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Item 1.	Financial Statements.

CHINA DIRECT, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

		March 31,				December 31,
		2009				2008
ASSETS		Unaudited				Audited
Current Assets:
Cash and cash equivalents		$	11,589,372			$	14,205,229
Investment in marketable securities available for sale			5,138,731				7,569,333
Investment in marketable securities available for sale - related party			208,691				160,459
Investment in subsidiaries - cost method			290,864				290,864
Accounts receivable, net			3,959,121				9,457,306
Accounts receivable - related parties			4,343,463				1,676,191
Inventories, net			9,659,615				8,559,593
Prepaid expenses and other current assets			5,356,477				8,127,300
Prepaid expenses - related parties			4,619,809				8,007,111
Loans receivable - related parties			1,347,082				1,652,728
Due from related parties			409,329				35,710
Total current assets			46,922,554				59,741,824
Restricted cash			1,808,687				846,197
Property, plant and equipment, net			43,000,157				43,455,683
Prepaid expenses and other assets			2,524,660				2,744,427
Property use rights, net			591,899				591,277
Total assets		$	94,847,957			$	107,379,408
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Loans payable-short term			2,183,885				933,735
Accounts payable and accrued expenses			5,009,646				8,590,010
Accounts payable-related parties			2,737,380				7,516,728
Advances from customers			404,577				1,545,273
Other payables			2,130,748				1,624,370
Income taxes payable			1,058,559				1,039,112
Due to related parties			2,209				978,739
Total current liabilities			13,527,004				22,227,967
Loans payable-long term			173,834				186,018
Minority interest			27,395,328				26,940,141
Stockholders' Equity:
Preferred Stock: $.0001 par value, stated value $1,000 per share; 10,000,000 authorized, 1,006 shares
and 0 shares issued and outstanding at March 31, 2009 and December 31, 2008, respectively			1,006,250				1,006,250
Common Stock: $.0001 par value, 1,000,000,000 authorized, 23,203,272 and
23,545,236 issued and outstanding at March 31, 2009 and December 31, 2008, respectively			2,320				2,353
Additional paid-in capital			50,606,583				51,701,293
Deferred compensation			-				(11,000	)
Accumulated comprehensive income			(13,411,582	)			(11,711,021	)
Retained earnings			15,548,220				17,037,407
Total stockholders’ equity			53,751,791				58,025,282
Total liabilities and stockholders’ equity		$	94,847,957			$	107,379,408

See notes to unaudited consolidated financial statements

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CHINA DIRECT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

		For the Quarter Ended March 31,
		2009				2008
Revenues		$	16,056,677			$	58,660,225
Revenues-related parties			4,629,432				733,921
Total revenues			20,686,109				59,394,146
Cost of revenues			19,317,293				49,414,002
Gross profit			1,368,816				9,980,144
Operating expenses:
Selling, general, and administrative			3,099,130				1,610,993
Operating (loss) income			(1,730,314	)			8,369,151
Other income (expense):
Other income			71,585				193,618
Interest income			46,114				96,859
Realized loss on sale of marketable securities			(232,711	)			(39,461	)
Total other (expense) income			(115,012	)			251,016
Net (loss) income before income taxes			(1,845,326	)			8,620,167
Income tax benefit (expense)			71,579				(323,633	)
(Loss) income from continuing operations before minority interest			(1,773,747	)			8,296,534
Minority interest			318,216				(3,687,166	)
Income from discontinued operation			-				143,508
Net (loss) income			(1,455,531	)			4,752,876
Deduct dividends on Series A Preferred Stock:
Preferred stock dividend			(20,235	)			(141,530	)
Relative fair value of detachable warrants issued			-				(2,765,946	)
Preferred stock beneficial conversion feature			-				(2,451,446	)
Loss applicable to common stockholders		$	(1,475,766	)		$	(606,046	)
Basic and diluted loss per common share after deduction
in the first quarter of 2008 of noncash deemed dividends
attributable to Series A Preferred Stock as described
Basic		$	(0.06	)		$	(0.03	)
Diluted		$	(0.06	)		$	(0.03	)
Basic weighted average common shares outstanding			23,414,500				21,003,439
Diluted weighted average common shares outstanding			23,414,500				21,003,439

 

See notes to unaudited consolidated financial statements

 

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CHINA DIRECT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

		For the Three Months Ended
		March 31,
		2009				2008
Cash flows from operating activities:
Net (loss) income from continuing operations		$	(1,455,531	)		$	4,609,368
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Depreciation			725,071				410,544
Allowance for bad debt			(290,643	)			3,999
Stock based compensation			522,671				207,273
Realized loss on investment in marketable securities			232,711				39,461
Fair value of securities received for services			(145,108	)			(94,286	)
Minority interest			(318,216	)			4,384,952
Changes in operating assets and liabilities:
Prepaid expenses and other current assets			2,767,606				(639,308	)
Prepaid expenses - related parties			3,387,302				(3,104,661	)
Inventories			(1,100,022	)			(6,484,792	)
Accounts receivable			5,788,829				(4,434,523	)
Accounts receivable - related parties			(2,667,272	)			1,284,250
Accounts payable and accrued expenses			(3,593,781	)			(1,842,356	)
Accounts payable - related parties			(4,779,350	)			(530,228	)
Advances from customers			(1,140,696	)			2,022,992
Other payables			506,378				1,925,295
Income taxes payable			19,447				257,562
Net cash provided by (used in) continuing activities			(1,540,604	)			(1,984,458	)
Net cash provided by discontinued operations			-				750,815
Net cash used in operating activities			(1,540,604	)			(1,233,643	)
Cash flows from investing activities:
Decrease (increase) in notes receivable			-				167,741
Increase (decrease) in loans receivable			305,646				(2,138,931	)
Proceeds from the sale of marketable securities available for sale			292,974				239,579
Purchases of property, plant and equipment			(46,561	)			(2,300,528	)
Net cash provided by (used in) investing activities			552,059				(4,032,139	)
Cash flows from financing activities:
Decrease (increase) in restricted cash			(962,489	)			644,160
Proceeds from loans payable			1,250,150				2,082,912
Payment of loans payable			(12,184	)			(1,859,423	)
Payment of notes payable			-				(592,007	)
Payment of notes payable-related party			-				(410,167	)
Due from related parties			(373,620	)			1,043,185
Due to related parties			(976,530	)			(1,653,274	)
Gross proceeds from sale of preferred stock			-				12,950,000
Proceeds from exercise of warrants/options			7,791				-
Cash payment for stock repurchase			(1,650,000	)			-
Capital contribution from minority interest owners			715,788				-
Offering expenses			-				(1,504,345	)
Net cash (used in) provided by financing activities			(2,001,094	)			10,701,041
Effects of exchange rate changes on cash			373,782				1,000,269
Net (decrease) increase in cash			(2,615,857	)			6,435,528
Cash, beginning of year			14,205,229				20,394,931
Cash, end of period		$	11,589,372			$	26,830,459
Supplemental disclosures of cash flow information:
Cash paid for taxes		$	-			$	6,166
Cash paid for interest		$	-			$	27,156
Dividend payment in stock to preferred stock shareholders		$	20,235			$	-
Non-cash preferred stock deemed dividend		$	-			$	5,217,392

 

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NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS

Business and Organization

China Direct, Inc., a Florida corporation and its subsidiaries are referred to in this report as the “Company”, “we”, “us”, “our”, or “China Direct”.

We are a U.S. company that manages a portfolio of Chinese entities.  We also provide consulting services to Chinese businesses. We operate in three identifiable segments, Magnesium, Basic Materials and Consulting, in accordance with SFAS No. 131, “Disclosure about segments of an Enterprise and Related Information”. In 2006 we established our Magnesium and Basic Materials segments which have grown through acquisitions of controlling interests of Chinese private companies. We consolidate these acquisitions as either our wholly or majority owned subsidiaries. Through this ownership control, we provide management advice as well as investment capital to expand their businesses. We hold a controlling interest in twelve subsidiaries operating in China, five of which comprise our Magnesium segment and five comprise our Basic Materials segment. As of the date of this report, we have a total of 1,287 full-time employees, the majority of which, 1,269, work in the PRC.

In our largest segment, Magnesium, we operate five entities which produce, sell and distribute pure magnesium ingots, magnesium powders and magnesium scraps.

In our Basic Materials segment, we operate five entities which sell and distribute a variety of products including (i) industrial grade synthetic chemicals, (ii) steel products, (iii) non ferrous metals, and (iv) recycled materials. This segment also includes our zinc mining property which has not commenced operations.

In our Consulting segment, we provide a suite of consulting services to U.S. public companies that operate primarily in China. The consulting and transactional fees we charge vary based upon the scope of the services to be rendered.

In 2007 we launched a Clean Technology segment. We discontinued this segment in the third quarter of 2008 when we completed the sale in October 2008 of an 81% interest in CDI Clean Technology and its 51% interest in CDI Wanda and its 52% interest in Yantai CDI Wanda to PE Brothers Corp. for $1,240,000, paid in form of a promissory note.  We plan to maintain our 19% ownership interest in CDI Clean Technology we retained. In February, 2009 we have received the first installment payment of approximately $240,000.  See Note 6 - Prepaid Expenses and Other Current Assets.

NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

Our unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and pursuant to the requirements for reporting on Form 10-Q. Accordingly, they do not include all the information and footnotes required by U.S. generally accepted accounting principles for annual financial statements. However, the information included in these interim financial statements reflects all adjustments (consisting solely of normal recurring adjustments) which are, in the opinion of management, necessary for the fair presentation of the consolidated financial position and the consolidated results of operations. Results shown for interim periods are not necessarily indicative of the results to be obtained for a full year. The consolidated balance sheet information as of December 31, 2008 was derived from the audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2008. These interim financial statements should be read in conjunction with our Form 10-K for the year ended December 31, 2008. Certain reclassifications have been made to prior year amounts to conform to the current year presentation and to disclose our reclassification of discontinued operations.

Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 revenue and expenses during the reporting period. Actual results when ultimately realized could differ from those estimates. Significant estimates include the allowance for doubtful accounts receivable, certain assumptions underlying the calculation of stock-based compensation, investments in marketable securities available for sale, assets and liabilities held for sale and the useful life of property, plant and equipment.

 

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Cash and Cash Equivalents

For purposes of the consolidated statements of cash flows, we consider all highly liquid investments with original maturities of three months or less to be cash equivalents. The carrying values of these investments approximate their fair value.

Concentration of Credit Risks

Financial instruments which potentially subject us to concentrations of credit risk consist principally of cash and trade accounts receivable. We deposit our cash with high credit quality financial institutions in the United States and China. As of March 31, 2009, bank deposits in the United States exceeded federally insured limits by $130,068. At March 31, 2009, we had deposits of $6,972,516 in banks in China. In China, there is no equivalent federal deposit insurance as in the United States, so the amounts held in banks in China are not insured. We have not experienced any losses in such bank accounts through March 31, 2009.

At March 31, 2009 and December 31, 2008, bank deposits, (reclassified to reflect discontinued operations), by geographic area were as follows:

Country		March 31, 2009								December 31, 2008
United States		$	4,616,856				40	%		$	6,640,672				47	%
China			6,972,516				60	%			7,564,557				53	%
Total cash and cash equivalents		$	11,589,372				100	%		$	14,205,229				100	%

In an effort to mitigate any potential risk, we periodically evaluate the credit quality of the financial institutions at which we hold deposits, both in the United States and China.

Accounts Receivable

Accounts receivable are reported at net realizable value. We have established an allowance for doubtful accounts based upon factors pertaining to the credit risks of specific customers, historical trends, age of the receivable and other information. Delinquent accounts are written off when it is determined that the amounts are uncollectible. At March 31, 2009 and December 31, 2008, allowances for doubtful accounts were approximately $85,000 and $500,000, respectively.

Inventories

Inventories, consisting of raw materials and finished goods, are stated at the lower of cost or market utilizing the weighted average method. Inventories as of March 31, 2009 and December 31, 2008 were $9,659,615 and $8,559,593, respectively. Due to the nature of our business and the short duration of the manufacturing process of our products, there was no work-in-process inventory at March 31, 2009 and December 31, 2008.

Accounts Payable-Related Parties

At March 31, 2009 our consolidated balance sheet reflects accounts payable-related party of $2,737,380. At December 31, 2008, our consolidated balance sheet reflects accounts payable-related party of $7,516,728, comprised of $4,497,180 and $3,019,548 due Chang Magnesium in repayment of customer advances by Pine Capital and Wheaton Group, respectively.

 

 

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Fair Value of Financial Instruments

As of January 1, 2008, we adopted on a prospective basis certain required provisions of Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurements, as amended by Financial Accounting Standards Board (FASB) Financial Staff Position (FSP) No. 157-2, on the effective date of FASB Statement No. 157. Those provisions relate to our financial assets and liabilities carried at fair value and our fair value disclosures related to financial assets and liabilities. SFAS 157 defines fair value, expands related disclosure requirements and specifies a hierarchy of valuation techniques based on the nature of the inputs used to develop the fair value measures. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. There are three levels of inputs to fair value measurements - Level 1, meaning the use of quoted prices for identical instruments in active markets; Level 2, meaning the use of quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active or are directly or indirectly observable; and Level 3, meaning the use of unobservable inputs. Observable market data should be used when available.

Most, but not all, of our financial instruments are carried at fair value, including, all of our cash equivalents, investments classified as available for sale securities and assets held for sale and are carried at fair value, with unrealized gains and losses, net of tax. Virtually all of our valuation measurements are Level 1 measurements. The adoption of SFAS 157 did not have a significant impact on our consolidated financial statements.

Marketable Securities

Marketable securities held for sale and marketable securities held for sale-related party at March 31, 2009 and December 31, 2008 consists of the following:

 

Company		March 31, 2009								December 31, 2008
						%								%
China America Holdings, Inc.		$	360,557				7	%		$	272,200				4	%
China Logistics Group, Inc.			760,999				14	%			1,807,357				23	%
Dragon International Group Corp.			804,552				15	%			704,656				9	%
China Armco Metals, Inc.			2,995,971				56	%			4,045,002				52	%
Sunwin International Neutraceuticals, Inc.			214,572				4	%			649,337				8	%
Other			210,771				4	%			251,240				3	%
Marketable securities held for sale		$	5,347,422				100	%		$	7,729,792				100	%

 

Through our Consulting segment, we receive securities which include preferred stock, common stock and common stock purchase warrants from clients. We classify these securities as investments in marketable securities available for sale or investment in marketable securities available for sale-related party. These securities are stated at their fair value in accordance with SFAS No. 115 “Accounting for Certain Investments in Debt and Equity Securities ”, and EITF 00-8 Accounting by a Grantee for an Equity Instrument to be Received in Conjunction with Providing Goods or Services”. Unrealized gains or losses in investments in marketable securities available for sale are recognized as an element of other comprehensive income on a monthly basis based on fluctuations in the fair value of the security as quoted on an exchange or an inter-dealer quotation system. Realized gains or losses are recognized in the consolidated statements of operations when the securities are liquidated.

Our consulting fees vary based upon the scope of the services to be rendered. Historically, a significant portion of the fees we earned have been paid in the form of our clients’ securities which include preferred stock, common stock and common stock purchase warrants. We categorize securities as investment in marketable securities available for sale and investment in marketable securities available for sale-related party. Some of the securities of China Logistics we own are restricted securities and cannot be readily resold by us absent a registration of those securities under the Securities Act of 1933 (the “Securities Act”) or the availability of an exemption from the registration requirements under the Securities Act.

The securities of one client, Dragon Capital Group Corp. (“Dragon Capital”), accounted for all of the investment in marketable securities available for sale-related party and totaled $160,459 at December 31, 2008. Dragon Capital is a related party. Mr. Lisheng (Lawrence) Wang, the CEO and Chairman of the Board of Dragon Capital, is the brother of Dr. James Wang, CEO and Chairman of China Direct. These securities were issued by Dragon Capital as compensation for consulting services. Dragon Capital is a non-reporting company whose securities are quoted on the Pink Sheets, and as such, under Federal securities laws, securities of Dragon Capital cannot be readily resold by us, generally, absent a registration of those securities under the Securities Act. Dragon Capital does not intend to register the securities.

 

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Other-than-temporary impairment of securities is evaluated periodically to determine whether a decline in their value is other than temporary. Management utilizes criteria such as the magnitude and duration of the decline, in addition to the reasons underlying the decline, to determine whether the loss in value is other than temporary. The term “other-than-temporary” is not intended to indicate that the decline is permanent. It indicates that the prospects for a near term recovery of value are not necessarily favorable, or that there is a lack of evidence to support fair values equal to, or greater than, the carrying value of the investment. Once a decline in value is determined to be other than temporary, the value of the security is reduced and a corresponding impairment charge to earnings is recognized.

In January 2009, the FASB issued FSP EITF 99-20-1 to amend the impairment guidance in EITF Issue No. 99-20 in order to achieve more consistent determination of whether other-than-temporary impairment (“OTTI”) has occurred. This FSP amended EITF 99-20 to more closely align the OTTI guidanceto the guidance in Statement No. 115. Retrospective application to a prior interim or annual period is prohibited. The guidance in this FSP was considered in the assessment of OTTI for various securities at March 31, 2009.

All securities (exclusive of preferred stock and common stock purchase warrants) received from our clients as compensation are quoted either on the Over-the-Counter Bulletin Board or the Pink Sheets. The securities are typically restricted as to resale. Our policy is to liquidate securities received as compensation when market conditions are favorable for sale. As these securities are often restricted, we are unable to liquidate these securities until the restriction is removed. We recognize revenue for common stock based on the fair value at the time common stock is granted and for common stock purchase warrants based on the Black-Scholes valuation model. Unrealized gains or losses on marketable securities available for sale and on marketable securities available for sale-related party are recognized as an element of comprehensive income on a monthly basis based on changes in the fair value of the security as quoted on an exchange or an inter-dealer quotation system. Once liquidated, realized gains or losses on the sale of marketable securities available for sale and marketable securities available for sale-related party are reflected in our net income for the period in which the security was liquidated.

The unrealized loss on marketable securities available for sale, net of the effect of taxes, for the first quarter of 2009 and 2008 was $14,382,854 and $1,590,347, respectively. The realized loss on investments in marketable securities available for sale for the first quarter of 2009 and 2008 was $232,711 and $39,461, respectively.

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consist of (i) prepayments to vendors for merchandise that had not yet been shipped, (ii) the fair value of securities received from client companies associated with our Consulting segment assigned to our executive officers and employees as compensation, (iii) value added tax refunds available from the Chinese government, (iv) loans receivable and (v) other receivables.  At March 31, 2009 and December 31, 2008, our consolidated balance sheets include prepaid expenses and other current assets of $5,356,477 and $8,127,300, respectively.

Prepaid expenses-related parties were $4,619,809 and $8,007,111 at March 31, 2009 and December 31, 2008, respectively. This item is discussed in further detail in Note 10, Related Party Transactions.

Non-current prepaid expenses and other assets consist of (i) the fair value of the securities of our client companies assigned to executive officers and employees as compensation for services to be rendered over the term of the respective consulting agreement which will be amortized beyond the twelve month period, and (ii) other assets acquired in connection with the acquisition of Pan Asia Magnesium.  This item is discussed in further detail in Note 6- Prepaid Expenses and other current assets.  Accordingly, non-current prepaid expenses totaled $2,024,660 and $2,744,427 at March 31, 2009 and December 31, 2008, respectively.

Property, Plant and Equipment

Property, plant and equipment are recorded at cost and depreciated on a straight line basis over their estimated useful lives of three to forty years. Maintenance and repairs are charged to expense as incurred. Significant renewals and improvements are capitalized.

Acquisitions

We account for acquisitions using the purchase method of accounting in accordance with the provisions of SFAS No. 141. In each of our acquisitions for the periods presented, we determined that fair values were equivalent to the acquired historical carrying costs. Acquisitions to be made after December 15, 2008 will be accounted for under the provisions of SFAS 141R.

 

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Advances from Customers and Deferred Revenues

Advances from customers represent (i) prepayments to us for merchandise that had not yet been shipped to customers, and (ii) the fair value of securities received as compensation which will be amortized over the term of the respective consulting agreement. We will recognize these advances as revenues as customers take delivery of the goods or when the services have been rendered, in compliance with our revenue recognition policy. Advances from customers totaled $404,577 and $1,545,273 at March 31, 2009 and December 31, 2008 (reclassified to reflect discontinued operation), respectively.

Comprehensive Income

We follow Statement of Financial Accounting Standards No. 130 (SFAS 130) “Reporting Comprehensive Income” to recognize the elements of comprehensive income. Comprehensive income is comprised of net income and all changes to the statements of stockholders’ equity, except those due to investments by stockholders, changes in paid-in capital and distributions to stockholders. Comprehensive income for the first quarter of 2009 and 2008 included net income, foreign currency translation adjustments, unrealized gains or losses on marketable securities available for sale, net of income taxes, and unrealized gains or losses on marketable securities available for sale-related party, net of income taxes.

Foreign Currency Translation

The accompanying consolidated financial statements are presented in United States dollars. The functional currency of our Chinese subsidiaries is the Renminbi, the official currency of the People’s Republic of China, (“RMB”). Capital accounts of the consolidated financial statements are translated into United States dollars from RMB at their historical exchange rates when the capital transactions occurred. Assets and liabilities are translated at the exchange rates as of the balance sheet date. Income and expenditures are translated at the average exchange rates for the first quarter of 2009 and 2008. A summary of the conversion rates for the periods presented is as follows:

	March 31,
	2009					2008
Quarter end RMB : U.S. Dollar exchange rate			6.8456				7.0222
Average year-to-date RMB : U.S. Dollar exchange rate			6.8466				7.1757

The RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through PRC authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into United States dollars at the rates applied in the translation.

 

Impairment of Long-Lived Assets

In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, we periodically review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. We recognize an impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The amount of impairment is measured as the difference between the estimated fair value and the book value of the underlying asset. We did not record any impairment charges during first quarter of 2009 and 2008.

Subsidiaries Held for Sale

Long-lived assets are classified as held for sale when certain criteria are met. These criteria include management’s commitment to a plan to sell the assets; the availability of the assets for immediate sale in their present condition; an active program to locate buyers and other actions to sell the assets has been initiated; the sale of the assets is probable and their transfer is expected to qualify for recognition as a completed sale within one year; the assets are being marketed at reasonable prices in relation to their fair value; and it is unlikely that significant changes will be made to the plan to sell the assets. We measure long-lived assets to be disposed of by sale at the lower of carrying amount or fair value, less cost to sell.

 

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Minority Interest

Under generally accepted accounting principles when losses applicable to the minority interest in a subsidiary exceed the minority interest in the equity capital of the subsidiary, the excess is not charged to the majority interest since there is no obligation of the minority interest to make good on such losses. We, therefore, absorbed all losses applicable to a minority interest where applicable. If future earnings do materialize, we shall be credited to the extent of such losses previously absorbed.

Income Taxes

We accounted for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes”. SFAS No. 109 requires the recognition of deferred tax assets and liabilities to reflect the future tax consequences of events that have been recognized in our financial statements or tax returns. Measurement of the deferred items is based on enacted tax laws. In the event the future consequences of differences between the financial reporting and tax basis of our assets and liabilities result in a deferred tax asset, SFAS No. 109 requires an evaluation of the probability of our being able to realize the future benefits indicated by such assets. A valuation allowance related to a deferred tax asset is recorded when it is more likely than not that some or the entire deferred tax asset will not be realized.

Basic and Diluted Earnings per Share

Basic income per common share is computed by dividing income available to common shareholders by the weighted average number of shares of common stock outstanding for the periods presented. Diluted income per share reflects the potential dilution that could occur if securities were exercised or converted into common stock or other contracts to issue common stock resulted in the issuance of common stock that would then share in our income, subject to anti-dilution limitations.

Revenue Recognition