Summary of CHINA 3C GROUP - Yahoo! Finance

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

Overview

China 3C Group was incorporated on August, 20, 1998 under the laws of the State of Nevada. Capital Future Developments Limited ("CFDL") was incorporated on July 22, 2004 under the laws of the British Virgin Islands. Zhejiang Yong Xin Digital Technology Co., Ltd. ("Zhejiang"), Yiwu Yong Xin Communication Ltd. ("Yiwu"), Hangzhou Wandga Electronics Co., Ltd. ("Wang Da"), Hangzhou Sanhe Electronic Technology, Limited ("Sanhe"), and Shanghai Joy & Harmony Electronic Development Co., Ltd. ("SJHE") were incorporated under the laws of Peoples Republic of China on July 11, 2005, July 18, 1997, March 30, 1998, April 12, 2004, and August 25, 2003, respectively. China 3C Group owns 100% of CFDL and CFDL own 100% of the capital stock of SJHE and HSET. Until August 14, 2007, when it made the change to its ownership structure described in the next paragraph in order to comply with certain requirements of PRC law, CFDL owned 100% of the capital stock of Zhenjiang.. Zhejiang owns 90% and Yiwu owns 10% of HWDA. Zhejiang owns 90% and Wang Da owns 10% of Yiwu. Collectively the six corporations are referred to herein as the Company.

On December 21, 2005 CFDL became a wholly owned subsidiary of China 3C Group through a merger with a wholly owned subsidiary of the Company. China 3C Group acquired all of the issued and outstanding capital stock of CFDL pursuant to a Merger Agreement dated at December 21, 2005 by and among China 3C Group, XY Acquisition Corporation, CFDL and the shareholders of CFDL (the "Merger Agreement"). Pursuant to the Merger Agreement, CFDL became a wholly owned subsidiary of China 3C Group and, in exchange for the CFDL shares, China 3C Group issued 35,000,000 shares of its common stock to the shareholders of CFDL, representing 93% of the issued and outstanding capital stock of China 3C Group at that time and a cash consideration of $500,000. On August 15, 2007, in order to comply with the requirements of PRC law, the Company recapitalized its ownership structure. As a result, instead of CFDL owning 100% of Zhejiang as previously was the case, CFDL entered into contractual agreements with Zhejiang whereby CFDL owns a 100% interest in the revenues of Zhejiang. CFDL does not have an equity interest in Zhejiang, but is deemed to have all the economic benefits and liabilities by contract. Under this structure, Zhejiang is now a wholly foreign owned enterprise (WOFE) of CFDL. The contractual agreements give CFDL and its' equity owners an obligation to absorb, any losses, and rights to receive revenue. CFDL will be unable to make significant decisions about the activities of Zhejiang and can not carry out its principal activities without financial support. These characteristics as defined in Financial Accounting Standards Board (FASB) interpretation 46, Consolidation of Variable Interest Entities (VIEs), qualifies the business operations of (Zhejiang) to be consolidated with (CFDL) and ultimately with China 3C Group.

As a result of the Merger Agreement, the reorganization was treated as an acquisition by the accounting acquiree that is being accounted for as a recapitalization and as a reverse merger by the legal acquirer for accounting purposes. Pursuant to the recapitalization, all capital stock shares and amounts and per share data have been retroactively restated. Accordingly, the financial statements include the following:

(1) The balance sheet consists of the net assets of the accounting acquirer at historical cost and the net assets of the legal acquirer at historical cost.

(2) The statements of operations include the operations of the accounting acquirer for the period presented and the operations of the legal acquirer from the date of the merger.

Pursuant to a share exchange agreement, dated August 3, 2006, we issued 915,751 shares of restricted common stock, to the former shareholders of Hangzhou Sanhe Electronic Technology Ltd. The shares were valued at $3,750,000, which was the fair value of the shares at the date of exchange agreement. This amount is included in the cost of net assets and goodwill purchased.

Pursuant to a share exchange agreement, dated November 28, 2006, we issued 2,723,110 shares of newly issued shares of Common Stock to the former shareholders of Shanghai Joy & Harmony Electronics Company Limited. The shares were valued at $11,000,000, which was the fair value of the shares at the date of exchange agreement. This amount is included in the cost of net assets and goodwill purchased.

The Company is now engaged in the business of the resale and distribution of mobile phones, facsimile machines, DVD players, stereos, speakers, MP3 and MP4 players, iPods, electronic dictionaries, CD players, radios, Walkmans, and audio systems. We sell and distribute these products through retail stores and secondary distributors.

Result of Operations

For the Three Months Ended March 31, 2008 and 2007

Net Sales

Net sales for the three months ended on March 31, 2008 decreased by 19%, to $68,153,455 compared with $84,523,194 for the three months ended March 31, 2007. The decrease was due to fact that we had fewer sales which management believes was contributed to by many factors including the slowdown in the retail markets in general, a significant snowstorm in China during the first two months of the year which created a backlog in our distribution channels, and the pressure of increased competition within the markets in which we operate.

Cost of Sales

Cost of sales for the three months ended on March 31, 2008 totaled $57,607,075 compared to $70,590,912 for the three months ended on March 31, 2007, a decrease of 18%. The decreased cost of sales was a direct result of the decrease in expenditures required to meet fewer customers' requests during this period than last year.

Gross Profit Margin

Gross profit margin for the three months ending March 31, 2008 was 15.5% compared to 16.5% for the three months ending March 31, 2007. The lower gross profit margin was due to increasing unit purchase prices and unit sales prices that did not increase as much as purchases.

General and Administrative Expenses

General and administrative expenses for the three months ending March 31, 2008 totaled $2,986,044 or approximately 4% of net sales, compared to $3,726,162 or approximately 4% of net sales for the three months ended March 31, 2007, an decrease of 20%. The decrease was primarily due to strengthening cost controls such as rationalizing of management structure and increasing sophistication of computerized systems.

Income from Operations

Income from operations for the three months ended March 31, 2008 was $7,560,336 or 11% of net sales as compared to income from operations of $10,206,120 or 12% of net sales for the three months ending March 31, 2007, a decrease of 26%. Lower sales, higher product costs, and logistic costs such as higher distribution costs were the key factors for the decrease in income from operations.

Provision for Income Taxes

The provision for income taxes for the three months ended March 31, 2008 was $1,810,573 as compared with $3,749,259 for the three months ended March 31, 2007. The decrease was mainly attributed to the decrease in both taxable income and lower statutory tax rates effective for 2008 in China.

Net Income

Net income was $5,773,045 or 8.5% of net sales for the three months ended on March 31, 2008 compared to $6,463,788 or 7.6% of net sales for the three months ended on March 31, 2007, an decrease of 11%. The pressure of competition on retail price and continued rising prices on product unit costs were the critical factors which contributed to the decrease in net income.

Liquidity and Capital Resources

Operations and liquidity needs are funded primarily through cash flows from operations. Cash and cash equivalents were $23,421,645 at March 31, 2008, as compared to $9,085,186 at March 31, 2007, and compared to $24,952,614 at December 31, 2007.

Under the SJHE share exchange agreement, dated November 28, 2006, in exchange of surrendering all their ownership in SJHE, the SJHE shareholders received both stock consideration and cash consideration. The cash consideration consisted of $7,500,000 in cash is payable as follows: $3,000,000 within 10 business days after the closing of the transaction, and $4,500,000 payable six months after the closing of the transaction as evidenced by promissory notes issued by us to the Shanghai Shareholders. The $4,500,000 loan was repaid in the second quarter of 2007.

We believe that the funds available to us are adequate to meet our operating needs for the remainder of 2008.

Capital Expenditures

Total capital expenditures for the first three months of 2008 were $6,581 for purchase of fixed assets as compared to $34,897 for the first three months of 2007.

Working Capital Requirements

Historically operations and short term financing have been sufficient to meet our cash needs. We believe that we will be able to generate revenues from sales to provide the necessary cash flow to meet anticipated working capital requirements. However, our actual working capital needs for the long and short term will depend upon numerous factors, including operating results, competition, and the availability of credit facilities, none of which can be predicted with certainty. Future expansion will be limited by the availability of financing products and raising capital.

Off-Balance Sheet Arrangements

We have never entered into any off-balance sheet financing arrangements and have never established any special purpose entities. We have not guaranteed any debt or commitments of other entities or entered into any options on non-financial assets.