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 ("Capital") 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. ("Joy & Harmony") 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 Capital and Capital own 100% of the capital stock of Joy & Harmony and Sanhe. 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, Capital owned 100% of the capital stock of Zhenjiang. Zhejiang owns 90% and Yiwu owns 10% of Wang Da. 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 Capital 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 Capital pursuant to a Merger Agreement dated at December 21, 2005 by and among China 3C Group, XY Acquisition Corporation, Capital and the shareholders of Capital (the "Merger Agreement"). Pursuant to the Merger Agreement, Capital became a wholly owned subsidiary of China 3C Group and, in exchange for the Capital shares, China 3C Group issued 35,000,000 shares of its common stock to the shareholders of Capital, 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 Capital owning 100% of Zhejiang as previously was the case, Capital entered into contractual agreements with Zhejiang whereby Capital owns a 100% interest in the revenues of Zhejiang. Capital 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 of Capital. The contractual agreements give Capital and its' equity owners an obligation to absorb, any losses, and rights to receive revenue. Capital 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 Capital 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 Limited. The shares were valued at $3,750,000, which was the fair value of the shares at the date of the 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 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 Nine and Three Months Ended September 30, 2008 and 2007

Net Sales

Net sales for the nine months ended September 30, 2008 increased by 9%, to $225,725,603 as compared to $206,918,528 for the nine months ended September 30, 2007. Net sales for the three months ended September 30, 2008 increased by 37%, to $79,056,756 as compared to $57,896,861 for the three months ended September 30, 2007. Management believes that the higher sales were a result of various factors including the successful introduction of new products, a better-trained sales force leading to higher sales, and more effective targeted marketing of the company's products towards the company's intended demographics.

Cost of Sales

Cost of sales for the nine months ended September 30, 2008 totaled $190,457,324 as compared to $168,764,661 for the nine months ended September 30, 2007, an increase of 13%. Cost of sales for the three months ended September 30, 2008 totaled $67,210,574 as compared to $45,113,474 for the three months ended September 30, 2007, an increase of 49%. The increased cost of sales for the nine months was a direct result of the increase in net sales during the same period.

Gross Profit Margin

Gross profit margin for the nine months ended September 30, 2008 was 15.6% as compared to 18.4% for the nine months ended September 30, 2007. Gross profit margin for the three months ended September 30, 2008 was 15.0% as compared to 22.1% for the three months ended September 30, 2007. The lower gross profit margin was due to increased cost of sales for units purchased 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 sales with higher selling prices.

Because the Company does not include the costs related to its distribution network in cost of sales, its gross profit and gross profit as a percentage of net sales ("gross profit margin") may not be comparable to those of other retailers that may include all costs related to their distribution network in cost of sales and in the calculation of gross profit and gross margin. The Company includes costs related to its distribution network in General and Administrative Expenses.

General and Administrative Expenses

General and administrative expenses for the nine months ended September 30, 2008 totaled $10,043,055 or approximately 4% of net sales, as compared to $9,597,200 or approximately 5% of net sales for the nine months ended September 30, 2007, an increase of 5%. General and administrative expenses for the three months ended September 30, 2008 totaled $3,730,967 or approximately 5% of net sales, as compared to $2,856,805 or approximately 5% of net sales for the three months ended September 30, 2007, an increase of 31%. 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 nine months ended September 30, 2008 was $25,225,224 or 11% of net sales as compared to income from operations of $28,556,667 or 14% of net sales for the nine months ended September 30, 2007, a decrease of 12%. Income from operations for the three months ended September 30, 2008 was $8,115,215 or 10% of net sales as compared to income from operations of $9,926,582 or 17% of net sales for the three months ended September 30, 2007, a decrease of 18%. 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 nine months ended September 30, 2008.

Provision for Income Taxes

The provision for income taxes for the nine months ended September 30, 2008 was $6,333,265 as compared to $10,063,012 for the nine months ended September 30, 2007. The provision for income taxes for the three months ended September 30, 2008 was $2,168,638 as compared to $3,372,489 for the three months ended September 30, 2007. The decrease was mainly attributed to the lower statutory tax rates effective for 2008 in China.

Net Income

Net income was $19,688,606 or 8.7% of net sales for the nine months ended September 30, 2008 as compared to $18,538,284 or 9.0% of net sales for the nine months ended September 30, 2007, an increase of 6%. Net income was $6,363,567 or 8.0% of net sales for the three months ended September 30, 2008 as compared to $6,572.969 or 11.3% of net sales for the three months ended September 30, 2007, a decrease of 3%. Lower statutory tax rates and strengthening cost controls were the critical factors which contributed to the increase in net income for the nine months ended September 30, 2008. For the decrease in the comparative three-month period, the major factors was the vendor rebates which occurred in the third quarter of 2007 which did not similarly occur in the third quarter of 2008.

Liquidity and Capital Resources

Operations and liquidity needs are funded primarily through cash flows from operations. Cash and cash equivalents were $31,678,969 at September 30, 2008, as compared to $16,531,158 at September 30, 2007, and compared to $24,952,614 at December 31, 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 nine months of 2008 was $11,088 for purchase of fixed assets as compared to $63,057 for the first nine 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.