accountants, was the Registrant’s independent registered public accounting firm engaged to examine the financial statements of the Registrant for the fiscal year ended December 31, 2005 and 2004.  Hein & Associates LLP, was the Registrant’s independent registered public accounting firm engaged to examine the financial statements of the Registrant for the fiscal year ended January 31, 2003.  The Registrant changed its fiscal year end from January 31 to December 31 on May 19, 2004.  Rotenberg & Co. LLP performed the following services and has been paid the following fees. FISCAL YEAR ENDED DECEMBER 31, 2005 and 2004            AUDIT FEES            Rotenberg & Co. LLP was paid aggregate fees of approximately $120,000 and $140,000 for the fiscal years ended December 31, 2005 and 2004, respectively, for professional services rendered for the audit of the Registrant’s annual financial statements and for the reviews of the financial statements included in the Registrant’s quarterly reports on Form 10-QSB for the periods ended March 31, 2005 and 2004, June 30, 2005 and 2004, as well as September 30, 2005 and 2004.            AUDIT-RELATED FEES            Rotenberg & Co. LLP was not paid additional fees for the fiscal years December 31, 2005 and December 31, 2004 for assurance and related services reasonably related to the performance of the audit or review of the Registrant’s financial statements.            TAX FEES            Rotenberg & Co. LLP was not paid any fees for the fiscal years ended December 31, 2005 and December 31, 2004 for professional services rendered for tax compliance, tax advice and tax planning.  This service was not provided.            ALL OTHER FEES            Rotenberg & Co. LLP was paid no other fees for professional services during the fiscal years ended December 31, 2005 and December 31, 2004.            AUDIT COMMITTEE PRE-APPROVAL POLICIES AND PROCEDURES            Our Audit Committee’s policy is to pre-approve all audit and permissible non-audit services provided by our independent auditors.  These services may include audit services, audit-related services, tax services and other services.  Pre-approval is generally provided for up to one year and any pre-approval is detailed as to the particular service or category of services.  The independent auditor and management are required to periodically report to the Audit Committee regarding the extent of services provided by the independent auditor in accordance with this pre-approval. - 60 -
EXHIBIT NO.        DOCUMENT DESCRIPTION                  3.1              Articles of   Incorporation (1)      3.2              Bylaws (1)      10.1              Share   Exchange Agreement and Plan of Reorganization (2)     10.2              Joint   Venture Agreement (3)      31.1               Certification of Principal Executive Officer pursuant to Rule 13a-14 and Rule 15d-14(a), promulgated under the Securities and Exchange Act of 1934, as amended. (3)      31.2               Certification of Principal Financial Officer pursuant to Rule 13a-14 and Rule 15d-14(a),  promulgated under the Securities and Exchange Act of 1934, as amended. (3)      32.1               Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer). (3)      32.2               Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002 (Chief Financial Officer). (3)              (1)    Incorporated   herein by reference from the Registrant’s Form 10-QSB filed with the   Securities and Exchange Commission, File No. 000-11991 on May 28,   2003.                  (2)    Incorporated   herein by reference from the Registrant’s Form 8-K Current Report and   amendment thereto as filed with the Securities and Exchange Commission, on   May 24, 2004.                  (3)    Filed   herewith.     - 61 -      SIGNATURES            Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on this 25th day of March 2006.          SORL AUTO PARTS, INC.                            By:      /s/ Xiao Ping   Zhang                               Xiao Ping   Zhang                Chief   Executive Officer and Chairman               Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following person on behalf of the Registrant and in the capacities.     Name         Position         Date                           /s/ Xiao Ping   Zhang         Chief   Executive Officer, and Chairman         March 25,   2006                              Xiao Ping   Zhang                                                     /s/ Xiao Feng   Zhang         Chief   Operating Officer and Director         March 25,   2006                               Xiao Feng   Zhang                                                    /s/ Zong Yun   Zhou         Chief   Financial Officer         March 25,   2006                               Zong Yun   Zhou                                                    /s/ Li Min   Zhang         Director         March 25,   2006                               Li Min Zhang                                                     /s/ Zhi   Zhong Wang         Director         March 25,   2006                              Zhi Zhong   Wang                                                     /s/ Yi Guang   Huo         Director         March 25,   2006                              Yi Guang Huo                                                     /s/ Jiang Hua   Feng         Director         March 25,   2006                              Jiang Hua Feng                                 /s/ Jung Kang Chang     Director     March 25, 2006                    Jung Kang Chang                - 62 -       EX-10.2 2 sl5225ex102.htm EXHIBIT 10.2       Exhibit 10.2     CONTRACT OF RUILI GROUP RUIAN AUTO PARTS CO., LTD          RUILI GROUP RUIAN AUTO PARTS CO., LTD.   Contract of the Joint Venture           CONTRACT OF RUILI GROUP RUIAN AUTO PARTS CO., LTD          Article 1  General Provisions             1.1          This contract is made and entered into on the basis of equality and mutual benefit, through friendly consultations, by and between RUILI GROUP CO., LTD.  and FAIRFORD HOLDINGS LIMITED, who agree to jointly set up and run a JOINT VENTURE in Wenzhou city, Zhejiang province in China under the Act of Sino-foreign Joint Ventures of the People’s Republic of China, its implementation statutes, the other related laws and regulations made by the People’s Republic of China as well as the stipulations in this contract.  Article 2 The Two Parties of the Contract            2.1          The parties of this contract are as follows:                           (1)          RUILI GROUP CO., LTD.  (hereinafter referred as party A), a corporation registered in Wenzhou city, China, with its legal address as: 1169Yumeng Road, the Economy Development Zone, Ruian city          Legal   representative: ZHANG xiaoping           Post: Board   Chairman           Nationality:   Chinese                              (2)          FAIRFORD HOLDINGS LIMITED (hereinafter referred as party B ), a company registered in Hong Kong.  The legal address is: 12 Zhong huan xia que road, Hong Kong Special Administration District         Legal   representative: Zhang Ronggang           Post:   General Manager           Nationality:   Taiwan China     Article 3  Definition            Otherwise stipulated, the words and phrases used in the contract have the meanings as follows:            “Related company” refers to any company controlled by any party directly or indirectly, controlled together with any other party by or control any party; the word “control” means possession of stock or registered capital allowing the right to vote by over 50%.            “Article of Associations” refers to the constitution of joint ventures subscribed by both parties in this contract and authorized by the examining and approving institution.            “The Board of Directors” shall mean the directorate of the joint ventures.         CONTRACT OF RUILI GROUP RUIAN AUTO PARTS CO., LTD                   “Business License” shall mean the business license of joint ventures issued by the State Administrative department for Industry and Commerce or authorized local Administration department Industry and Commerce.            “Contract Duration” refers to the contract term stated in Article 19.            “Effective Date” shall mean the date on which the contract and the article of associations becomes effective, viz.  the date of approval by the examining and approving authorities.            “Examining and approving Authorities” shall mean the government authorities that are entitled with the right to examine and approve the contract according to the stipulations on the examination of overseas invested projects.            “Force Majeure” refers to all the contingencies which happened after the subscription of the contract and can not be anticipated at the moment, the occurrence and aftermath of which can not be avoided or conquered, and which hinder the full or partial performance of the contract.  The above mentioned contingencies include earthquake, typhoon, flood, wars, international or domestic conveyance breakdown, act of government or public institutions, epidemic, civil commotions, strike as well as other contingencies generally considered force majeure by the international business conventions.            “Joint Ventures Company” shall mean the Sino-foreign joint ventures established according to the stipulations in the contract.            “Joint Ventures Product” shall mean the products made in the ranges stated in the Article5.2            “Joint Ventures Regulations” refers to The Implementation Regulations of Sino-foreign Joint Ventures Law of People’s Republic of China.           “Labor Law” refers to The Labor Law of People’s Republic of China as well as relevant laws and regulations of China.            “Administrative Staff (executives)” refers to the general manager of the joint ventures, as well as other administrative staff who report directly to the general manager.            “A Party” refers to any party stated in Article2.1 in this contract.            “The Third Party” refers to any natural man, legal person, other organization or entity other than the two parties of this contract.            “The Three Funds” refers to the reserve funds, development funds, employee bonus and welfare funds of the joint ventures stipulated in the joint venture regulations.  2         CONTRACT OF RUILI GROUP RUIAN AUTO PARTS CO., LTD          Article 4  The Foundation of the Joint Ventures Company            4.1          Both parties agree to establish a joint venture in Wenzhou city, Zhejiang province, China according to the laws and regulations of China as well as the stipulations in this contract.  Upon the subscription of this contract by both parties, party A shall transact promptly Feasibility Study of the joint venture, the examination procedures of the contract and its constitutions as well as the registration procedures of the joint venture.  Party B shall cooperate with party A and provide the documents and information that are requested.            4.2          The Chinese name of the joint venture is  , the English name is “RUILI GROUP RUIAN AUTO PARTS CO., LTD.”.            4.3          The legal address of the joint venture is: Ruili Industry Garden, 1169Yumeng Road, Ruian Economy Development, Zhejiang Province, PRC.            4.4          With the agreement of the board of directors as well as the approval by the relevant Chinese government department, the joint venture is entitled to establish branches setup both in and out of the China territory.            4.5          The joint venture is an enterprise legal person stipulated by China laws.  All the activities of the joint venture shall conform to the laws, provisions and rules & regulations of PRC.            4.6          The joint venture is a company with limited liability.  The responsibility one party carries is confined with the registered capital turned over to the joint venture according to the stipulations in Article6.  The creditors of the joint venture have recourses only for the assets of the joint venture, and they have no right for indemnification, damage compensation or other remediation from any party.  On the premise that the above stipulations are observed, both parties share in the profits and losses as well as the risks of the joint venture according to the respective investment proportions in the registered capital of the joint venture.  Article 5 Scope and Scale of Management            5.1          The purposes of joint ventures are: to manufacture and sell products by joint venture through adaptation of advanced technology and scientific administration; to exploit and introduce new products and new services, so as to obtain satisfactory economic benefits for both parties.            5.2          The management scope of the joint venture is: to produce and sell automobile parts.            5.3          The management scale of the currently planned joint venture by each party is: annual production of 3 million automobile gas brake valve, with total annual output value of 40 million US dollars (USD40,000,000).  3         CONTRACT OF RUILI GROUP RUIAN AUTO PARTS CO., LTD          Article 6  The Total Amount of Investment and the Registered Capital            6.1          The total amount of investment of the joint venture is 14 million US dollars (USD14, 000,000), say fourteen million only and the registered capital is 7.1 million US dollars (USD 7,100,000).say seven million and one hundred only            6.2          The subscribed investment amount by each party for the registered capital is:                          (1)          Party A: 710 thousand US dollars (USD 710,000), say seven hundred and ten thousand only which accounts for 10% of the registered capital of the joint venture.                           (2)          Party B: 6.39 million US dollars (USD6,390,000), six million, three hundred and ninety thousand only which accounts for 90% of the registered capital of the joint venture.            6.3          The contribution modes for the registered capital by each party are as follows:                           (1)          Party A shall invest by assets, which is evaluated by qualified Asset Assessment Institution and converted into money as 710 thousand  US dollars (USD 710,000).                           (2)          Party B shall invest by assets, which are evaluated by qualified Asset Assessment Institute and converted into money as USD 6,390,000, say six million, three hundred and ninety thousand US dollars only.            6.4          Party B shall pay 60% of the total purchase amount within six months as from the date on which the business license is issued, and shall make all the purchase payment within one year.  Party A shall change the ownership of the assets investment to the name of the joint venture company within three months as from the date on which the business license is issued.           6.5          If one party hasn’t contributed the contracted investment upon the due date, she shall pay to the joint venture interests calculated from the due date to the actual contributions date of the investment with respect to the unpaid amount (or the value of tangible materials investment), the interest rate shall be calculated on the basis of benchmark rate of RMB loan for six months issued daily during the default time.  Moreover, the observant party may inform in written notice to the defaulting party demanding her to contribute the investment in one (1) month as from the receipt date.  If the default party fails to contribute within the time limit, the observant party shall have the right to contribute the investment according to the proportion and acquires the corresponding equity of registered capital accordingly.  Or, the observant party may choose a third party to contribute the investment and acquires the corresponding equity of registered capital accordingly.  The observant party may also terminate the contract according to the Article20.1 in the contract.  Under each circumstance in this article, the observation party may claim damages from the defaulting party.  The provisions in the Article 6.5 herein shall not affect any other rights enjoyed by observant party as for the failure of investment by the defaulting party under this contract or other applicable laws and regulations.  4         CONTRACT OF RUILI GROUP RUIAN AUTO PARTS CO., LTD                    6.6          After the contribution of investment to the registered capital of the joint venture by each of the two parties, it shall be verified immediately by a Chinese Certified Public Accountant (CPA) engaged by the Board of Directors, and shall submit the Capital Verification Report to the joint venture company within sixty (60) days after the investment date.  Within thirty (30) days as from the receipt of the Capital Verification Report, according to style and content prescribed in the joint venture codes, the joint venture shall submit to the party an investment certificate signed by the Board Chair with the stamp of the joint venture on it, as well as a copy as a record in the Examining and approving authorities, the General Manager shall put on file all the copies of Capital Verification Report and investment certificates which have been granted to the parties.           6.7          In despite of any other provisions in this contract, if any of the following conditions fail to be implemented, and both parties have not given up the condition in writing, then both parties shall have no obligations to contribute any investment to the registered capital of the joint venture:                           (1)           After the capital contribution of the contract and article of association by both parties, they have been approved by the examining and approving authorities, and neither of the terms and conditions has been altered, nor has any extra obligation been added to one party or the joint venture company; but if the alterations herein or the extra obligations have been informed to each party in writing, and each party agrees with them in writing, then it shall be excluded.                           (2)          The business license has been issued with no alteration to the scope of business of the joint venture stipulated in Article5.2; but if each party has been informed of the alterations herein in writing, and each party agrees with them in writing, then it shall be excluded.                                          Both parties agree, (i) within three (3) months after the issue of the business license, or (ii) within five (5) months after the signing of this contract by both parties (the earlier shall prevail), or within any extended term decided in writing by both parties through consultation, any of the above-mentioned prerequisites has not been realized, nor has any party given them up, then either party shall be entitled to inform the other party in writing so as to terminate the contract, while any party shall have no obligation to contribute any investment to the registered capital of the joint venture.           6.8          The increase of or adjustment to the registered capital of the joint venture company shall be approved by both parties in writing with the unanimous agreement through the board of directors as well as the approval by the examining and approving authorities.  After approval from the above authorities, the joint venture company shall proceed registration procedures for the registered capital alteration in relevant administrative department for Industry and Commerce.            6.9          The provisions in Article 6.9 herein are suitable for the transferring of the registered capital of the joint venture company:  5         CONTRACT OF RUILI GROUP RUIAN AUTO PARTS CO., LTD                                   (1)           According to the following stipulations, each party enjoys priority right to purchase full or partial assignment or transfer of equity the other party’s in the registered capital of the joint venture company.                                          (a)          The party that wishes to transfer the full or partial interests in the registered capital of the joint venture company (“assigning party”) should inform the other party in writing (“transfer notice”), stating clearly the identity of the intended assignee (“the intended assignee”), equity intended to transfer (“transferred rights and interests”), the transferring price and other terms and conditions.  The transfer notice constitutes as an irrevocable offer, that is to say, to transfer all the rights and interests to the other party according to the price as well as other terms and conditions.                                         (b)          The other party shall be entitled to inform the assigning party in writing (“purchase notice”) within sixty (60) days as from the receipt date of the transfer notice, so as to purchase the full or partial shares in the assigner’s transferred rights and interests at priority.  Within the sixty days herein, the assigner shall provide promptly the information on the conditions of business and finance of the intended assignee to the party according to its reasonable requirements, so as to make the party decide whether to exercise the purchase right at priority.                                          (c)          If the other party fails to purchase within sixty (60) days stipulated in item (b), then the assigning party may transfer all the equity to the intended assignee, with price no lower than the price stipulated in the transfer notice, while the other terms and conditions offered to the intended assignee shall not be more preferential than what are stated in the transfer notice.                                          (d)          The assigner should inform the other party in writing of the final terms and conditions of transferring within two (2) days as from the date of signing of the transfer contract by the assignee.  If the transfer made to the assignee fails to be reported to the examining and approving authorities within thirty (30) days after the signing of the transfer contract for approval, then the assigner shall follow once again the provisions prescribed in article (1).                          (2)          Within the term of this contract, each party may transfer the full or partial right or interest (equity) in the registered capital of the joint venture to a related (interested) company.  After the approval of the original examining and approving authorities, the registration procedures of company alteration should be proceeded.  One party shall hereby give up the preferential purchase right for such transfer to the other party.                           (3)          The party that transfers the rights and interests of the registered capital of the joint venture shall confirm that the assignee has signed a document with legal binding which makes him a party of this contract, and shall be restricted by the terms and conditions under this contract as the assigner himself.                           (4)          Pursuant to Article 6.9, each party shall consent any transfer of registered capital and the Board of Directors shall be deemed as consent the transfer.  Each party shall agree to take immediate action required under the law, execute all documents under the law and urge its appointed directors to immediately take the action and execute all the documents hereinbefore.  The transfer of the registered capital shall be subject to application with and approval by the examining and approval authority.  Upon receipt of the said approval, the Joint Venture shall check in the transfer to the related administrative department for industry and commerce.  6         CONTRACT OF RUILI GROUP RUIAN AUTO PARTS CO., LTD                   6.10          The Joint Venture may get banking loan from finance institutes in or out of China and the shareholder loan from the two parties, financing for the balance between the total investment of the Company and her registered capital.  If the shareholders of the two parties shall provide the loan, it is based on its proportional percentage of investment of each party in the registered capital.  The two parties shall determine their willingness and in what way they shall provide guarantee if required by the loaner.              6.11          Save as lien of general nature (the lien of general nature herein refers to the lien established on the entity held by share by any party hereto, such as lien out of tax, duty and exercise, or the lien made under security documents secured with all assets where the assets are not particularly identified), each party shall not be allowed to mortgage or pledge part or all of its share in the registered capital of the Joint venture, or to set any credit in other whatsoever forms.  Article 7  The Responsibilities of Both Parties            7.1          In addition to the other responsibilities stipulated in this contract, the parties shall fulfill their respective responsibilities as follows:                           (1)           Responsibilities of party A:                                          (a)          Assist the joint venture in applying for all the licenses and permission required for the running of business of the joint venture company.                                         (b)          Assist the joint venture in coordinating with the local government, so as to make water, electricity and road.  Available near the joint venture company                                          (c)          Assist the joint venture in all the procedures to assign the ownership of asset of both parties to the joint venture company.                                          (d)          Assist the joint venture in applying for the preferential tax treatments and other investment encouragement available under the relevant China laws, administrative statutes and local regulations.                                          (e)          Assist the joint venture in obtaining all the machinery equipment, instrument, raw materials, office appliance and facility, vehicles as well as other materials needed in the manufacture or management of the joint venture company through buying, leasing or other ways in the China territory.                                          (f)          Assist the joint venture in applying for import license for the machinery equipment, instrument, raw materials, office appliances and facility, vehicles as well as other materials needed in the manufacturing or administration of the joint venture company, and to assist in transacting all the relevant procedures and formalities to declare customs. 7         CONTRACT OF RUILI GROUP RUIAN AUTO PARTS CO., LTD                                                  (g)          Assist the joint venture in recruiting local Chinese personnel, and to assist the joint venture in obtaining visas, residence permits, work permit and housings for its foreign personnel.                                          (h)          Assist the joint venture in obtaining and ecommending the Foreign Exchange Registration Certificate as well as other approval needed to adopt the various methods of foreign exchange balance permitted by Chinese laws and statutes.                                          (i)          Assist the joint venture in arranging reliable supply of water, electricity, heating, gas, steam, telecommunication and transport needed in the production.                                          (j)          Assist the joint venture company in other matters consigned by the Board of Directors.                          (2)          Responsibilities of party B:                                          (a)          Assist the joint venture company in obtaining machinery equipment, raw material etc.  by purchase or lease or other ways from abroad.                                          (b)          Assist the joint venture company in distributing its products in the international market.                                          (c)          Training the administrative staff and technical personnel of the joint venture company.                                          (d)           Assist the joint venture in other matters consigned by the Board of Directors.            Both parties agree to perform their respective responsibilities stipulated in Article7 herein without any condition.  Article 8  Mutual Declarations and Warranties           8.1          Each party hereto claims and warrants to the other party that as of the execution date and the validity date of the contract:                           (1)          This party is formed under laws of establishment or that of registered place, legally existing in accordance with all rules and regulations;                           (2)          This party has gone through all the necessary procedures and obtained all the necessary approvals under relevant laws and regulations with which it shall comply, and it has all necessary rights, power and capacity under such laws to execute this Contract and to perform all the obligations under this Contract;  8         CONTRACT OF RUILI GROUP RUIAN AUTO PARTS CO., LTD                                   (3)          This party has taken all the necessary internal measures and actions to obtain authorization to execute this Contract, her representative(s) who have signed this Contract has been fully authorized to make this Contract binding on its/their party;                           (4)          This Contract shall be binding on each party as of the date of validity;                          (5)          Execution hereof or the performance of obligation hereunder by this party shall not conflict with each/all provision(s) herein below or result in breach of such provision(s) or non-performance of either such provision(s) or this party’s article of association or internal by-laws, or any laws, regulations, or authorization, or approvals by any government authorities or organs, or any contract or agreement to which this party is one party or is binding to any party;                           (6)          There has not any jurisdiction or arbitration or any other legal or administrative proceedings or government investigations against or threat to against this party, which shall affect her capacity to execute or perform this Contract;                           (7)          This party has disclosed all the materials held by it, in respect of establishment of the Joint Venture or the future operations of the Joint Venture, which may have virtually unfavorable effect on this party’s capacity to fully perform all the obligations hereunder, or, which may virtually affect the intention of the party hereto to execute the Contract.  In case it is disclosed to other party hereto, there exists no furthermore virtually untrue or misguiding statements by this party to the other party hereto; Provided that each party hereto is in breach of any statements and warrants as provided in 8.1, it shall indemnify the other party from all losses, damages and claims suffered from (including but not limited to any interests accrued thereof and reasonable lawyer fee).     Article 9  Technology           Both parties agree that the Joint Venture company shall use the advanced technology and equipment for manufacturing of spare parts of car to realize the production scale under article 5.  Article 10  Sales of the Joint Venture Products            10.1          The products of the Joint Venture may be sold in China and abroad.  Under the condition of meeting internationally recognized quality standard, the joint venture company shall try to export part of the product overseas, taking into consideration of the market demands in accordance the economic interests of the joint venture company.            10.2          The joint venture company shall be responsible for the selling of the products, and the two parties shall assist the joint venture company in sales.  Any party has the priority to purchase the products at the usual market price.  The two parties shall buy, according to the percentage of their equity in the joint venture company in case of lacking in enough products.  9         CONTRACT OF RUILI GROUP RUIAN AUTO PARTS CO., LTD                    10.3          The joint venture company may set up branches in China and overseas appointing sales agents and distributors for sales and after-sales service after relevant government authorization.  The Board of Directors also can appoint any party thereby as the sales agent or the distributor. Article 11  Board of Directors            11.1          The Board of Directors of the Joint Venture shall be established upon the date that business license is issued.  The Board of Directors is the supreme power authority of the joint venture company.            11.2          The Board of Directors shall consist of three (3) directors, of whom, one (1) shall be appointed by Party A and two (2) by Party B.  Respective parties appoint directors in written form with a term of office for four (4) years.  The appointing party may dismiss the appointed director any time, in case that an immediate written notice is sent to other shareholders.  The related party that nominates them may renew the appointment of the directors.  If there is any vacancy on the Board of Directors arising from the retirement, resignation, dismissal, lack of civil ability or the death of a director, the originally nominated party shall appoint a successor to continue the term of the director with a written form to other shareholders.            11.3          The Board of Directors shall be one Chairman whom shall be appointed by Party B.  The Chairman shall be the legal representative of the joint venture company.  If, for any reason, the Chairman is unable to perform his duty, any other director shall be authorized by the Chairman to perform his duties by proxy.            11.4          Any delegation, dismissal, appointment or the replacement of a Chairman or a director shall be effected pursuant to written notice to other shareholders on receiving the written notice by the shareholders.  The above delegation, dismissal, appointment or the replacement therefore shall be reported to and filed with examining and approving authority and registered with related Administrative Department for Commerce and Industry.           11.5          The Joint Venture company shall compensate all the indemnity claim and responsibility for any director, in case that the indemnity is occurred when the director performs his duty of the Joint Venture company on the condition that the claim and responsibility is not incurred by the deliberate misdemeanor, major negligence and intentional breach of the criminal law by that director.            11.6          The first meeting of the Board of Directors shall be held within one (1) month since the date that business license is issued.  Thereafter, the Board of Directors shall conduct at least a meeting once a year.  Upon the written request of more than one director specifying the matters to be discussed, the Chairman shall within thirty (30) days, after receiving the request therefore summon an ad hoc meeting of the Board of Directors.  10         CONTRACT OF RUILI GROUP RUIAN AUTO PARTS CO., LTD                    11.7          Written notice of the time, place, and agenda of each meeting of the Board of Directors shall be sent by the Chairman to all the directors, at least fifteen (15) days before such meeting.  The Chairman shall put all the written request of any director in the agenda to be discussed.  The summoned meeting of the Board of Directors shall be deemed as invalid unless all the directors have been properly notified except the director hand in the written notice of voluntary forfeiture before or after the meeting.  The Boarding meeting shall be conducted in the registration place the Joint Venture or other places in or out of China, which is determined by the Chairman.  The Chairman shall determine the agenda of the meeting, convene and preside over the meeting of the Board of Directors.           11.8          A quorum for the meeting of the Board of Directors shall exist if at least two (2) directors are present in person or by proxy.  The Chairman shall notice all the Board members for another meeting thirty (30) days prior to the date of that meeting if the quorum for the meeting of the Board of Directors is less than two (2) of the directors present in person or by proxy.  Each party shall make sure the appointed directors present all the properly summoned meetings of the Board of Directors in person or by proxy.              11.9          In the event a director is unable to attend a Board meeting, he may appoint by notice in writing a proxy to attend on his behalf.  The appointed proxy may act as a director to represent more than one director if authorized and the appointed proxy shall be entitled the same rights as whom he represents.              11.10     Detailed written minutes shall be recorded in all the Board meetings.  The resolution of the Boarding meeting shall be written in Chinese for the signing of directors who are in approval of the resolution.  The minutes shall be sent to all the directors within fifteen (15) days of the meeting and the directors who hope to amend or supplement the minutes shall hand in the amendment and supplementary proposal to the Chairman in writing within seven (7) days after receiving the minutes (The signed written resolution of the meeting shall not be amended or supplemented).  The Chairman shall complete and sign the minutes (These minutes shall be deemed as ultimate) and send one copy of the minutes to all the directors and parties within thirty (30) days after the meeting.  The Joint Venture shall file all the minutes for the free reference of the two parties  and their authorized representatives.            11.11     The resolution and the ratification of the Board meetings shall determine (but not limited to) the following major matters:                          (1)           Any amendment to the Article;                            (2)           Formulating plans for merger with another economic organization;                            (3)           Disbanding the Joint Venture or terminating any business operation of the Joint Venture;                            (4)           Increasing, transferring or decreasing the registered capital of the Joint Venture;                           (5)           The investment of the Joint Venture to any other companies or corporations;                           (6)           Setting up any branches or other operating places;  11         CONTRACT OF RUILI GROUP RUIAN AUTO PARTS CO., LTD                                  (7)           Signing any contract, the contract value of which exceeds four million U.S.  dollars (USD4, 000,000) between the Joint Venture and any shareholder or the related company as well as the amendment and termination of the contract;                           (8)           Subject to Article 16.12 thereafter, formulating after-tax profit distribution plans of any fiscal year;                            (9)           The collected total amount of the three funds and the spending of the money;                           (10)           The sale or purchase of any fixed asset or real estate which exceeds one hundred thousand U.S. dollars (USD100, 000) as well as in other currencies of the same value;                           (11)           The annual or the long-term production plan, sales and promotion plan, basic construction plan, research and development plan, financing plan, financial budget, tax report as well as the audited financial statement of the Joint Venture;                           (12)           Signing any other commercial contract without the normal business line of the Joint Venture, the contract value of which exceeds two million U.S.  dollars (USD2, 000,000) as well as in other currencies of the same value;                          (13)           Receiving any loan which exceed five hundred thousand U.S.  dollars (USD500, 000) as well as in other currencies of the same value;                           (14)           Providing any guarantee or loan for others by the Joint Venture;                           (15)           Deciding the basic departmental structure of the Joint Venture, including setting positions for management personnel which is not stipulated in this Contract;                           (16)           The internal policy and the major regulations and Articles of Association;                           (17)           The appointment, dismissal, remuneration and the welfare of the management personnel;                           (18)           The employment of external accountant, auditor and the legal advisor;                           (19)           Opening bank account and appointing the signer;                          (20)           Any litigation or arbitration claim of the Joint Venture and the settlement of any legal claim related to the Joint Venture.            11.12     The following issues shall require approval from all the directors of the Board with the presentation of the directors in person or by proxy in the Board meeting summoned according to the stipulations herein.                           (1)           Any amendment to the Article;                            (2)           Formulating plans for merger with another economic organization;  12         CONTRACT OF RUILI GROUP RUIAN AUTO PARTS CO., LTD                                   (3)           Disbanding the Joint Venture or terminating any business operation of the Joint Venture company;                            (4)           Increasing, transferring or decreasing the registered capital of the Joint Venture company;                          (5)           Approval and termination of any service management contract.            11.13     The resolution of other issues shall require the approval of a/half directors who present in person or by proxy in the Board meeting summoned according to the stipulations herein.            11.14     The Board of Directors may ratify a resolution through teleconference or with no meeting, if all the incumbent directors may sign the resolution in written form.  The resolution herein shall be filed with minutes, bearing the same validity as those resolutions ratified in the Board meeting.            11.15     Directors shall not be paid a salary except the reasonable expenses (including but not limited to transportation and accommodations) incurred by the directors as per the performance of their duties.  Article 12  Management Structure            12.1          The Joint Venture company shall set up operation management structure and stipulate clauses and conditions of offering management service thereof as well as the regulations employed by the management.            12.2          The Joint Venture shall one General Manager as leader, who shall be appointed by and responsible to the Board of Directors.  The Joint Venture shall have one Deputy Manager, one accountant and departmental managers, all of whom are appointed by the Board of Directors and responsible to the General Manager.           12.3          The duty of the General Manager shall be to organize and supervise the day-to-day management of the Joint Venture company and to carry out the resolutions of the Board of Directors.            12.4          Unless approved by the Board of Directors of the Joint Venture company, the General Manager and all the other management personnel shall not work as the managers in other companies or corporations, nor shall they be allowed to work as directors, consultant or be involved in any economic interests in other companies and corporations which are in commercial competition with the Joint Venture.            12.5          The basic organization structure, including the positions for management personnel who are not stipulated in the Contract shall be set up by the Joint Venture.  The details of the organizational structure and the establishment of other positions except those of management personnel shall be determined by the Board of Directors.  13         CONTRACT OF RUILI GROUP RUIAN AUTO PARTS CO., LTD          Article 13  The Purchase of Material and Equipment            13.1          The Joint Venture may purchase the necessary machinery, instruments, vehicles, spare parts, and goods and materials for the operation the company in or out of China and obtain the necessary service for the production and operation of the company.  The necessary raw material, fuel, spare parts, equipment, etc, shall be bought within China if the condition, price, quality, and other aspects of terms are the same as those from aboard. Article 14  Preparation of the Joint Venture Company            14.1          During preparation of the joint venture company, a preparation office shall be set up for preparation of Company establishment.  The office consists of one representative from each party.            14.2          Work Scope of Preparation Office                           (1)           Purchase and check before acceptance goods such as equipment   and materials                             (2)           Formulate relevant administrative methods                            (3)           Well organize protection and classification of relevant files, drawings, archives and data.            14.3          Salary of Preparation Office staff and expenses concerning the preparation shall be included in the Set-up Cost (Organization cost) after approval of Board of Directors.            14.4          After completion of the preparation, the preparation office shall be cancelled by the board.  Article 15 Labor Management            15.1          Labor matters concerning the staff and workers of the joint venture company such as the recruitment, dismissal, resignation, salaries, welfare shall be in accordance with Labor Law.  Its labor policy and implementation rules shall be approved by the board and put into force by General Manager or under supervision of General Manager.              15.2          Except executives, the joint venture company shall recruit staff in accordance with rules of individual labor contracts.  For administrative personnel (executives), the joint venture company abides by individual appointment contracts approved by the board.  14         CONTRACT OF RUILI GROUP RUIAN AUTO PARTS CO., LTD                    15.3          Employees shall be selected based on their major qualifications, characteristics and working experience.  For specific staff number and their qualifications, General Manager shall decide by as per the joint venture’s actual requirements.  Common staff (non-executives) shall be interviewed and selected by General Manager or his appointed proxy.  Before becoming formal employees of the joint venture, all the staff shall satisfactorily pass three months’ probation.            15.4          Social insurance (such as pension, unemployment, medical, work injury, maternity leave) of every employee during his employment term in the joint venture company shall be borne by Company in accordance with relevant law and provisions, but not include that before the date of recruitment.  (As per effective date of Labour Contract entered into by the joint venture company and Employee.)           15.5          The joint venture company shall abide by Country provisions and rules & regulations concerning labor protection to ensure safety and civilized production.  Social insurance of the joint venture company employees shall confirm to “Labour Law”.  Article 16  Accounting, Auditing and other financial affairs            16.1          Chief accountant of the joint venture company, under the leadership of General Manager, shall be responsible for the its financial administration.            16.2          General Manager and Chief accountant shall draw up accounting system and procedures in accordance with “Accounting System of Foreign-invested Enterprises of People’s Republic China” and other law provisions and regulations for approval of the board.  These accounting systems and procedures shall be put into record in Supervision authorities of the joint venture company, relevant local finance bureaus and taxation bureaus.              16.3          The joint venture company shall adopt Renminbi as recording currency used in book-keeping.  Meanwhile, it can adopt U.S Dollar or other foreign currency as an auxiliary accounting currency.            16.4          All vouchers, receipts, accounts books, financial statements and reports shall be written in Chinese.            16.5          Foreign currency will be converted to Renminbi at the middle rate of buying and selling rate issued on current day by the People’s Bank of China based on actual receipts and expenditure transactions.           16.6          The fiscal year of the joint venture company shall coincide with the calendar year.  The first fiscal year of the joint venture company shall be up to December 31 on the Gregorian calendar as from the date of getting Business License.            16.7          Both parties shall have ample and equal opportunity to review accounts of the joint venture company, which shall be properly kept in legal address of the joint venture company.  The joint venture company shall monthly and quarterly provide the two parties with unaudited finance statements for them to continuously get acquaintance about the financial results of the joint venture company.   15         CONTRACT OF RUILI GROUP RUIAN AUTO PARTS CO., LTD          In addition, under the premise of charging her own expenses and pre-notice to the joint venture company in advance, either party may invite an accountant registered in China or abroad to audit the joint venture company on behalf of herself.  The joint venture company shall allow the auditor to be responsible for checking of all financial and accounting records under the condition that the auditor shall keep all the above documents strictly confidential.            16.8          The joint venture company shall invite a China Public Certified Accountant (CPA), which is independent from either party to audit accounts, make fiscal financial statements and reports.  The draft work sheet of audited finance statements and reports shall be submitted to the two parties and board of directors for examining and verifying within (two) months as from the date of the end of every fiscal year.  The final work sheet shall be completed within (four) months as from the date of the end of every fiscal year.           16.9          The joint venture company shall open foreign exchange deposit accounts and Renminbi account respectively in China, which are allowed for foreign exchange transactions.  After approval of the State Administration of Foreign Exchange, the joint venture company can also open foreign exchange account abroad.            16.10     Through sales and other methods approved by China’s Law and provisions (including foreign exchange in banks and foreign exchange swap centers according to foreign exchange administration rules), the joint venture company shall, on her own, maintain a balance between its foreign exchange receipts and expenditures.            16.11     After prior year’s loss making-up, the board of directors shall decide the percentage of allocations for three reserve funds from profits after tax.  Except for additional resolution of the board of directors, the total proportion of three funds withdrawn in any fiscal year shall not exceed 15% of profits after tax            16.12     Joint Venture Company shall abide by the following provisions to distribute profits to both parties:                           (1)          The board of directors shall, within (four) months as from the date of the end of every fiscal year, decide the remaining profits (after withdrawn of three reserves) for production and operation and the profit to be distributed proportionately to each party’s investment in the joint venture company.                           (2)          Profits may not be distributed before the losses of the previous year have been made up.  Remaining profits from previous year (or years) may be distributed together with those of the current year.                            (3)           Profits for distribution shall be calculated in Renminbi.  But Party B enjoys first priority to be paid by foreign exchange of Joint Company for her part in shared profits.  (Renminbi shall be converted to U.S. Dollar at the middle rate of buying and selling rate issued by the People’s Bank of China on the date of resolution on profit distribution by the board of directors.)  If foreign currency fails to pay off Party B’s entire profit share by sufficient foreign exchange.    16         CONTRACT OF RUILI GROUP RUIAN AUTO PARTS CO., LTD           The joint venture company shall, after receipt of Party A’s notice, for the party B, immediately convert the remaining Renminbi to foreign currency in banks or foreign exchange swap center to Party B.  Upon failure of exchange, the joint venture company shall, after receipt of Party A’s notice, deposit the remaining Renminbi profit into an interest saving account individually bank account in name of the joint venture company and moreover, keep the Renminbi deposit and accrued interests for Party B for further notification from Party B.  As long as Party B requires to dispose the above-said account in a way which doesn’t conflict with China’s Law and provisions, the joint venture company shall immediately follow Party B’s instructions.            16.13     As for profits and other payment from the joint venture company to Part B abroad, the joint venture company shall, under premise of abiding by China’s foreign exchange administration provisions, remit the payment into banks’ account abroad designated by Party B. Article 17  Taxes            17.1          The joint venture company shall pay all taxes and tariff prescribed by China local laws and relevant provisions.  Chinese and foreign Staff employed by the joint venture shall pay individual income tax according to “the Individual Income Tax Law of the People’s Republic of China”.  Article 18  Confidentiality            18.1          Before or within contract period, one party has disclosed or probably may disclose his business, financial position, know how, research and development and other confidential information or documents to other parties.  In addition, the two parties may get confidential and private documents of the two parties and vice versa, With the exception of other Confidentiality or non-disclosure agreements or provisions, either Party and the joint venture company who accept all above documents (with inclusion of written documents or non-written documents, hereinafter referred as “secret documents” shall, within the validity period of the contract and following two years”                           (1)           Keep them under secret conditions                           (2)           Except for her own employees who need to get acquaintance of the above secret documents to fulfill duties and will not disclose to any other person or Entity. 17         CONTRACT OF RUILI GROUP RUIAN AUTO PARTS CO., LTD                     18.2          The above regulation Article 18.1 shall not apply to the following secret documents:                           (1)           Any written record can verify that these documents from the disclosure party has been known to the other party before                           (2)           Not due to the receiver’s breach of this contract but those  documents are or have been published                            (3)           Secret data received from another third party without any non-disclosure liability                            (4)      Data required to be disclosed as per order of court of jurisdiction or government departments            18.3          As per required by one party, the joint venture company should sign another Non-disclosure agreement on the secret documents obtained from the party or its related companies, provisions of which shall be similar with those under Article 18.            18.4           Rule & regulations shall be formulated by every party and the joint venture company to ensure every party herself, related companies, Board members, high-ranking executives and other employees can equally abide by the above non-disclosure liability stipulated in Article 18.  All directors, manager and other employees of the joint venture company shall sign a non-disclosure letter of guarantee with an acceptable style and contents.           18.5          Rules and regulations under this Article 18 are stipulated without prejudice to any possible occurred rights or obligations of either Party or the joint venture company under relevant Law or relevant provisions.            18.6          For any natural person or legal person of either party under this contract, after his transferred registered capital and correspondent rights and obligations no more belongs to his possession alone, article 18 keeps binding upon either party.  In addition, even upon the contract expiration of the Duration or termination before the date of expiration or dissolutions of the joint venture, rights and obligations under article 18 shall be kept valid within prescribed period.  Article 19  The duration of a Joint Venture Company            19.1          The duration of a joint venture company shall be 15 years.  The duration begins from the date when the joint venture is issued a business license.            19.2          When both parties agree to extend the duration, the joint venture shall file an application for extending the duration by the parties with the examining and approving authorities not less than (6) months before the date of expiration of the duration.  Duration of contract can only be extended after approval of the examining and approving authorities.  Article 20  Termination, Business Acquisition, Liquidation            20.1          Except extension under Article 19.2, the contract shall be terminated upon expiration of the joint venture.  This contract can also be terminated through consultation in written.  Either party shall have the right to terminate the joint venture in case one of the following situations occurs by issuing a (30) days written pre-notice to other parties to terminate the contract before the date of expiration. 18         CONTRACT OF RUILI GROUP RUIAN AUTO PARTS CO., LTD                                   (1)           The Joint Venture company stops operation or can’t pay off debts due;                           (2)           Any jurisdiction authorities for either party require to make amendments to this contract or any article of the article of associations, which will cause major unfavorable results to the joint venture company.                             (3)          Have the right to terminate this contract in accordance with the articles of 6.7, 23.1, 24.3, 25.2.                            (4)           All or part of the joint venture company is confiscated, thus affecting major favorable results for the joint venture company.                           (5)           Either party violates the provisions prescribed under this contract, assign or transfer all or part of shares in registered capital of the joint venture company, under which only non-ceder party has the right to terminate this contract.                          (6)           Either party virtually violates this contract or rules and regulations of article of association and his such violating activities are not adjusted within (60) days as from the date of written notification of violation.                           (7)           Either party is declared bankruptcy or enters into bankruptcy, dissolution or liquidation procedures or is unable to pay off debts due, only other unaffected party can terminate this contract.            20.2          If either party issues notice expression willingness to terminate this contract under article 20.1, both parties shall go through consultation to try to cancel the causes of termination within (two) months as from the date of the notice.  If the problems keep unsolved after expiration of the above (two) months, either party shall have rights to buy out the other party’s equity under the article 20.3 in the joint venture company.  But the condition shall be if it belongs to the termination of (5), (6), (7) of article 20.1, the observant party (parties) or non-affected party shall have the right to purchase equity of defaulting party or affected party.            20.3           (1) Upon determination before the date of expirations under article 20.1 under this contract or before expirations of cooperative duration stipulated under article 19, with the exception of stipulations prescribed under 20.2, any party (“takeover party”), after consent from the other party (“withdrawn party”) can buy out the withdrawn party’s equity in the joint venture company (as an enterprise under operations).  If the takeover party issues notice to buy out the other party’s equity, both parties shall decide the joint venture company’s value through consultations.  If no agreements are reached within (30) days of discussion, then within the following (30) days they shall appoint an international investment bank corporation, using public international standards to decide the value (evaluated) of the joint venture as an enterprise under business operations.  Relevant charges occurred should be borne the joint venture company.  19         CONTRACT OF RUILI GROUP RUIAN AUTO PARTS CO., LTD                                    (2)           Business acquisition (takeover) prices shall be multiplied product of the following two items (a) value of the joint venture company specified under the item of article (1) multiply (b) Proportion of registered capital in the joint venture of the withdrawn party.  The takeover party can inform the withdrawn party thirty- (30) -days in written notice after final evaluation of the joint venture company and buy out equity of withdrawn party in the joint venture company via acquisition.                               (3)           If the takeover party chooses to buy out the equity of withdrawn party in the joint venture, both parties shall timely sign a transfer or assignment contract on the above equity for necessary approval from authorities for application and completion of the assignment.  If the above assignment is not completed within (90) days after the receipt of notice mentioned in article (2), then the acquisition party has the right (but no obligation), at any time, to terminate business acquisition.  Under this situation, assignment application shall be withdrawn and the joint venture company and both parties shall apply for dissolution of the joint venture company from examining and approving authorities.              20.4          After the termination of article 20 under this contract, if either party has not started the takeover procedures prescribed under the article 20.3, it shall be deemed that the board of directors has unanimously agree to pass the resolution to dissolve the joint venture company.  Then the joint venture company shall immediately apply for dissolution from examining and approving authorities.  To terminate this contract or dissolve the joint venture company, either party agrees to take any action prescribed in Law, signs up any document prescribed by law and agrees to promote Board members to take the above actions and sign up the above documents accordantly. Article 21  The Disposal of Assets after the Expiration of the Duration            21.1          Upon the expiration of contract duration, or approval of dissolution in accordance with Article 20 or terminations of contract or dissolutions of the joint venture under other conditions, liquidation shall be carried out in accordance with China’s law, relevant provisions and rules and regulations below for liquidation (except for those conflicting with Law)                            (1)           The liquidation committee shall be made up of three members.  Party A has right to appoint one member and Party B two members.  Any resolutions made by liquidation committee shall be unanimously approved.                           (2)           In the process of drafting and carrying out liquidation plan, the liquidation committee shall make all efforts to get as high price as possible for assets of the joint venture.  Moreover, in accordance with the State Regulations on Foreign Exchange Control, assets shall be sold in U.S dollar, other convertible foreign currencies or Renminbi.                           (3)           Assets evaluation process shall be operated for any asset to be liquidated.  The liquidation committee shall invite an accounting firm to perform, which is registered in China, with correspondent qualifications, moreover independent from either party.   20         CONTRACT OF RUILI GROUP RUIAN AUTO PARTS CO., LTD                                   (4)           Upon distribution of residual assets after liability and equity disposal and tax composition, Party B enjoys the first priority for foreign exchange of the joint venture.  If foreign exchange in he joint venture fails to pay off Party B’s all proportional shares in the residual assets, the liquidation committee shall, for the party B, convert Renminbi to foreign exchange in Foreign exchange swap centers or banks.                           (5)           After the liquidation, either party shall be entitled to obtain copies of accounting vouches, books, financial statements, meeting minutes of the board of directors, resolutions and other relevant documents at their own expenses.            21.2          Articles 20.3, 20.4 and 21.1 shall be kept valid after the contract Expiration of the Duration or termination before the date of expiration of the joint venture until  all takeover procedures under article 20.3 and the liquidation work under the article 21.1 has been completed.  Article 22  Insurance            22.1          Throughout contract period, the joint venture company on shall, in all the time, cover insurance.  Types and value of insurance shall be decided by General Manager and approved by the board of directors.  In accordance with law and provisions of the People’s Republic of China, he joint venture can cover insurance from Insurance companies or institutes in China and abroad. Article 23  Liability for breach of contract            23.1          Should either Party fail to provide on schedule the contributions in accordance with the provisions defined in Article 6 of this contract, the defaulting party shall pay to the other party (3)% per month of the prescribed contributions to observant party starting from the first month after exceeding the time limit.  Should the defaulting party fail for accumulatively three months, he shall pay (9%) of the other party’s prescribed contribution shall  to the other party.  Meanwhile, the observant party shall have the right to terminate the contract accordance with the provisions of Article 20.1 of the contract.            23.2          Should all or part of the contract be unable to be fulfilled owing to the fault of one party, the party in breach shall bear the liability therefore.  Under all circumstances, the liabilities of the above defaulting party shall be limited to the amount of their respective subscribed capital contributions  Article 24  Force Majeure            24.1          Any failure or delay in the performance by either Party hereto of its obligations under this contract shall not constitute a breach hereof if it is caused by the occurrences beyond the control, that is, force majeure.  21         CONTRACT OF RUILI GROUP RUIAN AUTO PARTS CO., LTD                   24.2          The declaring prevented party shall notify the other party in written without any delay, and within (15) days  thereafter provide sufficient documents of Force Majeure and its affecting period for evidence             24.3          Under the situation of Force Majeure, the two Parties hereto shall settle the problem through mutual consultation for a fair solution, moreover, shall dedicate all reasonable endeavors to cut down its influence.  If the results or aftermath of Force Majeure event has set up heavy obstacles for the operation of the joint venture and lasts over 6 months, moreover, no fair solutions was found, both parties shall have the right to terminate the contract under the premise that the Party who terminates the contract has fulfilled his obligations prescribed under the article 24.3.  Article 25  Governing Law and Jurisdiction            25.1          The formation, validity, interpretation, execution and settlement of disputes in respect of, this contract shall be governed by the relevant laws of the People’s Republic of China.  For unsettled problem under our contract having no law stipulation, it shall be settled abiding by international trade practice.            25.2          With regard to newly issued law or rules and provision after the effective date of this contract or amendments or new explanation for current law provisions, which may have virtual and unfavorable effect on interests of one party under this contract, two parties shall, try their best, effectuate most necessary amendments to keep the either party economic interests no less than those before newly issued law or rules and provision after the effective date of this contract or amendments or new explanation for current law provisions.  In case of such adjustments failure, any party whose interests were virtually or unfavorably affected has the right to terminate this contract.           25.3          As from the date of this contract, the join venture and the two parties has the right to enjoy more favorable taxation, investment or other treatments than those in this contract as Foreign-invested Enterprise or foreign investors in accordance by law.  As agreed, the two parties or the joint venture shall, under requirements of law, timely apply to enjoy favorable treatments the above.  Article 26  Settlement of Disputes            26.1          Any disputes arising from the execution of, or in connection with this contract shall be settled through friendly consultations between both parties.  In case no understanding settlement can be reached through consultations within (60) days as from the date the written request from a Party to the other party for consultation, the disputes shall be submitted to the China International Economic and Trade Arbitration Commission (“Trade Arbitration Commission”) for arbitration in accordance with its current effective rules in Beijing.    22         CONTRACT OF RUILI GROUP RUIAN AUTO PARTS CO., LTD                    26.2           (3) arbitrators shall be appointed, including (1) appointed by Claimant and the other (1) by defendant, (1) Both parties may jointly appoint one arbitrator.  Under the failure of joint appointment, Arbitration Commission shall appoint the latter arbitrator as the presiding arbitrator in arbitration tribunal.           26.3          Arbitration procedures shall be written in Chinese.            26.4          The arbitral award is final and binding upon both parties.            26.5          In the course of disputes, rights and obligations under this contract shall be continuously executed by both parties except the part of the contract that is under arbitration.            26.6          In any arbitration, any jurisdiction procedures of enforcement of arbitration award and any other lawsuit procedures, either party declared explicitly waiver of sovereign defenses, and other defenses based on such claims or facts as an institute or department from an independent and sovereign state.    Article 27  Other clauses            27.1          The failure, delay, relaxation or indulgence on the part of either party in exercising any power or right conferred under this contract does not operate as a waiver of that power or right, nor does any single exercise of a power or part exercise of right preclude any other or further exercise of this power or right under this agreement.            27.2          Except other provisions, neither party may assign or transfer all or any part of its rights or obligations under this agreement subscribed to a third party without the prior written consent of the other party or approval from the examination and approval authority as per required legally.           27.3          This contract is hereto made and entered into by two parties two parties based on mutual interests of their lawful successors and assignees of and is legally binding This contract shall not be subject to any oral amendments.  Any amendments to the contract or other appendices shall come into force only after a written agreement has been signed both parties and after approved by the examining and approving authority as per requirement legally.            27.4          Any provision in this agreement, which is invalid or unenforceable, shall not affect the validity or enforceability of other provision under this contract.            27.5          The contract undersigned shall be written in Chinese and in (six) original copies.             27.6          Any notice or written correspondence from one party to the other or the joint venture prescribed d under our contract shall be in Chinese.  Any notice shall be sent by express courier or by fax.  The express service company shall confirm the receipt of delivery.  For any notice or written correspondence under this contract, (7) days as from the date from handing over to an express courier service company shall be deemed as Receipt Date, or, in case of fax, (1) days from the date as Receipt Date which, however, shall be verified by fax confirmation report.  23         CONTRACT OF RUILI GROUP RUIAN AUTO PARTS CO., LTD           Any notice and correspondence shall be sent to the following address till written notice to the other Party for change of address.          Party A           RUILI GROUP   CO.,LTD.           Address:   No.1169, Yu Meng Road, Economic Development Zone, Rui An City           Fax   No.:0577-65608962           Mail   Acceptor: ZHANG Xiaoping                       Party B           FAIRFORD   HOLDINGS LIMITED           Address:   No.12, Zhong Huan Xia Que Road, Hong Kong Special Administrative Region          00852-25220172           Mail   Acceptor: ZHANG Ronggang                       Joint   Venture:           RUILI GROUP   RUIAN AUTO PARTS CO., LTD.           Address:   No.1169, Yu Meng Road, Economic Development Zone, Rui An City           Tel:   0577-65608962           Mail   Acceptor: General Manager               27.7          This contract iterates full agreements on contract object and thus replaces all former discussions, negotiations and agreements on contract object.  If the former resolutions conflict with provisions prescribed under this contract clause and the article of association, hereabove, if any, this contract clause and regulations prevail. 24         CONTRACT OF RUILI GROUP RUIAN AUTO PARTS CO., LTD                    IN WITNESS WHEREOF, the Parties hereto have signed up this contracted by their duly authorized representatives in Wenzhou, Zhejiang province as of the date on Jan.  19th, 2004 first above written.            RUILI GROUP   CO., LTD.                                             Signature                              Name:    ZHANG   Xiaoping                Board Chairman           Nationality:    China                                             FAIRFORD   HOLDINGS LIMITED                                            Signature                               Name:    ZHANG   Ronggang           Title:    General   Manager           Nationality:    China     25         CONTRACT OF RUILI GROUP RUIAN AUTO PARTS CO., LTD         TABLE OF CONTENTS             Page(s)                   Article 1    General   Provisions    1      Article 2    The Two   Parties of the Contract    1      Article 3    Definition    1      Article 4    The   Foundation of the Joint Ventures Company    3     Article 5    Scope and   Scale of Management    3      Article 6    The Total   Amount of Investment and the Registered Capital    4      Article 7    The   Responsibilities of Both Parties    7      Article 8    Mutual   Declarations and Warranties    8      Article 9    Technology    9      Article 10    Sales of the   Joint Venture Products    9      Article 11    Board of   Directors    10     Article 12    Management   Structure    13      Article 13    The Purchase   of Material and Equipment    14      Article 14    Preparation   of the Joint Venture Company    14      Article 15    Labor   Management    14      Article 16    Accounting,   Auditing and other financial affairs    15      Article 17    Taxes    17      Article 18    Confidentiality    17     Article 19    The duration   of a Joint Venture Company    18      Article 20    Termination, Business Acquisition, Liquidation    19      Article 21    The Disposal   of Assets after the Expiration of the Duration    20      Article 22    Insurance    21      Article 23    Liability   for breach of contract    21      Article 24    Force   Majeure    21      Article 25    Governing   Law and Jurisdiction    22     Article 26   Settlement   of Disputes   22     Article 27   Other   clauses   23    i      GRAPHIC 3 image001.jpg GRAPHIC  begin 644 image001.jpg M_]C_X``02D9)1@`!`@$`D`"0``#_X08Q17AI9@``34T`*@````@`!P$2``,` M```!``$```$:``4````!````8@$;``4````!````:@$H``,````!``(```$Q M``(````4````<@$R``(````4````AH=I``0````!````G````,@```"0```` M`0```)`````!061O8F4@4&AO=&]S:&]P(#7U5F9VAI:FML;6YO8W1U=G=X>7 MI[?'U^?W$0`"`@$"!`0#!`4&!P<&!34!``(1`R$Q$@1!46%Q(A,%,H&1%*&Q M0B/!4M'P,R1BX7*"DD-3%6-S-/$E!A:BLH,')C7"TD235*,79$55-G1EXO*S MA,/3=>/S1I2DA;25Q-3D]*6UQ=7E]59F=H:6IK;&UNV)S='5V=WAY>GM\?_ MV@`,`P$``A$#$0`_`.WMP^LXO3Z:&W5OAU%;*,2@U!C1?6XMKV9#&UXM.#ZF M.]GZ/?6S_K5F;]7,VW*LS&QU'"?=CBW&LR@;'-K<&8-.1;38U[/VAZF'ZNS9 M=C_9O3M_G+\E>"I)*?>L=G6\CHG4JF69&+EOQ&MJ8*W5G[;8S[5GY-5M]&[T M;LK*;C_H_P":]'(^R>DJE.5UP=-Z^X8>3A'[-E.HQ[*&T8S,7TW7,<] MCL;Z3+*[:_[?JV^())*??,<=8J^L;KS%;M]7[7 MM]G^$L_F?4M_2*MT?,ZC7U+`P.HT]2^T5,IJRRG(]/%=7 M4UN78[[2ZIV%9;ZN9Z-OHU?HL;Y^224_0'V?J=/UC;2]UUN+ELOR:ZCE7,E3BT5JMU(]<;UAS69F772'&*PZKUC]J M>YF%7A4,Q[>GV5,=@6_I,ZRS)IQ;;;LG[%77^G\(224_0?UFHZCE]4Z-33;] MFH<^Y]@:2V[>VE[_`-%:W?73^B]7&]7W_H\FU"RL?.R?J]TBH;Q0\X?VEU-S MV6&MQQF>A3]F=B;?4W^^VS^:HKM_PMWZ+P%))3[SDV=3NZ=>W'==3:,[(KI< MZV^'LHHN>WU+O7<]E3[*WU/LQ7[&7?X'U*T/"RNN/Z;?:#G]H=@YGZR]_2;/4];&_1^KC_K-'\UZ=&._3SGW=9MI=9=C>G2 MTOK-CKF_H\N]F[].UK&_;L2O_1>KZ+_^#7SPDDI__]G_[0I`4&AO=&]S:&]P M(#,N,``X0DE-!"4``````!``````````````````````.$))30/M```````0 M`)`````!``$`D`````$``3A"24T$)@``````#@`````````````_@```.$)) M300-```````$````'CA"24T$&0``````!````!XX0DE-`_,```````D````` M``````$`.$))300*```````!```X0DE-)Q````````H``0`````````!.$)) M30/T```````2`#4````!`"T````&```````!.$))30/W```````<``#_____ M________________________`^@``#A"24T$"```````$`````$```)````" M0``````X0DE-!!X```````0`````.$))300:``````-%````!@`````````` M````%P```6L````(`&D`;0!A`&<`90`P`#``,0````$````````````````` M`````````0`````````````!:P```!<``````````````````````0`````` M```````````````````0`````0```````&YU&P````"````!F)O=6YD'1)D%L:6=N96YU;0````]%4VQI8V5(;W)Z06QI9VX` M```'9&5F875L=`````EV97)T06QI9VYE;G5M````#T53;&EC959E7!E96YU;0```!%%4VQI8V5"1T-O M;&]R5'EP90````!.;VYE````"71O<$]U='-E=&QOF<`````````"FQE9G1/ M=71S971L;VYG``````````QB;W1T;VU/=71S971L;VYG``````````MR:6=H M=$]U='-E=&QOF<``````#A"24T$$0```````0$`.$))3004```````$```` M`3A"24T$#``````%'P````$```"`````"````8````P````%`P`8``'_V/_@ M`!!*1DE&``$"`0!(`$@``/_M``Q!9&]B95]#30`#_^X`#D%D;V)E`&2````` M`?_;`(0`#`@("`D(#`D)#!$+"@L1%0\,#`\5&!,3%1,3&!$,#`P,#`P1#`P, M#`P,#`P,#`P,#`P,#`P,#`P,#`P,#`P,#`$-"PL-#@T0#@X0%`X.#A04#@X. 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MC6FXX[::372Z^U]>-;ORMSK&,?C5_P!>U0^S6G_&1]K!8*_V+Z6WU&>IN^U; M]WV7?]I]'_A_1]'?^C]5`MQ^IV_7=_4,08U%PZ><(8^7)=8_-]7]+5]J_2U+2^LV!U+J'3LK&JZE1TS`MQW,RK;<< MV/:P[OM+_7LRJ**:G8_Z-_J8_P"C_2/];_1U/V?U4=`^S4]5Z;5TD8GILN^Q MO?6W'%>QMGJ9/5+Z+:FX_NWY'K5?Z7U$OJ+T;]C].R,?&ZC7U/I%E[K.F6,. M\MK.EM;KV/=C.VY#7^W'KK_2^M?_`#F1Z&-;^M6!T'-Q<3]OY->-B8V77D,] M9]===EC!9MQ[OM(=79596ZSU*O\`",6/EX?^+G)MP[.GV].KS   EX-31.1 4 sl5225ex311.htm EXHIBIT 31.1       Exhibit 31.1  SARBANES-OXLEY SECTION 302(A) CERTIFICATION PRINCIPAL EXECUTIVE OFFICER          I, Xiao Ping   Zhang, certify that:                       (1)    I have   reviewed this Form 10-K of SORL Auto Parts, Inc.;                       (2)    Based on my   knowledge, this report does not contain any untrue statement of a material   fact or omit to state a material fact necessary to make the statements made,   in light of the circumstances under which such statements were made, not   misleading with respect to the period covered by this report;                      (3)    Based on my   knowledge, the financial statements, and other financial information included   in this report, fairly present in all material respects the financial   condition, results of operations and cash flows of the issuer as of, and for,   the periods presented in this report;                       (4)    The issuer’s   other certifying officer(s) and I are responsible for establishing and   maintaining disclosure controls and procedures (as defined in Exchange Act   Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting   (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the issuer and   have:                            (a)    Designed   such disclosure controls and procedures, or caused such disclosure controls   and procedures to be designed under our supervision, to ensure that material   information relating to the issuer, including its consolidated subsidiaries,   is made known to us by others within those entities, particularly during the   period in which this report is being prepared;                           (b)    Designed   such internal control over financial reporting, or caused such internal   control over financial reporting to be designed under our supervision, to   provide reasonable assurance regarding the reliability of financial reporting   and the preparation of financial statements for external purposes in   accordance with generally accepted accounting principles;                            (c)    Evaluated   the effectiveness of the issuer’s disclosure controls and procedures and   presented in this report our conclusions about the effectiveness of the   disclosure controls and procedures, as of the end of the period covered by   this report based on such evaluation; and                            (d)    Disclosed in   this report any change in the issuer’s internal control over financial   reporting that occurred during the issuer’s most recent fiscal quarter (the   issuer’s fourth fiscal quarter in the case of an annual report) that has   materially affected, or is reasonably likely to materially affect, the   issuer’s internal control over financial reporting; and                      (5)    The issuer’s   other certifying officer(s) and I have disclosed, based on our most recent   evaluation of internal control over financial reporting, to the issuer’s   auditors and the audit committee of the issuer’s board of directors (or   persons performing the equivalent functions):                            (a)    All   significant deficiencies and material weaknesses in the design or operation   of internal control over financial reporting which are reasonably likely to   adversely affect the issuer’s ability to record, process, summarize and   report financial information; and                            (b)    Any fraud,   whether or not material, that involves management or other employees who have   a significant role in the issuer’s internal control over financial reporting.         Date:  March 20, 2006    By:      /s/ Xiao   Ping Zhang                               Xiao Ping   Zhang                Chief   Executive Officer           EX-31.2 5 sl5225ex312.htm EXHIBIT 31.2        Exhibit 31.2  SARBANES-OXLEY SECTION 302(A) CERTIFICATION  PRINCIPAL FINANCIAL OFFICER         I, Zong Yun   Zhou, certify that:                       (1)    I have   reviewed this Form 10-K of SORL Auto Parts, Inc.;                       (2)    Based on my   knowledge, this report does not contain any untrue statement of a material   fact or omit to state a material fact necessary to make the statements made,   in light of the circumstances under which such statements were made, not   misleading with respect to the period covered by this report;                       (3)    Based on my   knowledge, the financial statements, and other financial information included   in this report, fairly present in all material respects the financial   condition, results of operations and cash flows of the issuer as of, and for,   the periods presented in this report;                      (4)    The issuer’s   other certifying officer(s) and I are responsible for establishing and   maintaining disclosure controls and procedures (as defined in Exchange Act   Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting   (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the issuer and   have:                            (a)    Designed   such disclosure controls and procedures, or caused such disclosure controls   and procedures to be designed under our supervision, to ensure that material   information relating to the issuer, including its consolidated subsidiaries,   is made known to us by others within those entities, particularly during the   period in which this report is being prepared;                            (b)    Designed   such internal control over financial reporting, or caused such internal   control over financial reporting to be designed under our supervision, to   provide reasonable assurance regarding the reliability of financial reporting   and the preparation of financial statements for external purposes in   accordance with generally accepted accounting principles;                           (c)    Evaluated   the effectiveness of the issuer’s disclosure controls and procedures and   presented in this report our conclusions about the effectiveness of the   disclosure controls and procedures, as of the end of the period covered by   this report based on such evaluation; and                            (d)    Disclosed in   this report any change in the issuer’s internal control over financial   reporting that occurred during the issuer’s most recent fiscal quarter (the   issuer’s fourth fiscal quarter in the case of an annual report) that has   materially affected, or is reasonably likely to materially affect, the   issuer’s internal control over financial reporting; and                       (5)    The issuer’s   other certifying officer(s) and I have disclosed, based on our most recent   evaluation of internal control over financial reporting, to the issuer’s   auditors and the audit committee of the issuer’s board of directors (or   persons performing the equivalent functions):                           (a)    All   significant deficiencies and material weaknesses in the design or operation   of internal control over financial reporting which are reasonably likely to   adversely affect the issuer’s ability to record, process, summarize and   report financial information; and                            (b)    Any fraud,   whether or not material, that involves management or other employees who have   a significant role in the issuer’s internal control over financial reporting.         Date:  March 20, 2006    By:      /s/ Zong Yun   Zhou                              Zong Yun   Zhou                Chief   Financial Officer           EX-32.1 6 sl5225ex321.htm EXHIBIT 32.1        Exhibit 32.1  CERTIFICATION PURSUANT TO  18 U.S.C. SECTION 1350,  AS ADOPTED PURSUANT TO  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002            In connection with the Annual Report of SORL AUTO PARTS, INC. (the “Company”) on Form 10-K for the year ended December 31, 2005 as filed with the Securities and Exchange Commission on the date here of (the “report”), I, Xiao Ping Zhang, Chief Executive Officer of the Registrant, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:          (1)    The Report   fully complies with the requirements of Section 13(a) or 15(d) of the   Securities Exchange Act of 1934; and                           (2)    The   information contained in this Report fairly presents, in all material   respects, the financial condition and results of operations of the   Registrant.         Dated this   20th day of March, 2006.    By:      /s/ Xiao Ping   Zhang                               Xiao Ping   Zhang                Chief   Executive Officer           EX-32.2 7 sl5225ex322.htm EXHIBIT 32.2       Exhibit 32.2  CERTIFICATION PURSUANT TO  18 U.S.C. SECTION 1350,  AS ADOPTED PURSUANT TO  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002            In connection with the Annual Report of SORL AUTO PARTS, INC. (the “Company”) on Form 10-K for the year ended December 31, 2005 as filed with the Securities and Exchange Commission on the date here of (the “report”), I, Zong Yun Zhou, Chief Financial Officer of the Registrant, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:          (1)    The Report   fully complies with the requirements of Section 13(a) or 15(d) of the   Securities Exchange Act of 1934; and                            (2)    The   information contained in this Report fairly presents, in all material   respects, the financial condition and results of operations of the   Registrant.         Dated this   20th day of March, 2006.    By:      /s/ Zong Yun   Zhou                               Zong Yun   Zhou                Chief   Financial Officer                                     -----END PRIVACY-ENHANCED MESSAGE-----