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 ("Merger Transaction"). 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 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 Six and Three Months Ended June 30, 2008 and 2007

Net Sales

Net sales for the six months ended June 30, 2008 decreased by 2%, to $146,668,847 as compared to $149,021,667 for the six months ended June 30, 2007. Net sales for the three months ended June 30, 2008 increased by 22%, to $78,515,392 as compared to $64,498,473 for the three months ended June 30, 2007. Management believes that the lower sales were a result of various factors including a slowdown in the retail markets in general, a significant snowstorm in China during the first two months of 2008 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 six months ended June 30, 2008 totaled $123,246,750 as compared to $123,651,187 for the six months ended June 30, 2007, a decrease of 0.3%. Cost of sales for the three months ended June 30, 2008 totaled $65,639,675 as compared to $53,060,275 for the three months ended June 30, 2007, an increase of 24%. The decreased cost of sales for the six months was a direct result of the decrease in the number of sales during the same period.

Gross Profit Margin

Gross profit margin for the six months ended June 30, 2008 was 16.0% as compared to 17.0% for the six months ended June 30, 2007. Gross profit margin for the three months ended June 30, 2008 was 16.4% as compared to 17.7% for the three months ended June 30, 2007. The lower gross profit margin was due to increasing unit purchase prices and unit sales prices that did not increase in line with increasing inflation in China. With the increasing competition, we could not offset the cost of operations with higher selling prices.

General and Administrative Expenses

General and administrative expenses for the six months ended June 30, 2008 totaled $6,312,088 or approximately 4% of net sales, as compared to $6,740,395 or approximately 5% of net sales for the six months ended June 30, 2007, an decrease of 6%. General and administrative expenses for the three months ended June 30, 2008 totaled $3,326,044 or approximately 4% of net sales, as compared to $3,014,233 or approximately 5% of net sales for the three months ended June 30, 2007, an increase of 10%. The decrease was primarily due to strengthening cost controls such as a rationalization of management structure and increasingly sophisticated use of computerized systems.

Income from Operations

Income from operations for the six months ended June 30, 2008 was $17,110,009 or 12% of net sales as compared to income from operations of $18,630,085 or 13% of net sales for the six months ended June 30, 2007, a decrease of 8%. Income from operations for the three months ended June 30, 2008 was $9,549,673 or 12% of net sales as compared to income from operations of $8,423,965 or 13% of net sales for the three months ended June 30, 2007, an increase of 13%. Lower sales, higher product costs, and logistical costs, such as higher distribution costs, were the key factors for the decrease in income from operations during the six months ended June 30, 2008.

Provision for Income Taxes

The provision for income taxes for the six months ended June 30, 2008 was $4,164,627 as compared to $6,690,523 for the six months ended June 30, 2007. The provision for income taxes for the three months ended June 30, 2008 was $2,354,054 as compared to $2,941,264 for the three months ended June 30, 2007. The decrease was mainly attributed to the lower statutory tax rates effective for 2008 in China.

Net Income

Net income was $13,325,039 or 9.1% of net sales for the six months ended June 30, 2008 as compared to $11,965,315 or 8.0% of net sales for the six months ended June 30, 2007, an increase of 11%. Net income was $7,551,995 or 9.6% of net sales for the three months ended June 30, 2008 as compared to $5,501,527 or 8.5% of net sales for the three months ended June 30, 2007, an increase of 37%. Strengthening cost controls and lower statutory tax rates were the critical factors which contributed to the increase in net income.

Liquidity and Capital Resources

Operations and liquidity needs are funded primarily through cash flows from operations. Cash and cash equivalents were $25,993,638 at June 30, 2008, as compared to $15,230,508 at June 30, 2007, and compared to $24,952,614 at December 31, 2007.

Under the Joy & Harmony share exchange agreement, dated November 28, 2006, in exchange of surrendering all their ownership in Joy & Harmony, the Joy & Harmony 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 Joy & Harmony's 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 six months of 2008 were $10,650 for purchase of fixed assets as compared to $62,353 for the first six 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.