UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
_______________
FORM
10-K
(Mark
One)
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þ
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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For
the fiscal year ended December 31, 2007
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o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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For
the transition period from ___ to ___
Commission
File Number 0-28806
EVER-GLORY
INTERNATIONAL GROUP, INC.
(Exact
name of registrant as specified in its charter)
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Florida
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65-0420146
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(State
of Incorporation)
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(I.R.S.
Employer Identification No.)
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100
N. Barranca Ave. #810
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(626)
839-9116
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West
Covina, California 91791
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(Registrant’s
telephone number, including area code)
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(Address
of principal executive offices,
including
zip code)
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Securities
registered pursuant to Section 12(b) of the Act:
None
Securities
registered pursuant to Section 12(g) of the Act:
Common
Stock, par value $0.001 per share
(Title
of class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. Yes
o
No
þ
Indicate
by check mark whether the registrant is required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes
þ
No
o
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. Yes
þ
No
o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained to the best
of
the registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this
Form 10-K.
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act (Check one):
| Large Accelerated Filer o | Accelerated Filer o | |
| Non-accelerated filer o | Smaller reporting company þ |
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes
o
No
þ
As
of
March 4, 2007, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was approximately $18.6 million based on a
split-adjusted closing price of $3.10 per share of common stock as reported
on
the Over-the-Counter Bulletin Board on such date.
On
December 31, 2007, we had 11,379,309 shares of our
common stock issued and outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE:
None.
EVER-GLORY
INTERNATIONAL GROUP, INC.
FORM
10-K
For
the Year Ended December 31, 2007
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Note
Regarding Forward-Looking Statements
Statements
contained in this Annual Report on Form 10-K, which are not historical facts,
are forward-looking statements, as the term is defined in the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements, whether
expressed or implied, are subject to risks and uncertainties which can cause
actual results to differ materially from those currently anticipated, due to
a
number of factors, which include, but are not limited to:
| · |
Competition
within our industry;
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| · |
Seasonality
of our sales;
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| · |
Success
of our investments in new product development;
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| · |
Success
of our acquired businesses;
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| · |
Our
relationships with our major customers;
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| · |
The
popularity of our products;
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| · |
Relationships
with suppliers, including foreign suppliers, and cost of supplies;
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| · |
Financial
and economic conditions in Asia, Europe and the U.S.;
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| · |
Regulatory
requirements affecting our business;
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| · |
Currency
exchange rate fluctuations;
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| · |
Our
future financing needs; and
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| · |
Our
ability to attract additional investment capital on attractive terms.
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Forward-looking
statements also include the assumptions underlying or relating to any of the
foregoing or other such statements. When used in this report, the words “may,”
“will,” “should,” “could,” “expect,” “plan,” “anticipate,” “believe,”
“estimate,” “predict,” “continue,” and similar expressions are generally
intended to identify forward-looking statements.
Readers
are cautioned not to place undue reliance on these forward-looking statements,
which reflect management’s opinions only as of the date hereof. We undertake no
obligation to revise or publicly release the results of any revision to these
forward-looking statements. Readers should carefully review the factors
described in the Section of this report entitled “Risk Factors” beginning on
page 15 and other documents we file from time to time with the Securities
and Exchange Commission, including the Quarterly Reports on Form 10-Q to be
filed by us in the fiscal year 2008.
Business
Operations
We
manufacture and sell apparel to well-known casual wear, sportswear and outerwear
brands and retailers in major markets worldwide. We manufacture our apparel
products in China, including from our three factories located in the Nanjing
Jiangning Economic and Technological Development Zone and Shang Fang Town
respectively in Nanjing, China. We have over 1,800 employees, and our factories
are now capable of producing up to 9 million garments per year. In 2007, we
achieved total net sales of $70,335,383.
We
conduct our operations through three wholly-owned subsidiaries in China:
Goldenway Nanjing Garments Company Limited (“Goldenway”), Nanjing New-Tailun
Garments Company Limited (PRC) (“New-Tailun”), and Nanjing Catch-Luck Garments
Co., Ltd. (“Catch-Luck”). Our corporate structure is illustrated below.
Although
we have our own manufacturing capacity, we currently outsource a large portion
of our manufacturing to our strategic contractors as a part of our overall
sourcing strategy. Outsourcing work allows us to maximize production flexibility
while managing capital expenditures and costs of maintaining what would
otherwise be a massive workforce. We inspect products manufactured by our
contractors to ensure that they meet our rigorous quality standards. See
“
Production
and Quality Control
”
below.
Our
Current Corporate Structure
Our
Goldenway subsidiary focuses primarily on quality and production control, and
coordinating with the contract manufacturers that we outsource to. Our
New-Tailun subsidiary focuses on the Japanese market, and has strengths in
the
design, production, sale and marketing of jeans and trousers. Our Catch-Luck
subsidiary is geared toward the European market, and it designs and makes
products that complement the product lines of our other subsidiaries.
Products
We
manufacture a broad array of products in various categories for the women’s,
men’s and children markets. Within those categories, various product
classifications including high and middle grade casual-wear, sportswear and
outwear, including the following product lines:
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Womens’
Clothing:
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coats,
jackets, slacks, skirts, shirts, trousers, and jeans
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Mens’
Clothing:
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vests,
jackets, trousers, skiwear, shirts, coats and jeans
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Childrens’
Clothing:
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coats,
vests, down jackets, trousers, knitwear and
jeans
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Customers
Ever-Glory
manufactures garments for a number of well-known retail chains and
internationally famous brands. We also have our own in-house design capabilities
and can provide our customers with a selection of unique and original designs
that the customer may have manufactured-to-order. We ordinarily supply our
customers’ through purchase orders, and we have no long-term supply contracts
with any of our customers.
In
the
fiscal year ended December 31, 2007, approximately 57% of our sales revenue
came
from customers in Europe, 21% from customers in the United States, 16% from
customers in Japan, and 6% from customers in China. In 2007, sales to our single
largest customer represented approximately 31% of our total net sales. Also,
in
2007, sales to our five largest customers generated approximately 59% of our
total net sales.
In
the
fiscal year ended December 31, 2006, approximately 58% of our sales revenue
came
from customers in Europe, 16% from customers in the United States, 18% from
customers in Japan, 6% from customers in China and 2% from customers in other
countries. In 2006, sales to our single largest customer represented
approximately 28% of our total net sales. In addition, in 2006, sales to our
five largest customers resulted in approximately 56% of our total net sales.
Suppliers
We
purchase raw materials (including fabric, fasteners, thread, buttons, labels
and
related materials) directly from local fabric and accessory suppliers, and
import specialty fabrics to meet requirements specially requested by customers.
In
2007
and 2006, we did not rely on any one supplier for more than 10% of our supply
purchases, which we believe is a result of a steady diversification of our
sources of supply. Up to the present we have not experienced any significant
difficulty in obtaining materials that are essential to our business. We
generally agree to pay our suppliers within 30-60 days after our receipt of
goods. We typically place orders for materials from suppliers when we receive
orders from our customers. On average, the supplies we hold in stock will
generally be consumed in production in approximately 20 days.
Sales
and Marketing
We
have
set up our own merchandising department to interface with our customers. We
believe we have developed good and stable business relationships with our main
customers in the U.S., the EU, Japan and China. Our sales representatives
typically work directly with our customers and arrange the terms of our dealings
with them, and to explore possible new relationships.
Management
believes we continue to benefit from our solid reputation for providing high
quality goods and professional service in the markets where we have a presence,
which provides us further opportunities to work with desirable customers. Our
marketing strategy aims to attract customers with the strongest brands within
the strongest markets. We market directly to branded retailers and retail chains
instead of selling through intermediary buyers and agents. We seek to attract
customers mainly from Japan, Europe, the U.S. and China. In addition, we look
for customers with strong brand appeal and product lines that require high
quality manufacturing and generate sufficient sales volume to support our
sizeable production capacity. Referrals from existing customers have been and
continue to be a fruitful source of new customers. In addition, we aim to
maintain an active presence in trade shows around the world, including in
Europe, Japan, the U.S. and China.
In
January 2008, we established a joint venture with La Chapelle Garments Co.,
Ltd., a Shanghai-based womens’ fashion retailer widely known in China operating
a retail network of over 350 outlets, to launch our new “LA GO GO” private label
into the Chinese market. We have a 60% stake in this newly-formed joint venture.
Through the joint venture, management expects to establish our brand presence
in
several dozen retail outlets through several major cities in China by the end
of
2008.
Production
and Quality Control
In
2007,
we manufactured approximately 30% of the products we sold in our own
manufacturing facilities. We typically outsource a portion of our products
based
upon factory capacity and customer demand. The number of outside contract
manufacturers to which we outsource is expected to increase in order to meet
the
anticipated growth in demand from our customers.
In
2006,
we completed the construction of a new office building. In 2007, we
completed the process of consolidating our operations into our new building.
The
new facility occupies 10,000 square meters of space and is equipped with
state-of-the-art production equipment. This consolidation allowed us to increase
our production capacity during 2007.
In
2006
and 2007, we acquired Nanjing New-Tailun Garments Co., Ltd. and Nanjing
Catch-Luck Garments Co., Ltd. respectively to strengthen our manufacturing
base
and production capabilities as well as supplement our product lines. As of
December, 31, 2007, our total production capacity including our outsourcing
capacity increased approximately to 9 million pieces per year. At present,
our production capacity is more than adequate to meet customer demand, and
we
have no significant backlog of customer orders.
We
are
committed to designing and manufacturing high quality garments. Because we
emphasize the fit, performance and quality of our apparel products, we place
a
high priority on quality control. We have implemented strict quality control
and
craft discipline systems. Before we manufacture in large quantities, we obtain
the approval from our customers either through in-person visits to the factories
or by shipping samples of our apparel products to our customers for testing,
inspection and feedback. This ensures that our products accurately meet
specifications prior to production. In addition, our trained employees
periodically inspect the manufacturing process and quality of our apparel
products. Our factory is ISO 9000 certified.
Due
to
our strict quality control and testing process, we have not undergone any
product or merchandise recalls, and we generally do not receive any significant
requests by our customers to return finished goods. Product returns are not
a
material factor in our operating expenses.
We
anticipate continuing our practice of outsourcing a portion of our production,
even with our recent increases in production capacity. Management believes
that
outsourcing allows us to maximize our production flexibility while reducing
significant capital expenditure and costs associated with managing a very large
production workforce. We contract for the production of a portion of our
products through various outside independent manufacturers. Quality control
reviews are done by our employees to ensure that material and component
qualities and the product’s “fit” are in accordance with our specifications. We
inspect prototypes of each product prior to cutting by the contractors, and
conduct a final inspection of finished products prior to shipment to ensure
that
they meet our high standards.
Delivery
and Transportation
We
do not
hold any significant inventory of finished goods, as we typically ship finished
goods to our customers upon completion.
We
deliver most of our products through Jiangsu Ever-Glory, our primary export
and
logistics agent. Jiangsu Ever-Glory acts as an independent contractor to handle
export, shipping and transportation. Our products are usually shipped directly
to customers. Jiangsu Ever-Glory has access to a variety of ground and air
shipping companies and can typically deliver the finished product to the client
within timeframes we require. Merchandise is carried from our production
facilities by truck to a port where it is consolidated and loaded on
containerized vessels for ocean transport to the ultimate destination.
Competition
The
garment manufacturing industry is highly competitive, particularly in China.
Our
competitors include garment manufacturers of all sizes, both within China and
elsewhere in the world, many of which have greater financial and manufacturing
resources than us. We have been in the garment manufacturing business since
1993
and believe that we have earned a reputation for producing high quality products
efficiently and at competitive prices, with excellent customer service. We
believe that we compete effectively with other companies based on the experience
and know-how that we have acquired since 1993. Additionally, our
state-of-the-art manufacturing equipment and facilities enable us to produce
high-quality garments at competitive prices.
Currently,
we have several competitors in China including large and small sized companies
including some state-owned trading groups and private garment companies. We
believe we differentiate ourselves from the competition and will be able to
effectively compete with our rivals due to our persistent pursuit of quality
control, a diversified casual wear product lineup, in-house design talent.
In
addition, we believe we derive advantages from the rapid feedback we receive
from our customers in the supply chain and using our advanced ERP
system. Our ERP system integrates
many of
our operational processes into one system including order processing,
statistical analysis, purchasing, manufacturing, logistics and payment control
systems, proving management with instantaneous feedback on important aspects
of
our business operations.
Governmental
Regulations/Quotas
Pursuant
to a World Trade Organization (WTO) agreement, effective January 1, 2005, the
United States and other WTO member countries agreed to remove quotas that
apply to textiles. However, as the removal of quotas resulted in an
import surge from China, the U.S. took action in May 2005 and imposed safeguard
quotas on seven categories of goods, including certain classes of apparel
products, arousing strong objection from China.
On
June
10, 2005, in response to the surge of Chinese imports into the European Union
(EU), the EU Commission signed a Memorandum of Understanding (MOU) with China
in
which ten categories of textiles and apparel are subject to restraints.
Additionally, on November 8, 2005, the U.S. and China entered into a Memorandum
of Understanding in which 21 categories of textiles and apparel are subject
to restraints.
Although
certain of our apparel products fall within the categories subject to the
safeguards in the U.S. and the EU, which could adversely affect our ability
to
export and sell these products, the imposition of quotas in 2005 did not have
a
material effect on our net sales, although it did impact our gross margin.
The
imposition of quotas did not have a material effect on our net sales or our
gross margins in both 2006 and 2007. See
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
.
We
believe that we will be able to obtain a sufficient quota allocation based
on
our experience in prior years. In addition, we may bid for additional
export quota allocation from the government for the U.S. and EU markets. The
elimination of export quotas to the EU became effective from January 1, 2008,
and we anticipate that export quotes to the U.S. market will be eliminated
by
the end of 2008. We expect that these new developments will give us more access
to the EU and U.S. markets.
Nevertheless,
there can be no assurance that additional trade restrictions will not be imposed
on the export of our products in the future. Such actions could result in
increases in the cost of our products generally and may adversely affect our
results of operations.
On
a
longer term basis, we believe that our customer mix and our ability to adjust
the types of apparel we manufacture will mitigate our exposure to such trade
restrictions in the future.
We
are
also required to comply with local regulations that apply to some of the
products we produce, in the countries we export to. In order to address these
compliance issues, we have established an advanced fabric testing center to
ensure that our products meet certain quality and safety standards in the U.S.
and EU. In addition, we work closely with our customers so that they understand
our testing and inspection process.
Seasonality
We
have
typically experienced seasonal fluctuations in sales volume due to the seasonal
fluctuations experienced by the majority of our customers. These seasonal
fluctuations typically result in sales decreases in the first and second
quarters and sales increases in the third and fourth quarters of each
year.
Employees
As
of
December 31, 2007, we had over 1,800 employees. None of our employees belong
to
a labor union. We consider our relationships with our employees to be good,
and
we have never experienced a labor strike or work stoppage. We are in full
compliance with the Chinese labor laws and regulations and are committed to
providing safe and comfortable working conditions and accommodations for
our employees.
Labor
Costs
.
The
manufacture of garments is a labor-intensive business. Although much of our
productio
n
process
is automated and mechanized, we rely on skilled labor to make our products.
Recently, we have benefitted from the abundance of workers who migrate to urban
areas such as Nanjing to seek jobs that pay relatively well. Generally, we
offer
one to three months of training to new workers to improve their skills during
an
apprenticeship period. Management expects that our access to reasonably priced
and competent labor will continue into the foreseeable future.
Working
Conditions and Employee Benefits
.
We
consider our social responsibilities to our workers to be an important
objective, and we are committed to providing them a safe, clean, comfortable
working environment and accommodations. Our employees also are entitled to
time
off during national holidays. In addition, we frequently monitor our third
party
manufacturers’ working conditions to ensure their compliance with related labor
laws and regulations. We are in full compliance with our obligations to provide
pension benefits to our workers, as mandated by the PRC government. We strictly
comply with the Chinese labor laws and regulations, and offer reasonable wages,
life insurance and medical insurance to our workers.
Compliance
with Environmental Laws
Based
on
the present nature of our operations, we do not believe that environmental
laws
and the cost of compliance with those laws have or will have a material impact
on us or our operations.
Description
of Property
In
2007,
we operated three factories in the Nanjing Jiangning Economic and Technological
Development Zone and in Shangfang Town, which are located in Nanjing,
China. In January 2007, we completed the construction of our new
headquarters and a new manufacturing facility in Jiangning Economic and
Technological Development Zone in Nanjing. Our operations have been consolidated
into this new facility. We also hold a fifty-year land use right for 112,442
square meters of land in the Nanjing Jiangning Economic and Technological
Development Zone. For further details concerning our property, see Item 2 on
page 26 of this report regarding
“
Properties.
”
Insurance
We
have
purchased asset insurance coverage for our new facilities and fixed assets.
We
have no other material policies of insurance.
Taxation
Our three
operating subsidiaries, all of which are incorporated in the PRC, are
governed by PRC income tax laws and are subject to the PRC enterprise income
tax. Each of our consolidated entities files its own separate tax return,
and we
do not file a consolidated tax return. In
addition, Goldenway currently enjoys a 50% reduction in its income
tax as a foreign invested enterprise that exports over 70% of its
output, and was entitled a lowered income tax rate of 12% for the
2006 and 2007 tax years. Both New-Tailun and Catch-Luck were
entitled to two-year income tax exemptions effective for the
2006 and 2007 tax years, and for the three year thereafter (2008, 2009 and
2010)
based on current law these entities will be entitled to a 50% reduction in
enterprise income tax. All of our income before income taxes, and the income
tax
we pay, are related to our operations in China.
Corporate
History and Background
Ever-Glory
International Group, Inc., sometimes referred to in this report as the
“
Company,
”
is a holding
company that oversees the operations of its subsidiaries, and provides these
subsidiaries with resources and services in financial, legal, administrative
and
other areas. The Company was incorporated in Florida on October 19, 1994.
We changed our name to “Ever-Glory International Group, Inc.” on November 17,
2005.
Perfect
Dream Limited (“Perfect Dream”) was incorporated in the British Virgin Islands
on July 1, 2004. Perfect Dream was originally formed as a holding company,
and
it became a wholly-owned subsidiary as a result of a share exchange transaction
completed in November 2005.
In
January 2005, Perfect Dream acquired 100% of Goldenway Nanjing Garments Company
Limited (“Goldenway”). Goldenway, a People’s Republic of China (“PRC”) wholly
foreign-owned enterprise was incorporated on December 31, 1993. Goldenway is
principally engaged in the manufacturing and sale of garments.
Until
December 2004, Goldenway was a joint venture held by Jiangsu Ever-Glory
International Group Corporation (“Jiangsu Ever-Glory”). After its acquisition by
Perfect Dream, Goldenway changed its status to that of a wholly foreign owned
enterprise and increased its registered capital from $2,512,106 to $20,000,000.
The increased registered capital was required to be paid in installments within
three years of the issuance of Goldenway's updated business license. As of
December 31, 2007, we have paid $3.63 million of our registered capital
requirements. The remaining $13.86 million was due on January 28, 2008. On
January 11, 2008, we submitted an application to Jiangsu Administration for
Industry Commerce for the extension of the deadline for payment of the remaining
registered capital to July 25, 2008. As of the date of this report, we have
obtained approval for this extension.
On
November 9, 2006, Perfect Dream entered into a purchase agreement with
Ever-Glory Enterprises (HK) Limited (“Ever-Glory Hong Kong”) whereby we acquired
a 100% interest in Nanjing New-Tailun Garments Company Limited (“New-Tailun”)
from Ever-Glory Hong Kong (the “New-Tailun transaction”). Pursuant to the terms
of the purchases agreement for this acquisition, we agreed to pay Ever-Glory
Hong Kong the amount of $2,000,000 in cash and issue 20,833,333 shares of our
restricted common stock having a value of $10,000,000, such value of shares
were
based on the preceding 30-day average of high bid and the low ask price for
our
common stock on the date of the transfer within 90 days of the closing of the
New-Tailun transaction. The total consideration due to Ever-Glory Hong Kong
in
connection with this transaction has been paid. The New-Tailun transaction
closed on December 30, 2006.
New-Tailun
is a 100% foreign-owned enterprise incorporated in the PRC and is engaged in
the
manufacturing and sale of garments. New-Tailun has a staff of over 700 people
with the annual production capacity of about 2.5 million pieces.
On
August
27, 2007, we acquired Nanjing Catch-Luck Garments Co. Ltd., a Chinese limited
liability company (“Catch-Luck”), which further expanded our production
capacity. Catch-Luck is primarily engaged in the manufacturing and sale of
garments to China, Europe, Japan, and the United States. Founded in 1995,
Catch-Luck has more than 500 employees with annual production capacity of 1.2
million garments. It currently operates one factory spanning 6,000 square meters
in the Nanjing Jiangning Economic and Technological Development Zone. For
further details concerning this acquisition, see
Recent
Developments
below.
As
a
result of our acquisitions of Goldenway, New-Tailun, and Catch-Luck, we now
own
and operate three subsidiaries in China.
Recent
Developments
Acquisition
of Nanjing Catch-Luck Garments Co. Ltd.
On
August
27, 2007, we acquired Nanjing Catch-Luck Garments Co. Ltd., a Chinese limited
liability company, from Ever-Glory Hong Kong, which further expanded our
production capacity.
Catch-Luck
was originally incorporated as a joint venture, and later became a wholly owned
foreign enterprise after we acquired it.
The
acquisition of Catch-Luck was financed by a combination of $0.6 million in
cash
and common stock valued at $9.4 million. Upon completion of this transaction,
Catch-Luck became a wholly owned subsidiary of Ever-Glory. Under the Agreement
for the Purchase and Sale of Stock dated June 26, 2006, as amended on August
31,
2006 (the “Agreement”) by and between us, our wholly owned subsidiary,
Perfect Dream Ltd., a British Virgin Islands corporation (“Perfect Dream”),
Ever-Glory Hong Kong and Catch-Luck, we agreed to pay Ever-Glory Hong
Kong an amount in Renminbi equal to $600,000 and issue 1,307,693 shares of
our common stock to Ever-Glory Hong Kong. As agreed, we issued
the 1,307,693 shares of common stock at the closing of this transaction. We
have not yet paid the $600,000 cash portion of this consideration, however
we
plan to do so in the second quarter of 2008. In addition, upon Catch-Luck’s
achievement of certain financial targets for the fiscal years 2008 and 2009,
we
will issue an additional 1,153,846 shares of common stock to Ever-Glory
Hong Kong for each of these two fiscal years (i.e., 1,153,846 shares for 2008
and 1,153,846 shares for 2009).
Ever-Glory
Hong Kong was 100% owned by our President and Chairman of the Board, Kang Yihua
at the time we entered into the acquisition agreement. Mr. Kang has subsequently
transferred 100% of his interest in Ever-Glory Hong Kong to Yan Xiaodong who
is
one of our former directors. We and Ever-Glory Hong Kong received a business
valuation report for Catch-Luck from Savills Valuation and Professional Services
Ltd., dated March 7, 2006. Our board of directors was fully informed of the
interests of each of these directors, including Mr. Kang, in Ever-Glory
Hong Kong. The board conditioned the consummation of the Catch-Luck acquisition
on approval by a majority of our disinterested shareholders in accordance with
the Florida Business Organizations Code. These disinterested shareholders
approved the Catch-Luck acquisition on June 2, 2006. None of the consenting
shareholders had any interest in Ever-Glory Hong Kong or its
affiliates.
Private
Placement Financing
On
August
2, 2007, we completed a $2 million private placement involving the issuance
of
our secured convertible notes and warrants pursuant to subscription agreements
(“Subscription Agreements”) with six accredited investors. This private
placement financing closed on August 6, 2007.
Under
the
terms of the financing, we issued and sold two-year secured convertible notes
in
the principal amount of $2,000,000 to investors, secured by all of the assets
of
Ever-Glory excluding its subsidiaries. The convertible notes issued in our
August 2007 private placement financing bear interest at a rate of 6% per year
payable by us on a quarterly basis in either cash or absent any event of
default, in shares of our common stock equal to 110% of the interest due (based
on the volume-weighted average price of our common stock for the ten trading
days prior to interest payment due date). The maturity date of the notes is
August 2, 2009, at which time we must redeem the notes by paying all unpaid
principal and interest under all then-outstanding notes. The notes are
convertible at a fixed conversion price of $0.22 per share, into a total of
approximately 9.1 million shares of common stock, provided, however that the
notes are subject to full-ratchet anti-dilution protection, i.e., if we issue
shares (with certain enumerated exceptions) at an average per-share price below
$0.22 per share, the conversion price of the notes shall be adjusted downward
to
match such per-share price. Under the terms of the notes, the full-ratchet
anti-dilution adjustments do not apply to (i) the issuance of approximately
up
to $1.6 million shares or shares under options to employees and consultants,
(ii) securities issued in connection with acquisitions of third parties valued
above $8 million; (iii) the issuance of approximately up to $1.6 million shares
or shares under warrants or other securities issued to non-affiliates for
services rendered to us, as more fully described and set forth in the notes.
The
holders of the notes may convert the unpaid principal amount the notes into
our
common stock at any time prior to maturity, at the applicable conversion price.
We may at any time at its option, redeem the notes by paying 125% of the unpaid
principal and accrued interest.
The
performance of our obligations under the notes along with certain other
obligations in connection with the financing is secured by all of our assets,
excluding our subsidiaries, pursuant to a security agreement. Our performance
of
the notes and other obligations in connection with the financing is also secured
by a pledge of 3,897 shares Series A Preferred Stock personally held by our
current CEO pursuant to a stock pledge agreement. Upon any event of default
(as
defined in the notes, the security agreement and the stock pledge agreement),
the investors will be entitled to exercise their respective rights under the
security agreement and stock pledge agreement. In addition, our subsidiaries,
Perfect Dream Limited, a British Virgin Islands corporation, and Goldenway
Nanjing Garments Co. Ltd., a corporation in the People’s Republic of China, each
guaranteed the performance of our obligations under the notes and the
subscription agreement under a subsidiary guaranty agreement.
On
October 3, 2007,
all
7,883
shares of our Series A Preferred Stock were automatically converted into a
total
of 59,910,800 shares of common stock. Accordingly, the 3,897 pledged shares
of
Series A Preferred Stock held by Mr. Kang were converted into 29,617,200 shares
of common stock. On November 20, 2007, we amended our Articles of Incorporation
to effectuate a 10-to-1 reverse stock split, and, accordingly, the
29,617,200 pledged shares were split into 2,961,720 shares of common stock,
which presently remain pledged under the stock pledge agreement.
In
connection with the financing, on August 2, 2007 we issued warrants to investors
that are exercisable for up to approximately 9.1 million shares of our common
stock with an exercise price of $0.32 per share. The warrants issued in the
August 2007 financing are exercisable for five years following the date on
which
the underlying warrant shares are registered for resale under an effective
registration statement filed with the Commission. The warrants are subject
to
full-ratchet anti-dilution protection in the event that we issue shares (with
certain exceptions) at an average per-share price below $0.32 per share. Similar
to the notes, under the terms of the warrants, full-ratchet anti-dilution
adjustments do not apply to (i) the issuance of approximately up to $1.6 million
of shares or shares under options to employees and consultants, (ii) securities
issued in connection with acquisitions of third parties valued above $8 million;
(iii) the issuance of approximately up to $1.6 million of shares or shares
under
warrants or other securities issued to non-affiliates for services rendered
to
us, as more fully described and set forth in the warrants. If at any time after
fifteen months after the closing date there is no effective registration
statement covering the resale of the shared underlying the warrants, the warrant
holders may exercise their warrants by means of a cashless
exercise.
In
connection with the financing, we agreed to register the common stock issuable
upon conversion of the notes issued to the investors, for resale by them, by
filing an appropriate form for registration with the SEC within 60 days
following the closing. We also agreed to file a separate registration statement
to register the common stock issuable upon exercise of the warrants, within
300
days following the closing. If we do not file these registration statements
within the agreed time periods, or the registration statement covering the
warrant shares does not become effective within 120 days after the filing of
that registration statement, or if we fail to file a registration statement
in
connection with the investors’ piggyback or demand registration rights, or fail
to keep a required registration statement continuously effective for two years,
we will be subject to monthly liquidated damages payable in cash equal to 2%
of
the offering amount in the August 2007 private placement financing, up to a
maximum of 10% of the offering amount, or $200,000. On October 5, 2007, we
filed
a registration statement on Form S-1 with the Commission to register (for
resale) common stock issuable upon conversion of the notes. This registration
statement was declared effective on November 13, 2007.
In
connection with the financing, we agreed to enter into a letter of intent with
Mr. Yihua Kang for the acquisition by Ever-Glory of a branded retail division
owned by Mr. Kang, provided that the acquisition would be consummated if the
retail business operates more than 14 stores worldwide and achieves annual
consolidated sales of at least USD $5,000,000. Mr. Kang also agreed to enter
into a lockup agreement to refrain from sales of shares held by him, for a
period of 12 months following the closing. Mr. Kang also agreed to enter into
a
two-year non-competition agreement with us which prohibits competition against
us or solicitation of our customers or employees. Subscribers in the financing
also have a twelve-month right of first refusal to participate in certain future
financing transactions involving the sale and issuance of our
securities.
The
securities were offered and sold in the financing to accredited investors in
reliance on an exemption from the registration requirements of the Securities
Act of 1933, as amended, under Regulation D. At the time of the closing, the
offering was not registered under the Securities Act or any state securities
or
“blue sky” laws.
Strategic
Investment in La Chapelle
On
January 9, 2008, our subsidiary, Goldenway Nanjing Garment Company Limited,
a
PRC company entered into a Capital Contribution Agreement (“Capital Contribution
Agreement”) with Shanghai La Chapelle Garment and Accessories Company Limited
(“La Chapelle”), a Shanghai-based garment maker, and several shareholders of La
Chapelle. Under the terms of the Capital Contribution Agreement, Goldenway
agreed to invest RMB 10 million (approximately USD $1.35 million) in La Chapelle
for a 10% stake in La Chapelle.
Prior
to
the Capital Contribution Agreement, the capital of La Chapelle registered with
the PRC business administration authorities amounted to RMB 4.5 million,
consisting of RMB 3.69 million invested by Xing Jiaxing accounting for 82%
of
its total registered capital, RMB 0.405 million invested by Wu Jinying
accounting for 9% of its total registered capital, and RMB 0.405 million
invested by Zhang Danling accounting for 9% of its total registered capital.
As
a result of the investment under the Capital Contribution Agreement, these
three
shareholders will retain a 60% stake in La Chapelle, and two new investors
(including Goldenway) will acquire a 40% stake. Of the 40% stake, Goldenway
will
hold 10%, and 30% will be held by Wuxi Xin Bao Lian Investment Company Limited
(“Wuxi Xin Bao”), a strategic investor. As a result of this capital
contribution, the total registered capital of La Chapelle will increase from
RMB
4.5 million to RMB 7.5 million.
The
total
amount invested by Goldenway and Wuxi Xin Bao Li
an
is RMB
$40 million in cash (approximately USD $5.41 million). Goldenway and Wuxi Xin
Bao each have the right to designate one director on La Chapelle’s five-member
board of directors.
The
total
inves
tment
amount was paid by Goldenway and Wuxi Xin Bao
Lian
in
January 2008.
La
Chapelle agreed that it will meet the quantitative conditions that are required
in order to list its shares as national Class A Shares or Class B Shares in
China by December 31, 2010, and if it does not satisfy this criteria, Goldenway
and Wuxi Xin Bao will have the right to sell their shares in La Chapelle to
the
founding shareholders of La Chapelle for a purchase price of not less than
the
original purchase price of the shares plus 10% interest per annum.
La
Chapelle also agreed to meet certain audited net income targets of at least
RMB
20 million in 2008 and RMB 30 million in 2009. In the event La Chapelle’s actual
audited net income falls below 90% of either of these targets, the overall
equity interest of Goldenway and Wuxi Xin Bao shall, in each instance, be
increased proportionally in accordance with a formula set forth in the Capital
Contribution Agreement (a copy of which is attached as an Exhibit to this Form
8-K).
Joint
Venture with Shanghai La Chapelle Garment and Accessories Company
Also
on
January 9, 2008, concurrently with Goldenway’s investment, Goldway entered into
a Joint Venture Establishment Agreement with Shanghai La Chapelle Garment and
Accessories Company Limited, to form a joint venture to develop, promote and
market our new line of women’s wear in China referred to as “LA GO GO”. The
joint venture will be in the form of a jointly owned PRC-based company to be
registered as “Shanghai LA GO GO Fashion Company Limited
.”
The
joint venture’s registration process is expected to be completed by the end of
March 2008.
Goldenway
agreed to initially invest RMB 6 million (USD $0.8 million), and La Chapelle
agreed to invest RMB 4 million (USD $0.54 million), for a 60% and 40% stake,
respectively, in the joint venture.
The
business objective of the joint venture is to establish a leading brand of
ladies’ garments for the mainland Chinese market. The scope of the business of
the joint venture includes all activities relating to the development of the
“LA
GO GO” brand, including marketing and branding activities, design, production,
and sales. In connection with the establishment of the joint venture, La
Chapelle transferred all of its rights and ownership in the “LA GO GO” brand
name (including any related brand names) to the joint venture. The joint venture
plans to select and engage at least twenty seasoned retailers in Shanghai,
Chengdu, Nanjing, Suzhou, Beijing, and Tianjin to exclusively carry and sell
the
LA GO GO line of women’s clothing for 2008.
The
parties agreed that La Chapelle will be primarily responsible for appointing
design and sales teams, while Goldenway shall be responsible for appointing
accounting and financial managers and supervisors in charge of production.
In
addition, the parties agreed to jointly appoint personnel in charge of
procurement and logistics.
The
joint
venture agreement contains restrictions on the ability of each joint venture
party to transfer its equity interest in the joint venture, and provides for
a
right of first refusal to acquire shares of the other partner in the event
of an
approved transfer of interests. The parties agreed that future capital
contributions would be made on a pro rata basis accordance with the 60-40 split
unless otherwise approved by the parties or if one party fails to make
additional contributions. The parties agreed each party shall at all times
maintain a minimum 30% interest in the joint venture.
Our
Growth Strategy
We
plan
to expand our business and increase sales and profitability by:
| · |
building
our own brand in the PRC market;
|
| · |
developing
retail and wholesale distribution channels in the
PRC;
|
| · |
expanding
our production capacity through new
facilities;
|
| · |
further
developing relationships with customers to increase
sales;
|
| · |
entering
into strategic partnerships with our important customers and major
suppliers;
|
| · |
broadening
and expanding our product offerings and product
lines;
|
| · |
continuing
to enhance our manufacturing process to increase efficiency of
production;
|
| · |
building
and promoting our own private label brands;
and
|
| · |
seeking
acquisitions of complimentary businesses in the textile
industry.
|
Our
goal
is to continue to strengthen our position to become a major multi-national
apparel manufacturer, and to expand into new markets worldwide.
You
should carefully consider the risks described below together with all of the
other information included in this prospectus before making an investment
decision with regard to our securities. The statements contained in or
incorporated into this prospectus that are not historic facts are
forward-looking statements that are subject to risks and uncertainties that
could cause actual results to differ materially from those set forth in or
implied by forward-looking statements. If any of the following events
described in these risk factors actually occurs, our business,
financial condition or results of operations could be harmed. In that case,
the
trading price of our common stock could decline, and you may lose all or part
of
your investment.
Risks
Relating to Our Industry
Our
sales are influenced by general economic cycles. A prolonged period of depressed
consumer spending would have a material adverse effect on our
profitability.
Apparel
is a cyclical industry that is dependent upon the overall level of consumer
spending. Purchase of apparel generally decline during recessionary periods
when
disposable income is low. Our customers anticipate and respond to adverse
changes in economic conditions and uncertainty by reducing inventories and
canceling orders. As a result, any substantial deterioration in general economic
conditions, increases in energy costs or interest rates, acts of war, acts
of
nature or terrorist or political events that diminish consumer spending and
confidence in any of the regions in which we compete, could reduce our sales
and
adversely affect our business and financial condition. We currently sell to
customers in the U.S., the EU and Japan. Accordingly, economic conditions and
consumer spending patterns in these regions could affect our sales, and an
economic down turn in one or more of these regions could have an adverse
effect on our business.
Intense
competition in the worldwide apparel industry could reduce our sales and
prices.
We
face a
variety of competitive challenges from other apparel manufacturers both in
China
and other countries. Some of these competitors have greater financial and
marketing resources than we do and may be able to adapt to changes in consumer
preferences or retail requirements more quickly, devote greater resources to
the
marketing and sale of their products or adopt more aggressive pricing policies
than we can. As a result, we may not be able to compete successfully with them
if we cannot continue enhancing our marketing and management strategies, quality
and value or responding appropriately to consumers needs.
The
success of our business depends upon our ability to offer innovative and
upgraded products at attractive price points.
The
worldwide apparel industry is characterized by constant product innovation
due
to changing consumer preferences and by the rapid replication of new products
by
competitors. As a result, our success depends in large part on our ability
to
continuously and rapidly respond to customer requirements for innovative and
stylish products at a competitive pace, intensity, and price. Failure on our
part to regularly and rapidly respond to customer requirements could adversely
affect our ability to retain our existing customers or to acquire new customers
which would limit our sales growth.
The
worldwide apparel industry is subject to ongoing pricing
pressure.
The
apparel market is characterized by low barriers to entry for both suppliers
and
marketers, global sourcing through suppliers located throughout the world,
trade
liberalization, continuing movement of product sourcing to lower cost countries,
ongoing emergence of new competitors with widely varying strategies and
resources, and an increasing focus on apparel in the mass merchant channel
of
distribution. These factors contribute to ongoing pricing pressure throughout
the supply chain. This pressure has and may continue to:
| · |
require
us to reduce wholesale prices on existing products;
|
| · |
result
in reduced gross margins across our product
lines;
|
| · |
increase
pressure on us to further reduce our production costs and our operating
expenses.
|
Any
of
these factors could adversely affect our business and financial
condition.
Fluctuation
in the price, availability and quality of raw materials could increase our
cost
of goods and decrease our profitability.
We
purchase raw materials directly from local fabric and accessory suppliers.
We
may also import specialty fabrics to meet specific customer requirements. We
also purchase finished goods from other contract manufacturers. The prices
we
charge for our products are dependent in part on the market price for raw
materials used to produce them. The price, availability and quality of our
raw
materials may fluctuate substantially, depending on a variety of factors,
including demand, crop yields, weather patterns, supply conditions,
transportation costs, government regulation, economic climates and other
unpredictable factors. Any raw material price increases could increase our
cost
of goods and decrease our profitability unless we are able to pass higher prices
on to our customers.
As
of
December 31, 2007 and 2006, we did not rely on any one supplier which exceeds
10% of all of our total supply purchases.
We
do not
have
any long-term
written agreements with any of these suppliers and do not anticipate entering
into any such agreements in the near future. However, we always execute a
written agreement for each order placed with our suppliers. We do not believe
that loss on any of these suppliers would have a material adverse effect on
our
ability to obtain finished goods or raw materials essential to our business
because we believe we can locate other suppliers in a timely
manner.
Risks
Relating to Our Business
We
depend on some key customers for a significant portion of our sales. A
significant adverse change in a customer relationship or in a customer’s
performance or financial position could harm our business and financial
condition.
For
the
year ended December 31, 2007, our five largest customers represented
approximately 56% of our total net sales. For the year ended December 31, 2006,
our five largest customers represented approximately 59% of our total net sales.
The
garment manufacturing industry has experienced substantial consolidation in
recent years, which has resulted in increased customer leverage over suppliers,
greater exposure for suppliers to credit risk and an increased emphasis by
customers on inventory management and productivity.
A
decision by a major customer, whether motivated by competitive considerations,
strategic shifts, financial requirements or difficulties, economic conditions
or
otherwise, to decrease its purchases from us or to change its manner of doing
business with us, could adversely affect our business and financial condition.
In addition, while we have long-standing customer relationships, we do not
have
long term contracts with any of our customers.
As
a
result, purchases generally occur on an order-by-order basis, and the
relationship, as well as particular orders, can generally be terminated by
either party at any time. We do not believe that there is any material risk
of
loss of any of these customers during the next 12 months. We also believe that
the unexpected loss of these four customers could have material adverse effect
on our earnings or financial condition. While we believe that we could replace
these three customers within 12 months, the loss of which will not have material
adverse effect on our financial condition in the long term. None of our
affiliates are officers, directors, or material shareholders of any of these
three customers.
Our
internal controls and procedures have been materially deficient, and we are
in
the process of correcting internal control deficiencies.
In
the
second quarter of 2007, resulting from comments by and discussions with the
staff of the SEC related to our Preliminary Information Statement on Form 14C,
we and our independent registered public accounting firm recognized that our
internal controls had material weaknesses. We restated our results of
operations for the year ended December 31, 2006 and our quarterly results for
the quarter ended March 31, 2007 as a result of our purchase accounting for
the
acquisition of New-Tailun completed on December 30, 2006.
In
2006
and 2007, we did not maintain effective controls to ensure the completeness,
accuracy, and valuation over the accounting for business combinations, including
the inability to prepare financial statements and footnotes in accordance with
SEC rules and regulations and with our 2006 acquisition of New-Tailun. We
misapplied generally accepted accounting principles whereby we did not value
the
acquisitions and record the resulting purchase accounting in accordance with
SFAS 141 and EITF 02-5. As a result, we were required to restate our financial
results for the year ended December 31, 2006 and for the three months ended
March 31, 2007.
If
we
cannot rectify these material weaknesses through remedial measures and
improvements to our systems and procedures, management may encounter
difficulties in timely assessing business performance and identifying incipient
strategic and oversight issues. Management is currently focused on remedying
internal control deficiencies, and this focus will require management from
time
to time to devote its attention away from other planning, oversight and
performance functions.
We
cannot
provide assurances as to the timing of the completion of these efforts. We
cannot be certain that the measures we take will ensure that we implement and
maintain adequate internal controls in the future. Any failure to implement
required new or improved controls, or difficulties encountered in their
implementation, could harm our operating results or cause us to fail to meet
our
reporting obligations.
We
will be required to evaluate our internal control over financial reporting
under
Section 404 of the Sarbanes-Oxley Act.
Failure
to timely comply with the requirements of Section 404 or any adverse results
from such evaluation could result in a loss of investor confidence in our
financial reports and have an adverse effect on the trading price of our debt
and equity securities.
We
currently are not an “accelerated filer” as defined in Rule 12b-2 under the
Securities Exchange Act of 1934, as amended. Beginning with our Annual Report
for the year ended December 31, 2007, Section 404 of the Sarbanes-Oxley Act
of
2002 requires us to include an internal control report with our Annual Report
on
Form 10-K. That report must include management’s assessment of the effectiveness
of our internal control over financial reporting as of the end of the fiscal
year. This report must also include disclosure of any material weaknesses in
internal control over financial reporting that we have identified. Additionally,
for the fiscal year ended December 31, 2008 our independent registered public
accounting firm will be required to issue reports on management’s assessment of
our internal control over financial reporting and their evaluation of the
operating effectiveness of our internal control over financial reporting. Our
assessment requires us to make subjective judgments and our independent
registered public accounting firm may not agree with our
assessment.
Achieving
compliance with Section 404 within the prescribed period may require us to
incur
significant costs and expend significant time and management resources. If
we
are not able to complete our assessments as required under
Section
404 in a timely manner, we and our independent registered public accounting
firm
would be unable to conclude that our internal control over financial reporting
is effective as of December 31, 2008. As a result, investors could lose
confidence in our reported financial information, which could have an adverse
effect on the trading price of our debt securities. In addition, our independent
registered public accounting firm may not agree with our management’s assessment
or conclude that our internal control over financial reporting is operating
effectively. We will continue to consistently improve our internal control
over
the financial reporting with our best efforts and we plan to engage assistance
from outside experts in doing so.
We
are listed on the over-the-counter bulletin board, and therefore we are subject
to less stringent corporate governance requirements as opposed to a company
listed on a national exchange. Specifically, we do not have a majority of
independent directors on our board, nor do we have a separate audit committee,
as these requirements are not applicable to us, and this provides less
protection to our investors.
Our
board
of directors currently does not have a separate audit committee or a member
that
qualifies as an audit committee financial expert or an independent director.
In
addition, we do not have an independent majority on our board of directors.
Our
management and board of directors are considering the addition of an independent
director who qualified as a financial expert but there can be no assurance
we
will be able to attract one or more qualified independent directors or that
any
such directors can be added to our board as it may require us to increase the
number of director on our board of directors, seek the resignation of directors
who are not independent, or some combination thereof. If we are unable to
attract qualified independent directors or nominate or elect such directors,
our
security holders will not have the protections provided by having independent
directors or audit committee members. Although we believe that all actions
taken
by our directors on our behalf will be in our best interests, whether or not
they are deemed to be independent, we cannot assure you that this will actually
be the case. If actions are taken, or expenses are incurred that are not in
our
best interests, it could have a material adverse effect on our business and
operations and the price of our stock held by our shareholders.
We
must successfully maintain and/or upgrade our information technology
systems.
We
rely
on various information technology systems to manage our operations, and we
regularly evaluate these systems against our current and expected requirements.
Although we have no current plans to implement modifications or upgrades to
our
systems, we will eventually be required to make changes to legacy
systems
and
acquiring new systems with new functionality. We are considering additional
investments in updating our ERP system to help us improve our internal control
system and to meet compliance requirements under Section 404.
We
are
also continuing to develop and update our internal information systems on a
timely basis to meet our business expansion needs. Any information technology
system disruptions, if not anticipated and appropriately mitigated, could have
an adverse effect on our business and operations.
We
may engage in future acquisitions and strategic investments that dilute the
ownership percentage of our shareholders and require the use of cash, incur
debt
or assume contingent liabilities.
As
part
of our business strategy, we expect to continue to review opportunities to
buy
or invest in other businesses or technologies that we believe would enhance
our
manufacturing capabilities, or that may otherwise offer growth opportunities.
If
we buy or invest in other businesses in the future, this may require the use
of
our cash, or we may incur debt or assume contingent liabilities.
As
part
of our business strategy, we expect to continue to review opportunities to
buy
or invest in other businesses or technologies that we believe would complement
our current products, expand the breadth of our markets or enhance our technical
capabilities, or that may otherwise offer growth opportunities. If we buy or
invest in other businesses, products or technologies in the future, we
could:
| · |
incur
significant unplanned expenses and personnel
costs;
|
| · |
issue
stock that would dilute our current shareholders’ percentage
ownership;
|
| · |
use
cash, which may result in a reduction of our
liquidity;
|
| · |
incur
debt;
|
| · |
assume
liabilities; and
|
| · |
spend
resources on unconsummated
transactions.
|
We
may not realize the anticipated benefits of past or future acquisitions and
strategic investments, and integration of acquisitions may disrupt our business
and management.
We
may in
the future acquire or make strategic investments in additional companies. We
may
not realize the anticipated benefits of these or any other acquisitions or
strategic investments, which involve numerous risks, including:
| · |
problems
integrating the purchased operations, technologies, personnel or
products
over geographically disparate
locations;
|
| · |
unanticipated
costs, litigation and other contingent
liabilities;
|
| · |
diversion
of management’s attention from our core
business;
|
| · |
adverse
effects on existing business relationships with suppliers and
customers;
|
| · |
incurrence
of acquisition-related costs or amortization costs for acquired intangible
assets that could impact our operating
results;
|
| · |
inability
to retain key customers, distributors, vendors and other business
partners
of the acquired business;
|
| · |
potential
loss of our key employees or the key employees of an acquired
organization; and
|
| · |
If
we are not be able to successfully integrate businesses, products,
technologies or personnel that we acquire, or to realize expected
benefits
of our acquisitions or strategic investments, our business and financial
results may be adversely affected.
|
International
political instability and concerns about other international crises may increase
our cost of doing business and disrupt our business.
International
political instability may halt or hinder our ability to do business and may
increase our costs. Various events, including the occurrence or threat of
terrorist attacks, increased national security measures in the EU, the United
States and other countries, and military action and armed conflicts, can
suddenly increase international tensions. Increases in energy prices will also
impact our costs and could harm our operating results. In addition, concerns
about other international crises, such as the spread of severe acute respiratory
syndrome (“SARS”), avian influenza, or bird flu, and West Nile viruses, may have
an adverse effect on the world economy and could adversely affect our business
operations or the operations of our OEM partners, contract manufacturer and
suppliers. This political instability and concerns about other international
crises may, for example:
| · |
negatively
affect the reliability and cost of
transportation;
|
| · |
negatively
affect the desire and ability of our employees and customers to
travel;
|
| · |
adversely
affect our ability to obtain adequate insurance at reasonable
rates;
|
| · |
require
us to take extra security precautions for our operations;
and
|
| · |
furthermore,
to the extent that air or sea transportation is delayed or disrupted,
our
operations may be disrupted, particularly if shipments of our products
are
delayed.
|
Business
interruptions could adversely affect our business.
Our
operations and the operations of our suppliers and customers are vulnerable
to
interruption by fire, earthquake, hurricanes, power loss, telecommunications
failure and other events beyond our control. In the event of a major natural
disaster, we could experience business interruptions, destruction of facilities
and loss of life. In the event that a material business interruption occurs
that
affects us or our suppliers or customers, shipments could be delayed and our
business and financial results could be harmed.
Risks
Related to Doing Business in China
Because
our assets are located overseas, shareholders may not receive distributions
that
they would otherwise be entitled to if we were declared bankrupt or
insolvent.
Our
assets are, for the most part, located in the PRC. Because our assets are
located overseas, our assets may be outside of the jurisdiction of U.S. courts
to administer if we are the subject of an insolvency or bankruptcy proceeding.
As a result, if we declared bankruptcy or insolvency, our shareholders may
not
receive the distributions on liquidation that they would
otherwise be entitled to if our assets were to be located within the
U.S., under U.S. bankruptcy law.
Export
quotas imposed by the WTO could negatively affect our business and operations,
particularly if the Chinese government changes its allocation of such quotas
to
us.
Pursuant
to a World Trade Organization (WTO) agreement, effective January 1, 2005, the
United States and other WTO member countries agreed to remove quotas applicable
to textiles. However, as the removal of quotas resulted in an import surge
from China, the U.S. took action in May 2005 and imposed safeguard quotas on
seven categories of goods, including certain classes of apparel products,
arousing strong objection from China.
On
June
10, 2005, in response to the surge of Chinese imports into the European Union
(EU), the EU Commission signed a Memorandum of Understanding (MOU) with China
in
which ten categories of textiles and apparel are subject to restraints.
Additionally, on November 8, 2005, the U.S. and China entered into a Memorandum
of Understanding in which 21 categories of textiles and apparel are subject
to restraints.
Although
certain of our apparel products fall within the categories subject to the
safeguards in the U.S. and the EU, which could adversely affect our ability
to
export and sell these products, the imposition of quotas in 2005 did not have
a
material effect on our net sales, although it did impact our gross margin.
The
imposition of quotas did not have a material effect on our net sales or our
gross margins in both 2006 and 2007. See
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
.
We believe that we will be able to obtain a sufficient quota allocation
based on our experience in prior years. In addition, we may bid for
additional export quota allocation from the government for the U.S. and EU
markets. On a longer term basis, we believe that our customer mix and our
ability to adjust the types of apparel we manufacture will mitigate our exposure
to such trade restrictions in the future.
Nevertheless,
there can be no assurance that additional trade restrictions will not be imposed
on the exportation of our products in the future. Such actions could
result in increases in the cost of our products generally and may adversely
affect our results of operations.
Adverse
changes in economic and political policies of the PRC government could have
a
material adverse effect on the overall economic growth of China, which could
adversely affect our business.
All
of
our business operations are currently conducted in the PRC, under the
jurisdiction of the PRC government. Accordingly, our results of operations,
financial condition and prospects are subject to a significant degree to
economic, political and legal developments in China. China’s economy differs
from the economies of most developed countries in many respects, including
with
respect to the amount of government involvement, level of development, growth
rate, control of foreign exchange and allocation of resources. While the PRC
economy has experienced significant growth in the past 20 years, growth has
been
uneven across different regions and among various economic sectors of China.
The
PRC government has implemented various measures to encourage economic
development and guide the allocation of resources. Some of these measures
benefit the overall PRC economy, but may also have a negative effect on us.
For
example, our financial condition and results of operations may be adversely
affected by government control over capital investments or changes in tax
regulations that are applicable to us. Since early 2004, the PRC government
has
implemented certain measures to control the pace of economic growth. Such
measures may cause a decrease in the level of economic activity in China, which
in turn could adversely affect our results of operations and financial
condition.
Unprecedented
rapid economic growth in China may increase our costs of doing business, and
may
negatively impact our profit margins and/or profitability.
Our
business depends in part upon the availability of relatively low-cost labor
and
materials. Rising wages in China may increase our overall costs of production.
In addition, rising raw material costs, due to strong demand and greater
scarcity, may increase our overall costs of production. If we are not able
to
pass these costs on to our customers in the form of higher prices, our profit
margins and/or profitability could decline.
Fluctuation
in the value of Chinese Renminbi (RMB) relative to other currencies may
have a
material adverse effect on our business and/or an investment in our
shares.
The
value
of RMB against the U.S. dollar, the Euro and other currencies may fluctuate
and
is affected by, among other things, changes in political and economic
conditions.
In
the
last decade, the RMB has been pegged at 8.2765 yuan to one U.S. Dollar.
On July
21,
2005
it was
revalued to 8.11 per U.S. dollar. Following the removal of the peg to the
U.S.
Dollar and pressure from the United States, the People’s Bank of China also
announced that the RMB would be pegged to a basket of foreign currencies,
rather
than being strictly tied to the U.S. Dollar, and would be allowed to float
trade
within a narrow 0.3% daily band against this basket of currencies. The
PRC
government has stated that the basket is dominated by the U.S. Dollar,
E
uro,
Japanese Yen and South Korean Won, with a smaller proportion made up of
the
British Pound, Thai Baht, Russian Ruble, Australian Dollar, Canadian Dollar
and
Singapore Dollar.
There
can
be no assurance that the relationship between the RMB and these currencies
will
remain stable over time, especially in light of the significant political
pressure on the Chinese government to permit the free flotation of the
RMB,
which could result in greater and more frequent fluctuations in the exchange
rate between the RMB, the U.S. dollar, and the Euro. If the RMB were to
increase
in value against the U.S. Dollar and other currencies, for example, consumers
in
the U.S., Japan and Europe would experience an increase in the relative
prices
of goods and services produced by us, which might translate into a decrease
in
sales. In addition, if the RMB were to decline in value against these other
currencies, the financial value of your investment in our shares would
also
decline.
You
may face difficulties in protecting your interests, and your ability to protect
your rights through the U.S. federal courts may be limited, because our
subsidiaries are incorporated in non-U.S. jurisdictions, we conduct
substantially all of our operations in China, and all of our officers reside
outside the United States.
Although
we are incorporated in Florida, we conduct substantially all of our operations
in China through our wholly owned subsidiaries in China. All of our officers
reside outside the United States and some or all of the assets of those persons
are located outside of the United States. As a result, it may be difficult
or
impossible for you to bring an action against us or against these individuals
in
China in the event that you believe that your rights have been infringed under
the securities laws or otherwise. Even if you are successful in bringing an
action of this kind, the laws of the PRC may render you unable to enforce a
judgment against our assets or the assets of our directors and
officers.
As
a
result of all of the above, our public shareholders may have more difficulty
in
protecting their interests through actions against our management, directors
or
major shareholders than would shareholders of a corporation doing business
entirely within the United States.
Risks
Related to an Investment in Our Securities
Our
common stock has limited liquidity.
Our
common stock is traded on the Over-the-Counter Bulletin Board. It is thinly
traded compared to larger more widely known companies in the same industry.
Thinly traded common stock can be more volatile than stock trading in an active
public market. We cannot predict the extent to which an active public market
for
our common stock will develop or be sustained. The high and low bid price of
Ever-Glory’s common stock during the past 52 week period is $5.00 and $1.60 per
share respectively.
Our
stock is categorized as a penny stock. Trading of our stock may be restricted
by
the SEC’s penny stock regulations which may limit a shareholder’s ability to buy
and sell our stock.
Our
stock
is categorized as a penny stock. The Securities and Exchange Commission has
adopted Rule 15g-9 which generally defines “penny stock” to be any equity
security that has a market price (as defined) less than $5.00 per share or
an
exercise price of less than $5.00 per share, subject to certain exceptions.
Our
securities are covered by the penny stock rules, which impose additional sales
practice requirements on broker-dealers who sell to persons other than
established customers and accredited investors. The penny stock rules require
a
broker-dealer, prior to a transaction in a penny stock not otherwise exempt
from
the rules, to deliver a standardized risk disclosure document in a form prepared
by the SEC which provides information about penny stocks and the nature and
level of risks in the penny stock market. The broker-dealer also must provide
the customer with current bid and offer quotations for the penny stock, the
compensation of the broker-dealer and its salesperson in the transaction and
monthly account statements showing the market value of each penny stock held
in
the customer’s account. The bid and offer quotations, and the broker-dealer and
salesperson compensation information, must be given to the customer orally
or in
writing prior to effecting the transaction and must be given to the customer
in
writing before or with the customer’s confirmation. In addition, the penny stock
rules require that prior to a transaction in a penny stock not otherwise exempt
from these rules, the broker-dealer must make a special written determination
that the penny stock is a suitable investment for the purchaser and receive
the
purchaser’s written agreement to the transaction. These disclosure requirements
may have the effect of reducing the level of trading activity in the secondary
market for the stock that is subject to these penny stock rules. Consequently,
these penny stock rules may affect the ability of broker-dealers to trade our
securities.
We
believe that the penny stock rules discourage investor interest in and limit
the
marketability of our common stock.
FINRA sales
practice requirements may also limit a shareholder’s ability to buy and sell our
stock.
In
addition to the “penny stock” rules described above, FINRAhas adopted rules that
require that in recommending an investment to a customer, a broker-dealer must
have reasonable grounds for believing that the investment is suitable for that
customer. Prior to recommending speculative low priced securities to their
non-institutional customers, broker-dealers must make reasonable efforts to
obtain information about the customer’s financial status, tax status, investment
objectives and other information. Under interpretations of these rules, FINRA
believes that there is a high probability that speculative low priced securities
will not be suitable for at least some customers. The FINRA requirements make
it
more difficult for broker-dealers to recommend that their customers buy our
common stock, which may limit your ability to buy and sell our stock and have
an
adverse effect on the market for our shares.
We
expect to experience volatility in our stock price, which could negatively
affect shareholders’ investments.
The
market price for shares of our common stock may be volatile and may fluctuate
based upon a number of factors, including, without limitation, business
performance, news announcements or changes in general market
conditions.
Other
factors, in addition to the those risks included in this section, that may
have
a significant impact on the market price of our common stock include, but are
not limited to:
| · |
receipt
of substantial orders or order cancellations of
products;
|
| · |
quality
deficiencies in services or
products;
|
| · |
international
developments, such as technology mandates, political developments
or
changes in economic policies;
|
| · |
changes
in recommendations of securities
analysts;
|
| · |
shortfalls
in our backlog, sales or earnings in any given period relative to
the
levels expected by securities analysts or projected by
us;
|
| · |
government
regulations, including stock option accounting and tax
regulations;
|
| · |
energy
blackouts;
|
| · |
acts
of terrorism and war;
|
| · |
widespread
illness;
|
| · |
proprietary
rights or product or patent
litigation;
|
| · |
strategic
transactions, such as acquisitions and
divestitures;
|
| · |
rumors
or allegations regarding our financial disclosures or practices;
or
|
| · |
earthquakes
or other natural disasters in Nanjing, China where a significant
portion
of our operations are based.
|
In
the
past, securities class action litigation has often been brought against a
company following periods of volatility in the market price of its securities.
Due to changes in the volatility of our common stock price, we may be the target
of securities litigation in the future. Securities litigation could result
in
substantial costs and divert management’s attention and resources.
Conversion
of the notes into shares of our common stock will dilute the ownership interests
of existing shareholders, including holders who will have already converted
their notes.
The
conversion of some or all of the notes into our shares of our common stock
will
dilute the ownership interests of existing shareholders. Any sales in the public
market of the shares of common stock issuable upon such conversion could
adversely affect prevailing market prices of our shares of common stock. In
addition, the existence of the notes may encourage short selling by market
participants because the conversion of the notes could depress the price of
our
shares of common stock.
To
date, we have not paid any cash dividends and no cash dividends will be paid
in
the foreseeable future.
We
do not
anticipate paying cash dividends on our common stock in the foreseeable future
and we may not have sufficient funds legally available to pay dividends. Even
if
the funds are legally available for distribution, we may nevertheless decide
not
to pay any dividends. We presently intend to retain all earnings for our
operations.
Our
common shares are not currently traded at high volume, and you may be unable
to
sell at or near ask prices or at all if you need to sell or liquidate a
substantial number of shares at one time.
We
cannot
predict the extent to which an active public market for its common stock will
develop or be sustained. However, we do not rule out the possibility of applying
for listing on the American Stock Exchange or Nasdaq Capital Market or other
markets.
Our
common shares are currently traded, but currently with low volume, based on
quotations on the “Over-the-Counter Bulletin Board”, meaning that the number of
persons interested in purchasing our common shares at or near bid prices at
any
given time may be relatively small or non-existent. This situation is
attributable to a number of factors, including the fact that we are a small
company which is still relatively unknown to stock analysts, stock brokers,
institutional investors and others in the investment community that generate
or
influence sales volume, and that even if we came to the attention of such
persons, they tend to be risk-averse and would be reluctant to follow an
unproven company such as ours or purchase or recommend the purchase of our
shares until such time as we became more seasoned and viable. As a consequence,
there may be periods of several days or more when trading activity in our shares
is minimal or non-existent, as compared to a seasoned issuer which has a large
and steady volume of trading activity that will generally support continuous
sales without an adverse effect on share price. We cannot give you any assurance
that a broader or more active public trading market for our common stock will
develop or be sustained, or that trading levels will be sustained.
Shareholders
should be aware that, according to SEC Release No. 34-29093, the market for
“penny stocks” has suffered in recent years from patterns of fraud and abuse.
Such patterns include (1) control of the market for the security by one or
a few
broker-dealers that are often related to the promoter or issuer; (2)
manipulation of prices through prearranged matching of purchases and sales
and
false and misleading press releases; (3) boiler room practices involving
high-pressure sales tactics and unrealistic price projections by inexperienced
sales persons; (4) excessive and undisclosed bid-ask differential and markups
by
selling broker-dealers; and (5) the wholesale dumping of the same securities
by
promoters and broker-dealers after prices have been manipulated to a desired
level, along with the resulting inevitable collapse of those prices and with
consequent investor losses. Our management is aware of the abuses that have
occurred historically in the penny stock market. Although we do not expect
to be
in a position to dictate the behavior of the market or of broker-dealers who
participate in the market, management will strive within the confines of
practical limitations to prevent the described patterns from being established
with respect to our securities. The occurrence of these patterns or practices
could increase the future volatility of our share price.
Our
corporate actions are substantially controlled by our principal shareholders
and
affiliated entities.
Our
principal shareholders, which includes our officers and directors, and their
affiliated entities own approximately 47% of our outstanding shares of common
stock. These shareholders, acting individually or as a group, could exert
substantial influence over matters such as electing directors and approving
mergers or other business combination transactions. In addition, because of
the
percentage of ownership and voting concentration in these principal shareholders
and their affiliated entities, elections of our board of directors will
generally be within the control of these shareholders and their affiliated
entities. While all of our shareholders are entitled to vote on matters
submitted to our shareholders for approval, the concentration of shares and
voting control presently lies with these principal shareholders and their
affiliated entities. As such, it would be difficult for shareholders to propose
and have approved proposals not supported by management. There can be no
assurances that matters voted upon by our officers and directors in their
capacity as shareholders will be viewed favorably by all of our
shareholders.
The
elimination of monetary liability against our directors, officers and employees
under Florida law and the existence of indemnification rights to our directors,
officers and employees may result in substantial expenditures by our company
and
may discourage lawsuits against our directors, officers and
employees.
Our
amended and restated Articles of Incorporation contain a provision permitting
us
to eliminate the liability of our directors for monetary damages to our company
and shareholders to the extent provided by Florida law. We may also have
contractual indemnification obligations under our employment agreements with
our
officers. The foregoing indemnification obligations could result in our company
incurring substantial expenditures to cover the cost of settlement or damage
awards against directors and officers, which we may be unable to recoup. These
provisions and resultant costs may also discourage our company from bringing
a
lawsuit against directors and officers for breaches of their fiduciary duties,
and may similarly discourage the filing of derivative litigation by our
shareholders against our directors and officers even though such actions, if
successful, might otherwise benefit our company and shareholders.
Legislative
actions, higher insurance costs and potential new accounting pronouncements
may
impact our future financial position and results of
operations.
There
have been regulatory changes, including the Sarbanes-Oxley Act of 2002, and
there may potentially be new accounting pronouncements or additional regulatory
rulings that will have an impact on our future financial position and results
of
operations. The Sarbanes-Oxley Act of 2002 and other rule changes as well as
proposed legislative initiatives following the Enron bankruptcy are likely
to
increase general and administrative costs and expenses. In addition, insurers
are likely to increase premiums as a result of high claims rates over the past
several years, which we expect will increase our premiums for insurance
policies. Further, there could be changes in certain accounting rules. These
and
other potential changes could materially increase the expenses we report under
generally accepted accounting principles, and adversely affect our operating
results.
If
we fail to maintain an effective system of internal controls, we may not be
able
to accurately report our financial results or prevent material
misstatements.
We
are
subject to reporting obligations concerning our internal controls, under the
U.S. securities laws. The Securities and Exchange Commission, or the SEC, as
required by Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules
requiring every public company to include a management report on such company’s
internal controls over financial reporting in its annual report, which contains
management’s assessment of the effectiveness of our internal controls over
financial reporting. In addition, an independent registered public accounting
firm must attest to management’s assessment of the effectiveness of our internal
controls over financial reporting, and report on the effectiveness of these
controls. These requirements will first apply to our annual report on Form
10-K
for the fiscal year ending December 31, 2007. Our management may conclude that
our internal controls over our financial reporting are not effective. Moreover,
even if our management concludes that our internal controls over financial
reporting are effective, our independent registered public accounting firm
may
still decline to attest to our management’s assessment or may issue a report
that is qualified if it is not satisfied with our controls or the level at
which
our controls are documented, designed, operated or reviewed, or if it interprets
the relevant requirements differently from us. Our reporting obligations as
a
public company will place a significant strain on our management, operational
and financial resources and systems for the foreseeable future. Effective
internal controls, particularly those related to sales revenue recognition,
are
necessary for us to produce reliable financial reports and are important to
help
prevent material misstatements, or in certain extreme cases, fraud. As a result,
our failure to achieve and maintain effective internal controls over financial
reporting could result in the loss of investor confidence in the reliability
of
our financial statements, which in turn could harm our business and negatively
impact the trading price of our stock. Furthermore, we anticipate that we will
incur considerable costs and use significant management time and other resources
in an effort to comply with Section 404 and other requirements of the
Sarbanes-Oxley Act.
None.
Factories
In
2007,
we operated three office/factory complexes in the Nanjing Jiangning Economic
and
Technological Development Zone and in Shangfang Town, which are located in
Nanjing, China. The following is a description of these factories:
(i)
Goldenway
. Our Goldenway facilities are located in Nanjing Jiangning
Economic and Technological Development Zone, PRC, and includes 10,000 square
meters of floor space. Approximately 600 employees work at this location. Our
Goldenway facility handles administrative, sales and distribution functions
in
addition to manufacturing.
(ii)
New-Tailun
. Our New-Tailun facilities are located in Shangfang Town,
Nanjing, PRC, and includes 25,000 square meters of floor space. Approximately
700 employees work at this location. Our New-Tailun facility mainly handles
manufacturing.
(iii)
Catch-Luck.
Our Catch-Luck facilities are located in Nanjing Jiangning Economic and
Technological Development Zone, PRC, and includes 26,629 square meters of office
and production space. Approximately 500 employees work at this location. Our
Catch-Luck location mainly handles manufacturing.
In
March
1996, Goldenway entered into an agreement to develop certain land held by
Jiangsu Ever-Glory International Group Corporation, its former parent company.
Under
that agreement, Goldenway agreed to pay for and develop a facility with 4,000
square meters of floor space, on that land. In exchange, Goldenway obtained
the
use rights to the newly constructed facility for a twenty year period (after
which period the use rights would revert back to Jiangsu Ever-Glory
International Group Corporation. Goldenway
currently
holds the right to use the building and improvements, and continues to lease
the
land from Jiangsu Ever-Glory under a 20 year lease. Goldenway has
offictively prepaid 100% of the rental payments of approximately $137,100 under
the lease. There are no material encumbrances on the building and improvements.
A copy of the Land Development Agreement is included as Exhibit 10.23 to this
report.
The
New-Tailun factory leases the land and building from Jiangsu Ever-Glory for
$26,666 per annum under a two year leasing arrangement that began on April
1,
2006.
In
2006,
we made a full deposit of $2,730,890 to purchase a fifty-year land use
right for 112,442 square meters of land in the Nanjing Jiangning Economic
and Technological Development Zone. The land includes an existing facility
with
26,629 square meters of manufacturing and office space (now the Catch-Luck
factory). On April 7, 2006, we closed the transaction with the local government
of Nanjing City. On June 24, 2006, we obtained the title to the land for
the land use rights for 50 years. This land is now used for our new headquarters
and manufacturing facilities.
Expansion
of Facilities
By
the
end of 2006, we completed the construction of our new headquarters and
production
facilities. These facilities occupy approximately 36,629 square meters, in
which
26,629 square meters were leased by Goldenway to Nanjing Catch-Luck Garments
Co.
Ltd. Following our acquisition of Goldenway, Catch-Luck ceased making lease
payments to Goldenway.
In
January 2007, we completed construction of our new headquarters and a new
manufacturing facility in Jiangning Economic and Technological Development
Zone
in Nanjing, which replaces Goldenway's old facility in the Nanjing Jiangning
Economic and Technological Development Zone.
This new
construction was financed through a construction loan with Nanjing City
Commercial Bank. As of December 31, 2007, the remaining unpaid amount under
our
construction agreements with service providers relating to the construction
was
$390,207. Since the completion of our new headquarters and manufacturing
facility in December 2006, we began consolidating our operations. On January
10,
2007, we completed the process of consolidating our operations into the new
facility. Our new facility is equipped with state-of-the art manufacturing
equipment. Our headquarters are now located at 509 Chengxin Road, Jiangning
Economic and Technological Development Zone in Nanjing, People’s Republic of
China.
We
plan
to lease the older facility (previously occupied by Goldenway) to the third
parties upon consolidation of all our operations into the new location. We
believe that our current facilities, including the facilities newly built in
2007, will be more than sufficient to sustain our operations for the foreseeable
future.
We
were
named as a defendant in an action pending in the U.S. District Court for the
Northern District of Ohio. The action was filed on February 22, 2006 by
Plaintiff Douglas G. Furth. The other principal parties are named defendants
John Zanic, Wilson-Davis & Co., and Godwin, Pappas, Longley & Ronquillo,
LLP. The action alleges that we breached an agreement with the plaintiff under
which we had promised to
provide
plaintiff 1,000,000 shares of its common stock in exchange for certain
assistance in marketing and financial public relations services. The action
seeks an award of damages in excess of $75,000. We denied that we were a party
to such an agreement, that we breached the agreement or that we are otherwise
liable. We intend to vigorously defend our legal position. After vigorously
defending this action, the complaint was voluntarily dismissed by the Plaintiff
without prejudice from an action pending in the U.S. District Court for the
Northern District of Ohio. In May 2007, Plaintiff Douglas G. Furth has filed
a
Second Amended Complaint in the Litigation asserting claims against us and
other
principal parties. We have denied all the claims and have filed the responses
and objections to the Plaintiff and asked for dismissal with prejudice by the
plaintiff. No payment was made to plaintiff and no settlement has been discussed
between us and the Plaintiff.
On
November 29, 2007, we made a motion to dismiss the action for lack of personal
jurisdiction, and a decision on this matter is pending.
We
were
also named as a defendant in a civil action in the U.S. court of common pleas
of
Allegheny County, Pennsylvania. The civil action was filed on April 17, 2006
by
Plaintiff Mark B. Aronson. The action alleged that we violated the Pennsylvania
Unsolicited Telecommunication Advertisement Act by issuing “spam” emails
soliciting purchasers for our common stock. The action seeks an award of damages
in excess of $12,100. Management believes the allegations made in this action
are baseless. On January 4, 2007, the case was dismissed without prejudice
by
the Plaintiff.
We
are
aware that “spam” emails soliciting purchasers for our common stock have
originated from unknown sources. Ever-Glory does not endorse or authorize,
nor
does it participate, in the distribution of “spam” email to the public. We have
declared an anti-spamming policy on our website.
On
August
10, 2007, a majority of the holders of our voting capital stock approved an
amendment to our Articles of Incorporation to increase the authorized number
of
shares of the our common stock from 100,000,000 shares to 500,000,000 shares.
This amendment was made in order to facilitate the conversion of Series A
Preferred Stock to common stock. The shareholder approval was granted by written
consent, in lieu of a special meeting of the shareholders. In order to provide
information to our shareholders regarding this action, we filed a definitive
information statement with the Securities and Exchange Commission and delivered
it to our shareholders of record on September 11, 2007.
Market
Price of Common Equity
Our
common stock is current
ly
quoted
on the OTC Bulletin Board under the symbol “EVGY.” As of December 31, 2007,
there were approximately 70 shareholders of record of our common stock. The
number
of
registered shareholders excludes any estimate by us of the number of beneficial
owners of common shares held in street name. The following table sets forth
the
high and low bid information for the common stock for each quarter within the
last two fiscal years, as reported by the OTC Bulletin Board. These quotations
reflect inter-dealer prices, without retail mark-up, mark-down or commission
and
may not represent actual transactions.
|
|
Bid
Price
|
||||||
|
PERIOD
|
HIGH
|
LOW
|
|||||
|
|
|
|
|||||
|
FISCAL
YEAR 2007:
|
|
|
|||||
|
|
|
|
|||||
|
Fourth
Quarter ended December 31, 2007
|
$
|
5.00
|
$
|
3.10
|
|||
|
Third
Quarter ended September 30, 2007
|
$
|
4.00
|
$
|
2.80
|
|||
|
Second
Quarter ended June 30, 2007
|
$
|
3.30
|
$
|
1.80
|
|||
|
First
Quarter ended March 31, 2007
|
$
|
2.60
|
$
|
1.60
|
|||
|
|
|||||||
|
FISCAL
YEAR 2006:
|
|||||||
|
|
|||||||
|
Fourth
Quarter ended December 31, 2006
|
$
|
7.30
|
$
|
2.80
|
|||
|
Third
Quarter ended September 30, 2006
|
$
|
12.20
|
$
|
3.50
|
|||
|
Second
Quarter ended June 30, 2006
|
$
|
18.70
|
$
|
9.00
|
|||
|
First
Quarter ended March 31, 2006
|
$
|
30.00
|
$
|
9.00
|
|||
|
|
|||||||
|
FISCAL
YEAR 2005:
|
|||||||
|
|
|||||||
|
Fourth
Quarter ended December 31, 2005
|
$
|
10.10
|
$
|
1.50
|
|||
|
Third
Quarter ended September 30, 2005
|
$
|
6.00
|
$
|
1.50
|
|||
|
Second
Quarter ended June 30, 2005
|
$
|
8.20
|
$
|
2.70
|
|||
|
First
Quarter ended March 31, 2005
|
$
|
5.50
|
$
|
3.50
|
|||
On
March
3, 2008, the closing sale price of our
common
stock on the OTC Bulletin Board was $3.10 per share. The stock prices shown
in
the table above are retroactively adjusted, as applicable, to reflect our
10-to-1 reverse stock split effective on November 20, 2007.
Dividend
Policy
We
have
never declared or paid any cash dividends on our capital stock. We currently
intend to retain all of our net income for use in our business, and do not
anticipate paying any cash dividends in the foreseeable future. Any future
determination relating to dividend policy will be made at the discretion of
our
board of directors and will depend on a number of factors, including future
earnings, capital requirements, financial condition and future prospects and
other factors the board of directors may deem relevant.
You
should read the summary consolidated financial data set forth below in
conjunction with “
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
”
and
our
predecessor’s financial statements and the related notes included elsewhere in
this prospectus. The financial data of Ever-Glory International Group, Inc.
and its subsidiaries, for the twelve months ended December 31, 2007 and
2006 were derived from the financial statements included in this prospectus.
Historical results are not necessarily indicative of the results to be expected
for any future period.
|
|
Twelve
Months Ended
December 31,
|
|||||||||||||||
|
|
2007
|
2006
|
2005
|
2004
|
2003
|
|||||||||||
|
|
(restated)
|
(unaudited)
|
||||||||||||||
|
Income
Statement Data:
|
|
|
|
|
|
|||||||||||
|
Net
Sales
|
70,335,383
|
51,065,249
|
10,813,961
|
7,967,601
|
7,099,254
|
|||||||||||
|
Cost
of Sales
|
59,026,265
|
42,448,928
|
8,712,565
|
6,092,868
|
5,741,150
|
|||||||||||
|
Gross
Profit
|
11,309,118
|
8,616,321
|
2,101,396
|
1,874,733
|
1,358,104
|
|||||||||||
|
|
||||||||||||||||
|
Operating
Expenses
|
3,974,678
|
3,006,729
|
969,663
|
487,626
|
668,616
|
|||||||||||
|
|
||||||||||||||||
|
Income
from Operations
|
7,334,440
|
5,609,592
|
1,131,733
|
1,387,107
|
689,488
|
|||||||||||
|
Other
Income (Expense), net
|
(316,509
|
)
|
(262,312
|
)
|
73,487
|
(
8,668
|
)
|
(2,618
|
)
|
|||||||
|
|
||||||||||||||||
|
Income
Before Taxes
|
7,017,931
|
5,347,280
|
1,205,220
|
1,378,439
|
686,870
|
|||||||||||
|
Income
Taxes
|
(252,682
|
)
|
(312,010
|
)
|
161,680
|
145,584
|
82,424
|
|||||||||
|
Net
Income
|
6,765,249
|
5,035,270
|
1,043,540
|
1,232,855
|
604,446
|
|||||||||||
|
|
||||||||||||||||
|
Foreign
Currency Translation
|
1,383,279
|
657,375
|
5,621
|
-
|
-
|
|||||||||||
|
Comprehensive
Income
|
8,148,528
|
5,692,645
|
1,049,161
|
1,232,855
|
604,446
|
|||||||||||
|
|
||||||||||||||||
|
Basic
Net Income Per Share (in US$)
|
0.99
|
0.93
|
0.20
|
0.20
|
-
|
|||||||||||
|
Diluted
Net Income Per Share (in US$)
|
0.94
|
0.44
|
0.10
|
0.20
|
-
|
|||||||||||
|
Basic
Weighted Average Number of Shares Outstanding
|
6,865,482
|
5,388,201
|
5,522,470
|
5,831,727
|
-
|
|||||||||||
|
Diluted
Weighted Average Number of Shares Outstanding
|
7,244,062
|
11,379,700
|
11,513,969
|
5,831,727
|
-
|
|||||||||||
|
Twelve
Months Ended December 31,
|
||||||||||||||||
|
|
2007
|
2006
|
2005
|
2004
|
2003
|
|||||||||||
|
Balance
Sheet Data:
|
(restated)
|
(unaudited)
|
||||||||||||||
|
Total
Assets
|
33,513,272
|
28,433,821
|
8,035,279
|
7,445,965
|
5,988,415
|
|||||||||||
|
Current
Liabilities
|
9,111,053
|
14,416,589
|
2,286,240
|
2,788,132
|
2,563,433
|
|||||||||||
|
Long
Term Liabilities
|
4,474,985
|
4,238,526
|
-
|
-
|
-
|
|||||||||||
|
Stockholders
Equity
|
19,927,234
|
9,778,706
|
5,749,039
|
4,657,833
|
3,424,982
|
|||||||||||
Overview
The
following discussion and analysis of our financial condition and results of
operations for the quarter and the fiscal year ended December 31, 2007 should
be
read in conjunction with the Financial Statements and corresponding notes
included in this annual Report on Form 10-K. Our discussion includes
forward-looking statements based upon current expectations that involve risks
and uncertainties, such as our plans, objectives, expectations, and intentions.
Actual results and the timing of events could differ materially from those
anticipated in these forward-looking statements as a result of a number of
factors, including those set forth under the Risk Factors and Special Note
Regarding Forward-Looking Statements in this report. We use words such as
“anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,”
“believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions
to identify forward-looking statements.
We
manufacture apparel for men, women, and children for primarily middle to
high-grade well-known casual wear, sportswear, and outerwear brands and for
a
variety of companies. Most of our products are exported to Japan, Europe, and
the United States. Our customers include large retailers and well-known brands.
We manufacture our apparel products in China, including from our three factories
located in the Nanjing Jiangning Economic and Technological Development Zone
and
Shang Fang town respectively in Nanjing, China. We conduct our operations
through three wholly-owned subsidiaries in China:
Goldenway
Nanjing Garments Company Limited (“Goldenway”), Nanjing New-Tailun Garments
Company Limited (PRC) (“New-Tailun”), and
Nanjing
Catch-Luck Garments Co., Ltd. (“Catch-Luck”).
Although
we have our own manufacturing capacity, we currently outsource a large portion
of our manufacturing to our strategic contractors as a part of our overall
sourcing strategy.
Outsourcing
much of the manufacturing work allows us to maximize production flexibility
while managing capital expenditures and costs of maintaining what would
otherwise be a massive workforce. We inspect products manufactured by our
contractors to ensure that they meet our rigorous quality standards. See
“
Production
and Quality Control
.”
We
export
garments to customers in Europe, the US, Japan, and China. During fiscal years
2006 and 2007, sales generated from our five largest customers accounted for
56%
and 59% of our net sales respectively. Sales generated from the sales
to our single largest customer, being the same European customer, accounted
for
28% and 31% of our total net sales respectively.
In
2007,
approximately 57% of our sales came from customers in Europe, 21% from customers
in the United States, 16% from customers in Japan, and 6% from customers in
China. In 2006, approximately 60% of our net sales came from customers in
European countries, 18% from customers in Japan, 15% from customers in the
United States, and 6% from customers in China. Management believes that we
have established and maintained a solid business relationship with all of our
major customers.
We
purchase the majority of our raw materials directly from numerous local fabric
and accessories suppliers. We
also
purchase finished goods from other contract manufacturers. In 2006 and 2007,
we
did not rely on any one supplier exceeding 10% of our purchases.
Purchases
from our single largest supplier accounted for 7% and 5% of our total supply
purchases respectively. During fiscal years 2006 and 2007, purchases from our
five largest suppliers accounted for 24% and 21% of our total supply purchases
respectively. We have not experienced difficulty in obtaining raw materials
essential to our business, and management believes that we have built and
maintained a solid business relationship with all of our major suppliers.
In
2007,
we operated three factories in the Nanjing Jiangning Economic and Technological
Development Zone and in Shangfang Town in the Jiangning District in Nanjing,
China. Our three factories employ a staff of over 1,800 people, with an annual
production capacity of over 9 million pieces. We consider relations with our
employees to be satisfactory.
On
April
7, 2006, we completed the process of acquiring a fifty-year land use right
on
112,442 square meters of land in the Nanjing Jiangning Economic and
Technological Development Zone. The land contains an existing facility of 26,629
square meters, which includes manufacturing and office space. By the end of
2006, we completed the construction of the new office buildings
and adjoining factory. We consolidated our operation into our new
headquarters and manufacturing facility in January 2007. The new manufacturing
facility occupies an area of 10,000 square meters and is equipped with
state-of-the-art equipment
.
The
new
land and its completed buildings were collaterized as the security for the
Goldenway two year bank loan maturing in June 2010.
In
2007,
all Chinese manufacturers of certain garments were subject to aggregate export
quotas, or limitations, to the United States and Europe. Although certain of
our
apparel products fall within the categories subject to the quotas with respect
to exports to the United States and Europe, the Chinese government allocated
a
portion of the aggregate export quota to us based upon the amount of product
that we exported in the prior year. Management believes that the imposition
of
such quotas did not have a material negative effect on our net sales and our
net
margin. See
Results
of Operations
below.
As a result of our prior export performance, we were awarded a sufficient
portion of the export quotas to enable us to increase our sales to customers
in
Europe and the United States despite the export quotas. We believe that our
customer mix and our ability to adjust the types of apparel it manufactures
will
mitigate our exposure to such trade restrictions in the future.
Our three
operating subsidiaries, all of which are incorporated in the PRC, are
governed by PRC income tax laws and are subject to the PRC enterprise income
tax. Each of our consolidated entities files its own separate tax return, and
we
do not file a consolidated tax return. In
addition, Goldenway currently enjoys a 50% reduction in its income
tax as a foreign invested enterprise that exports over 70% of its
output, and was entitled a lowered income tax rate of 12% for the
2006 and 2007 tax years. Both New-Tailun and Catch-Luck were
entitled to two-year income tax exemptions effective for the
2006 and 2007 tax years, and for the three year thereafter (2008, 2009 and
2010)
based on current law these entities will be entitled to a 50% reduction in
enterprise income tax. All of our income before income taxes, and the income
tax
we pay, are related to our operations in China.
Acquisition
of Nanjing Catch-Luck Garments Co. Ltd.
On
August
27, 2007, we acquired Nanjing Catch-Luck Garments Co. Ltd., a Chinese limited
liability company, which further expanded our production capacity. Catch-Luck
is
primarily engaged in the manufacturing and sale of garments to China, Europe,
Japan and the United States. Founded in 1995, Catch-Luck has more than 500
non-union employees with annual production capacity of 1.2 million garment
pieces. It currently operates one factory spanning 6,000 square meters in the
Nanjing Jiangning Economic and Technological Development Zone. During the first
half of 2007, Catch-Luck generated net sales of $9.7 million and net income
of $1.2 million. Approximately 78% of sales came from customers in Europe,
9% from customers in the U.S., 8% from customers in China and 4% from customers
in Japan. The acquisition of Catch-Luck was financed by a combination of $0.6
million in cash and $9.4 million of our common stock. Upon completion of this
transaction, Catch-Luck became a wholly owned subsidiary of Ever-Glory. For
further details regarding our acquisition of Catch-Luck, please refer to
page 10 of the Business section of this report.
Private
Placement Financing
On
August
2, 2007, we completed a $2 million private placement involving the issuance
of
our secured convertible notes and warrants pursuant to subscription agreements
(“Subscription Agreements”) with six accredited investors. This private
placement financing closed on August 6, 2007. Under the terms of the financing,
we issued and sold two-year secured convertible notes in the principal amount
of
$2,000,000 to investors, secured by all of the assets of Ever-Glory excluding
its subsidiaries. For a further description of the terms of the financing,
please refer to page 11 in the Business section of this prospectus.
Recent
Subsequent Events
Strategic
Investment in La Chapelle
On
January 9, 2008, our subsidiary, Goldenway Nanjing Garment Company Limited,
a
PRC company entered into a Capital Contribution Agreement (“Capital Contribution
Agreement”) with Shanghai La Chapelle Garment and Accessories Company Limited
(“La Chapelle”), a Shanghai-based garment maker, and several shareholders of La
Chapelle. Under the terms of the Capital Contribution Agreement, Goldenway
agreed to invest RMB 10 million (approximately USD $1.35 million) in La Chapelle
for a 10% stake in La Chapelle.
Joint
Venture with Shanghai La Chapelle Garment and Accessories Company
On
January 9, 2008, concurrently with Goldenway’s investment, Goldway entered into
a Joint Venture Establishment Agreement with Shanghai La Chapelle Garment and
Accessories Company Limited, to form a joint venture to develop, promote and
market our new line of women’s wear in China referred to as “LA GO GO.” The
joint venture is in the form of a jointly owned PRC-based company registered
as
“Shanghai LA GO GO Fashion Company Limited.” Goldenway agreed to initially
invest RMB 6 million (USD $0.8 million), and La Chapelle agreed to invest RMB
4
million (USD $0.54 million), for a 60% and 40% stake, respectively, in the
joint
venture.
The
business objective of the joint venture is to establish a leading brand of
ladies’ garments for the mainland Chinese market. The scope of the business of
the joint venture includes all activities relating to the development of the
“LA
GO GO” brand, including marketing and branding activities, design, production,
and sales. In connection with the establishment of the joint venture, La
Chapelle transferred all of its rights and ownership in the “LA GO GO” brand
name (including any related brand names) to the joint venture. The joint venture
plans to select and engage at least sixty seasoned retailers in Shanghai,
Chengdu, Nanjing, Suzhou, Beijing, and Tianjin to exclusively carry and sell
the
LA GO GO line of women’s clothing for 2008.
2008
Outlook
As
we
look to 2008, we are working to make domestic growth in China a major part
of
our strategy and to launch the retail and wholesale distribution of our own
youthful lifestyle and fashion products under our own brands in China. With
our
new agreement with Shanghai La Chapelle Garment and Accessories Co., Ltd.,
one
of the top-ranked fashion retailers in China which operates over 350 stores
across the nation, we are in the process of launching our “LA GO GO” brand of
ladies’ wear. We plan to expand our retail network to include several dozen
stores by the end of this year, through which we plan to market and sell our
new
line. Over time, we believe sales of lifestyle and fashion products under our
own brand names in China will enable us to achieve greater balance in our sales
revenue from both overseas and domestic markets.
Building
upon our accomplishments in 2007, we are eager to demonstrate additional
progress in 2008.
In
fiscal
2008, we expect to generate total net sales of $90 million to $100
million and net income of $8 million to $8.6 million.
We
are
also pursuing plans to have our shares listed on a national exchange in the
U.S., which we believe will provide additional benefits to our shareholders.
Toward that end, we are currently seeking to appoint additional independent
directors for our board, in order to fulfill one important aspect of the listing
requirements for a national exchange.
Sales and
Expenses
We
market
and sell our products through a combination of international distributors and
direct sales to brands and retail chain stores primarily in Europe, the United
States and Japan.
For
our
new customers, we ordinarily accept orders backed by a letter of credit. For
our
established customers, we generally accept payment within 30 to 60 days
following delivery of finished goods to the customer.
Our
cost
of net sales consists of the appropriate materials purchasing, receiving
and inspection costs, inbound freight where applicable, garment finishing fees,
direct labor, and manufacturing overhead, including our contributions to a
government mandated multi-employer defined contribution plan, packing materials
and others. In addition, we subcontract a portion of our manufacturing, which
costs are included in our cost of net sales.
Our
selling expenses consist primarily of transportation and unloading charges
and
product inspection charges.
Our
general and administrative expenses consist primarily of related expenses for
executive, finance, accounting, facilities and human resources personnel, office
expenses and professional fees.
CRITICAL
ACCOUNTING POLICIES
We
have
identified critical accounting policies that, as a result of judgments,
uncertainties, uniqueness and complexities of the underlying accounting
standards and operation involved could result in material changes to our
financial position or results of operations under different conditions or using
different assumptions.
The
preparation of our 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 sales revenue and expenses
during the reporting period. Actual results could differ from those estimates.
Significant estimates in 2006 and 2005 include the allowance for the useful
life
of property and equipment.
Inventories,
consisting of raw materials and finished goods related to our products are
stated at the lower of cost or market utilizing the specific identification
method.
We
recognize sales revenue in compliance with Staff Accounting Bulletin (“SAB”)
104. Sales revenue is recognized upon delivery to our customers for local sales
and upon shipment of the products for export sales, at which time title passes
to the customer, a formal arrangement exists, the price is fixed or
determinable, no other significant obligations of the Company exist and
collectability is reasonably assured.
We
recognize sales revenue upon delivery to our customers for local sales and
upon
shipment of the products for export sales, at which time title passes to the
customer.
Details
regarding our use of these policies and the related estimates are described
in
the accompanying financial statements as of December 31, 2007 and for the years
ended December 31, 2007 and 2006. During the year ended December 31, 2007,
there
have been no material changes to our critical accounting policies that impacted
our consolidated financial condition or results of operations.
RECENT
ACCOUNTING PRONOUNCEMENTS
In
July
2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty
in
Income Taxes—an Interpretation of FASB Statement 109 (“FIN 48”), which clarifies
the accounting for uncertainty in tax positions. This interpretation provides
that the tax effects from an uncertain tax position can be recognized in our
financial statements, only if the position is more likely than not of being
sustained on audit, based on the technical merits of the position. The
provisions of FIN 48 are effective as of the beginning of fiscal 2007, with
the
cumulative effect of the change in accounting principle recorded as an
adjustment to opening retained earnings. FIN 48 did not have an impact on the
Company’s results of operations or financial condition.
In
September 2006, FASB issued Statement 157, Fair Value Measurements. This
statement defines fair value and establishes a framework for measuring fair
value in generally accepted accounting principles (GAAP). More precisely, this
statement sets forth a standard definition of fair value as it applies to assets
or liabilities, the principle market (or most advantageous market) for
determining fair value (price), the market participants, inputs and the
application of the derived fair value to those assets and liabilities. The
effective date of this pronouncement is for all full fiscal and interim periods
beginning after November 15, 2008. We are currently evaluating the impact SFAS
157 will have on our results of operations or financial condition.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities” (SFAS 159) which permits entities to
choose to measure many financial instruments and certain other items at fair
value that are not currently required to be measured at fair value. SFAS 159
will become effective for us on January 1, 2008. We are currently evaluating
the
impact this new standard, but believes that it will not have a material impact
on our financial position.
In
December 2007, the FASB issued SFAS No. 160,”Noncontrolling Interests in
Consolidated Financial Statements - an amendment of Accounting Research Bulletin
No. 51” (“SFAS 160”), which establishes accounting and reporting standards for
ownership interests in subsidiaries held by parties other than the parent,
the
amount of consolidated net income attributable to the parent and to the
noncontrolling interest, changes in a parent’s ownership interest and the
valuation of retained non-controlling equity investments when
a
subsidiary is deconsolidated. The statement also establishes reporting
requirements that provide sufficient disclosures that clearly identify and
distinguish between the interests of the parent and the interests of the
non-controlling owners. SFAS 160 is effective for fiscal years beginning after
December 15, 2008. We have not determined the effect that the application of
SFAS 160 will
have
on
its consolidated financial statements.
In
December 2007, the FASB issued SFAS 141R, “Business Combinations,” which applies
to all transactions or other events in which an entity obtains control of one
or
more businesses, including those sometimes referred to as “true mergers” or
“mergers of equals” and combinations achieved without the transfer of
consideration. This statement replaces FASB Statement No. 141 and applies to
all
business entities, including mutual entities that previously used the
pooling-of-interests method of accounting for some business combinations. We
believe that adoption of the FAS 141R will have an effect on future
acquisitions.
Results
of Operations
The
following is a discussion and analysis of our results of operations, comparing
the years ended December 31, 2007 and 2006. In connection with the following
discussion, please refer to our
Selected
Financial Data
appearing on page 30 of this Annual Report on Form 10-K.
Year
Ended December 31, 2007 Compared to Year Ended December 31,
2006
The
following table summarizes our results of operations. The table and the
discussion below should be read in conjunction with the audited financial
statements and the notes thereto appearing elsewhere in this report.
Results
of Operations
|
Year
Ended December 31,
|
|||||||||||||
|
2007
|
2006
|
||||||||||||
|
(in
U.S. Dollars, except for percentages)
|
|||||||||||||
|
Sales
|
$
|
70,335,383
|
100.00
|
%
|
$
|
51,065,249
|
100.00
|
%
|
|||||
|
Gross
Profit
|
$
|
11,309,118
|
16.08
|
%
|
$
|
8,616,321
|
16.87
|
%
|
|||||
|
Operating
Expense
|
$
|
3,974,678
|
5.65
|
%
|
$
|
3,006,729
|
5.89
|
%
|
|||||
|
Income
From Operations
|
$
|
7,334,440
|
10.43
|
%
|
$
|
5,609,592
|
10.98
|
%
|
|||||
|
Other
Expenses
|
$
|
316,509
|
0.45
|
%
|
$
|
262,312
|
0.51
|
%
|
|||||
|
Income
tax expenses
|
$
|
252,682
|
0.36
|
%
|
$
|
312,010
|
0.61
|
%
|
|||||
|
Net
Income
|
$
|
6,765,249
|
9.62
|
%
|
$
|
5,035,270
|
9.86
|
%
|
|||||
Sales,
Cost of Sales and Gross Margin
Sales
The
following table sets forth a breakdown of our total sales revenue, by
region, for the periods indicated:
|
For
the year ended December 31,
|
||||||||||||||||||
|
2007
|
2006
|
|||||||||||||||||
|
(in
U.S. dollars, except for percentages)
|
||||||||||||||||||
|
$
|
%
of total
sales revenue
|
$
|
% of total
sales revenue
|
Growth
in 2007 compared with 2006
|
||||||||||||||
|
|
|
|
|
|
|
|||||||||||||
|
Europe
|
$
|
40,308,166
|
57.3
|
%
|
$
|
29,469,046
|
57.7
|
%
|
36.8
|
%
|
||||||||
|
US
|
$
|
14,480,389
|
20.6
|
%
|
8,389,786
|
16.4
|
%
|
72.6
|
%
|
|||||||||
|
Japan
|
$
|
10,956,030
|
15.6
|
%
|
9,270,860
|
18.2
|
%
|
18.2
|
%
|
|||||||||
|
China
|
$
|
4,590,798
|
6.5
|
%
|
3,119,065
|
6.1
|
%
|
47.2
|
%
|
|||||||||
|
Other
|
$
|
0
|
-
|
816,492
|
1.6
|
%
|
-
|
|||||||||||
|
Total
Net Sales
|
$
|
70,335,383
|
100.0
|
%
|
51,065,249
|
100.0
|
%
|
37.7
|
%
|
|||||||||
Sales
for
the year ended December 31, 2007 were $70,335,383, an increase of 38% from
$51,065,249 for 2006. We generate revenue primarily from the production and
the
sale of garments to overseas as well as domestic Chinese markets. The increase
in our sales was primarily attributable to an overall increase in sales to
customers in Europe, the U.S., Japan and the PRC.
Sales
to
customers in Europe
accounted
for 57% of our total net sales in 2007, while sales to these
customers increased by 37% from the prior year. This growth in sales
was primarily due to the increase of orders from our largest customer in Germany
in 2007.
Sales
to
customers in the U.S.
accounted
for 21% of our total net sales in 2007,
while
sales to these customers
increased by 73% from the prior year. The growth in our sales was primarily
due to the relatively large increase in orders from our two customers in the
U.S. market. In 2007, our sales to one existing customer increased by 221%,
and
the addition of a new customer during 2007 accounted for an additional $1.9
million in sales.
Sales
to
customers in Japan accounted for 16% of our total net sales in 2007, with sales
to these customers increasing by 18% as compared to the prior year. Growth
in
sales to these customers was primarily due to the increase in sales to our
largest customer in Japan.
Sales
to
customers in the Chinese market accounted for 6.5% of our total net sales in
2007. Sales to Chinese customers grew by 47% as compared to the prior year.
Growth in sales to these customers was primarily due to the increase of orders
from our new customer in Hong Kong.
The
following table summarizes our revenues generated from related parties and
third
parties during the periods indicated.
|
Year
Ended December 31,
|
|||||||||||||
|
2007
|
2006
|
||||||||||||
|
(in
U.S. dollars, except for percentages)
|
|||||||||||||
|
Net
sales to related parties
|
$
|
1,155,998
|
1.64
|
%
|
$
|
479,004
|
0.94
|
%
|
|||||
|
Net
sales to third parties
|
$
|
69,179,385
|
98.36
|
%
|
$
|
50,586,245
|
99.06
|
%
|
|||||
|
Total
|
$
|
70,335,383
|
100.00
|
%
|
$
|
51,065,249
|
100.00
|
%
|
|||||
Net
sales
to related parties accounted for 1.6% of our total sales in 2007, an increase
from 0.94% in 2006. The increase was mainly attributable to an increase in
new
orders from a related party who operates in the Chinese domestic market.
Management expects sales to related parties will continue to constitute
a small portion of our total sales, in the future.
Cost
of Sales and Gross Profit Margin
The
following table sets forth the components of our cost of sales and gross profit
both in absolute amount and as a percentage of total net sales for the periods
indicated.
|
Year
Ended December 31,
|
||||||||||||||
|
2006
|
2006
|
|||||||||||||
|
(in
U.S. dollars, except for percentages)
|
||||||||||||||
|
Total
Net Sales
|
$
|
70,335,383
|
100.00
|
%
|
$
|
51,065,249
|
100.00
|
%
|
||||||
|
Raw
materials
|
$
|
30,784,337
|
43.77
|
%
|
$
|
23,076,654
|
45.19
|
%
|
||||||
|
Labor
|
$
|
3,151,476
|
4.48
|
%
|
$
|
3,356,331
|
6.57
|
%
|
||||||
|
Outsource
Production Costs
|
$
|
23,458,802
|
33.35
|
%
|
$
|
14,518,853
|
28.43
|
%
|
||||||
|
Other
and Overhead
|
$
|
1,631,650
|
2.32
|
%
|
$
|
1,497,090
|
2.93
|
%
|
||||||
|
Total
Cost of Sales
|
$
|
59,026,265
|
83.92
|
%
|
$
|
42,448,928
|
83.13
|
%
|
||||||
|
Gross
Profit
|
$
|
11,309,118
|
16.08
|
%
|
$
|
8,616,321
|
16.87
|
%
|
||||||
Raw
materials costs accounted for 44% of our total net sales in 2007, an increase
of
33% compared to the prior year. These costs, as a percentage of our total net
sales, decreased from 45% of our total net sales in 2006 to 44% of our total
net
sales in 2007. This decrease was mainly due to slightly lower material prices
as
the result of discounts from our volume purchases of some kinds of fabrics
in
2007, which discounts did not apply in 2006.
Labor
costs accounted for 4.5% of our total net sales in 2007, down from 6.6% in
the
prior year. This decrease was mainly due to a workforce reduction by our
Goldenway subsidiary. In 2007, Goldenway began to increase outsourcing to
independent contract manufacturers, and dismissed most of its workers in order
to reduce direct labor costs.
Outsource
production costs accounted for 33% of our total net sales in 2007, an increase
of 5% from the prior year. These costs, as a percentage of our total net sales,
incre
ased
from
28% of total net sales in 2006 to 33% of total net sales in 2007. This increase
was mainly due to an overall increase in the volume of our outsourced
production.
Overhead
and other expenses accounted for 2.3% of our total net sales in 2007, compared
to 2.9% of total net sales in 2006. This decrease as the percentage of our
net
sales was mainly due our cost containment measures for water and electricity
expenses.
Total
cost of sales for the year ended December 31, 2007 was $59,026,265, an increase
of 39% from $42,448,928 in 2006. As a percentage of total net sales, our cost
of
sales increased to approximately 83.92% of total net sales for 2007, up slightly
from approximately 83.13% of total net sales in 2006. Consequently, gross margin
as a percentage of total net sales decreased slightly to approximately 16.08%
for 2007 from approximately 16.87% for 2006. The 0.79% decrease in
gross
margin
was attributable to a slight increase in the cost of raw materials, an increase
in outsource production cost and a modest increase in labor costs, which could
not entirely be passed on to our customers in the form
of
higher prices.
The
following table sets forth our total net sales, cost of sales, gross profit
and
gross margin of the geographic market segments for the periods
indicated.
|
For
the year ended December 31,
|
|||||||||||||||||||||||||
|
2007
|
2006
|
||||||||||||||||||||||||
|
Net
Sales
|
Cost
of sales
|
Gross
profit
|
Gross
margin
|
Net
Sales
|
Cost
of sales
|
Gross
profit
|
Gross
margin
|
||||||||||||||||||
|
(in
U.S. dollars, except for percentages)
|
|||||||||||||||||||||||||
|
Europe
|
$
|
40,308,166
|
$
|
33,742,787
|
$
|
6,565,379
|
16.3
|
%
|
$
|
29,757,894
|
$
|
24,284,729
|
$
|
5,473,165
|
18.4
|
%
|
|||||||||
|
US
|
14,480,389
|
13,109,394
|
1,370,995
|
9.5
|
%
|
8,368,405
|
7,432,476
|
935,929
|
11.2
|
%
|
|||||||||||||||
|
Japan
|
10,956,030
|
8,982,183
|
1,973,847
|
18.0
|
%
|
9,436,593
|
7,959,672
|
1,476,921
|
15.7
|
%
|
|||||||||||||||
|
China
|
4,590,798
|
3,191,901
|
1,398,897
|
30.5
|
%
|
3,064,108
|
2,408,191
|
655,917
|
21.4
|
%
|
|||||||||||||||
|
Other
|
-
|
-
|
-
|
-
|
438,249
|
363,860
|
74,389
|
17.0
|
%
|
||||||||||||||||
|
Total
|
70,335,383
|
59,026,265
|
11,309,118
|
16.1
|
%
|
51,065,249
|
42,448,928
|
8,616,321
|
16.9
|
%
|
|||||||||||||||
Overall
gross margin in 2007 was 16.1%, which decreased from 16.9% in 2006 mainly as
a
result of increased reliance on outsourcing to contract manufacturers. Gross
margin on sales to Japan and China increased significantly as we moved from
mass
market products to high quality upper market products, and launched higher
margin women’s wear products. Gross margin on sales to the EU and U.S. markets
declined under the margin pressures.
Selling,
General and Administrative Expenses
|
For
the Year Ended December 31,
|
|||||||||||||
|
2007
|
2006
|
||||||||||||
|
|
$
|
%
of Total
Net
Sales
|
$
|
%
of Total
Net
Sales
|
|||||||||
|
(in
U.S. Dollars, except for percentages)
|
|||||||||||||
|
Gross
Profit
|
$
|
11,309,118
|
16.1
|
%
|
$
|
8,616,321
|
16.9
|
%
|
|||||
|
Operating
Expenses:
|
|||||||||||||
|
Selling
Expenses
|
593,570
|
0.8
|
%
|
726,574
|
1.4
|
%
|
|||||||
|
General
and Administrative
Expenses
|
3,381,108
|
4.8
|
%
|
2,280,155
|
4.5
|
%
|
|||||||
|
Total
|
3,974,678
|
5.7
|
%
|
3,006,729
|
5.9
|
%
|
|||||||
|
Income
from Operations
|
7,334,440
|
10.4
|
%
|
5,609,592
|
11.0
|
%
|
|||||||
Selling
expenses in 2007 decreased by 18.31% from $726,574 in 2006 to $593,570 in 2007
due to reduced export and export quota expenses as the PRC government moved
toward a more transparent and merit-based quota allocation system.
General
and administrative expenses increased by 48% from $2,280,155 in 2006 to
$3,381,108 in 2007. The increase was partially explained by the higher
depreciation and amortization on office facilities, expenditures on office
equipment while we moved into new facilities during the year. Payroll also
increased during the year as a result of the increase of our management staff
to
handle our business expansion.
Interest Expenses
Interest
expenses were $424,448 in 2007 compared to $285,876 in 2006. This increase
was
mainly due to the increase from the intere
st
due on
the Nanjing City Commerical Bank loan in the amount of $4,798,500 to
finance our new construction and supplement our working capital.
We
paid
interest of $49,973 in connection with our private placement o
f
$2
million in secured convertible notes, which began accruing interest (due and
payable quarterly) beginning in August 2007.
We
also
recorded a discount on the convertible notes related to the intrinsic value
of
the beneficial conversion feature totaling $943,797, and $1,056,203 for the
fair
value of the warrants issued. The fair value of warrants was calculated using
the Binomial model with the following assumptions: (i) risk-free interest rate
of 4.62%; (ii) expected life (in years) of 6; (iii) expected volatility of
112%;(iv) expected dividend yield of 0.00%; and (v) stock market price of $2.70.
The discount on notes payable is amortized using effective interest method
over
2 years. For the year ended December 31, 2007, we recorded $25,503 as interest
expense in our statement of operations.
Income
Tax Expenses
Income
tax expenses for 2006 and 2007 amounted to $312,010 and $252,862, respectively,
and our effective income tax rates were 6% and 4% during 2006 and 2007
respectively as a result of lower taxable income generated from
Goldenway.
Our
PRC
subsidiaries were subject to various preferential tax policies and were entitled
to the following preferential income tax rates:
|
2007
|
2006
|
|
|||||
| Goldenway | 12 | % | 12 | % | |||
| Catch-Luck | 0 | % | 0 | % | |||
| New-Tailun | 0 | % | 0 | % | |||
Goldenway is
a foreign invested enterprise that exports over 70% of its output, and as a
result, Goldenway benefits from a 50% reduction in its income tax rate.
Goldenway was entitled a lowered income tax rate of 12% for the 2006
and 2007 tax years. Both New-Tailun and Catch-Luck were entitled
to two-year income tax exemptions effective for the 2006 and
2007 tax years, and for the three year thereafter (2008, 2009 and 2010) based
on
current law these entities will be entitled to a 50% reduction in
enterprise income tax.
Ever-Glory
International Group, Inc. was incorporated in the United States and has incurred
net operating losses for income tax purposes the years ended December 31, 2007
and 2006. The net operating loss carry forwards for United States income taxes
amounted to $461,854 which may be available to reduce future years’ taxable
income. These carry forwards will expire, if not utilized, through 2027.
Management believes that the realization of the benefits from these losses
appears uncertain due to our limited operating history and continuing losses
for
United States income tax purposes. Accordingly, we have provided a 100%
valuation allowance on the deferred tax asset benefit to reduce the asset to
zero. The valuation allowance at December 31, 2007 was $461,854. Management
will
review this valuation allowance periodically and make adjustments as
warranted.
Net
Income
Net
income in 2007 was $6,765,249, an increase of $1,729,979 or 34% from $5,035,270
in 2006. This increase was mainly attributable to a significant increase in
our
net sales derived from customers in Europe and the U.S. Our fully diluted
earnings per share was $0.94 for the year ended December 31, 2007 compared
to
$0.44 for the same period in 2006.
LIQUIDITY
AND CAPITAL RESOURCES
As
of
December 31, 2007, we had cash and cash equivalents of $641,739, other current
assets of $18,001,447 and current liabilities of $ 9,111,053. We presently
finance our operations primarily from the cash flow from our operations, and
we
anticipate that this will continue to be our primary source of funds to finance
our short-term cash needs. If we require additional capital to expand or enhance
our existing facilities, we will consider debt or equity offerings or
institutional borrowing as potential means of financing.
Net
cash
provided in operating activities for 2007 was $1,876,458 compared with net
cash
provided by operating activities of $3,749,859 in 2006. This decrease was mainly
attributable to advances made by us for the purchase of raw materials as the
result of our business expansion.
Net
cash
used in investing activities was approximately $4,695,462 in 2007, compared
with
$9,300,029 in 2006. This decrease in 2007 was mainly due to the completion
of
our new headquarters and facilities in early 2007. In 2006, we borrowed
approximately $4.8 million from Nanjing City Commercial Bank to finance our
new
construction. In 2007, our new construction was completed, and accordingly
we did not borrow additional funds relating to construction in 2007. Interest
payment associated with the loan in 2007 was about $230,000.
Net
cash
provided by financing activities was $1,757,480 in 2007, compared with
$4,662,180 in 2006. The decrease was mainly because we did not increase
borrowings from the Nanjing City Commercial Bank in 2007 as compared to 2006.
On
August
15, 2006, Goldenway entered into credit agreements with Nanjing City Commercial
Bank to borrow an aggregate principal amount of up to $6.58 million within
24
months. The loans were secured by our new facilities and were used to fund
construction costs as well as our daily operations. As of December 31, 2007,
we
had borrowed $1,371,000 at an interest rate of 6.53% per annum and $3,427,500
at
an interest rate of 7 % per annum. The maturity of these borrowings can be
extended at our option. We plan to repay the loans with cash flow from
operations. In the event we do not have available cash flow from operations
to
repay these loans, we will seek to consolidate and refinance the loans at
maturity.
On
August
2, 2007, we consummated a private placement of $2,000,000 of our secured
convertible notes. The net proceeds was $1,757,480 excluding financing costs.
The financing was mainly to supplement our working capital.
In
addition, as of December 31, 2007, we had borrowed $4,474,985 from a related
party for the main purpose of funding the increased registered capital of
Goldenway. Interest to be paid to this related party totaled $236,459 for the
2007 fiscal year.
Capital
Commitments
We
have a
continuing program for the purpose of improving its manufacturing facilities.
We
anticipate that cash flows from operations and borrowings from banks will be
used to pay for these capital commitments. The Articles of Association of our
Goldenway subsidiary required that registered capital of approximately $17.5
million be paid into Goldenway by February 1, 2008. The increased registered
capital is to be paid in installments within three years of the issuance of
Goldenway’s updated business license. As of December 31, 2007, we have paid $3.6
million of our registered capital requirements. The remaining $13.9 million
is
due on January 28, 2008 but remains unpaid as of the date of this report. We
have applied for an extension of the deadline for payment of the remaining
registered capital to July 25, 2008, with the Jiangsu Administration of Industry
and Commerce. As of the date of this report, we have obtained approval for
this extension.
On
August
2, 2007, the Company consummated a private placement of $2,000,000 senior
secured convertible notes. The notes mature and become due and payable two
years
after the date they were issued, unless they are sooner converted by the
noteholders into our common stock. If the notes are not converted into common
stock, we will be required to repay the outstanding principal balance of these
notes plus accrued interest on August 2, 2009.
On
January 9, 2007, our Goldenway subsidiary entered into a Joint Venture
Establishment Agreement with Shanghai La Chapelle Garment and Accessories
Company Limited, in order to pursue a joint venture to develop, a private label
referred to as “LA GO GO” in Chinese market. Goldenway agreed to invest RMB 6
million (USD $0.8 million), and La Chapelle agreed to invest RMB 4 million
(USD
$0.54 million), for a 60% and 40% stake, respectively in the joint venture
to
develop several dozen retail chain stores in China by the end of
2008.
Uses
of Liquidity
Our
cash
requirements through the end of fiscal 2008 will be primarily to fund daily
operations for the growth of our business. Our management will consider
acquiring additional manufacturing capacity in the future to strengthen and
stabilize our manufacturing base. We intend to establish our own distribution
and logistics channels in overseas markets. As discussed above, on January
9,
2008, we entered into a joint venture to launch a proprietary brand directly
to
the Chinese market which also expected to require additional cash investments
in
2008. In addition, we must make certain required capital contributions to our
Goldenway subsidiary in accordance with a timetable to be determined with the
input of applicable local authorities.
Sources
of Liquidity
Our
primary source of liquidity for our short-term cash needs are expected to be
from cash flow generated from operations, and cash and cash equivalents
currently on hand. We believe that we will be able to borrow additional funds
if
needed.
We
believe our cash flow from operations together with our cash and cash
equivalents currently on hand will be sufficient to meet our needs for working
capital, capital expenditure and other commitments through the end of 2008.
For
our long-term cash needs, we are currently considering a number of different
financing opportunities which may include debt and equity financing. No
assurance can be made that such financing will be available to us, and adequate
funds may not be available on terms acceptable to us. If additional funds are
raised through the issuance of equity securities, dilution to existing
shareholders may result. If funding is insufficient at any time in the future,
we will develop or enhance our products or services and expand our business
through our own cash flows from operations.
As
of
December 31, 2007, we had outstanding borrowings under a loan from Nanjing
City
Commercial Bank of approximately $4,798,500. This credit facility does not
require that we meet or maintain any financial ratios or tests. As of December
31, 2007, we did not have any standby letters of credit or standby repurchase
obligations.
Foreign
Currency Translation Risk
Our
operations are, for the most part, located in the PRC, which may give rise
to
significant foreign currency risks from fluctuations and the degree of
volatility of foreign exchange rates between the United States dollar and the
Chinese Renminbi. Sales of our products are in dollars. During 2003 and 2004
the
exchange rate of RMB to the dollar remained constant at 8.26 RMB to the dollar.
On July 21, 2005, the Chinese government adjusted the exchange rate from 8.26
to
8.09 RMB to the dollar. In 2007, the RMB continued to appreciate against the
U.S. dollar. By the end of 2007, the market foreign exchanges rate was increased
to 7.31 RMB to one U.S. dollar. As a result, the ongoing appreciation of RMB
to
U.S. dollar negatively impacted our gross margins for the year ended December
31, 2007. We are always negotiating order price adjustments with most of our
customers based on the daily market foreign exchange rates, which we believe
will reduce our exposure to exchange rate fluctuations in the future and pass
some increase of the cost to our customers.
In
addition, the financial statements of Goldenway, New-Tailun and Catch-Luck
(whose functional currency is the RMB) are translated into US dollars using
the
closing rate method. The balance sheet items are translated into US dollars
using the exchange rates at the respective balance sheet dates. The capital
and
various reserves are translated at historical exchange rates prevailing at
the
time of the transactions while income and expenses items are translated at
the
average exchange rate for the year. All exchange differences are recorded within
equity. The foreign currency translation gain for the years ended December
31,
2007 and 2006 was $1,383,279 and $657,375, respectively.
OFF-BALANCE
SHEET ARRANGEMENTS
We
do not
have any off-balance sheet arrangements that have or are reasonably likely
to
have a current or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that are material to our
investors.
We
do not
use derivative financial instruments in our investment portfolio and have
no
foreign exchange contracts. Our financial instruments consist of cash and
cash
equivalents, trade accounts receivable, accounts payable and long-term
obligations. We consider investments in highly-liquid instruments purchased
with
a remaining maturity of 90 days or less at the date of purchase to be cash
equivalents.
Interest
Rates
.
Our
exposure to market risk for changes in interest rates relates primarily to
our
short-term investments and short-term obligations; thus, fluctuations in
interest rates would not have a material impact on the fair value of these
securities. At December 31, 2007, we had approximately $640,000 in cash and
cash equivalents. A hypothetical 5% increase or decrease in either short
term or
long term interest rates would not have any material impact on our earnings
or
loss, or the fair market value or cash flows of these instruments.
Foreign
Exchange Rates
.
We pay
our suppliers and employees in Chinese Renminbi (RMB), however, we sell to
customers in the U.S., Japan and Europe and we generate sales in U.S.
dollars and Euros. Accordingly, our business has substantial exposure to
changes
in exchange rates between and among the Chinese RMB, the U.S. dollar and
the
Euro.
In
the
last decade, the RMB has been pegged at 8.2765 yuan to one U.S. dollar. On
July
21
,
2005
it was
revalued to 8.11 per U.S. dollar. Following the removal of the peg to the
U.S.
dollar and pressure from the United States, the People’s Bank of China also
announced that the RMB would be pegged to a basket of foreign currencies,
rather
than being strictly tied to the U.S. dollar, and would be allowed to float
trade
within a narrow 0.3% daily band against this basket of currencies. The PRC
government has stated that the basket is dominated by the U.S. Dollar,
E
uro,
Japanese Yen and South Korean Won, with a smaller proportion made up of the
British Pound, Thai Baht, Russian Ruble, Australian Dollar, Canadian Dollar
and
Singapore Dollar.
There
can
be no assurance that the relationship between the RMB and these currencies
will
remain stable over time, especially in light of the significant political
pressure on the Chinese government to permit the free flotation of the RMB,
which could result in greater and more frequent fluctuations in the exchange
rate between the RMB, the U.S. dollar and the Euro. For additional discussion
regarding our foreign currency risk, see the section titled “
Risk
Factors—
Fluctuation
in the value of Chinese Renminbi (RMB) relative to other currencies may have
a
material adverse effect on our business and/or an investment in our
shares
.”
The
Consolidated Financial Statements and Financial Statement Schedule are included
in Part III, Item 15 (a) (1) and (2) of this Annual Report
on Form 10-K.
INDEX
TO CONSOLIDATED FINANCIAL INFORMATION
|
F-1
|
||||
| F-3 | ||||
| F-4 | ||||
| F-5 | ||||
| F-6 | ||||
| F-7 |
The
report dated February 12, 2007 and July 4, 2007 of Jimmy C. H. Cheung & Co.
included on page F-1 is a copy and has not been reissued by such firm.
|
JIMMY C.H.
CHEUNG & CO.
Certified
Public Accountants
(Amember
of Kreston International)
|
Registered
with the Public Company
Accounting
Oversight Board
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors of:
Ever-Glory
International Group, Inc.
We
have
audited the accompanying consolidated balance sheets of Ever-Glory International
Group, Inc. and subsidiaries as of December 31, 2006
(restated)
and the related consolidated statements of operations, stockholders’ equity and
cash flows for the year ended December 31, 2006
(restated).
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 audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit 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 of the financial
statements provide a reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Ever-Glory International Group,
lnc. and subsidiaries as of December 31, 2006 (restated) and the results
of its
operations and its cash flows for the year ended December 31, 2006 (restated),
in conformity with accounting principles generally accepted in the United
States
of America.
/s/
JIMMY
C.H.
CHEUNG & CO
JIMMY
C.H.
CHEUNG & CO
Certified
Public Accountants
Hong
Kong
Date:
February 12, 2007 and July 4, 2007.
|
1607
Dominion Centre, 43 Queen’s Road East, Wanchai, Hong Kong
Tel:
(852) 25295500 Fax: (852) 28651067 Email:
jchc@krestoninternational.com.hk
|
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors and Stockholders
of
Ever-Glory International Group, Inc.
We
have
audited the accompanying consolidated balance sheet of Ever-Glory International
Group, Inc. and subsidiaries as of December 31, 2007, and the related statements
of income, stockholders’ equity and comprehensive income, and cash flows for the
year then ended. Ever-Glory International Group, Inc.’s management is
responsible for these financial statements. Our responsibility is to express
an
opinion on these financial statements based on our audits. The consolidated
financial statements of Ever-Glory International Group, Inc. and subsidiaries
as
of December 31, 2006 in the accompanying consolidated financial statements
were
audited by other auditors whose report dated February 12, 2007 except for
Note
2, to which the date is July 4, 2007, expressed an unqualified opinion on
those
statements.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The company is not required
to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control
over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Ever-Glory International Group,
Inc. and subsidiaries as of December 31, 2007, and the results of its operations
and its cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America.
/s/
Moore
Stephens Wurth Frazer and Torbet,
LLP
Moore
Stephens Wurth Frazer and Torbet, LLP
Walnut,
California
March
10,
2008
EVER-GLORY
INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
AS
OF DECEMBER 31, 2007 AND 2006
|
ASSETS
|
|||||||
|
2007
|
2006
|
||||||
|
|
(restated)
|
||||||
|
CURRENT
ASSETS
|
|||||||
|
Cash
and cash equivalents
|
$
|
641,739
|
$
|
897,093
|
|||
|
Accounts
receivable
|
13,035,299
|
7,881,131
|
|||||
|
Accounts
receivable - related parties under common control
|
158,235
|
2,463,857
|
|||||
|
Inventories
|
1,897,023
|
1,216,251
|
|||||
|
Other
receivables and prepaid expenses
|
150,855
|
153,216
|
|||||
|
Advances
on inventory purchase - related parties under common
control
|
2,568,040
|
-
|
|||||
|
Deferred
financing costs
|
191,995
|
-
|
|||||
|
Total
Current Assets
|
18,643,186
|
12,611,548
|
|||||
|
LAND
USE RIGHT, NET
|
2,729,183
|
2,521,109
|
|||||
|
PROPERTY
AND EQUIPMENT, NET
|
12,140,903
|
13,301,164
|
|||||
|
TOTAL
ASSETS
|
$
|
33,513,272
|
$
|
28,433,821
|
|||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|||||||
|
CURRENT
LIABILITIES
|
|||||||
|
Accounts
payable
|
$
|
1,796,655
|
$
|
1,264,200
|
|||
|
Accounts
payable - related parties under common control
|
245,589
|
2,005,323
|
|||||
|
Other
payables- related party under common control
|
650,000
|
2,621,130
|
|||||
|
Other
payables and accrued liabilities
|
1,069,682
|
3,742,088
|
|||||
|
Value
added tax payable
|
378,898
|
239,738
|
|||||
|
Income
tax payable and other taxes payable
|
146,226
|
61,930
|
|||||
|
Bank
loans
|
4,798,500
|
4,482,180
|
|||||
|
Convertible
notes payable,
|
|||||||
|
(net
of unamortized discount of $1,974,497)
|
25,503
|
-
|
|||||
|
Total
Current Liabilities
|
9,111,053
|
14,416,589
|
|||||
|
COMMITMENTS
AND CONTINGENCIES
|
-
|
-
|
|||||
|
LONG-TERM
LIABILITIES
|
|||||||
|
Loan
from related party under common control
|
4,474,985
|
4,238,526
|
|||||
|
TOTAL
LIABILITIES
|
13,586,038
|
18,655,115
|
|||||
|
STOCKHOLDERS'
EQUITY
|
|||||||
|
Preferred
stock ($.001 par value, authorized 5,000,000 shares,
|
|||||||
|
no
shares issued and outstanding)
|
-
|
-
|
|||||
|
Series
A Convertible Preferred Stock ($.001 par value,
|
|||||||
|
authorized
10,000 shares, 0 and 789 shares issued
|
|||||||
|
and
outstanding as of December 31, 2007 and 2006,
respectively)
|
-
|
1
|
|||||
|
Common
stock ($.001 par value, authorized 50,000,000
shares,
|
|||||||
|
11,379,309
and 1,997,203 shares issued and outstanding
|
|||||||
|
as
of December 31, 2007 and 2006, respectively)
|
11,379
|
1,997
|
|||||
|
Common
stock to be issued for acquisition (0 and 2,083,333
|
|||||||
|
shares
as of December 31, 2007 and 2006, respectively)
|
-
|
2,083
|
|||||
|
Additional
paid-in capital
|
2,154,368
|
161,666
|
|||||
|
Retained
earnings
|
12,247,748
|
6,260,518
|
|||||
|
Statutory
reserve
|
3,437,379
|
2,659,360
|
|||||
|
Accumulated
other comprehensive income
|
2,076,360
|
693,081
|
|||||
|
Total
Stockholders' Equity
|
19,927,234
|
9,778,706
|
|||||
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
$
|
33,513,272
|
$
|
28,433,821
|
|||
The
accompanying notes are an integral part of these statements.
See
report of independent registered public accounting firm.
EVER-GLORY
INTERNATIONAL GROUP, INC. AND SUBSDIARIES
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
|
2007
|
2006
|
||||||
|
|
(restated)
|
||||||
|
NET
SALES
|
|||||||
|
To
related parties under common control
|
$
|
1,155,998
|
$
|
479,004
|
|||
|
To
third parties
|
69,179,385
|
50,586,245
|
|||||
|
Total
net sales
|
70,335,383
|
51,065,249
|
|||||
|
COST
OF SALES
|
|||||||
|
From
related parties under common control
|
995,398
|
420,756
|
|||||
|
From
third parties
|
58,030,867
|
42,028,172
|
|||||
|
Total
cost of sales
|
59,026,265
|
42,448,928
|
|||||
|
GROSS
PROFIT
|
11,309,118
|
8,616,321
|
|||||
|
OPERATING
EXPENSES
|
|||||||
|
Selling
expenses
|
593,570
|
726,574
|
|||||
|
General
and administrative expenses
|
3,381,108
|
2,280,155
|
|||||
|
Total
Operating Expenses
|
3,974,678
|
3,006,729
|
|||||
|
INCOME
FROM OPERATIONS
|
7,334,440
|
5,609,592
|
|||||
|
OTHER
INCOME (EXPENSES)
|
|||||||
|
Interest
income
|
174,036
|
7,309
|
|||||
|
Interest
expenses
|
(424,448
|
)
|
(285,876
|
)
|
|||
|
Other
income
|
25,708
|
16,694
|
|||||
|
Other
expenses
|
(91,805
|
)
|
(439
|
)
|
|||
|
Total
Other Income (Expenses)
|
(316,509
|
)
|
(262,312
|
)
|
|||
|
INCOME
BEFORE INCOME TAX EXPENSE
|
7,017,931
|
5,347,280
|
|||||
|
INCOME
TAX EXPENSE
|
(252,682
|
)
|
(312,010
|
)
|
|||
|
NET
INCOME
|
6,765,249
|
5,035,270
|
|||||
|
OTHER
COMPREHENSIVE INCOME
|
|||||||
|
Foreign
currency translation gain
|
1,383,279
|
657,375
|
|||||
|
COMPREHENSIVE
INCOME
|
$
|
8,148,528
|
$
|
5,692,645
|
|||
|
Net
income per share - basic
|
$
|
0.99
|
$
|
0.93
|
|||
|
Net
income per share - diluted
|
$
|
0.94
|
$
|
0.44
|
|||
|
Weighted
average number of shares outstanding
|
|||||||
|
during
the year - basic
|
6,865,482
|
5,388,201
|
|||||
|
Weighted
average number of shares outstanding
|
|||||||
|
during
the year - diluted
|
7,244,062
|
11,379,700
|
The
accompanying notes are an integral part of these statements.
See
report of independent registered public accounting firm.
EVER-GLORY
INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
|
|
Series
A Convertible
Preferred
Stock
|
Common
Stock
|
Common
stock
to
be issued
for
acquistion
|
Additional
paid-in
|
Retained
|
Statutory
|
Accumulated
other
comprehensive
|
|||||||||||||||||||||||||||
|
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
capital
|
earnings
|
reserve
|
income
|
Total
|
|||||||||||||||||||||||
|
Balance
at December 31, 2005
|
789
|
$
|
1
|
1,997,203
|
$
|
1,997
|
-
|
$
|
-
|
$
|
1,263,749
|
$
|
2,221,341
|
$
|
2,012,041
|
$
|
35,706
|
$
|
5,534,835
|
|||||||||||||||
|
-
|
||||||||||||||||||||||||||||||||||
|
Capital
contribution from shareholder
|
-
|
-
|
-
|
-
|
-
|
-
|
900,000
|
-
|
-
|
-
|
900,000
|
|||||||||||||||||||||||
|
Distribution
to stockolder for merger of New-Tailun
|
-
|
-
|
-
|
-
|
-
|
-
|
(2,000,000
|
)
|
-
|
-
|
-
|
(2,000,000
|
)
|
|||||||||||||||||||||
|
Stock
to be issued for merger of New-Tailun
|
-
|
-
|
-
|
-
|
2,083,333
|
2,083
|
(2,083
|
)
|
-
|
-
|
-
|
-
|
||||||||||||||||||||||
|
Adjustment
for prior year accrued salary
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(348,774
|
)
|
-
|
-
|
(348,774
|
)
|
|||||||||||||||||||||
|
Net
income for the year
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
5,035,270
|
-
|
-
|
5,035,270
|
|||||||||||||||||||||||
|
Statutory
reserve
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(647,319
|
)
|
647,319
|
-
|
-
|
||||||||||||||||||||||
|
Foreign
currency translation gain
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
657,375
|
657,375
|
|||||||||||||||||||||||
|
Balance
at December 31, 2006 (Restated)
|
789
|
$
|
1
|
1,997,203
|
$
|
1,997
|
2,083,333
|
$
|
2,083
|
$
|
161,666
|
$
|
6,260,518
|
$
|
2,659,360
|
$
|
693,081
|
$
|
9,778,706
|
|||||||||||||||
|
Stock
issued for merger of New-Tailun
|
-
|
-
|
2,083,333
|
2,083
|
(2,083,333
|
)
|
(2,083
|
)
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||||||||
|
Stock
issued for merger of Catch-Luck
|
-
|
-
|
1,307,693
|
1,308
|
-
|
-
|
(1,308
|
)
|
-
|
-
|
-
|
-
|
||||||||||||||||||||||
|
Conversion
of preferred stock
|
(789
|
)
|
(1
|
)
|
5,991,080
|
5,991
|
-
|
-
|
(5,990
|
)
|
-
|
-
|
-
|
-
|
||||||||||||||||||||
|
Warrants
issued to convertible note holders
|
-
|
-
|
-
|
-
|
-
|
-
|
1,056,203
|
-
|
-
|
-
|
1,056,203
|
|||||||||||||||||||||||
|
Beneficial
conversion feature on notes
|
-
|
-
|
-
|
-
|
-
|
-
|
943,797
|
-
|
-
|
-
|
943,797
|
|||||||||||||||||||||||
|
Net
income for the year
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
6,765,249
|
-
|
-
|
6,765,249
|
|||||||||||||||||||||||
|
Statutory
reserve
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(778,019
|
)
|
778,019
|
-
|
-
|
||||||||||||||||||||||
|
Foreign
currency translation gain
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
1,383,279
|
1,383,279
|
|||||||||||||||||||||||
|
Balance
at December 31, 2007
|
-
|
-
|
11,379,309
|
$
|
11,379
|
-
|
$
|
-
|
$
|
2,154,368
|
$
|
12,247,748
|
$
|
3,437,379
|
$
|
2,076,360
|
$
|
19,927,234
|
||||||||||||||||
The
accompanying notes are an integral part of these statements.
See
report of independent registered public accounting firm.
EVER-GLORY
INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
|
2007
|
2006
|
||||||
|
|
(restated)
|
||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|||||||
|
Net
income
|
$
|
6,765,249
|
$
|
5,035,270
|
|||
|
Adjusted
to reconcile net income to cash provided
|
|||||||
|
by
operating activities:
|
|||||||
|
Depreciation
and amortization
|
876,094
|
493,229
|
|||||
|
Amortization
of discount on convertible notes
|
25,503
|
-
|
|||||
|
Amortization
of deferred financing costs
|
50,525
|
-
|
|||||
|
Loss
on disposal of fixed assets
|
901
|
14,396
|
|||||
|
Changes
in operating assets and liabilities
|
|||||||
|
Accounts
receivable
|
(3,798,964
|
)
|
(8,034,568
|
)
|
|||
|
Accounts
receivable - related parties under common control
|
1,601,978
|
1,789,187
|
|||||
|
Inventories
|
(571,377
|
)
|
(197,690
|
)
|
|||
|
Other
receivables and prepaid expenses
|
11,383
|
(61,843
|
)
|
||||
|
Advance
on inventory purchase to related party under common
control
|
(1,668,357
|
)
|
-
|
||||
|
Accounts
payable
|
425,682
|
1,111,099
|
|||||
|
Accounts
payable - related parties under common control
|
(1,844,649
|
)
|
583,214
|
||||
|
Other
payables and accrued liabilities
|
143,002
|
2,005,057
|
|||||
|
Payables
to related parties under common control
|
(334,672
|
)
|
715,243
|
||||
|
Value
added tax payables
|
117,401
|
176,233
|
|||||
|
Income
tax and other tax payables
|
76,759
|
121,032
|
|||||
|
Net
cash provided by operating activities
|
1,876,458
|
3,749,859
|
|||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|||||||
|
Purchase
of New-Tailun
|
(2,000,000
|
)
|
-
|
||||
|
Purchase
of property and equipment
|
(3,127,321
|
)
|
(9,300,029
|
)
|
|||
|
Proceeds
from sale of equipment
|
431,859
|
-
|
|||||
|
Net
cash used in investing activities
|
(4,695,462
|
)
|
(9,300,029
|
)
|
|||
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|||||||
|
Contribution
by stockholder
|
-
|
900,000
|
|||||
|
Proceeds
from bank loan
|
8,558,550
|
4,389,210
|
|||||
|
Repayment
of bank loan
|
(8,558,550
|
)
|
(627,030
|
)
|
|||
|
Net
proceeds from convertible notes
|
1,757,480
|
-
|
|||||
|
Net
cash provided by financing activities
|
1,757,480
|
4,662,180
|
|||||
|
EFFECT
OF EXCHANGE RATE ON CASH
|
806,170
|
311,413
|
|||||
|
NET
DECREASE IN CASH AND CASH EQUIVALENTS
|
(255,354
|
)
|
(576,577
|
)
|
|||
|
CASH
AND CASH EQUIVALENTS AT BEGINNING OF YEAR
|
897,093
|
1,473,670
|
|||||
|
CASH
AND CASH EQUIVALENTS AT END OF YEAR
|
641,739
|
897,093
|
|||||
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
|||||||
|
Cash
paid during the year for:
|
|||||||
|
Interest
expense
|
$
|
162,156
|
$
|
50,017
|
|||
|
Income
taxes
|
$
|
199,071
|
$
|
357,280
|
The
accompanying notes are an integral part of these statements.
See
report of independent registered public accounting firm.
F-6
EVER-GLORY
INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 AND 2006
NOTE
1
- ORGANIZATION AND BASIS OF
PRESENTATION
Ever-Glory
International Group, Inc. (“EVGY”) was incorporated in Florida on October 19,
1994. All of its businesses are operated through its three subsidiaries in
the
People’s Republic of China.
Perfect
Dream Limited (“Perfect Dream”), a wholly owned subsidiary of EVGY, was
incorporated in the British Virgin Islands on July 1, 2004.
Nanjing
Goldenway Garments Co. Ltd. (“Goldenway”), a wholly owned subsidiary of Perfect
Dream, was incorporated in the People’s Republic of China (“PRC”) on December
31, 1993. Goldenway is principally engaged in the manufacturing and sale
of
garments.
Nanjing
New-Tailun Garments Co. Ltd. (“New-Tailun”), a wholly owned subsidiary of
Perfect Dream, was incorporated in the PRC on March 27, 2006. New-Tailun
is
principally engaged in the manufacturing and sale of garments.
Nanjing
Catch-Luck Garments Co, Ltd. (“Catch-Luck”), a wholly owned subsidiary of
Perfect Dream, was incorporated in the PRC on December 21, 1995. Catch-Luck
was
incorporated as a joint venture. On January 18, 2006, Catch-Luck became a
wholly
owned foreign enterprise after its acquisition by Perfect Dream. Catch-Luck
is
principally engaged in the manufacturing and sale of garments to customers
located in Europe and Japan.
EVGY,
Perfect Dream, Goldenway, New-Tailun and Catch-Luck are hereinafter referred
to
as (the ”Company”).
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles
of consolidation
The
accompanying consolidated financial statements of Ever-Glory International
Group, Inc. reflect the activities of EVGY, and its 100% owned subsidiaries
Perfect Dream, Goldenway, New-Tailun and Catch-Luck. These financial statements
have been prepared in accordance with accounting principles generally accepted
in the United States of America. All significant inter-company balances and
transactions have been eliminated in consolidation.
Business
combinations between entities under common control
The
Company entered into a purchase agreement, dated November 9, 2006, with
Ever-Glory Enterprises (HK) Limited (“Ever-Glory Hong Kong”) to acquire 100%
interest of New-Tailun (the “New-Tailun transaction”). Pursuant to the terms of
the purchase agreement, the Company paid to Ever-Glory Hong Kong an amount
of
$2,000,000 in cash and issued 20,833,333 shares of the Company’s restricted
common stock having a value of $10,000,000, such value of shares were based
on
the preceding 30-day average of high bid and the low ask price for the common
stock on the date of the transfer within 90 days of the closing of New-Tailun
transaction. The New-Tailun transaction closed on December 30, 2006. Assets
acquired and debts assumed as of the acquisition date are listed below:
EVER-GLORY
INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 AND 2006
|
Item
|
Book
Value
|
|||
|
Current
assets
|
$
|
3,376,168
|
||
|
Property,
plant, and equipment
|
341,461
|
|||
|
Intangible
assets
|
||||
|
Total
assets
|
3,717,629
|
|||
|
Total
liabilities
|
1,796,785
|
|||
|
Net
assets
|
$
|
1,920,844
|
||
The
Company entered into a purchase agreement, dated June 26, 2006, with Ever-Glory
Enterprises (HK) Limited (“Ever-Glory Hong Kong”) to acquire 100% interest of
Catch-Luck (the “Catch-Luck transaction”). Pursuant to the terms of the purchase
agreement, the Company
agreed
to pay to Ever-Glory Hong Kong an amount of $600,000 in cash and issue 1,307,693
shares of the Company’s restricted common stock having a value of $3,400,000
such value of shares were based on the preceding 30-day average of high bid
and
the low ask price for the common stock on the date of the transfer within
90
days of the closing of the Catch-Luck transaction. On August 31, 2006, the
Company entered into an amendment to the Agreement (“the Amendment”) whereupon
the terms of payment on the purchase consideration was amended as
follows:
1.
The
Company will pay to Ever-Glory Hong Kong an amount of $600,000 in cash and
issued 1,307,693 shares of the Company’s restricted common stock having a value
of $3,400,000 on the date of the transfer within 90 days of the closing of
the
transaction;
2.
At the
end of the first full fiscal year ending December 31, 2008 in which Catch-Luck
generates gross revenues of at least $19,000,000 and net profit of $1,500,000,
Perfect Dream will issue 1,153,846 shares of the Company’s restricted common
stock having a value of $3,000,000; and
3.
At the
end of the next full fiscal year ending December 31, 2009 in which Catch-Luck
generates gross revenues of at least $19,000,000 and net profit of $1,500,000,
Perfect Dream will issue 1,153,846 shares of the Company’s restricted common
stock having a value of $3,000,000.
The
number of shares of common stock to be delivered to Ever-Glory Hong Kong
in
satisfaction of the Stock Purchase Price shall be calculated based on the
preceding 30-average high and low price for the Company’s common stock as quoted
on the Over-the-Counter Bulletin Board as of the date of closing.
EVER-GLORY
INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 AND 2006
On
August
1, 2007, the Company filed a definitive 14C information statement to report
stockholder approval of the acquisition of Catch-Luck. The Information Statement
was mailed to the shareholders on August 7, 2007. The Catch-Luck transaction
closed on August 27, 2007. Assets acquired and debts assumed as of the
acquisition date are listed below:
|
Item
|
Book
Value
|
|||
|
Current
assets
|
$
|
7,028,842
|
||
|
Property,
plant, and equipment
|
799,579
|
|||
|
Intangible
assets
|
||||
|
Total
assets
|
7,828,421
|
|||
|
Total
liabilities
|
4,769,080
|
|||
|
Net
assets
|
$
|
3,059,341
|
||
These
transactions were accounted for as a merger of entities under common control,
accordingly, the operation results of New-Tailun for the period from March
27,
2006 (inception) to December 31, 2006 and operations results of Catch-Luck
for
the year ended December 31, 2006 were included in the consolidated financial
statements as if the transactions had occurred at the beginning of the first
period presented, each account was stated at its historical cost. In this
regard, the prior year’s financial statements and financial information have
been restated to combine the previously separate entities to furnish comparative
information. The results of the restatement were to increase the total assets
$3,520,261, the total liabilities $1,088,836, and the shareholder’s equity
$2,431,426 as of December 31, 2006 and the net income for the year ended
December 31, 2006 by $2,564,015.
Use
of estimates
The
preparation of the financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that
affect the reported amount 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.
For
example, the Company estimates its potential losses on uncollectible
receivables. Management believes that the estimates utilized in preparing
its
financial statements are reasonable and prudent. Actual results could differ
from these estimates.
Cash
and cash equivalents
For
purpose of the statements of cash flows, cash and cash equivalents include
cash
on hand and demand deposits with a bank with original maturities of less
than
three months.
EVER-GLORY
INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 AND 2006
Accounts
receivable
The
Company extends unsecured credit to its customers in the ordinary course
of
business but mitigates the associated risks by performing credit checks and
actively pursuing past due accounts. An allowance for doubtful accounts is
established and recorded based on managements’ assessment of the credit history
with the customer and current relationships with them.
As
of
December 31, 2007 and 2006, the Company considers all its accounts receivable
to
be collectable and no provision for doubtful accounts has been made in the
financial statements.
Inventories
Inventories
are stated at lower of cost or market value, cost being determined on a specific
identification method. The Company manufactures products upon receipt of
orders
from its customers. All the products must pass the customers’ quality assurance
procedures before its delivery. Therefore, the products are rarely returned
by
the customers after delivery.
Long-lived
assets
The
Company accounts for long-lived assets under the Statements of Financial
Accounting Standards Nos. 142 and 144 “Accounting for Goodwill and Other
Intangible Assets” and “Accounting for Impairment or Disposal of Long-Lived
Assets” (“SFAS No. 142 and 144”). In accordance with SFAS No. 142 and 144,
long-lived assets, goodwill and certain identifiable intangible assets held
and
used by the Company are reviewed for impairment at least annually or more
often
whenever events or changes in circumstances indicate that the carrying amount
of
an asset may not be recoverable. For purposes of evaluating the recoverability
of long-lived assets, when undiscounted future cash flows will not be sufficient
to recover an asset’s carrying amount, the asset is written down to its fair
value. As of December 31, 2007, the Company expects these assets to be fully
recoverable.
Property
and equipment
Property
and equipment are stated at cost, less accumulated depreciation. Expenditures
for additions, major renewals and betterments are capitalized and expenditures
for maintenance and repairs are charged to expense as incurred.
Depreciation
is provided on a straight-line basis, less an estimated residual value over
the
assets’ estimated useful lives. The estimated useful lives are as
follows:
EVER-GLORY
INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 AND 2006
|
Property
and plant
|
15-20
Years
|
|
Leasehold
improvements
|
10
Years
|
|
Machinery
and equipment
|
10
Years
|
|
Office
equipment and furniture
|
5
Years
|
|
Motor
vehicles
|
5
Years
|
Intangible
assets
All
land
in the People’s Republic of China is owned by the government and cannot be sold
to any individual or company. However, the government may grant “land use
rights” to firms or individuals to occupy, develop and use land. The Company
records the land use rights obtained as intangible assets.
Intangible
assets of the Company are reviewed annually to determine whether their carrying
value has become impaired. The Company considers assets to be impaired if
the
carrying value exceeds the future projected cash flows from related operations.
The Company also re-evaluates the periods of amortization to determine whether
subsequent events and circumstances warrant revised estimates of useful lives.
As of December 31, 2007, the Company expects these assets to be fully
recoverable.
Fair
value of financial instruments
Statement
of Financial Accounting Standards No. 107 (SFAS 107), “Disclosures about Fair
Value of Financial Instruments” requires disclosure of the fair value of
financial instruments held by the Company. SFAS 107 defines the fair value
of
financial instruments as the amount at which the instrument could be exchanged
in a current transaction between willing parties. The Company considers the
carrying amount of cash, accounts receivable, other
receivables,
accounts payable, accrued liabilities and other payables to approximate their
fair values because of the short period of time between the origination of such
instruments and their expected realization and their current market rate
of
interest.
The
carrying value of cash and cash equivalents, accounts receivable (trade and
others), accounts payable (trade and related party) and accrued liabilities
approximate their fair value because of the short-term nature of these
instruments. The Company places its cash and cash equivalents with what it
believes to be high credit quality financial institutions. The Company has
a
diversified customer base, most of which are in Europe, Japan, the United
States
and the PRC. The Company controls credit risk related to accounts receivable
through credit approvals, credit limit and monitoring procedures. The Company
routinely assesses the financial strength of its customers and, based upon
factors surrounding the credit risk, establishes an allowance, if required,
for
uncollectible accounts and, as a consequence, believes that its accounts
receivable credit risk exposure beyond such allowance is limited.
EVER-GLORY
INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 AND 2006
The
Company analyzes all financial instruments with features of both liabilities
and
equity under SFAS 150, “Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity,” SFAS No 133, “Accounting for
Derivative Instruments and Hedging Activities” and EITF 00-19, “Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in,
a
Company’s Own Stock.” During 2007, the Company issued 6% secured convertible
debentures in a face amount of $2,000,000 which are due and payable in full
in 2
years from their issuance. As fixed prices are set for the conversion prices
of
such convertible debentures and the attached warrants, the Company is in
a
position to be sure it had adequate authorized shares for the future conversion
of convertible debentures and warrants. Therefore, no embedded derivatives
and
warrants are required to be recorded at fair value and marked-to-market at
each
reporting period.
Beneficial
conversion feature of convertible notes
The
Company accounted for the secured convertible notes (the “Notes”) issued
pursuant to the subscription agreement discussed in Note 9 under EITF 00-27,
‘‘Application of Issue 98-5 to Certain Convertible Instruments’’.
Based on EITF 00-27, the Company has determined that the convertible notes
contained a beneficial conversion feature because at August 2, 2007, the
effective conversion price of the convertible notes was $1.10 when the market
value per share was $2.70.
Discount
on notes payable
A
discount with respect to the Notes issued during the period ended December
31,
2007 was recorded by the Company. The amount of the discount was calculated
to
be the intrinsic value of the beneficial conversion feature and the fair
value
of the warrants included among the securities issued pursuant to the terms
of
the subscription agreement discussed in Note 9.
Revenue
and cost recognition
The
Company recognizes revenue, net of value added taxes, upon delivery for local
sales and upon shipment of the products for export sales, at which time title
passes to the customer provided that: there are no uncertainties regarding
customer acceptance; persuasive evidence of an arrangement exists; the sales
price is fixed and determinable; and collectibility is deemed probable.
Local
transportation and unloading charges and product inspection charges are included
in selling expenses and totaled $195,995 in 2007 and $154,023 in
2006.
Cost
of
goods sold includes the appropriate materials purchasing, receiving and
inspection costs, inbound freight where applicable, direct labor cost and
manufacturing overheads including depreciation of production equipment
consistent with the revenue earned.
EVER-GLORY
INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 AND 2006
Income
taxes
The
Company accounts for income taxes under the Statement of Financial Accounting
Standards No. 109, “Accounting for Income Taxes” (“Statement 109”). Under
Statement 109, 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. Under Statement 109,
the
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that included the enactment date.
The
Company adopted FASB Interpretation 48, “Accounting for Uncertainty in Income
Taxes” (“FIN 48”) as of January 1, 2007. A tax position is recognized as a
benefit only if it is “more likely than not” that the tax position would be
sustained in a tax examination, with a tax examination being presumed to
occur.
The amount recognized is the largest amount of tax benefit that is greater
than
50% likely of being realized on examination. For tax positions not meeting
the
“more likely than not” test, no tax benefit is recorded. The adoption had no
effect on the Company’s financial statements.
The
charge for taxation is based on the results for the year as adjusted for
items,
which are non-assessable or disallowed. It is calculated using tax rates
that
have been enacted or substantively enacted by the balance sheet date. Deferred
tax is accounted for using the balance sheet liability method in respect
of
temporary differences arising from differences between the carrying amount
of
assets and liabilities in the financial statements and the corresponding
tax
basis used in the computation of assessable tax profit. In principle, deferred
tax liabilities are recognized for all taxable temporary differences, and
deferred tax assets are recognized to the extent that it is probably that
taxable profit will be available against which deductible temporary differences
can be utilized.
Deferred
tax is calculated at the tax rates that are expected to apply to the period
when
the asset is realized or the liability is settled. Deferred tax is charged
or
credited in the income statement, except when it related to items credited
or
charged directly to equity, in which case the deferred tax is also dealt
with in
equity. Deferred tax assets and liabilities are offset when they relate to
income taxes levied by the same taxation authority and the Company intends
to
settle its current tax assets and liabilities on a net basis.
EVER-GLORY
INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 AND 2006
China
income tax
The
Company’s subsidiaries are governed by the Income Tax Law of the People’s
Republic of China (PRC) concerning Foreign Investment Enterprises and Foreign
Enterprises and various local income tax laws (the Income Tax
Laws).
Beginning
January 1, 2008, the new Enterprise Income Tax (“EIT”) law will replace the
existing laws for Domestic Enterprises (“DES”) and Foreign Invested Enterprises
(“FIEs”).
The
key
changes are:
|
a.
|
The
new standard EIT rate of 25% will replace the 33% rate currently
applicable to both DES and FIEs, except for High Tech companies
who pays a
reduced rate of 15%;
|
|
b.
|
Companies
established before March 16, 2007 will continue to enjoy tax holiday
treatment approved by local government for a grace period of either
for
the next 5 years or until the tax holiday term is completed, whichever
is
sooner.
|
The
Company and its subsidiaries were established before March 16, 2007 and
therefore are qualified to continue enjoying the reduced tax rate as described
before.
Upon
approval by the PRC tax authorities, FIE's scheduled to operate for a period
of
10 years or more and engaged in manufacturing and production may by exempt
from
income taxes for two years, commencing with their first profitable year of
operations, after taking into account any losses brought forward from prior
years, and thereafter with a 50% reduction for the subsequent three
years.
Goldenway
is entitled to a reduction of 50% of any income tax rate for achieving export
sales in excess of 70% of its total sales since 2007.
New-Tailun
and Catch-Luck were approved as wholly foreign-owned enterprises in 2006.
This
entity status allows New-Tailun and Catch-Luck a two-year income tax exemption
beginning from the first year of profitability, and a 50% income tax reduction
for the three years thereafter. New-Tailun and Catch-Luck are entitled to
the
income tax exemptions for 2006 and 2007 and 50% income tax reduction for
the
calendar years ended December 31, 2008, 2009 and 2010.
EVER-GLORY
INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 AND 2006
Other
comprehensive income
The
reporting currency of the Company is the US dollar. The functional currency
of
EVGY and Perfect Dream is the US dollar. The functional currency of Goldenway,
New-Tailun and Catch-Luck is the Chinese Renminbi (RMB)..
For
the
subsidiaries whose functional currencies are the RMB, all assets and liabilities
accounts were translated at the exchange rate on the balance sheet date;
stockholder's equity are translated at the historical rates and items in
the
statement of operations items are translated at the average rate for the
period.
Translation adjustments resulting from this process are included in accumulated
other comprehensive income in the statement of stockholders’ equity. The
resulting translation gains and losses that arise from exchange rate
fluctuations on transactions denominated in a currency other than the functional
currency are included in the results of operations as incurred. Items in
the
cash flow statement are translated at the average exchange rate for the
period.
Translation
adjustments resulting from this process included in accumulated other
comprehensive income in the consolidated statement of stockholders’ equity
amounted to $2,076,360 and $693,081 as of December 31, 2007 and 2006,
respectively. Assets and liabilities at December 31, 2007 and 2006 were
translated at 7.29 RMB and 7.80 RMB to $1.00, respectively. The average
translation rates applied to income statement accounts and statement of cash
flows for the years ended December 31, 2007 and 2006 were 7.59 RMB and 7.96
RMB
to $1.00, respectively. As a result, amounts related to assets and liabilities
reported on the statement of cash flows will not necessarily agree with changes
in the corresponding balances on the balance sheet.
Earnings
per share
The
Company reports earnings per share in accordance with the provisions of SFAS
No.
128, "Earnings Per Share." SFAS No. 128 requires presentation of basic and
diluted earnings per share in conjunction with the disclosure of the methodology
used in computing such earnings per share. Basic earnings per share excludes
dilution and is computed by dividing income available to common stockholders
by
the weighted average common shares outstanding during the period. Diluted
earnings per share takes into account the potential dilution that could occur
if
securities or other contracts to issue common stock were exercised and converted
into common stock. Further, according to SFAS No. 128, if the number of common
shares outstanding increase as a result of a stock dividend or stock split
or
decrease as a result of a reverse stock split, the computations of a basic
and
diluted EPS shall be adjusted retroactively for all periods presented to
reflect
that change in capital structure.
EVER-GLORY
INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 AND 2006
Segments
The
Company adopted Statement of Financial Accounting Standards No. 131, Disclosures
about Segments of an Enterprise and Related Information (“SFAS 131”). SFAS
establishes standards for operating information regarding operating segments
in
annual financial statements and requires selected information for those segments
to be presented in financial reports issued to stockholders. SFAS 131 also
establishes standards for related disclosures about products and services
and
geographic areas. Operating segments are identified as components of an
enterprise about which separate discrete financial information is available
for
evaluation by the chief operating decision maker, or decision making group,
in
making decision how to allocate resources and assess performance. The
information disclosed herein, represents all material financial information
related to the Company’s principal operating segment. The Company operates in a
single segment.
Recent
accounting pronouncements
In
July
2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty
in
Income Taxes—an Interpretation of FASB Statement 109 (“FIN 48”), which clarifies
the accounting for uncertainty in tax positions. This Interpretation provides
that the tax effects from an uncertain tax position can be recognized in
the
Company’s financial statements, only if the position is more likely than not of
being sustained on audit, based on the technical merits of the position.
The
provisions of FIN 48 are effective as of the beginning of fiscal 2007, with
the
cumulative effect of the change in accounting principle recorded as an
adjustment to opening retained earnings. The adoption of FIN 48 did not impact
the Company’s results of operations or financial condition.
In
September 2006, FASB issued Statement 157, Fair Value Measurements. This
statement defines fair value and establishes a framework for measuring fair
value in generally accepted accounting principles (GAAP). More precisely,
this
statement sets forth a standard definition of fair value as it applies to
assets
or liabilities, the principle market (or most advantageous market) for
determining fair value (price), the market participants, inputs and the
application of the derived fair value to those assets and liabilities. The
effective date of this pronouncement is for all full fiscal and interim periods
beginning after November 15, 2008. The Company does not expect the adoption
of
SFAS 157 to have an impact on the Company’s results of operations or financial
condition.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities” (SFAS 159) which permits entities to
choose to measure many financial instruments and certain other items at fair
value that are not currently required to be measured at fair value. SFAS
159
will become effective for us on January 1, 2008. The Company is currently
evaluating the impact this new Standard, but believes that it will not have
a
material impact on the Company’s financial position.
EVER-GLORY
INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 AND 2006
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements - an amendment of Accounting Research Bulletin
No. 51” (“SFAS 160”), which establishes accounting and reporting standards for
ownership interests
in
subsidiaries held by parties other than the parent, the amount of consolidated
net income attributable to the parent and to the noncontrolling interest,
changes in a parent’s ownership interest and the valuation of retained
non-controlling equity investments when a subsidiary is deconsolidated. The
Statement also establishes reporting requirements that provide sufficient
disclosures that clearly
identify
and distinguish between the interests of the parent and the interests of
the
non-controlling owners. SFAS 160 is effective for
fiscal
years beginning after December 15, 2008. The Company has not determined the
effect that the application of SFAS 160 will
have
on
its consolidated financial statements.
In
December 2007, the FASB issued SFAS 141R, “Business Combinations,” which applies
to all transactions or other events in which an entity obtains control of
one or
more businesses, including those sometimes referred to as “true mergers” or
“mergers of equals” and combinations achieved without the transfer of
consideration. This statement replaces FASB Statement No. 141 and applies
to all
business entities, including mutual entities that previously used the
pooling-of-interests method of accounting for some business combinations.
The
Company believes that adoption of the FAS 141R will have an effect on future
acquisitions.
Reclassifications
and restatements
Certain
prior period amounts have been reclassified to conform to current period
presentation. These reclassifications have no effect on net income or cash
flows.
During
the audit of the financial statements as of December 31, 2007 and for the
year
then
ended. The Company noted errors on the valuation and accounting for
the
convertible
notes issued on August 2, 2007. Accordingly, the carrying value of
the
convertible
notes and related expenses were adjusted to correct amounts as of
and
for the
year ended December 31, 2007. See Note 9 -
Convertible
Notes Payable.
NOTE
3 - ACCOUNTS RECEIVABLE
Accounts
receivable at December 31, 2007 and 2006 consisted of the following:
|
2007
|
2006
|
||||||
|
Accounts
receivable
|
$
|
13,035,299
|
$
|
7,881,131
|
|||
|
Less:
allowance for doubtful accounts
|
-
|
-
|
|||||
|
Accounts
receivable, net of allowance
|
$
|
13,035,299
|
$
|
7,881,131
|
|||
As
of
December 31, 2007 and 2006, the Company considered all accounts receivable
collectable and did not record a provision for doubtful accounts.
NOTE
4 - INVENTORIES
Inventories
at December 31, 2007 and 2006 consisted of the following:
EVER-GLORY
INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 AND 2006
|
2007
|
2006
|
||||||
|
Raw
materials
|
$
|
304,178
|
$
|
318,221
|
|||
|
Work-in-progress
|
338,599
|
518,912
|
|||||
|
Finished
goods
|
1,254,246
|
379,118
|
|||||
|
Total
inventories
|
$
|
1,897,023
|
$
|
1,216,251
|
|||
For
the
years ended December 31, 2007 and 2006, no provision for obsolete inventories
was recorded by the Company.
NOTE
5 - LAND USE RIGHTS
On
September 24, 2006, the Company obtained a fifty-year land use right on 112,442
square meters of land in the Nanjing Jiangning Economic and Technological
Development Zone.
Land
use
rights at December 31, 2007 and 2006 consisted of the following:
|
2007
|
2006
|
||||||
|
Land
use rights
|
$
|
2,867,991
|
$
|
2,550,869
|
|||
|
Less:
accumulated amortization
|
(138,808
|
)
|
(29,760
|
)
|
|||
|
Land
use rights, net
|
$
|
2,729,183
|
$
|
2,521,109
|
|||
Amortization
expense for the years ended December 31, 2007 and 2006 was $59,038 and $29,760,
respectively.
NOTE
6 - PROPERTY AND EQUIPMENT
The
following is a summary of property and equipment at December 31:
|
2007
|
2006
|
||||||
|
Property
and plant
|
$
|
11,354,623
|
$
|
4,039,818
|
|||
|
Equipment
and machinery
|
3,128,928
|
3,192,552
|
|||||
|
Office
equipment and furniture
|
208,327
|
362,628
|
|||||
|
Motor
vehicles
|
165,393
|
180,388
|
|||||
|
Construction
in progress
|
3,519
|
7,392,010
|
|||||
|
14,860,790
|
15,167,396
|
||||||
|
Less:
accumulated depreciation
|
2,719,887
|
1,866,232
|
|||||
|
Property
and equipment, net
|
$
|
12,140,903
|
$
|
13,301,164
|
|||
Depreciation
expenses for the years ended December 31, 2007 and 2006 were $817,056 and
$463,469, respectively. During 2007 and 2006 the Company recognized losses
on
disposal of equipment of $901 and $14,396, respectively. For the year ended
December 31, 2007 and 2006, $124,808 and $0 of interest was capitalized into
construction in progress and later transferred to property and plant when
completed.
EVER-GLORY
INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 AND 2006
NOTE
7 - OTHER PAYABLES AND ACCRUED LIABILITIES
Other
payables and accrued liabilities at December 31, 2007 and 2006 consist of
the
following:
|
2007
|
2006
|
||||||
|
Building
construction costs payable
|
$
|
390,207
|
$
|
2,927,498
|
|||
|
Accrued
professional fees
|
252,495
|
200,057
|
|||||
|
Accrued
wages and welfare
|
337,995
|
545,987
|
|||||
|
Other
payables
|
88,985
|
68,546
|
|||||
|
Total
other payables and accrued liabilities
|
$
|
1,069,682
|
$
|
3,742,088
|
|||
NOTE
8 - BANK LOANS
Bank
loans represent amounts due to various banks and are due on demand or normally
within one year. These loans generally can be renewed with the banks. Short
term
bank loans consisted of the following:
|
2007
|
2006
|
||||||
|
Loan
from a bank, interest rate at 0.5442% per month
|
|||||||
|
due
February 9, 2008; paid in full, January 2008.
|
$
|
1,371,000
|
$
|
-
|
|||
|
Loan
from a bank, interest rate at 0.58482% per month
|
|||||||
|
due
May 11, 2008
|
685,500
|
-
|
|||||
|
Loan
from a bank, interest rate at 0.58482% per month
|
|||||||
|
due
June 2, 2008
|
1,371,000
|
-
|
|||||
|
Loan
from a bank, interest rate at 0.58482% per month
|
|||||||
|
due
June 12, 2008
|
1,371,000
|
-
|
|||||
|
Loan
from a bank, interest rate at 0.4875% per month
|
|||||||
|
due
April 18, 2007
|
-
|
1,920,936
|
|||||
|
Loan
from a bank, interest rate at 0.4875% per month
|
|||||||
|
due
May 20, 2007
|
-
|
640,311
|
|||||
|
Loan
from a bank, interest rate at 0.4875% per month
|
|||||||
|
due
June 14, 2007
|
-
|
640,311
|
|||||
|
Loan
from a bank, interest rate at 0.4875% per month
|
|||||||
|
due
June 20, 2007
|
-
|
640,311
|
|||||
|
Loan
from a bank, interest rate at 0.4875% per month
|
|||||||
|
due
June 26, 2007
|
-
|
640,311
|
|||||
|
Total
bank loans
|
$
|
4,798,500
|
$
|
4,482,180
|
|||
These
bank loans are all collateralized by land use rights and buildings of the
company.
EVER-GLORY
INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 AND 2006
Total
interest expense on the bank loans for the years ended December 31, 2007
and
2006 amounted to $237,323 and $50,017, respectively.
NOTE
9 - CONVERTIBLE NOTES PAYABLE
On
August
2, 2007, the Company consummated a private placement of $2,000,000 principal
amount of 6% secured convertible notes with five-year common stock warrants
to
six accredited investors. Financing cost of $242,520 was paid out of the
gross
proceeds. Pursuant to SFAS 91, financing cost is amortized over the life
of the
notes to interest expense using the effective interest method. During 2007,
the
Company amortized $50,525 of financing costs in interest expenses. The secured
convertible notes are due August 2, 2009 and were originally convertible
into
9,090,909 shares of common stock of the Company at a conversion price of
$0.22
per share. In November 2007, a 10:1 reverse stock split was made effective
on
its common stock. Accordingly, the number of shares of common stock convertible
from the notes was adjusted to 909,091 at a conversion price of $2.20 per
share.
The
notes
are subject to full-ratchet anti-dilution protection, i.e. if the Company
issues
shares at an average per-share price below $2.20 per share, the conversion
price
of the notes shall be adjusted downward to match the lower per-share price.
Under the terms of the notes, the full-ratchet anti-dilution adjustments
do not
apply to (i) shares issued upon conversion of options under future stock
option
plans (ii) shares issued to third parties for acquisitions valued above $8
million; (iii) shares issued to non-affiliates for services rendered to the
Company. The holders of the notes may convert the unpaid principal amount
of the
notes into common stock of the Company at any time prior to maturity, at
the
applicable conversion price. The Company may at any time at its option, redeem
the notes by paying 125% of the unpaid principal and accrued interest.
The
Company issued warrants to the investors in the note financing, for the purchase
of up to a total of 909,091 shares of common stock at an exercise price of
$3.20. The warrants are exercisable for a period that extends five years
beginning from the date that a registration statement covering the underlying
warrant shares is declared effective. The warrants are also subject to
full-ratchet anti-dilution protection in the event that the Company issues
shares (with certain exceptions) at an average per-share price below $3.20
per
share, similar to the notes. If at any time after fifteen months after the
closing date there is no effective registration statement covering the resale
of
the shares underlying the warrants, the warrant holders may exercise their
warrants by means of a cashless exercise.
The
notes
are secured by all of the assets of the Company, excluding its subsidiaries.
Pursuant to a security agreement, the Company’s performance of the notes and
other obligations in connection with the financing is also secured by a pledge
of 390 shares Preferred Stock (has been converted into 2,961,720 shares of
common stock on November 30, 2007) personally held by the current CEO of
the
Company pursuant to a stock pledge agreement. Upon any event of default (as
defined in the notes, the security agreement and the stock pledge agreement),
the investors will be entitled to exercise their respective rights under
the
security agreement and stock pledge agreement. In addition, the subsidiaries
of
the Company, Perfect Dream and Goldenway, each guaranteed the performance
of the
Company’s obligations under the notes and the subscription agreement under a
guaranty agreement.
EVER-GLORY
INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 AND 2006
As
of
December 31, 2007, the note holders have not converted the principal amount
of
their notes into shares of common stock of the Company.
The
Company recorded a discount on the note related to the intrinsic value of
the
beneficial conversion feature totaling $943,797 and $1,056,203 for the fair
value of the warrants issued. The fair value of warrants was calculated using
the Binomial model with the following assumptions: (i) risk-free interest
rate
of 4.62%; (ii) expected life (in years) of 6; (iii) expected volatility of
112%;(iv) expected dividend yield of 0.00%; and (v) stock market price of
$2.70.
The discount on notes payable is amortized using effective interest method
over
2 years. For the year ended December 31, 2007, the Company recorded $25,503
as
interest expense in the statement of operations.
The
notes
bear a 6% annual interest rate payable in arrears on the last business day
of
each calendar quarter thereafter and on the maturity date. For the year ended
December 31, 2007, $49,972 was recorded as interest expense.
NOTE
10 - INCOME TAX
EVGY
was
incorporated in the United States and has incurred net operating losses for
income tax purposes for 2007 and 2006.
Perfect
Dream was incorporated in the British Virgin Islands and under the current
laws
of the British Virgin Islands, is not subject to tax on income or on
capital.
Goldenway
was incorporated in the PRC and is subject to PRC income tax laws and
regulations. The applicable tax rate has been 24%. In 2007, Goldenway is
entitled to a refund of 50% of any income taxes paid for achieving export
sales
in excess of 70% of the total sales in a calendar year. In 2007, Goldenway
was
subject to an applicable tax rate of 12%.
New-Tailun
and Catch-Luck were incorporated in the PRC and are subject to PRC income
tax
laws and regulations. According to the relevant laws and regulations in the
PRC,
enterprises with foreign investment in the PRC are entitled to full exemption
from income tax for two years beginning from the first year the enterprises
become profitable and has accumulated profits and a 50% income tax reduction
for
the subsequent three years. New-Tailun and Catch-Luck were approved as wholly
foreign-owned enterprises in 2006 and are entitled to the income tax exemptions
in 2006 and 2007. In 2007, no income tax was recorded by New-Tailun and
Catch-Luck as these entities are entitled to full exemption from income
tax.
EVER-GLORY
INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 AND 2006
Provision
for income tax for the years ended December 31, 2007 and 2006 amounted to
$252,682 and $312,010, respectively.
The
following table reconciles the statutory rates to the Company’s effective tax
rate for the years ended December 31, 2007 and 2006:
|
2007
|
2006
|
||||||
|
U.S.
Statutory rate
|
34.0
|
%
|
34.0
|
%
|
|||
|
Foreign
income not recognized in USA
|
(34.0
|
)
|
(34.0
|
)
|
|||
|
China
income taxes
|
33.0
|
33.0
|
|||||
|
China
income tax exemption
|
(29.4
|
)
|
(27.2
|
)
|
|||
|
Effective
income tax rate
|
3.6
|
%
|
5.8
|
%
|
|||
Ever-Glory
International Group Inc. was incorporated in the United States and has incurred
net operating losses for income tax purposes the years ended December 31,
2007
and 2006. The net operating loss carry forwards for United States income
taxes
amounted to $461,854 which may be available to reduce future years’ taxable
income. These carry forwards will expire, if not utilized, through 2027.
Management believes that the realization of the benefits from these losses
appears uncertain due to the Company’ limited operating history and continuing
losses for United States income tax purposes. Accordingly, the Company has
provided a 100% valuation allowance on the deferred tax asset benefit to
reduce
the asset to zero. The valuation allowance at December 31, 2007 was $461,854.
Management will review this valuation allowance periodically and make
adjustments as warranted.
Value
added tax
Enterprises
or individuals who sell commodities, engage in repair and maintenance or
import
and export goods in the PRC are subject to a value added tax, VAT, in accordance
with Chinese laws. The VAT standard rate is 17% of the gross sales price.
A
credit is available whereby VAT paid on the purchases of semi-finished products
or raw materials used in the production of the Company’s finished products can
be used to offset the VAT due on sales of the finished product.
VAT
on
sales and VAT on purchases amounted to $61,650,708 and $55,417,959 for the
years
ended December 31, 2007 and $42,640,629 and $39,343,972 for the year ended
December 31, 2006, respectively. Sales and purchases are recorded net of
VAT
collected and paid as the Company acts as an agent because the VAT taxes
are not
impacted by the income tax holiday.
EVER-GLORY
INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 AND 2006
NOTE
11 - EARNINGS PER SHARE
As
discussed in Note 2, all share and per share amounts used in the Company's
financial statements and notes thereto have been retroactively restated to
reflect the 10-for-1 reverse stock split, which occurred on November 20,
2007.
The
following demonstrates the calculation for earnings per share for 2006 and
2007:
|
Year
Ended December 31,
|
|||||||
|
2007
|
2006
|
||||||
|
Net
income
|
$
|
6,765,249
|
$
|
5,035,270
|
|||
|
Add:
interest expense related to convertible notes
|
75,474
|
-
|
|||||
|
Adjusted
net income for calculating EPS-diluted
|
$
|
6,840,723
|
$
|
5,035,270
|
|||
|
Weighted
average number of common stock - Basic
|
6,865,482
|
5,388,201
|
|||||
|
Effect
of dilutive securities:
|
|||||||
|
Convertible
notes
|
378,580
|
-
|
|||||
|
Series
A Convertible preferred stock
|
-
|
5,991,499
|
|||||
|
Weighted
average number of common stock - Diluted
|
7,244,062
|
11,379,700
|
|||||
|
Earnings
per share - basic
|
$
|
0.99
|
$
|
0.93
|
|||
|
Earnings
per share -diluted
|
$
|
0.94
|
$
|
0.44
|
|||
As
of
December 31, 2007, the Company excluded all 909,091 warrants outstanding
from
diluted earnings per share because the exercise price of $3.20 exceeded the
average trading price of $2.86 for the year ended December 31, 2007, making
these warrant anti-dilutive. There were no options or warrants outstanding
in
2006.
NOTE
12 - STOCKHOLDERS’ EQUITY
Authorized
shares of common stock
On
August
10, 2006, holders of a majority of the capital stock of the Company approved
an
amendment to the Company’s Articles of Incorporation, to increase the number of
authorized shares of common stock from 100,000,000 to 500,000,000. On October
3,
2007, the Company filed a Certificate of Amendment to the Articles of
Incorporation to effect the amendment. Further in November, a 10-to-1 reverse
stock split became effective. The 10-to-1 reverse stock split reduced both
the
number of outstanding shares and the number of authorized shares of common
stock
to 1/10
th
of the
amount immediately prior to the reverse stock split. As of December 31, 2007,
the authorized number of common shares was 50,000,000 with a par value of
$0.001
per share.
EVER-GLORY
INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 AND 2006
Series
A convertible preferred stock
On
October 3, 2007, effective upon the filing of an amendment to its Articles
of
Incorporation, 789 shares of the Company’s Series A Preferred Stock were
automatically converted into 59,914,988 shares, or 5,991,080 shares after
the
10-for-1 reverse stock split, of common stock of the Company. There was no
outstanding series A convertible preferred stock at December 31,
2007.
Stock
issued for acquisitions under common control
In
September 2007, the Company issued 2,083,333 shares of restricted common
stock
at a market price of $4.80 per share totaling $10,000,000 as part of the
consideration to a related company in the acquisition of
New-Tailun.
In
September 2007, the Company issued 1,307,693 shares of restricted common
stock
at a market price of $2.6 per share totaling $3,400,000 as part of the
consideration to a related company in the acquisition of Catch-Luck.
Reverse
stock split
On
November 20, 2007, the Company amended its Articles of Incorporation as filed
with the Department of State of the State of Florida to effect a 10-to-1
reverse
stock split which decreased the number of authorized shares of common stock
from
500,000,000 to 50,000,000 and reduced the number of outstanding shares from
approximately 113 million to 11.3 million shares. As of December 31, 2007,
the
post-reverse-split outstanding shares of common stock totaled
11,379,309.
As
a
result of the reverse stock split of the Company’s common stock, the conversion
price of the convertible notes was adjusted from $0.22 to $2.20 per share.
The
exercise price of the warrants issued in connection with the convertible
notes
was also adjusted from $0.32 to $3.20 per share.
Statutory
reserve
The
Company’s PRC subsidiaries are required to make appropriations to reserve funds,
comprising the statutory surplus reserve, statutory public welfare fund and
discretionary surplus reserve, based on after-tax net income determined in
accordance with generally accepted accounting principles of the People’s
Republic of China (the “PRC GAAP”). Appropriation to the statutory surplus
reserve should be at least 10% of the after tax net income determined in
accordance with PRC GAAP until the reserve is equal to 50% of the entities’
registered capital. Appropriations to the statutory public welfare fund are
at
10% of the after tax net income determined in accordance with PRC GAAP. The
statutory public welfare fund is established for the purpose of providing
employee facilities and other collective benefits to the employees and is
non-distributable other than in liquidation. Appropriations to the discretionary
surplus reserve are made at the discretion of the Board of Directors. Effective
January 1, 2006, the Company is only required to contribute to one statutory
reserve fund at 10% of net income after tax per annum, such contributions
not to
exceed 50% of the respective companies’ registered capital.
EVER-GLORY
INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 AND 2006
During
2007 and 2006, the Company appropriated $778,019 and $647,319, respectively,
to
the statutory surplus reserve fund.
NOTE
13 - RELATED PARTY TRANSACTIONS
Mr.
Kang
Yihua is the Company’s chairman and chief executive officer. The Company
purchased materials, sub-contracted certain manufacturing work, and sold
products to companies under the control of Mr. Kang Yihua. All related party
outstanding balances are short tem in nature and are expected to be settled
in
cash.
Sales
and cost of sales to related parties under common
control
For
year
ended December 31, 2007, the Company recognized sales of $1,155,998 to Nanjing
High-Tech Knitting & Weaving Technology Development Co., Ltd, a company
controlled by Mr. Kang Yihua. The related cost of sales was $995,398 for
the
year ended December 31, 2007.
For
the
year ended December 31, 2006, the Company recognized sales of $479,003 in
total
to five entities controlled by the Company’s CEO. The related cost of sales was
$420,756 for the year ended December 31, 2006. The five related parties
were:
|
(1)
|
Ever-Glory
Enterprises (Chuzhou) Co., Ltd.
|
|
(2)
|
Nanjing
High-Tech Knitting & Weaving Technology Development Co., Ltd.
|
|
(3)
|
Jiangsu
Ever-Glory International Group Corp.
|
|
(4)
|
Nanjing
Jiangning Shangfang Garments Manufacturing Co.,
Ltd.
|
|
(5)
|
Jiangsu
Blue Glory Knitting Co., Ltd.
|
Purchases
from and sub-contracts with related parties under common
control
During
2007 and 2006, the Company purchased raw materials totaling $446,561 and
$447,280, respectively, from entities controlled by the Company’s CEO. Purchases
from these entities for the years ended December 31, 2007 and 2006 were as
follows:
EVER-GLORY
INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 AND 2006
|
Purchases
from:
|
2007
|
2006
|
|||||
|
Nanjing
High-Tech Knitting & Weaving Technology Development Co.,
Ltd.
|
$
|
446,561
|
$
|
426,198
|
|||
|
Jiangsu
Blue Glory Knitting Co., Ltd.
|
-
|
21,082
|
|||||
|
Total
purchases from related parties
|
$
|
446,561
|
$
|
447,280
|
|||
In
addition, the Company sub-contracted certain manufacturing work valued at
$4,048,689 and $4,634,140 for years ended December 31, 2007 and 2006,
respectively, to related companies controlled by the Company’s CEO. The Company
provided raw materials to the sub-contractors who charged the Company a fixed
labor charge for the sub-contracting work. Sub-contract these entities for
the
years ended December 31, 2007 and 2006 were as follows:
|
Sub-contracts
with:
|
2007
|
2006
|
|||||
|
Ever-Glory
Enterprises (Chuzhou) Co., Ltd.
|
$
|
2,802,874
|
$
|
2,876,913
|
|||
|
Nanjing
High-Tech Knitting & Weaving Technology Development Co.,
Ltd.
|
268,743
|
81,895
|
|||||
|
Kunshan
Enjin Fashion Co., Ltd.
|
503,498
|
382,434
|
|||||
|
Nanjing
Ever-Kyowa Garment Washing Co., Ltd.
|
228,903
|
828,397
|
|||||
|
Nanjing
Jiangning Shangfang Garments Manufacturing Co., Ltd.
|
244,671
|
464,501
|
|||||
|
Total
sub-contracts with related parties
|
$
|
4,048,689
|
$
|
4,634,140
|
|||
Accounts
receivable - related parties under common
control
As
of
December 31, 2007 and 2006 accounts receivable from entities controlled by
the
Company’s CEO amounted to $158,235 and $2,463,857 for products sold and
sub-contracting services provided. Account receivables - related parties
were as
follows at December 31:
|
Receivable
from:
|
2007
|
2006
|
|||||
|
Ever-Glory
Enterprises (Chuzhou) Co., Ltd.
|
$
|
12,052
|
$
|
-
|
|||
|
Nanjing
High-Tech Knitting & Weaving Technology Development Co.,
Ltd.
|
146,183
|
-
|
|||||
|
Jiangsu
Ever-Glory International Group Corp.
|
-
|
2,463,857
|
|||||
|
Total
accounts receivable - related parties
|
$
|
158,235
|
$
|
2,463,857
|
|||
Advance
on inventory purchase - related party under common
control
As
of
December 31, 2007, the Company advanced funds to purchase raw material inventory
from Jiangsu Ever-Glory International Group Corp., a company controlled by
the
Company’s CEO, Mr. Kang Yihua, in amount of $2,568,040. Interest is charged at
0.5% per month according to the balance at the end of each month. Interest
income earned for the year ended of December 31, 2007 was $165,201.
EVER-GLORY
INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 AND 2006
Accounts
payables - related parties under common control
The
Company purchases raw material from and subcontract some of its productions
to
related parties. As of December 31, 2007 and 2006 the Company owed $245,589
and
$2,005,323 to related parties, all controlled by the Company’s CEO. Accounts
payables - related parties at December 31, 2007 and 2006 were as
follows:
|
Payable
to:
|
2007
|
2006
|
|||||
|
Ever-Glory
Enterprises (Chuzhou) Co., Ltd.
|
$
|
-
|
$
|
266,855
|
|||
|
Nanjing
High-Tech Knitting & Weaving Technology Development Co.,
Ltd.
|
-
|
7,356
|
|||||
|
Kunshan
Enjin Fashion Co., Ltd.
|
245,589
|
191,455
|
|||||
|
Wanshan
Furniture
|
-
|
5,794
|
|||||
|
Nanjing
Ever-Kyowa Garment Washing Co., Ltd.
|
-
|
129,557
|
|||||
|
Nanjing
Jiangning Shangfang Garments Manufacturing Co., Ltd.
|
-
|
19,209
|
|||||
|
Jiangsu
Ever-Glory International Group Corp.
|
1,385,097
|
||||||
|
Total
accounts payables - related parties
|
$
|
245,589
|
$
|
2,005,323
|
|||
Other
payables - related parties under common control
Other
payables - related parties at December 31, 2007 and 2006 were as
follows:
|
Payable
to
|
2007
|
2006
|
|||||
|
Ever-Glory
Hong Kong Limited, controlled by the Company’s CEO
|
$
|
650,000
|
$
|
2,613,542
|
|||
|
Mr.
Kang Yihua, the Company’s CEO
|
-
|
7,588
|
|||||
|
Total
other payables - related parties
|
$
|
650,000
|
$
|
2,621,130
|
|||
For
the
amount of $650,000 due to Ever-Glory Hong Kong Limited as of December 31,
2007,
$600,000 was due for the purchase of Catch-Luck while $50,000 was due for
our
going public fees paid by Ever-Glory Hong Kong Limited.
For
the
amount of $2,613,542 due to Ever-Glory Hong Kong Limited as of December 31,
2006, $2,000,000 was due for the purchase of New-Tailun while $613,542 was
due
for our going public fees paid by Ever-Glory Hong Kong Limited.
EVER-GLORY
INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 AND 2006
The
amount of $7,588 due to Mr. Kang as of December 31, 2006 was due for the
miscellaneous expenses paid by Mr. Kang on behalf of the Company.
Long
term liability - related party under common control
As
of
December 31, 2007 and 2006 the Company owed $4,474,985 and $4,238,526,
respectively to Blue Power (Hong Kong) Holding Inc., a company controlled
by the
Company’s CEO, for various advances received. Interest is charged at 6% per
annum on the amounts due. The loans are due between July 2010 and April 2011.
For years ended December 2007 and 2006, the Company accrued interest expense
of
$236,459 and $235,859, respectively. The accrued interest is included in
the
carrying amount of the loan in the accompanying balance sheets.
Lease
from a related party under common control
During
2007, the Company paid rent of $26,256 for factory and office spaces leased
from
Jiangsu Ever-Glory International Group Corp., an entity controlled by the
Company’s CEO. See Note 14.
NOTE
14 - COMMITMENTS AND CONTINGENCIES
Capital
commitment
According
to the Articles of Association of Goldenway, Goldenway had to fulfill registered
capital requirements of $17,487,894 within three years from February 2, 2005.
As
of December 31, 2007, the Company had fulfilled $3,630,000 of its registered
capital requirements and had a registered capital commitment of $13,857,894
payable by February 1, 2008. The Company has applied for the extension of
the
payment of the remaining registered commitment to July 25, 2008 with the
local
government. As of the date of this report, the Company obtained the approval
from the government granting the extension to make the required capital
contribution until July 25, 2008.
Operating
lease commitment
The
Company leases factory and office space from Jiangsu Ever-Glory International
Group Corp., a company controlled by Mr. Kang Yihua, controlling shareholder
and
chief executive of the Company, under an operating lease which expires on
March
31, 2008 at an annual rental of $26,256. Accordingly, for the period ended
December 31, 2007 and 2006, the Company recognized rental expense in amount
of
$26,256 and $18,811, respectively. The outstanding commitments of this
non-cancelable lease were $6,564 as of December 31, 2007.
EVER-GLORY
INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 AND 2006
Contingent
shares to be issued
Pursuant
to the terms of the purchase agreement on acquisition of Catch-Luck, the
Company
will issue additional common shares to the original shareholder as
follows:
|
(a)
|
At
the end of the first full fiscal year ending December 31, 2008
in which
Catch-Luck generates gross revenues of at least $19,000,000 and
net profit
of $1,500,000, Perfect Dream will issue 1,153,846 shares of the
Company’s
restricted common stock having a value of $3,000,000;
and
|
|
(b)
|
At
the end of the next full fiscal year ending December 31, 2009 in
which
Catch-Luck generates gross revenues of at least $19,000,000 and
net profit
of $1,500,000, Perfect Dream will issue 1,153,846 shares of the
Company’s
restricted common stock having a value of $3,000,000.
|
Legal
Proceedings
We
were
named as a defendant in an action pending in the U.S. District Court for
the
Northern District of Ohio. The action was filed on February 22, 2006 by
Plaintiff Douglas G. Furth. The other principal parties are named defendants
John Zanic, Wilson-Davis & Co., and Godwin, Pappas, Longley & Ronquillo,
LLP. The action alleges that we breached an agreement with the plaintiff
under
which we had promised to provide plaintiff 1,000,000 shares of its common
stock
in exchange for certain assistance in marketing and financial public relations
services. The action seeks an award of damages in excess of $75,000. We denied
that we were a party to such an agreement, that we breached the agreement
or
that we are otherwise liable. We intend to vigorously defend our legal position.
After vigorously defending this action, the complaint was voluntarily dismissed
by the Plaintiff without prejudice from an action pending in the U.S. District
Court for the Northern District of Ohio. In May 2007, Plaintiff Douglas G.
Furth
has filed a Second Amended Complaint in the Litigation asserting claims against
us and other principal parties. We have denied all the claims and have filed
the
responses and objections to the Plaintiff and asked for dismissal with prejudice
by the plaintiff. No payment was made to plaintiff and no settlement has
been
discussed between us and the Plaintiff. On November 29, 2007, we made a motion
to dismiss the action for lack of personal jurisdiction, and a decision on
this
matter is pending.
We
were
also named as a defendant in a civil action in the U.S. court of common pleas
of
Allegheny County, Pennsylvania. The civil action was filed on April 17, 2006
by
Plaintiff Mark B. Aronson. The action alleged that we violated the Pennsylvania
Unsolicited Telecommunication Advertisement Act by issuing “spam” emails
soliciting purchasers for our common stock. The action seeks an award of
damages
in excess of $12,100. Management believes the allegations made in this action
are baseless. On January 4, 2007, the case was dismissed without prejudice
by
the Plaintiff.
EVER-GLORY
INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 AND 2006
NOTE
15 - CONCENTRATIONS AND RISKS
Cash
includes cash on hand and demand deposits in accounts maintained with
state
owned
banks within the People’s Republic of China and Hong Kong. Total cash deposited
with these banks at December 31, 2007 and December 31, 2006 amounted to $625,947
and $896,381, respectively, of which no deposits are covered by insurance.
The
Company has not experienced any losses in such accounts and believes it is
not
exposed to any risks on its cash in bank accounts.
For
the
years ended December 31, 2007 and 2006, 31% and 28% of total sales were to
one
customer. As of December 31, 2007 and 2006, accounts receivable to this customer
totaled $3,023,102 and $2,980,036, respectively.
The
Company did not rely on any supplier during 2007 and 2006.
The
following is geographic information of the Company’s revenue for the year ended
December 31:
|
2007
|
2006
|
||||||
|
The
People’s Republic of China
|
$
|
4,590,798
|
$
|
3,119,065
|
|||
|
Europe
|
40,308,166
|
29,469,046
|
|||||
|
Japan
|
10,956,030
|
9,270,860
|
|||||
|
United
states
|
14,480,389
|
8,389,786
|
|||||
|
Others
|
-
|
816,492
|
|||||
|
Total
|
$
|
70,335,383
|
$
|
51,065,249
|
|||
The
Company's operations are carried out in the PRC. Accordingly, the Company's
business, financial condition and results of operations may be influenced
by the
political, economic and legal environments in the PRC, and by the general
state
of the economy in the regions where the Company’s customers are located. The
Company's operations in the PRC are subject to specific considerations and
significant risks not typically associated with companies in the North America
and Western Europe. These include risks associated with, among others, the
political, economic and legal environments and foreign currency exchange.
The
Company's results may be adversely affected by 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.
NOTE
16 - SUBSEQUENT EVENTS
On
January 4, 2008, the Company issued warrants to the placement agent that
are
exercisable for up to approximately 73,000 shares of common stock of the
Company
with an exercise price of $3.20 per share (“Warrants”). The Warrants are
exercisable for a three year period till January 4, 2011. These warrants
were
issued in connection with the private placement described in Note 9. These
warrants were valued at approximately $130,000 using the Binomial method
and
will be amortized over the life of the convertible notes.
EVER-GLORY
INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007 AND 2006
On
January 9, 2008, Goldenway entered into a Capital Contribution Agreement
(“Capital Contribution Agreement”) with Shanghai La Chapelle Garment and
Accessories Company Limited (“La Chapelle”), a Shanghai-based garment maker, and
several shareholders of La Chapelle. Under the terms of the Capital Contribution
Agreement, Goldenway agreed to invest approximately $1.37 million in cash
(RMB10
million) in La Chapelle for a 10% stake in La Chapelle. This investment will
be
accounted for using the cost method.
Also
on
January 9, 2008, concurrently with Goldenway’s investment, Goldenway entered
into an Establishment Agreement with Shanghai La Chapelle Garment and
Accessories Company Limited, to form a joint venture to develop, promote
and
market a new line of women’s wear in China commonly referred to as “LA GO GO”.
The joint venture will be in the form of a jointly owned PRC-based company
to be
registered as “Shanghai LA GO GO Fashion Company Limited.” Goldenway agreed to
initially invest approximately $820 thousand in cash (RMB 6 million), and
La
Chapelle agreed to invest approximately $550 thousand in cash (RMB 4 million),
for a 60% and 40% stake, respectively, in the joint venture. The business
objective of the joint venture is to establish and create a leading brand
of
ladies’ garments for the mainland Chinese market. The scope of the business of
the joint venture includes all activities relating to the development of
the “LA
GO GO” brand, including marketing and branding activities, design, production,
and sales. The joint venture, in which the Company is expected to have a
60%
stake, will be consolidated to the Company’s financial statements in 2008.
On
January 16, 2008, the Company approved the issuance of 12,478 shares of common
stock to pay fourth quarter interest of 2007 to six investors in connection
with
the senior convertible notes dated August 2, 2007. Approximately $30,904
was recorded as interest expense.
On
January 10, 2008 and February 11, 2008, the Company issued 50,083 and 64,013
unrestricted shares, respectively, of the Company’s common stock to Whalehaven
Capital Fund Limited in connection with the partial conversion of a Convertible
Notes issued on August 2, 2007.
On
March
5, 2008, the Company issued 131,325 unrestricted shares of the Company’s common
stock to Alpha Capital Anstalt in connection with the partial conversion
of a
Convertible Note issued on August 2, 2007.
As
approved by our board of directors, we dismissed Jimmy C.H. Cheung & Co.
(“Cheung & Co.”) as our independent auditors effective December 12,
2007. Cheung & Co. served as our independent auditors for the
fiscal years ended December 31, 2006 and December 31, 2005, and the interim
periods since the quarter ended September 30, 2005. Cheung &
Co.’s reports on our financial statements for the fiscal years ended December
31, 2006 and December 31, 2005 (the “Reports”) did not contain an adverse
opinion or disclaimer of opinion and were not qualified or modified as to
uncertainty, audit scope, or accounting principles.
During
the fiscal years ended December 31, 2006 and December 31, 2005, and until Cheung
& Co’s dismissal, there were no disagreements with Cheung & Co. within
the meaning of Item 304 of Regulation S-B or any matter of accounting principles
or practices, financial disclosure, or auditing scope or procedure, which
disagreements, if not resolved to Cheung & Co.’s satisfaction, would have
caused Cheung & Co. to make reference to the subject matter of the
disagreements in connection with its Reports.
During
the fiscal years ended December 31, 2006 and December 31, 2005, and until Cheung
& Co.’s dismissal, there were no “reportable events” (as such term is
defined in Item 304(a)(1)(v) of Regulation S-B).
On
December 18, 2007, we filed a Current Report on Form 8-K disclosing the
dismissal of Cheung & Co. We requested Cheung & Co. to review the
disclosure contained therein and asked Cheung & Co. to furnish us with a
letter addressed to the Commission containing any new information, clarification
of the Registrant's expression of Cheung & Co.’s views, or the respects in
which Cheung & Co. does not agree with the statements contained herein. Such
Form 8-K indicated that we would file Cheung & Co.’s letter by amendment at
a later date. A copy of Cheung & Co.’s letter was filed as an exhibit to
Amendment No. 1 to such Form 8-K on December 20, 2007.
On
December 12, 2007, we engaged Moore Stephens Wurth Frazer and Torbet, LLP
(“Moore Stephens”) as our independent accounting firm. This action
was also approved by our board of directors. During our two most
recent fiscal years and any subsequent interim period prior to the engagement
of
Moore Stephens, neither us nor anyone on our behalf consulted with Moore
Stephens regarding either (i) the application of accounting principles to a
specified transaction, either contemplated or proposed, or the type of audit
opinion that might be rendered on our financial statements, or (ii) any matter
that was the subject of a ”disagreement” or a “reportable event.”
Evaluation
of Disclosure Controls and Procedures
We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the
SEC’s rules and forms, and that such information is accumulated and communicated
to our management, including its chief executive officer and chief financial
officer, as appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls and procedures,
management recognizes that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving
the
desired control objectives, and management necessarily is required to apply
its
judgment in evaluating the cost-benefit relationship of possible controls
and
procedures.
As
of
December 31, 2007, the end of the fiscal year covered by this report, we
carried out an evaluation, under the supervision and with the participation
of
our management, including our chief executive officer and our chief financial
officer, of the effectiveness of the design and operation of our disclosure
controls and procedures. Based on the foregoing, our chief executive officer
and
chief financial officer concluded that our disclosure controls and procedures
(
as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act
of
1934)
were
effective at the reasonable assurance level.
Management’s
Annual Report on Internal Control over Financial Reporting
Our
management is also responsible for establishing and maintaining adequate
internal control over financial reporting. Internal control over financial
reporting is defined in Rule 13a-15(f) and 15d-15(f) promulgated
under the Exchange Act as a process designed by, or under the supervision
of,
our principal executive and principal financial officers and effected by
our
board of directors, management and other personnel, 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 and includes those policies and procedures
that:
|
·
|
Pertain
to the maintenance of records that in reasonable detail accurately
and
fairly reflect the transactions and dispositions of the assets
of the
Company;
|
|
·
|
Provide
reasonable assurance that transactions are recorded as necessary
to permit
preparation of financial statements in accordance with generally
accepted
accounting principles, and that receipts and expenditures of the
Company
are being made only in accordance with authorizations of management
and
directors of the Company; and
|
|
·
|
Provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Company’s assets that
could have a material effect on the financial
statements.
|
Because
of its inherent limitations, our internal control over financial reporting
may
not prevent or detect all misstatements. Therefore, even those systems
determined to be effective can provide only reasonable assurance with respect
to
financial statement preparation and presentation. Projections of any evaluation
of effectiveness to future periods are subject to the risk that controls
may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
Our
management has assessed the effectiveness of our internal control over financial
reporting as of December 31, 2007. In making this assessment, management
used the criteria set forth by the Committee of Sponsoring Organizations
of the
Treadway Commission (COSO) in
Internal
Control—Integrated Framework
.
Based
on
such assessment, they have concluded that as of December 31, 2007, our internal
controls over financial reporting was deficient in certain respects because
of
the material weaknesses identified and described below.
Control
Activities
.
In 2006
and in the first quarter of 2007, we did not maintain effective controls
to
ensure the completeness and accuracy of the valuation methods and accounting
for
business combinations, including the lack of conforming financial statements
and
footnotes prepared in accordance with SEC rules and regulations, in connection
with our 2006 acquisition of New-Tailun. We inadvertently misapplied generally
accepted accounting principles whereby we did not value the acquisitions
and
record the resulting transaction under purchase accounting in accordance
with
SFAS 141 and EITF 02-5. As a result, we were required to restate our financial
results for the year ended December 31, 2006 and for the three months ended
March 31, 2007.
During
the audit of the financial statements as of
December 31, 2007 and for the year then ended. The Company noted errors on
the
valuation and accounting for the convertible notes issued on August 2, 2007.
Accordingly, the carrying value of the convertible notes and related expenses
needed to be adjusted and the corrected amounts were presented on the financial
statements as of and for the year ended December 31, 2007.
This
annual report does not include an attestation report of our registered public
accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by our registered public
accounting firm pursuant to temporary rules of the Securities and Exchange
Commission that permit us to provide only management’s report in this annual
report.
Remediation
of Material Weaknesses in Internal Control over Financial
Reporting
In
light
of the need for the restatements and the material weaknesses described above,
our management will conduct further review of our disclosure, financial
information, and internal controls and procedures with a particular focus
on
these areas for future complex financing transactions and acquisitions. This
review will include efforts by our management and directors, as well as the
use
of additional outside resources, as follows:
|
·
|
Senior
accounting personnel and our chief financial officer will continue
to
review any future acquisition or divestiture in order to evaluate,
document, and approve its accounting treatment in accordance with
SFAS 141
and EITF 02-5;
|
|
·
|
We
will augment, as necessary, such procedures by obtaining concurrence
with
independent outside accounting experts prior to finalizing financial
reporting for such transactions;
and
|
|
·
|
In
conjunction with the measures outlined below, we believe these
actions
will strengthen our internal control over our valuation and purchase
accounting of acquisitions, and this material weakness should be
resolved.
Management does not anticipate any extra cost from this change
over the
review of our valuation and purchase accounting of future acquisitions.
|
We
expect
that we will satisfactorily address the control deficiencies and material
weakness relating to these matters by the end of our fiscal year, December
31,
2008, although there can be no assurance that compliance will be achieved
in
this time frame.
Management,
including our chief executive officer and our chief financial officer, does
not
expect that our disclosure controls and internal controls will prevent errors
and omissions, even as the same are improved to address any deficiencies
and/or
weaknesses. A control system, no matter how well conceived and operated,
can
provide only reasonable, not absolute, assurance that the objectives of the
control system are met. Over time, controls may become inadequate because
of
changes in conditions or deterioration in the degree of compliance with policies
or procedures. Further, the design of a control system must reflect the fact
that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in
all
control systems, no evaluation of controls can provide absolute assurance
that
all control issues and errors and omissions, if any, within the Company have
been detected. These inherent limitations include the realities that judgments
in decision-making can be faulty, and that breakdowns can occur because of
simple error or mistake. Additionally, controls can be circumvented by the
individual acts of some persons, by collusion of two or more people, or by
management override of the control.
Our
financial reporting process includes extensive procedures we undertake in
order
to obtain assurance regarding the reliability of our published financial
statements, notwithstanding the material weaknesses in internal control.
We
expanded our review of accounting for business combinations to help compensate
for our material weaknesses in order to provide assurance that the financial
statements are free of material inaccuracies or omissions of material fact.
As a
result, management, to the best of its knowledge, believes that (i) this
Annual
Report on Form 10-K does not contain any untrue statements of a material
fact or
omits any material fact and (ii) the financial statements and other financial
information included in this report have been prepared in conformity with
GAAP
and fairly present in all material aspects our financial condition, results
of
operations, and cash flows.
Changes
in Internal Control over Financial Reporting
There
were no changes in our internal control over financial reporting (as defined
in
Rule 13a-15(f) of the Securities Exchange Act of 1934) during the fiscal
year
ended December 31, 2007 that have materially affected, or are reasonably
likely
to materially affect, our internal control over financial reporting.
Departure
and Appointment of Directors
Effective
July 30, 2007, Mr. Yang Xiaodong resigned as a director of Ever-Glory
International Group, Inc. The decision by Mr. Yan to resign from his
position was to devote more time to his own business and was not the result
of
any material disagreement with the Company on any matter relating to the
Company’s operations, policies or practices.
On
August
1, 2007, the board of directors of the Company (the “Board”) elected
Ms. Guo Yan as a director, effective immediately, to fill the vacancy
created by Mr. Yan’s resignation. Ms. Guo served as our chief
financial officer from 1999 to 2004.
Management
The
following table includes the names, positions held, and ages of our current
executive officers and directors as of December 31, 2007:
|
Name
|
|
Age
|
|
Position
|
|
Held
Position Since
|
|
Kang
Yihua
|
|
44
|
|
Chief
Executive Officer, President, and Director
|
|
1993
|
|
Sun
Jia Jun
|
|
34
|
|
Chief
Operating Officer and Director
|
|
2000*
|
|
Guo
Yan
|
|
30
|
|
Chief
Financial Officer and Director
|
|
1999**
|
|
Wei
Ru Qin
|
|
54
|
|
Director
|
|
2000
|
|
Li
Ning
|
|
45
|
|
Director
|
|
2000
|
|
Jin
Qiu
|
|
33
|
|
Secretary
|
|
2005
|
*
Mr. Sun
was appointed as a director on our board of directors in 2005.
**
Ms.
Guo was appointed as a director on our board of directors in 2007.
Each
director will hold office until the next annual meeting of shareholders and
until his or her successor has been elected and qualified.
Kang
Yihua
has
served as our President and Chief Executive Officer and as the Chairman of
our
Board of Directors since 2005. Since December 1993, Mr. Kang also serves as
the
President and Chairman of the Board of Directors of our subsidiary, Goldenway
Nanjing Garments Company Limited, and as a member of the Board of Directors
of
our subsidiary,
Nanjing
Catch-Luck Garments Co., Ltd.
Mr.
Kang
has extensive worldwide managerial and operational experience focusing upon
business development and strategic planning. Mr. Kang formerly was the party
Branch Secretary of the Management Department, Nanjing Aeronautics and
Astronautics University, and the Vice General Manager of the Import and Export
Department of Nanjing Shenda Company. Mr. Kang earned his bachelor’s degree in
Management from Beijing Aeronautics and Astronautics University and his
bachelor’s degree in Engineering from Nanjing Aeronautics and Astronautics
University.
Sun
Jia Jun
has
served as our Chief Operating Officer and a member of our Board of Directors
since 2005. Mr. Sun also serves as a member of the Board of Directors of
Goldenway since 2000 and as a member of the Board of Directors of
Nanjing
New-Tailun Garments Company Limited (PRC)
since
2006. From July 1996 to November 2002, Mr. Sun was the General Manager of
International Trade Department at Goldenway. Mr. Sun has more than 8 years
experience in import and export in the textile industry. Mr. Sun earned his
bachelor’s degree from the Wuhan Textile Industry Institute.
Guo
Yan
has
served as our Chief Financial Officer since 2005, and was appointed to our
Board
of Directors on August 1, 2007. From July 1999 to 2004, Ms. Guo was the Section
Chief of the Financial and Accounting Department of Goldenway. Ms. Guo earned
her bachelor’s degree in Accounting from the Nanjing Audit
Institute.
Wei
Ru Qin
has been
a member of our Board of Directors since 2007. Mr. Wei has been the head of
the
Auditing Department of Goldenway since 2000 and a member of the Board of
Directors of Goldenway since 2004. Mr. Wei has more than 20 years experience
in
accounting and finance management in the construction and textile industries.
Mr. Wei formerly served as a Vice Manager at Lishui Textile Garment Industry
Company and as Manager at Lishui Second Light Textile Products Material Supply
& Marketing Office.
Li
Ning
has been
a member of our Board of Directors since 2005. Mr. Li has been a member of
Goldenway’s Board of Directors since 2000, a member of Catch-Luck’s Board of
Directors since 2006, and a member of New-Tailun’s Board of Directors since
2006. Mr. Li has more than 10 years experience in finance and investment
management. Mr. Li earned his bachelor’s degree in Computer Science from Nanjing
Aeronautics and Astronautics University.
Jin
Qiu
has
served as our Corporate Secretary since 2005. From 2003 to 2005, Mr. Jin served
as the secretary to our President, Mr. Kang Yihua, in the aspects of corporation
development planning and investment management. Mr. Jin earned his bachelor’s
degree in English culture from the Beijing Institute of International Relations
and his master’s degree in Economics from Nanjing University.
There
are
no family relationships, or other arrangements or understandings between or
among any of the directors, executive officers or other person pursuant to
which
such person was selected to serve as a director or officer.
Involvement
in Certain Legal Proceedings
Our
directors, executive officers and control persons have not been involved in
any
of the following events during the past five years:
1.
any bankruptcy petition filed by or against any business of which such person
was a general partner or executive officer either at the time of the bankruptcy
or within two years prior to that time;
2.
any conviction in a criminal proceeding or being subject to a pending criminal
proceeding (excluding traffic violations and other minor offenses);
3.
being subject to any order, judgment, or decree, not subsequently reversed,
suspended or vacated, of any court of competent jurisdiction, permanently or
temporarily enjoining, barring, suspending or otherwise limiting his involvement
in any type of business, securities or banking activities; or
4.
being found by a court of competent jurisdiction (in a civil action), the SEC
or
the Commodity Futures Trading Commission to have violated a federal or state
securities or commodities law, and the judgment has not been reversed,
suspended, or vacated.
Audit
Committee Financial Expert
Our
Board
of Directors does not have a separate audit committee. The board has determined
that it does not have a member of the board that qualifies as an “audit
committee financial expert”, and is “independent” as the term is used in Item
7(d)(3)(iv) of Schedule 14A under the Securities Exchange Act of 1934, as
amended.
We
believe that the members of our board of directors are collectively capable
of
analyzing and evaluating our financial statements and understanding internal
controls and procedures for financial reporting. However, we are considering
appointing an independent qualified financial expert to our board of directors
in order to strengthen and improve its internal disclosure controls and
procedures.
Section
16(a) of the Exchange Act
Section
16(a) of the Securities Exchange Act of 1934, as amended, requires our directors
and certain of our officers, as well as persons who own more than 10% of a
registered class of our equity securities (“Reporting Persons”), to file reports
with the Securities and Exchange Commission. On September 15, 2006, Messers
Kang, Yan, Wei, Sun and Li each has filed a Form 5 to report the exchange of
their shares of common stock for shares of preferred stock, which exchange
was
effected on October 27, 2005. To our knowledge, based solely on review of the
copies of such reports furnished to us and written representations that no
other
reports were required, during the fiscal year ended December 31, 2006 all
Section 16(a) filing requirements applicable to its officers, directors and
greater than ten percent shareholders were complied with.
Code
of Business Conduct and Ethics
We
have
adopted a code of business conduct and ethics that applies to our officers,
directors and employees, including our Chief Executive Officer, senior executive
officers, principal accounting officer, controller and other senior financial
officers. Our code of business conduct and ethics is available on our website
at
www.everglorygroup.com. A copy of our code of business conduct will be provided
to any person without charge, upon written request sent to us at our
offices located at 100 N. Barranca Ave. #810 West Covina, California 91791,
Attention “Shareholder Relations.”
The
board
of directors and management are currently reviewing our code of business conduct
in connection with an overall review of our corporate governance and other
policies in light of Section 406 of the Sarbanes-Oxley Act. We will timely
disclose any amendments to or waivers of certain provisions of our code of
business conduct and ethics as required by the Securities Exchange Act and
the
rules and regulations of the SEC.
Compensation
Discussion and Analysis
This
compensation discussion and analysis describes the material elements of the
compensation awarded to our current executive officers. This compensation
discussion focuses on the information contained in the following tables and
related footnotes and narrative for the last completed fiscal year. In 2007,
our
Board of Directors oversaw and administered our executive compensation program.
Our
current executive compensation program presently includes a base salary. Our
compensation program does not include (i) discretionary annual cash
performance-based incentives, (ii) termination/severance and change of control
payments, or (iii) perquisites and benefits.
Our
Compensation Philosophy and Objectives
Our
philosophy regarding compensation of our executive officers includes the
following principles:
| · |
our
compensation program should align the interests of our management
team
with those of our shareholders;
|
| · |
our
compensation program should reward the achievement of our strategic
initiatives and short- and long-term operating and financial
goals;
|
| · |
compensation
should appropriately reflect differences in position and
responsibility;
|
| · |
compensation
should be reasonable and bear some relationship with the compensation
standards in the market in which our management team operates;
and
|
| · |
the
compensation program should be understandable and transparent.
|
In
order
to implement such compensation principles, we have developed the following
objectives for our executive compensation program:
| · |
overall
compensation levels must be sufficiently competitive to attract and
retain
talented leaders and motivate those leaders to achieve superior
results;
|
| · |
a
portion of total compensation should be contingent on, and variable
with,
achievement of objective corporate performance goals, and that portion
should increase as an executive’s position and responsibility
increases;
|
| · |
total
compensation should be higher for individuals with greater responsibility
and greater ability to influence our achievement of operating goals
and
strategic initiatives;
|
| · |
the
number of elements of our compensation program should be kept to
a
minimum, and those elements should be readily understandable by and
easily
communicated to executives, shareholders, and others;
and
|
| · |
executive
compensation should be set at responsible levels to promote a sense
of
fairness and equity among all employees and appropriate stewardship
of
corporate resources among
shareholders.
|
Determination
of Compensation Awards
Our
Board
of Directors is provided with the primary authority to determine the
compensation awards available to our executive officers. To aid the board of
directors in making its determination for the last fiscal year, our current
senior management provided recommendations to the board of directors regarding
the compensation of all executive officers.
Compensation
Benchmarking and Peer Group
Our
board
of directors did not rely on any consultants or utilize any peer company
comparisons or benchmarking in 2007 in setting executive compensation. However,
our management has considered competitive market practices by reviewing publicly
available information relating to compensation of executive officers at other
comparable companies in making its recommendations to our board of directors
regarding our executives’ compensation for fiscal year 2007. As our company
evolves, we expect to take steps, including the utilization of peer company
comparisons and/or hiring of compensation consultants, to ensure that the Board
has a comprehensive picture of the compensation paid to our executives and
with
a goal toward total direct compensation for our executives that are on a par
with the median total direct compensation paid to executives in peer companies
if annually established target levels of performance at the company and business
segment level are achieved.
Elements
of Compensation
Presently,
we compensate our executives with only a base salary. We do not pay any
compensation to our executive officers in the form of discretionary annual
cash
performance-based incentives, long-term incentive plan awards or perquisites
and
other compensation, although our board of directors may recommend and institute
such forms of compensation in the future.
Base
Salaries
Base
salary is used to recognize the experience, skills, knowledge and
responsibilities required of our employees, including our named executive
officers. All of our named executive officers, including our Chief Executive
Officer, are subject to employment agreements, and accordingly each of their
compensation has been determined as set forth in their respective agreement.
When establishing base salaries for 2007, subject to the provisions of each
person's employment agreement, our Board and management considered a number
of
factors, including the seniority of the individual, the functional role of
the
position, the level of the individual's responsibility, the ability to replace
the individual, the base salary of the individual at their prior employment
and
the number of well qualified candidates to assume the individual's role.
Discretionary
Annual Cash Performance-Based Incentives
In
2007,
we did not pay any compensation in the form of discretionary annual cash
performance-based incentives or other forms of bonuses to our Chief Executive
Officer and each other named executive officer. Our compensation committee
may,
however, recommend such bonuses in the future.
Long-Term
Incentive Plan Awards
We
currently do not have an equity incentive plan, and no separate stock awards
or
stock option grants were made to any of the named executive officers during
the
fiscal year ended December 31, 2007. No stock options were held by the named
executive officers as of December 31, 2007.
Perquisites
and Other Compensation
We
do not
have any retirement or pension plans in place for any of our named executives.
Our named executive officers are eligible for group medical benefits that
generally available to and on the same terms as our other employees.
Management’s
Role in the Compensation-Setting Process
Our
management plays a role in our compensation-setting process. We believe this
input from management is needed in order to evaluate the performance of our
management, recommend business performance targets and objectives, and recommend
compensation levels. Our management may from time to time, make recommendations
to our board of directors regarding executive compensation. During this process,
management may be asked to provide the board with their evaluation of the
executive officers’ performances, the background information regarding our
strategic financial and operational objectives, and compensation recommendations
as to the executive officers.
Summary
of cash and other compensation
The
following summary compensation table indicates the cash and non-cash
compensation earned during the fiscal year ended December 31, 2007 by the
Chief Executive Officer and each of our other four highest paid executives,
whose total compensation exceeded $100,000 (if any) during the fiscal year
ended
December 31, 2007.
Summary
Compensation Table
|
Name
and Principal Position
|
Year
|
|
Salary
($) (1)
|
Total($)
(1)
|
||||||
|
Kang
Yihua
|
2006
|
$
|
12,675
|
$
|
12,675
|
|||||
|
Chairman
of the Board, Chief Executive
Officer
and President
|
2007
|
$
|
19,830
|
$
|
19,830
|
|||||
| Guo Yan |
2006
|
$
|
2,408 |
$
|
2,408 | |||||
| Chief Financial Officer and Director |
2007
|
$
|
2,805 |
$
|
2,805 | |||||
|
(1)
|
All
compensation is paid in Chinese RMB. For reporting purposes, the
amounts
in the table above have been converted to U.S. dollars at the conversion
rate of 7.6 RMB to one U.S. dollar. The officers listed in this table
received no other form of compensation in the years shown, other
than the
salary set forth in this table.
|
Employment
Contracts and Termination of Employment and Change-In-Control
Arrangements
There
are
no employment contracts, compensatory plans or arrangements, including payments
to be received from us, with respect to any director or executive officer of
us
which would in any way result in payments to any such person because of his
resignation, retirement, or other termination of employment with us, any change
in control of the Company, or a change in the person’s responsibilities
following a change in control of the Company.
The
table
below sets forth information concerning compensation paid to our directors
for
fiscal 2006 and 2007.
Director
Compensation
|
Name
|
Year
|
Salary
($) (1)
|
Total
($) (1)
|
|||||||
|
Kang
Yihua
|
2006
2007
|
$
$
|
-
19,830
|
(2) |
$
$
|
-
19,830
|
(2) | |||
|
Sung
Jiajun
|
2006
2007
|
$
$
|
-
8,730
|
(3) |
$
$
|
-
8,730
|
(3) | |||
|
Yang
Xiao Dong (4)
|
2006
2007
|
$
$
|
5,262
2,805
|
$
$
|
5,262
2,805
|
|||||
|
Li
Ning
|
2006
2007
|
$
$
|
4,862
5,372
|
$
$
|
4,862
5,372
|
|||||
|
Wei
Ruquin
|
2006
2007
|
$
$
|
4,275
5,293
|
$
$
|
4,275
5,293
|
|||||
| Guo Yan |
2006
2007
|
$
$
|
-
-
|
$
$
|
-
-
|
|
(1)
|
|
All
compensation was paid in RMB. The amounts in the foregoing table
have been
converted into U.S. dollars at the conversion rate of 7.6 RMB to
the
dollar.
|
|
|
|
|
|
(2)
|
|
Mr.
Kang was not paid additional compensation as a director; however,
he
received salary during 2007 of $19,830 and total compensation of
$19,830
in consideration of his services as our Chief Executive
Officer.
|
|
|
|
|
|
(3)
|
|
Mr.
Sung was not paid additional compensation as a director; however,
he
received salary during 2007 of $8,730 and total compensation of $8,730
in
consideration of his services as our Chief Operating
Officer.
|
| (4) | Mr. Yang resigned as a director on July 30, 2007. | |
| (5) | Ms. Guo was appointed as a director effective July 30, 2007. |
Outstanding
Equity Awards at Fiscal Year-End
None
of
our executive officers were granted or otherwise received any option, stock
or
equity incentive plan awards during 2007 and there were no outstanding
unexercised options previously awarded to our officers and directors, at the
fiscal year end, December 31, 2007.
Indemnification
of Officers and Directors
We
are a
Florida corporation, and accordingly, we are subject to the corporate laws
under
the Florida Revised Statutes. Article V of our bylaws provides that we may
indemnify our officers and directors to the full extent permitted by law.
Section 607.0850 of the Florida Statutes provides that a Florida corporation
has
the power to indemnify its officers and directors in certain
circumstances.
Subsection
(1) of Section 607.0850 empowers a corporation to indemnify any director or
officer, or former director or officer, who was or is a party to any proceeding
(other than an action by, or in the right of, the corporation), by reason of
the
fact that he or she is or was a director, officer, employee, or agent of the
corporation or is or was serving at the request of the corporation as a
director, officer, employee, or agent of another corporation, partnership,
joint
venture, trust, or other enterprise against liability incurred in connection
with such proceeding, including any appeal thereof, if he or she acted in good
faith and in a manner he or she reasonably believed to be in, or not opposed
to,
the best interests of the corporation and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his or her conduct was
unlawful. The termination of any proceeding by judgment, order, settlement,
or
conviction or upon a plea of nolo contendere or its equivalent shall not, of
itself, create a presumption that the person did not act in good faith and
in a
manner which he or she reasonably believed to be in, or not opposed to, the
best
interests of the corporation or, with respect to any criminal action or
proceeding, had reasonable cause to believe that his or her conduct was
unlawful.
Subsection
(2) of Section 607.0850 empowers a corporation to indemnify any person, who
was or is a party to any proceeding by or in the right of the corporation to
procure a judgment in its favor by reason of the fact that the person is or
was
a director, officer, employee, or agent of the corporation or is or was serving
at the request of the corporation as a director, officer, employee, or agent
of
another corporation, partnership, joint venture, trust, or other enterprise,
against expenses and amounts paid in settlement not exceeding, in the judgment
of the board of directors, the estimated expense of litigating the proceeding
to
conclusion, actually and reasonably incurred in connection with the defense
or
settlement of such proceeding, including any appeal thereof. Such
indemnification shall be authorized if such person acted in good faith and
in a
manner he or she reasonably believed to be in, or not opposed to, the best
interests of the corporation, except that no indemnification shall be made
under
this subsection in respect of any claim, issue, or matter as to which such
person shall have been adjudged to be liable unless, and only to the extent
that, the court in which such proceeding was brought, or any other court of
competent jurisdiction, shall determine upon application that, despite the
adjudication of liability but in view of all circumstances of the case, such
person is fairly and reasonably entitled to indemnity for such expenses which
such court shall deem proper.
Section
607.0850 further provides that to the extent a director or officer of a
corporation has been successful on the merits or otherwise in defense of any
proceeding referred to in subsection (1) or subsection (2), or in the defense
of
any claim, issue, or matter therein, he or she shall be indemnified against
expenses (including attorneys’ fees) actually and reasonably incurred by him or
her in connection therewith; that indemnification and advancement of expenses
provided for by Section 607.0850 are not exclusive, and a corporation may make
any other or further indemnification or advancement of expenses of any of its
directors or officers under any bylaw, agreement, vote of shareholders or
disinterested directors, or otherwise, both as to action in his or her official
capacity and as to action in another capacity while holding such office; and
that the corporation shall have power to purchase and maintain insurance on
behalf of a director or officer of the corporation against any liability
asserted against him or her or incurred by him or her in any such capacity
or
arising out of his or her status as such whether or not the corporation would
have the power to indemnify him or her against such liabilities under Section
607.0850.
We
do not
currently carry directors’ and officers’ liability insurance covering our
directors and officers, but we have plans to do so. Insofar as indemnification
for liabilities under the Securities Act may be permitted to directors,
officers, or persons controlling the Company pursuant to the foregoing
provisions, we have been informed that, in the opinion of the Commission, such
indemnification is against public policy as expressed in the Securities Act
and
is therefore unenforceable.
The
following table sets forth information regarding the beneficial ownership of
our
common stock as of December 31, 2007, for each of the following
persons:
| · |
each
of our directors and each of the named executive officers in the
“Management” section of this
prospectus;
|
| · |
all
directors and named executive officers as a group;
and
|
| · |
each
person who is known by us to own beneficially five percent or more
of our
common stock.
|
Beneficial
ownership is determined in accordance with the rules of the Commission. Unless
otherwise indicated in the table, the persons and entities named in the table
have sole voting and sole investment power with respect to the shares set forth
opposite the shareholder’s name. Unless otherwise indicated, the address of each
beneficial owner listed below is c/o Ever-Glory International Group, Inc. 100
N.
Barranca Ave. #810, West Covina, California 91791. The percentage of class
beneficially owned set forth below is based on
11,379,309
shares
of
our common stock outstanding on December 31, 2007.
|
Name
of Beneficial Owner
|
Amount
and
Nature
of
Beneficial
Ownership
of
Common Stock (1)
|
Percent
of
Class
|
|||||
|
|
|
|
|||||
|
Executive
Officers and Directors
|
|
|
|||||
|
Kang
Yi Hua
|
4,802,315
|
42.2
|
%
|
||||
|
Sun
Jia Jun
|
174,800
|
1.5
|
%
|
||||
|
Guo
Yan
|
-
|
-
|
|||||
|
Li
Ning
|
291,840
|
2.6
|
%
|
||||
|
Wei
Ru Qin
|
87,400
|
0.8
|
%
|
||||
|
Jin
Qiu
|
-
|
-
|
|||||
|
All
Executive Officers and Directors as a Group (six persons)
|
5,356,355
|
47.1
|
%
|
||||
|
5%
Holders
|
|||||||
|
Ever-Glory
Enterprises (H.K.) Ltd. (2)
|
3,315,406
|
29.1
|
%
|
||||
|
Yan
Xiao Dong (2)
|
379,240
|
3.3
|
%
|
||||
|
(1)
|
The
percentage of shares beneficially owned is based on
11,379,309
shares
of common stock outstanding. Except as otherwise noted, shares are
owned
beneficially and of record, and such record shareholder has sole
voting,
investment and dispositive power of the shares.
|
|
(2)
|
Yan
Xiao Dong is the director of Ever-Glory Enterprises (H.K.) Ltd. and,
as
such, may be deemed to be the beneficial owner of the 3,315,406 shares
held by Ever-Glory Enterprises (H.K.)
Ltd.
|
Equity
Compensation Plan Information
We
have
not adopted any equity compensation plan as of December 31,
2007.
Mr.
Kang
Yihua is the Company’s controlling shareholder and chief executive officer. We
purchase materials, sub-contract certain manufacturing work, and sell products
to companies that are under the control of Mr. Kang Yihua. All related party
outstanding balances are short term in nature and are expected to be settled
in
cash.
Sales
to Related Parties
For
year
ended December 31, 2007, the Company recognized sales of $1,155,998 to
Nanjing
High-Tech Knitting & Weaving Technology Development Co., Ltd, a related
party controlle
d
by Mr.
Kang Yihua. The related cost of sales was $995,398 for the year ended December
31, 2007.
For
the
year ended December 31, 2006, we recognized sales of $479,003 in total to five
related parties controlled by Mr. Kang Yihua. The related cost of sales was
$420,756 for the year ended December 31, 2006. The five related parties
were:
| (1) |
Ever-Glory
Enterprises (Chuzhou) Co., Ltd.
|
| (2) |
Nanjing
High-Tech Knitting & Weaving Technology Development Co.,
Ltd,
|
| (3) |
Jiangsu
Ever-Glory International Group Corp.
|
| (4) |
Nanjing
Jiangning Shangfang Garments Manufacturing Co.,
Ltd.
|
| (5) |
Jiangsu
Blue Glory Knitting Co., Ltd.
|
Purchases
from and sub-contracts with related parties
During
2007 and 2006, we purchased raw materials totaling $446,561 and $447,280,
respectively, from related parties controlled by Mr. Kang Yihua. Purchases
from
related parties for the years ended December 2007 and 2006 were as
follows:
|
Year
Ended December 31,
|
|||||||
|
Purchases
from:
|
2007
|
2006
|
|||||
|
Nanjing
High-Tech Knitting & Weaving Technology Development Co.,
Ltd.
|
$
|
446,561
|
$
|
426,198
|
|||
|
Jiangsu
Blue Glory Knitting Co., Ltd.
|
-
|
21,082
|
|||||
|
Total
purchases from related parties
|
$
|
446,561
|
$
|
447,280
|
|||
In
addition, we sub-contracted certain manufacturing work valued at $4,048,689
and
$4,634,140 for year ended December 31, 2007 and 2006, respectively, to related
companies controlled by Mr. Kang Yihua. We provided raw materials to the
sub-contractors who charged us a fixed price for the sub-contracting work.
The
total dollar value of sub-contracts with related parties for the years ended
December 2007 and 2006 were as follows:
|
Year
Ended December 31,
|
|||||||
|
Sub-contracts
with:
|
2007
|
2006
|
|||||
|
Ever-Glory
Enterprises (Chuzhou) Co., Ltd.
|
$
|
2,802,874
|
$
|
2,876,913
|
|||
|
Nanjing
High-Tech Knitting & Weaving Technology Development Co.,
Ltd.
|
268,743
|
81,895
|
|||||
|
Kunshan
Enjin Fashion Co., Ltd.
|
503,498
|
382,434
|
|||||
|
Nanjing
Ever-Kyowa Garment Washing Co., Ltd.,
|
228,903
|
828,397
|
|||||
|
Nanjing
Jiangning Shangfang Garments Manufacturing Co., Ltd.
|
244,671
|
464,501
|
|||||
|
Total
sub-contracts with related parties
|
$
|
4,048,689
|
$
|
4,634,140
|
|||
Accounts
receivable - related parties
As
of
December 31, 2007 and 2006 accounts receivable from related parties amounted
to
$158,235 and $2,463,857 for products sold and sub-contracting services provided.
Account receivables - related parties were as follows.
|
At
December 31,
|
|||||||
|
Receivables from:
|
2007
|
2006
|
|||||
|
Ever-Glory
Enterprises (Chuzhou) Co., Ltd.
|
$
|
12,052
|
$
|
-
|
|||
|
Nanjing
High-Tech Knitting & Weaving Technology Development Co.,
Ltd.
|
146,183
|
-
|
|||||
|
Jiangsu
Ever-Glory International Group Corp.
|
-
|
2,463,857
|
|||||
|
Total
accounts receivable - related parties
|
$
|
158,235
|
$
|
2,463,857
|
|||
Advance
on inventory purchases - related party
As
of
December 31, 2007, we advanced funds to purchase raw material inventory from
Jiangsu Ever-Glory International Group Corp., a company controlled by Mr. Kang
Yihua, in amount of $2,568,040. Interest is charged at 0.5% per month according
to the principal balance outstanding at the end of each month. Interest income
earned for the year ended of December 31, 2007 was $165,201.
Accounts
payables - related parties
As
of
December 31, 2007 and 2006 we owed $245,589 to two related parties, and
$2,005,323 to seven related parties, all controlled by Mr. Kang Yihua.
Accounts
payables - related parties were as follows at the end of 2006 and 2007.
|
At
December 31,
|
|||||||
|
Payable
to:
|
2007
|
2006
|
|||||
|
Ever-Glory
Enterprises (Chuzhou) Co., Ltd.
|
$
|
-
|
$
|
266,855
|
|||
|
Nanjing
High-Tech Knitting & Weaving Technology Development Co.,
Ltd.
|
-
|
7,356
|
|||||
|
Kunshan
Enjin Fashion Co., Ltd.
|
245,589
|
191,455
|
|||||
|
Wanshan
Furnituring
|
-
|
5,794
|
|||||
|
Nanjing
Ever-Kyowa Garment Washing Co., Ltd.,
|
-
|
129,555
|
|||||
|
Nanjing
Jiangning Shangfang Garments manufacturing Co., Ltd.
|
-
|
19,209
|
|||||
|
Jiangsu
Ever-Glory International Group Corp.
|
1,385,097
|
||||||
|
Total
accounts payables - related parties
|
$
|
245,589
|
$
|
2,005,321
|
|||
Other
payables - related parties
Other
payables - related parties consisted of the following at the end of 2006 and
2007.
|
At
December 31,
|
|||||||
|
Payable
to:
|
2007
|
2006
|
|||||
|
Ever-Glory
Enterprises (H.K.) Limited, controlled b
y
Mr. Kang Yihua
|
$
|
650,000
|
$
|
2,613,542
|
|||
|
Mr.
Kang Yihua
|
-
|
7,588
|
|||||
|
Total
other payables - related parties
|
$
|
650,000
|
$
|
2,621,130
|
|||
Long
term liability - related party
As
of
December 31, 2007 and 2006 the Company owed $4,474,985 and $4,238,526,
respectively to
Blue
Power Holding Limited,
a
company controlled by Mr. Kang Yihua, for various advances received. Interest
is
charged at 6% per annum on the amounts due. The loans are due between July
2010
and April 2011. For years ended December 2007 and 2006, we accrued interest
expense of $236,459 and $235,859, respectively. The accrued interest is included
in the carrying amount of the loan in the accompanying balance
sheets.
Lease
from a related party
During
2007, we paid rent of $26,256 for factory and office spaces leased from
Jiangsu Ever-Glory International Group Corp., which is controlled by Mr. Kang
Yihua, our chairman and chief executive officer. See Note 14 of our
financial statements in Item 8 of this report.
Catch-Luck
Acquisition
Catch-Luck
was previously a wholly-owned subsidiary of Ever-Glory Hong Kong. Mr. Kang
Yihua
was previously the sole shareholder of Ever-Glory Hong Kong, until he
transferred 100% of his ownership to Mr. Yang Xiodong, an unrelated party,
in
2007. For further details concerning this acquisition, please see “
Recent
Developments - Acquisition of Nanjing Catch-Luck Garments Co.,
Ltd.
”
on
page
10 of this report.
About
Ever-Glory Hong Kong
In
2007,
Mr. Kang Yihua transferred his ownership of Ever-Glory Hong Kong to Mr. Yang
Xiodong. Currently, Ever-Glory Hong Kong is separate and independent from us,
except that Ever-Glory Hong Kong is one of our significant shareholders. None
of
our directors or officers has any ownership interest in Ever-Glory Hong Kong.
Ever-Glory Hong Kong is engaged in the business of sourcing, logistics, and
the
importing and exporting of finished goods and raw materials in and out of China.
Although our corporate names are similar, our line of business is separate
and
distinct from that of Ever-Glory Hong Kong. We use the services of Ever-Glory
Hong Kong to export some of our goods to other countries.
As
approved by our board of directors, we dismissed Jimmy C.H. Cheung & Co.
(“Cheung & Co.”) as our independent auditors effective December 12,
2007. Cheung & Co. served as our independent auditors for the
fiscal years ended December 31, 2006 and December 31, 2005 and for the
quarterly review for 2006. On December 12, 2007, we engaged Moore Stephens
Wurth
Frazer and Torbet, LLP (“Moore Stephens”) as our outside independent accounting
firm for the fiscal years ended December 31, 2007.
|
2007
|
2006
|
||||||
|
Audit
fees
|
$
|
233,000
|
$
|
205,000
|
|||
|
Audit-
related fees
|
-
|
-
|
|||||
|
Tax
fees
|
-
|
-
|
|||||
|
All
other fees
|
-
|
-
|
|||||
Fees
for
audit services include fees associated with the annual audit and the review
of
documents filed with the Securities and Exchange Commission including quarterly
reports on Form 10-Q and the annual report on Form 10-K. Audit-related fees
principally included accounting consultation and information system control
reviews.
Tax
fees
included tax compliance, tax advice and tax planning work.
a.
(1)
Financial
Statements
The
following consolidated financial statements of Ever-Glory International Group,
Inc. are included in Part II, Item 8 of this Report:
Report
of
Jimmy C. H. Cheung & Co., Independent Auditors
Report
of
Moore
Stephens Wurth Frazer and Torbet, LLP
,
Independent Auditors
Consolidated
Balance Sheets at December 31, 2007 and 2006
Consolidated
Statements of Operations and Comprehensive Income for the Years Ended December
31, 2007 and 2006
Consolidated
Statements of Stockholders’ Equity for the Years Ended
December
31, 2007 and 2006
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2007 and
2006
Notes
to
Consolidated Financial Statements
(2)
Financial Statement Schedules
Schedules
are omitted because the required information is not present or is not present
in
amounts sufficient to require submission of the schedule or because the
information required is given in the consolidated financial statements or the
notes thereto.
(3)
Exhibits
EXHIBIT
INDEX
|
Number
|
|
Description
|
|
|
|
|
|
2.1
|
|
Agreement
and Plan of Reorganization as amended, dated as of July 29, 2005,
by and
among Andean, Perfect Dream and Perfect Dream Shareholders (incorporated
by reference to Exhibit 2.1 of our Current Report on Form 8-K,
filed
August 24, 2005).
|
|
|
|
|
|
2.2
|
|
Agreement
for the Purchase and Sale of Stock of Nanjing Catch-Luck Garments
Co. Ltd.
dated (incorporated by reference to Exhibit 2.1 of our Current
Report on
Form 8-K, filed June 29, 2006).
|
|
|
|
|
|
2.3
|
|
Amendment
No. 1 To Agreement for the Purchase and Sale of Stock of Nanjing
Catch-Luck Garments Co. Ltd. dated (incorporated by reference to
Exhibit
2.2 of our Current Report on Form 8-K, filed September 1,
2006).
|
|
|
|
|
|
2.4
|
|
Agreement
for the Purchase and Sale of Stock of Nanjing New Tailun Garments
Co.,
Ltd. dated November 9, 2006 (incorporated by reference to Exhibit
2.1 of
our Current Report on Form 8-K, filed November 13,
2006).
|
|
|
|
|
|
3.1
|
|
Restated
Articles of Incorporation (incorporated by reference to Exhibit
3.1 of our
Annual Report on Form 10-KSB, filed March 29, 2006).
|
|
|
|
|
|
3.2
|
Articles
of Amendment as filed with the Department of State of Florida,
effective
November 20, 2007 (incorporated by reference to Exhibit 3.1 of
our Current
Report on Form 8-K, filed November 29, 2007).
|
|
|
3.3
|
|
Amended
and Restated Bylaws (incorporated by reference to Exhibit 3.2(b)
of our
Annual Report on Form 10-KSB40, filed April 14, 1998).
|
|
|
|
|
|
4.1
|
|
Sections
3.10, 7.10, and 7.11of the Amended and Restated Bylaws (incorporated
by
reference to Exhibit 3.2(b) of our Annual Report on Form 10-KSB40,
filed
April 14, 1998).
|
|
|
|
|
|
4.2
|
|
Articles
of Association of Perfect Dream (incorporated by reference to Exhibit
4.1
of our Current Report on Form 8-K, filed August 24,
2005).
|
|
|
|
|
|
4.3
|
|
Articles
of Association of Goldenway (incorporated by reference to Exhibit
4.2 to
our Current Report on Form 8-K, filed August 24, 2005).
|
|
|
|
|
|
10.1
|
|
Subscription
Agreement (incorporated by reference to Exhibit 10.1 of our Current
Report
on Form 8-K, filed August 8, 2007).
|
|
|
|
|
|
10.2
|
|
Form
of Convertible Note (incorporated by reference to Exhibit 10.2
of our
Current Report on Form 8-K, filed August 8, 2007).
|
|
|
|
|
|
10.3
|
|
Form
of Class A Common Stock Purchase Warrant (incorporated by reference
to
Exhibit 10.3 of our Current Report on Form 8-K, filed August 8,
2007).
|
|
|
|
|
|
10.4
|
|
Security
Agreement (incorporated by reference to Exhibit 10.4 of our Current
Report
on Form 8-K, filed August 8, 2007).
|
|
|
|
|
|
10.5
|
|
Stock
Pledge Agreement (incorporated by reference to Exhibit 10.5 of
our Current
Report on Form 8-K, filed August 8, 2007).
|
|
|
|
|
|
10.6
|
|
Lockup
Agreement (incorporated by reference to Exhibit 10.6 of our Current
Report
on Form 8-K, filed August 8, 2007).
|
|
|
|
|
|
10.7
|
|
Letter
of Intent to Acquire Branded Retail Division (incorporated by reference
to
Exhibit 10.7 of our Current Report on Form 8-K, filed August 8,
2007).
|
|
10.8
|
|
Non-Compete
Agreement (incorporated by reference to Exhibit 10.8 of our Current
Report
on Form 8-K, filed August 8, 2007).
|
|
|
|
|
|
10.9
|
|
Guaranty
(incorporated by reference to Exhibit 10.9 of our Current Report
on Form
8-K, filed August 8, 2007).
|
|
|
|
|
|
10.10
|
|
Equity
Interest Transfer Agreement between Perfect Dream and Ever-Glory
Enterprises (H.K.) Ltd. (incorporated by reference to Exhibit 10.1
of our
Current Report on Form 8-K, filed August 24, 2005).
|
|
|
|
|
|
10.11
|
|
Equity
Interest Transfer Agreement between Perfect Dream and Jiangsu Ever-Glory
International Group Corporation (incorporated by reference to Exhibit
10.2
of our Current Report on Form 8-K, filed August 24,
2005).
|
|
|
|
|
|
10.12
|
|
Loan
Agreement between Goldenway Nanjing Garments Co. Ltd. and Nanjing
City
Commercial Bank dated August 15, 2006 (incorporated by reference
to
Exhibit 10.3 of our Amendment No. 1 to its Annual Report on 10-KSB/A,
filed May 9, 2007).
|
|
10.21
|
Capital
Contribution Agreement, dated January 9, 2008 (incorporated by
reference
to Exhibit 99.1 of our Current Report on Form 8-K, filed January
15,
2008).
|
|
|
10.22
|
Joint
Venture Establishment Agreement, dated January 9, 2008 (incorporated
by
reference to Exhibit 99.2 of our Current Report on Form 8-K, filed
January
15, 2008).
|
|
|
10.23
|
Land
Development Agreement between Jiangsu Ever-Glory International
Group Corp.
and Nanjing Goldenway Garment Co., Ltd.
|
|
|
10.24
|
Lease
Agreement between Jiangsu Ever-Glory International Group Co. and
Nanjing
New-Tailun Garment Co., Ltd.
|
|
|
16.1
|
Letter
from Jimmy C.H. Cheung & Co., dated January 14, 2008 (incorporated by
reference to Exhibit 16.1 of our Amendment No. 3 to our Current
Report on
Form 8-K, filed January 14, 2008).
|
|
|
21.1
|
|
Subsidiaries
of Registrant (incorporated by reference to Exhibit 21.1 to our
Registration Statement on Form S-1, filed October 5, 2007).
|
|
23.1
|
Consent
of Independent Registered Public Accounting Firm.
|
|
|
|
|
|
|
31.1
|
Certification
by Chief Executive Officer pursuant to Sarbanes Oxley Section
302.
|
|
|
31.2
|
Certification
by Chief Financial Officer pursuant to Sarbanes Oxley Section
302.
|
|
|
32.1
|
Certification
by Chief Executive Officer pursuant to 18 U.S.C. Section
1350.
|
|
|
32.2
|
Certification
by Chief Financial Officer pursuant to 18 U.S.C. Section
1350.
|
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf
by
the undersigned, thereunto duly authorized on the 11th day of March, 2008.
|
EVER-GLORY
INTERNATIONAL GROUP, INC.
|
||
|
|
|
|
| By: |
/s/ Kang
Yihua
|
|
|
Kang
Yihua
Chief
Executive Officer
|
||
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated:
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
/s/
Kang Yihua
|
|
Chief
Executive Officer,
|
|
March
11, 2008
|
|
Kang
YiHua
|
|
President,
and Director
(Principal
Executive Officer)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Sun Jia Jun
|
|
Chief
Operating Officer
|
|
March
11, 2008
|
|
Sun
Jia Jun
|
|
and
Director
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Guo Yan
|
|
Chief
Financial Officer
|
|
March
11, 2008
|
|
Guo
Yan
|
|
(Principal
Financial and Accounting Officer)
and
Director
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Li Ning
|
|
Director
|
|
March
11, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Wei Ru Qin
|
|
Director
|
|
March
11, 2008
|
65
