PART
I
ITEM
1. BUSINESS
Overview
China
3C
Group (formerly Sun Oil & Gas Corp.) (referred to herein as the “Company”,
“we” or “us”) was incorporated on August 20, 1998 under the laws of the State of
Nevada as Editworks, Ltd. In 2001, the Company changed its name to Trilucent
Technologies Corp. The Company changed its name to Anza Innovations, Inc. in
2003. In 2004, the Company changed its name to Gaofeng Gold Corp. and then
later
in 2004 to Sun Oil & Gas Corporation. In December 2005, we changed our name
to China 3C Group. We are engaged in the business of the sale and distribution
of mobile phones, facsimile machines, DVD players, stereos, speakers, MP3 and
MP4 players, iPods, electronic dictionaries, CD players, radio Walkmans and
audio systems.
Due
to
our change to a new “stores in stores” business operation model, our number of
sales increased substantially during 2007. We continued to establish more
“stores in stores” in Eastern China. More than 800 “stores in stores” were
established or acquired by the end of 2006. This new business operation model
results in expanded marketing channels, thus positively stimulating the growth
of sales.
During
2006 we acquired two companies whose main products are digital products and
small home electronics. These acquisitions further brought in considerable
sales
and profit to the Company.
Organizational
Structure
On
December 21, 2005, we entered into a merger agreement with Capital Future
Development Limited, or “CFD,” and its shareholders pursuant to which we
acquired all of the issued and outstanding capital stock of CFD, thus making
it
a wholly owned subsidiary of the Company. CFD shareholders received and
aggregate of 35,000,000 newly issued shares of our common stock and cash
consideration of $500,000, divided proportionally among the CFD shareholders
in
accordance with their respective ownership interests in CFD immediately before
the completion of the transaction. The cash portion of the consideration was
paid on the first anniversary of the closing of this transaction pursuant to
nine interest-free promissory notes.
CFD
was
incorporated on July 22, 2004 under the laws of the British Virgin Island and
is
a holding company that owns all of the issued and outstanding stock of Hangzhou
Sanhe Electronic Technology Limited, or “HSE,” and Shanghai Joy & Harmony
Electronics Company Limited, or “SJ&H.”
CFD
acquired all of the issued and outstanding capital shares of HSE pursuant to
a
share exchange agreement with HSE and its shareholders in exchange for an
aggregate of 915,751 shares of the Company’s common stock and $5,000,000,
divided proportionally among the HSE shareholders in accordance with their
respective ownership interests in immediately before the completion of the
transaction.
CFD
acquired all of the issued and outstanding capital shares of SJ&H pursuant
to a share exchange agreement with SJ&H and its shareholders in exchange for
an aggregate of 2,723,110 shares of the Company’s common stock and $7,500,000,
divided proportionally among the SJ&H shareholders in accordance with their
respective ownership interests in immediately before the completion of the
transaction.
On
August
15, 2007, in order to comply with the requirements of PRC law, we recapitalized
our ownership structure. As a result, instead of CFDL owning 100% of ZYXD,
as
previously was the case, CFDL entered into contractual arrangements with ZYXD
whereby CFDL owns a 100% interest in the revenues of ZYXD. CFDL does not have
an
equity interest in ZYXD but is deemed to have all the economic benefits and
liabilities by contract. Under this structure, ZYXD is now a wholly foreign
owned enterprise (WOFE) of CFDL. The contractual agreements give CFDL and its
equity owners an obligation to absorb any losses and rights to receive revenue.
CFDL will be unable to make significant decisions about the activities of ZYXD
and cannot carry out its principal activities without financial support. These
characteristics as defined in Financial Accounting Standards Board (FASB)
Interpretation 46, Consolidation of Variable Interests Entities, qualifies
the
business operations of ZYXD to be consolidated with CFDL.
ZYX
is a
company organized under the laws of China, and it owns 90% of the issued and
outstanding capital stock of each of Hangzhou Wang Da Electronics Company,
Limited, or “HWD,” and Yiwu Yong Xin Telecommunication Company, Limited, or
“YYX,” both of which are organized under the laws of China. HWD and YYX each own
the remaining 10% of other’s issued and outstanding capital stock, and each are
operating companies.
Our
Business
Zhejiang
Yong Xin Digital Technology Company Limited (“ZYX”)
In
2001,
ZYX started its fax machine distribution business and is currently an authorized
agent for many well known brand fax machines. ZYXD entered into the cell phone
market in 2003, and is currently authorized agent for Chinese brands like Sang
Da, Da Xian, and Jin Zhen cell phones. The internal structure of ZYXD includes
CEO office, financial department, audit department, human resource department
and marketing department.
ZYX
is a
large-scale distribution channel manager integrating the selling, circulation
and modern logistics of 3C products (communication products, information
technology (“IT”) products and digital products) in China. Distribution channel
management is the integration of key business processes from end user through
to
original suppliers that provide products, services and information that add
value for customers and other stakeholders. In the fax machine industry, ZYX
distributes products to both first and second tier retailers in China. First
tier retailers are defined as large retailing business centers and second tier
retailers are defined as small individual retail stores. ZYX allocates its
distribution channels according to the size and population of the cities in
which the retailers are located. Accordingly, ZYX distributes products mainly
to
second tier retailers in bigger Chinese cities that have larger populations
and
to first tier retailers in smaller Chinese cities that have relatively smaller
populations, which results in cutting the cost of shipping and enables the
products to reach all areas.
As
a
retailer with hundreds of locations, the company is not reliant on any one
customer or on a few customers. The loss of any one customer would not likely
have an adverse effect on the company’s sales.
As
a
retailer of electronics products with thousands of customers who pay at point
of
sale, the Company does not have any material backlog of orders.
ZYX
does
not have a research and development department and does not initiate any
advertising or promotion activities on the products because it is not the
manufacturer. However, ZYX coordinates with the promotional activities initiated
or planned by the product manufacturers. ZYX focuses on circulation and
distribution activity and thereby eliminate unnecessary expenses. In addition,
ZYX manages credit risk by having its own credit system with the retailer
customers, and provides different policies or benefits on the payment and credit
period according to different credit level of the customers. ZYX strictly
follows all China state regulations regarding after sales services, including
policies allowing products to be returned and exchanged within seven days,
providing a one-year repair guarantee, and having specialists focus on after
sales services.
The
Company relies on rapid, just-in-time delivery of inventory and therefore does
not rely on a significant amount of inventory in its retail
locations.
ZYX’s
strategy is to establish distribution channels with chain stores selling
telecommunication products, digital products, and IT products, primarily
focusing in East China. ZYX plans to transition from the cord telephone market
and focus on fax machines, cell phones and other digital and IT products
throughout China.
The
main
competitors of ZYX include Hangzhou Guang Tong Company, Hangzhou Yin Dun
Company, Hangzhou Qing Teng Company, Hangzhou Si Tong Company, and Zhejiang
Shen
You Electrical Appliance Company. Nevertheless, none of these competitors reach
the size of ZYX.
Hangzhou
Wang Da Electronics Company, Limited (“HWD”)
HWD
was
incorporated on March 30, 1998 under the laws of the Peoples Republic of China.
HWD is an authorized sales agent focusing on the selling, circulation and modern
logistics of cell phones, cell phone products, IT products (including notebook
or laptop computers), and digital products (including digital cameras, digital
camcorders, MP3 players, PDAs, flash disks, and removable hard disks) in China.
The
five
largest suppliers for HWD are Shenzhen Sang Da Hui Tong Electronics Company
Limited, Shenzhen Yang Guang Xin Ke Digital Technology Company Limited, Shenzhen
Jie Pu Lin Holding Company Limited, Shenzhen Lian Sheng (Shi Dai) Technology
Company Limited, and Hangzhou Wei Hua Communication Equipment Company Limited.
The five largest customers for HWDA are Tai Zhou Yi Tong Communication Equipment
Company Limited, Wen Zhou Heng Da Electronics Company Limited, Shao Xing Yin
Hai
Cell Phones Market, Shao Xing Peng Fei Communication Equipment Company Limited,
and Ci Xi Guang Da Communication Equipment Company Limited.
Given
the
wide diversity of HWD’s customer base, the loss of any single customer is not
expected to have a material adverse affect on the Company’s business and
operations.
HWD
mainly distributes its products through retail “stores within stores” located in
major department stores throughout the “Huadong” region of China (consisting of
the Chinese provinces of Zhejiang, Jiangsu and Anhui). The Company did not
spend
a material amount of money on research and development, and did not have a
significant backlog for 2007.
As
a
retailer with hundreds of locations, the Company is not reliant on any one
customer or on a few customers. The loss of any one customer would not likely
have an adverse effect on the Company’s sales. As a retailer of electronics
products with thousands of customers who pay at point of sale, HWD does not
have
any material backlog of orders. The Company did not spend a material amount
of
money on research and development in 2007. HWD contributed approximately 30%
of
revenue to the Company in 2007.
There
are
no material effects from compliance with environmental laws.
The
main
competitors of HWD include Telephone World, Hangzhou Yindun, Shanghai Guangda,
Changjiang Tianyin and Hangzhou Zhenghua. Additionally, there are Ningbo Haishu,
and Zhongyu. These competitors typically have only a fraction of our
sales.
Yiwu
Yong Xin Telecommunication Company, Limited (“YYX”)
YYX
was
incorporated on July 18, 1997 under the laws of the Peoples Republic of China.
YYX is an authorized sales agent, focusing on the selling, circulation and
modern logistics of fax machines and cord phone products in China. YYXC mainly
focuses in Philips fax machines and China’s top local brands
Feng
Da
and CJT fax machines.
The
five
largest suppliers for YYX are Guangdong Feng Da High Technology Company Limited,
Hangzhou Sen Rui Da Trading Company Limited, Shanghai Rong Duo Trading Company
Limited, Shanghai Zhong Fang Electronics Company Limited, and Ningbo Zhong
Xun
Electronics Company Limited. The five largest customers for YYX are Shanghai
Guo
Mei Electrical Appliance Company Limited, Shanghai Jin Jiang Mai De Long
Shopping Mall Company Limited, Tai Zhou Shi Road Qiao Bo Xiong Electrical
Appliance Company Limited, Ningbo Hao You Duo Department Store Company Limited
(Ningbo Branch), and An Qing Mei Sheng Communication (An Qing Heng Da Technology
Company Limited).
Given
the
wide diversity of YYX’s customer base, the loss of any single customer is not
expected to have a material adverse affect on the Company’s business and
operations.
YYX
mainly distributes its products through retail “stores within stores” located in
major department stores throughout the “Huadong” region of China (consisting of
the Chinese provinces of Zhejiang, Jiangsu and Anhui). The Company did not
spend
a material amount of money on research and development., and did not have a
significant backlog for 2007.
As
a
retailer with hundreds of locations, the Company is not reliant on any one
customer or on a few customers. The loss of any one customer would not likely
have an adverse effect on the Company’s sales. As a retailer of electronics
products with thousands of customers who pay at point of sale, the Company
does
not have any material backlog of orders. The Company did not spend a material
amount of money on research and development in 2007. YYX contributed
approximately 22% of revenue to the Company in 2007.
There
are
no material effects from compliance with environmental laws.
On
the
retail side we distribute mainly via so-called concessionaire agreements with
larger department stores, supermarkets, large electronics retail stores, and
other retailers. The retail distribution of many products in China, including
those that we sell, is conducted via the concessionaire model. Under this model,
companies such as China 3C own their own outlets within the larger stores and
in
so doing assume responsibility for most financial and operational aspects of
those outlets including capital cost, inventory, wages, selection, pricing,
and
general management. Our retail partners are then compensated via margin they
earn on the products we sell. This model is similar to that employed by many
department stores in the US. On the other hand, this model is also different
from that found at large electronic retailers like Best Buy and general
retailers like Wal-Mart. We have found that many investors are curious as to
why
the model in China differs from that found in the US. From our point of view,
the main reasons are as follows:
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We
decrease the financial risk for our retail partners by assuming
responsibility for the inventory and capital expense associated with
distributing our products.
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We
decrease operational risk for our retail partners by hiring and managing
employees and handling logistics issues such as wholesale purchase
and
delivery and returns and after-sales
service.
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We
decrease merchandising risk for our retail partners by bringing product
expertise and specific market knowledge that is difficult for large
retailers to develop on their own across a broad range of product
categories.
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China’s
size, regional differences, logistical difficulties, managerial
challenges, underdeveloped credit markets, and rapid growth rate
increases
risk for all retailers and drive the need to mitigate risk which
is why
our retail partners rely on us.
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It
is
interesting to note that even foreign retailers such as Carrefour and Wal-Mart
have to a certain degree adopted the concessionaire model in China which is
an
indication as to how conditions in China make the concessionaire model a virtual
necessity for retailers.
Hangzhou
Sanhe Electronic Technology Ltd. (“HSE”)
HSE
is a
home electronics retail chain in Eastern China. It has approximately 200 retail
outlets in Shanghai City, Zhejiang Province and Jiangsu Province. HSE
specializes in the sale of home electronics, including air conditioners, audio
systems, speakers (92 different types of models) and DVD players (272 different
types of models). In 2006, HSE expanded its business to the televisions
industry, and has received sales agent licenses from TCL, Chuangwei and Haier.
HSE is headquartered in HangZhou city, China. Its major markets are Zhejiang,
Jiangsu and Shanghai.
Given
the
wide diversity of HSE’s customer base, the loss of any single customer is not
expected to have a material adverse affect on the Company’s business and
operations.
HSE
mainly distributes its products through retail “stores within stores” located in
major department stores throughout the “Huadong” region of China (consisting of
the Chinese provinces of Zhejiang, Jiangsu and Anhui). The Company did not
spend
a material amount of money on research and development., and did not have a
significant backlog for 2007.
As
a
retailer with hundreds of locations, the Company is not reliant on any one
customer or on a few customers. The loss of any one customer would not likely
have an adverse effect on the Company’s sales. As a retailer of electronics
products with thousands of customers who pay at point of sale, the HSE does
not
have any material backlog of orders. HSE did not spend a material amount of
money on research and development. HSE contributed approximately 25% of revenue
to the Company in 2007.
There
are
no material effects from compliance with environmental laws.
The
main
competitors of HSE include Hangzhou Meidi, Hangzhou Danong, Nanjing Mingci,
Shanghai Feitong and Jiangshu Huayi. Additionally, there is Baicheng Group
with
sales of approximately $30 million per year and Shanghai Feiteng with sales
of
approximately $30-40 million per year.
Shanghai
Joy & Harmony Electronics Company Limited
(“SJ&H”)
SJ&H
is a consumer electronics retail chain in Eastern China. It has approximately
180 retail outlets in Shanghai City and Jiangsu Province. The company
specializes in the sale of consumer electronics, including MP3 players, MP4
players, iPods, electronic dictionaries, CD players, radios, Walkmans, audio
systems and speakers. The company is the authorized sales agent for well-known
manufacturers in China, including Tecsun Radio and Changhong ZARVA.
As
a
retailer with hundreds of locations, the Company is not reliant on any one
customer or on a few customers. The loss of any one customer would not likely
have an adverse effect on the Company’s sales. As a retailer of electronics
products with thousands of customers who pay at point of sale, SJ&H did not
have any material backlog of orders. The Company did not spend a material amount
of money on research and development in 2007. SJ&H contributed approximately
25% of revenue to the Company in 2007.
There
are
no material effects from compliance with environmental laws.
The
main
competitors of SJ&H include Shanghai Huaning, Shanghai Juexiang, Shanghai
Wansi and Shanghai Feitong. SJ&H’s competitors are a combination of a large
number of very small stores who lack the Company’s economies and scale, as well
as a small number of large players such as large department stores. Additional
competitors include Shanghai Yonguan Digital with sales of approximately $45
million per year, Shanghai Dongqi with sales of approximately of $7-8 million
per year, and Shanghai Yidunj of sales of $4-5 million per year.
Customers
No
customer contributed more than 10% of the Company’s revenue.
Seasonality
and Quarterly Fluctuations
Our
businesses experience fluctuations in quarterly performance. Traditionally,
the
first quarter from January to March has a higher number of sales reflected
by
our electronics business due to the New Year holidays in China occurring during
that period. Nevertheless, at times, China can experience particularly inclement
weather in January and February which can serious disrupt the Company’s supply
chain management systems. As our business model is to operate only on several
days of inventory, the effects of such weather disruptions can be severe in
certain years.
Additionally,
during summer month we can experience a slowdown in sales. We therefore
generally use the summer months to concentrate on opening additional stores
to
offset the decline in sales per store.
Employees
The
Company currently has 1051 employees, all of which are full time employees
located in China. ZYX has 250 employees, YYX has 45 employees, HWD has 280
employees, HSE has 257 employees, and SJ&H has 189 employees.
The
Company has no collective bargaining agreements with any unions.
Recent
Developments
In
January and February of 2008, snowstorms swept across much of China, including
much of the area around Jiangsu and Zhejiang provinces, the Company’s major
points of operations. First, while the snow storms had less impact in major
cities like Shanghai, in other areas of the operating region (Jiangsu, Anhui
and
Zhejiang provinces) snow storms had a much larger impact on transport systems
that take people and products to stores. In addition to impacting traffic at
stores where we have outlets, transportation impediments had a substantive
impact on our ability to replenish products on the shelves. Because we operate
on only several days of inventory, it is management’s belief that the supply
chain interruptions resulted in a significant number of lost sales.
Additionally,
the Company believes gross margin is expected to stabilize in the 13-14% range
in 2008 because of the following reasons:
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The
Company pays concession fees, or leasing fees, to its retail partners.
These fees are typically passed on to the customers by being included
in
the price of goods sold. Approximately 50% of these concession agreements
have fixed payments which are not tied to sales. As such, when sales
per
store decreases, as happened in the first quarter due to the snow
storms,
the leasing fees do not change which leads to decreased gross margin.
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The
Company believes the majority of anticipated gross margin decreases
in
2008, will be caused by increased competition. The “Huadong” region where
the Company operates has experienced the growth of competitors who
are
increasingly utilizing a “store-in-store” model. As a result, management
anticipates a potential need to lower its pricing to maintain its
competitive advantage.
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These
factors along with increased transportation costs as well as efforts by the
government to control inflation which is expected to have a slight impact on
consumer spending, are expected to result in a gross margin in the range of
13-14% for fiscal 2008.
While
sales are expected to decrease in the first quarter by approximately 15%-20%,
the Company believes it will be in a position for overall sales to increase
in
the mid-single digits for the remaining three quarters of the year. The lower
year-over-year sales growth trends expected for 2Q08-4Q08 are primarily due
to
anticipated effects related to increased competition and a leveling of growth.
These projections do not take into account any impact related to future
acquisitions.
The
Company believes that sales and margin trends can improve over time as it
focuses its efforts on
internal
cost controls, improved logistics coordination, greater economies of scale,
closure of underperforming store counters, expansion of well performing stores,
adding new store counters in more productive locations, additional product
introductions, new customer and supplier agreements, customer marketing and
after sales support initiatives, acquisition opportunities and an increase
in
the overall managerial efficiency of the Company.
The
Company currently has approximately $25 million of cash on its balance sheet,
which it currently plans to use for consideration in connection with potential
acquisitions.
Availability
of SEC Filings
The
Company files annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and proxy and information statements and amendments
to reports filed or furnished pursuant to Sections 13(a) and 15(d) of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”). The public may
read and copy these materials at the Securities and Exchange Commission’s
(“SEC”) Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. The
public may obtain information on the operation of the public reference room
by
calling the SEC at 1-800-SEC-0330. The SEC also maintains a website
(http://www.sec.gov) that contains reports, proxy and information statements
and
other information regarding the Company and other companies that file materials
with the SEC electronically. You may also obtain copies of the Company’s reports
filed with the SEC, free of charge, on our website at
http://www.china3cgroup.com.
ITEM
1A.
RISK
FACTORS
Risks
Associated With Our Common Stock
There
is a limited public market for our common stock.
There
is
currently a limited public market for the common stock. Holders of our common
stock may, therefore, have difficulty selling their common stock, should they
decide to do so. In addition, there can be no assurances that such markets
will
continue or that any shares of common stock, which may be purchased may be
sold
without incurring a loss. Any such market price of the common stock may not
necessarily bear any relationship to our book value, assets, past operating
results, financial condition or any other established criteria of value, and
may
not be indicative of the market price for the common stock in the future.
Further, the market price for the common stock may be volatile depending on
a
number of factors, including business performance, industry dynamics, news
announcements or changes in general economic conditions.
Our
common stock may be deemed penny stock with a limited trading
market
. Our
common stock is currently listed for trading in the Over-The-Counter Market
on
the NASD Electronic Bulletin Board, which is generally considered to be a less
efficient markets than markets such as NASDAQ or other national exchanges,
and
which may cause difficulty in conducting trades and difficulty in obtaining
future financing. Further, our securities are subject to the “penny stock rules”
adopted pursuant to Section 15 (g) of the Securities Exchange Act of 1934,
as
amended (the “Exchange Act”). The penny stock rules apply to non-NASDAQ
companies whose common stock trades at less than $5.00 per share or which have
tangible net worth of less than $5,000,000 ($2,000,000 if the company has been
operating for three or more years). Such rules require, among other things,
that
brokers who trade “penny stock” to persons other than “established customers”
complete certain documentation, make suitability inquiries of investors and
provide investors with certain information concerning trading in the security,
including a risk disclosure document and quote information under certain
circumstances. Many brokers have decided not to trade “penny stock” because of
the requirements of the penny stock rules and, as a result, the number of
broker-dealers willing to act as market makers in such securities is limited.
In
the event that we remain subject to the “penny stock rules” for any significant
period, there may develop an adverse impact on the market, if any, for our
securities. Because our securities are subject to the “penny stock rules,”
investors will find it more difficult to dispose of our securities. Further,
for
companies whose securities are traded in the Over-The-Counter Market, it is
more
difficult: (i) to obtain accurate quotations, (ii) to obtain coverage for
significant news events because major wire services, such as the Dow Jones
News
Service, generally do not publish press releases about such companies, and
(iii)
to obtain needed capital.
We
do not intend to pay dividends on our common stock.
The
Company’s two operating subsidiaries in China paid $525,460 in dividends during
2005, but there are no plans for paying dividends in the foreseeable future.
We
intend to retain earnings, if any, to provide funds for the implementation
of
our new business plan. We do not intend to declare or pay any dividends in
the foreseeable future. Therefore, there can be no assurance that holders
of common stock will receive any additional cash, stock or other dividends
on
their shares of common stock until we have funds, which the Board of Directors
determines, can be allocated to dividends.
If
we are unable to successfully integrate the businesses we acquire, our ability
to expand our product offerings and geographic reach may be significantly
limited.
In
order
to expand our product offerings and grow our customer base by reaching new
customers through expanded geographic coverage, we may continue to acquire
businesses that we believe are complimentary to our growth strategy.
Acquisitions involve numerous risks, including difficulties in the assimilation
of acquired operations, loss of key personnel, distraction of management’s
attention from other operational concerns, failure to maintain supplier
relationships, inability to maintain goodwill of customers from acquired
businesses, and the inability to meet projected financial results that supported
how much was paid for the acquired businesses.
Our
business will be harmed if we are unable to maintain our supplier alliance
agreements with favorable terms and conditions.
We
have
licensing/distribution agreements with key suppliers in a number of major
product categories. Our business will be harmed if we are unable to maintain
these favorable agreements or are limited in our ability to gain access to
additional like agreements with our key suppliers.
It
is very difficult to predict the sales cycle for our
products
.
If
we are unable to successfully select and introduce new products or fail to
keep
pace with the rapid advances in technology, our business condition will be
negatively impacted.
The
duration and product selection involved in our sales cycle is dependent on
a
number of factors, including immediate product availability, pricing, features,
product complexity, economic environment, and customer financial condition.
If
potential customers take longer than we expect to decide to purchase our
products, or if our customers decide on a different product/feature set than
available from our existing supplier agreements, the financial condition and
results of our operations will be adversely affected.
Because
our operating/business model continues to evolve it is difficult to predict
our
future performance, and our business is difficult to evaluate.
Our
business model continues to evolve over time. We do not have an extensive
operating history upon which you can easily and accurately evaluate our
business, or our ongoing financial condition. As our model evolves over time
and
due to our numerous acquisitions, we face risks and challenges due to a lack
of
meaningful historical data upon which we can develop budgets and make
forecasts.
Future
acquisitions may result in potentially dilutive issuances of equity securities,
the incurrence of further indebtedness, and increased amortization expense.
Our
growth model has in the past and most probably in the future will involve
acquisitions that may result in potentially dilutive issuances of equity
securities or the incurrence of debt and unknown liabilities. Such acquisitions
may result in significant write-offs and increased amortization expenses that
could adversely affect our business and the results of our
operations.
If
our products fail to perform properly our business could suffer significantly.
Although
we do not currently develop or manufacturer our existing products, should they
fail to perform we may suffer lost sales and customer goodwill, ongoing
liability claims, license terminations, severe harm to our brand and overall
reputation, unexpected costs, and reallocation of resources to resolve product
issues.
Rapid
and substantial growth is the key to our overall strategy, if we are unable
to
manage our growth profitably and effectively, we may incur unexpected expenses
and be unable to meet our financial and customer obligations.
In
order
for us to meet our financial objectives we will need to substantially expand
our
operations to achieve necessary market share. We cannot be certain that our
IT
infrastructure, financial controls, systems, and processes will be adequate
to
support our expansion. Our future results will depend on the ability of our
officers and key employees to manage changing business conditions in
administration, reporting, controls, and operations.
If
we are unable to obtain additional financing for our future needs we may be
unable to respond to competitive pressures and our business may be impaired.
We
cannot
be certain that financing with favorable terms, or at all, will be available
for
us to pursue our expansion initiatives. We may be unable to take advantage
of
favorable acquisitions or to respond to competitive pressures. This inability
may harm our operations or financial results.
If
we are forced to lower our prices to compete, our financial performance may
be
negatively impacted.
We
derive
our sales from the resale of products from a number of our suppliers. If we
are
forced to lower our prices due to added competition, inferior feature offerings,
excess inventory, pressure for cash, declining economic climate, or any other
reason, our business may become less profitable.
If
we are unable to maintain existing supplier relationships or form new ones,
our
business and financial condition may suffer.
We
rely
on our current suppliers along with new suppliers to provide us access to
competitive products for resale. If we are unable to gain access to suppliers
with needed product with favorable terms our business may be negatively
impacted.
If
we incur costs that exceed our existing insurance coverage in lawsuits brought
to us in the future, it could adversely affect our business and financial
condition.
We
maintain third party insurance coverage against liability risks associated
with
lawsuits. While we believe these arrangements are an effective way to insure
against liability, the potential liabilities associated with such risks or
other
events could exceed the coverage provided by such insurance.
Risks
Related to Doing Business in China
Our
business operations take place primarily in China. Because Chinese laws,
regulations and policies are continually changing, our Chinese operations will
face several risks summarized below.
Limitations
on Chinese economic market reforms may discourage foreign investment in Chinese
businesses.
The
value
of investments in Chinese businesses could be adversely affected by political,
economic and social uncertainties in China. The economic reforms in China in
recent years are regarded by China’s central government as a way to introduce
economic market forces into China. Given the overriding desire of the central
government leadership to maintain stability in China amid rapid social and
economic changes in the country, the economic market reforms of recent years
could be slowed, or even reversed.
Any
change in policy by the Chinese government could adversely affect investments
in
Chinese businesses.
Changes
in policy could result in imposition of restrictions on currency conversion,
imports or the source of suppliers, as well as new laws affecting joint ventures
and foreign-owned enterprises doing business in China. Although China has been
pursuing economic reforms for the past two decades, events such as a change
in
leadership or social disruptions that may occur upon the proposed privatization
of certain state-owned industries could significantly affect the government’s
ability to continue with its reform.
We
face economic risks in doing business in China.
As
a
developing nation, China’s economy is more volatile than that of developed
Western industrial economies. It differs significantly from that of the U.S.
or
a Western European Country in such respects as structure, level of development,
capital reinvestment, resource allocation and self-sufficiency. Only in recent
years has the Chinese economy moved from what had been a command economy through
the 1970s to one that during the 1990s encouraged substantial private economic
activity. In 1993, the Constitution of China was amended to reinforce such
economic reforms. The trends of the 1990s indicate that future policies of
the
Chinese government will emphasize greater utilization of market forces. For
example, in 1999 the Government announced plans to amend the Chinese
Constitution to recognize private property, although private business will
officially remain subordinated to the state-owned companies, which are the
mainstay of the Chinese economy. However, there can be no assurance that, under
some circumstances, the government’s pursuit of economic reforms will not be
restrained or curtailed. Actions by the central government of China could have
a
significant adverse effect on economic conditions in the country as a whole
and
on the economic prospects for our Chinese operations.
The
Chinese legal and judicial system may negatively impact foreign
investors.
In 1982,
the National People’s Congress amended the Constitution of China to authorize
foreign investment and guarantee the “lawful rights and interests” of foreign
investors in China. However, China’s system of laws is not yet comprehensive.
The legal and judicial systems in China are still rudimentary, and enforcement
of existing laws is inconsistent. Many judges in China lack the depth of legal
training and experience that would be expected of a judge in a more developed
country. Because the Chinese judiciary is relatively inexperienced in enforcing
the laws that do exist, anticipation of judicial decision-making is more
uncertain than would be expected in a more developed country. It may be
impossible to obtain swift and equitable enforcement of laws that do exist,
or
to obtain enforcement of the judgment of one court by a court of another
jurisdiction. China’s legal system is based on written statutes; a decision by
one judge does not set a legal precedent that is required to be followed by
judges in other cases. In addition, the interpretation of Chinese laws may
be
varied to reflect domestic political changes.
The
promulgation of new laws, changes to existing laws and the pre-emption of local
regulations by national laws may adversely affect foreign investors. However,
the trend of legislation over the last 20 years has significantly enhanced
the
protection of foreign investment and allowed for more control by foreign parties
of their investments in Chinese enterprises. There can be no assurance that
a
change in leadership, social or political disruption, or unforeseen
circumstances affecting China’s political, economic or social life, will not
affect the Chinese government’s ability to continue to support and pursue these
reforms. Such a shift could have a material adverse effect on our business
and
prospects.
The
practical effect of the People’s Republic of China legal system on our business
operations in China can be viewed from two separate but intertwined
considerations. First, as a matter of substantive law, the Foreign Invested
Enterprise laws provide significant protection from government interference.
In
addition, these laws guarantee the full enjoyment of the benefits of corporate
Articles and contracts to Foreign Invested Enterprise participants. These laws,
however, do impose standards concerning corporate formation and governance,
which are not qualitatively different from the general corporation laws of
the
several states. Similarly, the People’s Republic of China accounting laws
mandate accounting practices, which are not consistent with U.S. Generally
Accepted Accounting Principles. China’s accounting laws require that an annual
“statutory audit” be performed in accordance with People’s Republic of China
accounting standards and that the books of account of Foreign Invested
Enterprises are maintained in accordance with Chinese accounting laws. Article
14 of the People’s Republic of China Wholly Foreign-Owned Enterprise Law
requires a Wholly Foreign-Owned Enterprise to submit certain periodic fiscal
reports and statements to designated financial and tax authorities, at the
risk
of business license revocation. Second, while the enforcement of substantive
rights may appear less clear than United States procedures, the Foreign Invested
Enterprises and Wholly Foreign- Owned Enterprises are Chinese registered
companies, which enjoy the same status as other Chinese registered companies
in
business-to-business dispute resolution. Generally, the Articles of Association
provide that all business disputes pertaining to Foreign Invested Enterprises
are to be resolved by the Arbitration Institute of the Stockholm Chamber of
Commerce in Stockholm, Sweden applying Chinese substantive law. Any award
rendered by this arbitration tribunal is, by the express terms of the respective
Articles of Association, enforceable in accordance with the “United Nations
Convention on the Recognition and Enforcement of Foreign Arbitral Awards
(1958).” Therefore, as a practical matter, although no assurances can be given,
the Chinese legal infrastructure, while different in operation from its United
States counterpart, should not present any significant impediment to the
operation of Foreign Invested Enterprises.
Economic
Reform Issues
China
is a country that has been undergoing a process of privatization for much of
the
past three decades.
Although
the Chinese government owns the majority of productive assets in China, in
the
past several years the government has implemented economic reform measures
that
emphasize decentralization and encourage private economic activity. Because
these economic reform measures may be inconsistent or ineffectual, there are
no
assurances that:
|
·
|
We
will be able to capitalize on economic
reforms;
|
|
·
|
The
Chinese government will continue its pursuit of economic reform
policies;
|
|
·
|
The
economic policies, even if pursued, will be
successful;
|
|
·
|
Economic
policies will not be significantly altered from time to time;
and
|
|
·
|
Business
operations in China will not become subject to the risk of
nationalization.
|
Since
1979, the Chinese government has reformed its economic systems. Because many
reforms are unprecedented or experimental, they are expected to be refined
and
improved. Other political, economic and social factors, such as political
changes, changes in the rates of economic growth, unemployment or inflation,
or
in the disparities in per capita wealth between regions within China, could
lead
to further readjustment of the reform measures. This refining and readjustment
process may negatively affect our operations.
Over
the
last few years, China’s economy has registered a high growth rate. Recently,
there have been indications that rates of inflation have increased. In response,
the Chinese government recently has taken measures to curb this excessively
expansive economy. These measures have included devaluations of the Chinese
currency, the Renminbi (RMB), restrictions on the availability of domestic
credit, reducing the purchasing capability of certain of its customers, and
limited re-centralization of the approval process for purchases of some foreign
products. These austerity measures alone may not succeed in slowing down the
economy’s excessive expansion or control inflation, and may result in severe
dislocations in the Chinese economy. The Chinese government may adopt additional
measures to further combat inflation, including the establishment of freezes
or
restraints on certain projects or markets.
To
date
reforms to China’s economic system have not adversely impacted our operations
and are not expected to adversely impact operations in the foreseeable future;
however, there can be no assurance that the reforms to China’s economic system
will continue or that we will not be adversely affected by changes in China’s
political, economic, and social conditions and by changes in policies of the
Chinese government, such as changes in laws and regulations, measures which
may
be introduced to control inflation, changes in the rate or method of taxation,
imposition of additional restrictions on currency conversion and remittance
abroad, and reduction in tariff protection and other import
restrictions.
Risk
Factors Associated with Our Business
Non-performance
by our suppliers may adversely affect our operations by delaying delivery or
causing delivery failures, which may negatively affect demand, sales and
profitability.
We
purchase various types of products from our suppliers. We would be
materially and adversely affected by the failure of our suppliers to perform
as
expected. We could experience delivery delays or failures caused by
production issues or delivery of non-conforming products if its suppliers failed
to perform, and we also face these risks in the event any of its suppliers
becomes insolvent or bankrupt.
We
depend on the continued services of our executive officers and the loss of
key
personnel could affect our ability to successfully grow our business.
We
are
highly dependent upon the services of our senior management team, particularly
Zhenggang Wang, our Chairman and Chief Executive Officer and Weidong Huang,
our
Chief Financial Officer. The permanent loss for any of our key executives,
could
have a material adverse effect upon our operating results. We may not be able
to
locate suitable replacements for our executives if their services were lost.
We
do not maintain key man life insurance on any of these individuals.
With
the markets being highly competitive, we may not be able to compete
successfully.
Many
of
our competitors have substantially greater revenues and financial resources
than
we do. We may not be able to compete favorably and increased competition may
substantially harm our business, business prospects and results of operations.
If we are not successful in our target markets, our sales could decline, our
margins could be negatively impacted and we could lose market share, any of
which could materially harm our business, results of operations and
profitability.
None.
ITEM
2. PROPERTIES
The
Company does not own any real estate properties; all of the properties are
leased. The lease terms are as follows:
YYXC
1.
Shanghai office: lease term: one year (June 2007 - June 2008)
2.
Yiwu
headquarter office: lease term: one year (Aug. 2007 - Aug. 2008)
3.
Apartments:1) A3 Yiwu building, Yiwu village, Lease term: 6 months (Sep. 2007
-
Mar. 2008); 2) Qiancheng District, Yiwu, Lease term one year (Nov. 2007 - Nov.
2008).
HWDA
1.
West-town computer center offices: Lease term: one year for office 1 (July
2007
- July 2008); one year for office 2 (Aug. 2007 - Aug. 2008).
2.
Suite
417 and Suite 608, 347 Shaoxin Road: Lease term: 3 months (Oct. 2007 - Jan.
2008).
3.
Apartments: Taizhou tower, Lease term one year (Oct. 2007- Oct. 2008).
HSET
1.
Yuanhua office: Lease term one year (Aug. 2007 - July 2008).
2.
Hangzhou Qunying office: Lease Term six months (Nov. 2007 - Apr. 2008).
3.
Apartments: Hangzhou: Lease Term three months (Jan. 2008 - Mar.
2008).
Shanghai
1.
Wuxi
Tower office: Lease term three months (Jan. 2008 - Mar. 2008).
2.
Warehouse: Shanghai, Lease term: two months (Jan. 2008 - Feb. 2008).
The
Company believes that its leased spaces are adequate and suitable to maintain
and develop its business operations.
ITEM
3. LEGAL PROCEEDINGS
Neither
the Company nor its property is a party to any pending legal proceeding. The
Company’s management does not believe that there are any proceedings to which
any director, officer, or affiliate of the Company, any owner of record of
beneficially held or owner of more than five percent (5%) of the Company’s
common stock, or any associate of any such director, officer, affiliate of
the
Company, or security holder is a party adverse to the Company, or has a material
interest adverse to the Company.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There
were no matters submitted to the stockholders in the fourth quarter of 2007
required to be disclosed.
PART
II
ITEM
5.
MARKET
FOR THE REGISTRANT’S COMMON STOCK, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
The
Company’s common stock is quoted on the OTC Bulletin Board under the symbol
“CHCG.OB.” The following table sets forth the range of quarterly high and low
closing bids of the common stock as reported during the years ending December
31, 2006 and December 31, 2007:
|
|
|
low
bid*
|
|
high
bid*
|
|
|
2006
|
|
|
|
|
|
|
Quarter
ended March 31
|
|
$
|
1.00
|
|
$
|
9.24
|
|
|
Quarter
ended June 30
|
|
$
|
1.75
|
|
$
|
7.50
|
|
|
Quarter
ended September 30
|
|
$
|
1.55
|
|
$
|
4.75
|
|
|
Quarter
ended December 31
|
|
$
|
1.08
|
|
$
|
4.95
|
|
|
|
|
|
low
bid*
|
|
|
high
bid*
|
|
|
2007
|
|
|
|
|
|
|
|
|
Quarter
ended March 31
|
|
$
|
3.14
|
|
$
|
6.95
|
|
|
Quarter
ended June 30
|
|
$
|
5.10
|
|
$
|
8.00
|
|
|
Quarter
ended September 30
|
|
$
|
3.45
|
|
$
|
8.50
|
|
|
Quarter
ended December 31
|
|
$
|
3.08
|
|
$
|
5.66
|
|
*The
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not represent actual transactions.
Stockholders
As
of the
close of business on March 14, 2008, there were approximately 91 holders of
record of the Company’s common stock. However, we believe that there are
additional beneficial owners of our common stock who own their shares in “street
name.”
Dividends
The
Company’s four operating entities in China paid no dividends during 2007. The
Company has no plans to declare cash dividends on its common stock in the
future. There are no restrictions that limit the ability of the Company to
declare cash dividends on our common stock and the Company does not believe
that
there are any that are likely to do so in the future.
Securities
authorized for issuance under equity compensation plans
The
following is a summary of all of our equity compensation plans as of December
31, 2007.
|
Plan
Category
|
|
Number
of securities to be
issued
upon exercise
of
outstanding options,
warrants
and rights
|
|
Weighted
average exercise
price
of outstanding
options,
warrants and
rights
|
|
Number
of securities
remaining
available for
future
issuance
under
equity
compensation
plan
(excluding
securities
reflected
in
column
(a))
|
|
|
|
|
(a)
|
|
(b)
|
|
(c)
|
|
|
Equity
Compensation Plans Approved by Securityholders
|
|
|
|
|
|
|
|
|
|
|
|
Equity
Compensation Plans Not Approved by Securityholders
|
|
|
435,000
|
(1)
|
$
|
3.94
|
|
|
765,000
|
|
(1)
1,000,000 shares of our Common Stock were authorized for grant (both incentive
stock options and non-qualified stock options), and/or issuance pursuant to
a
board resolution approved in June 2007.
Repurchase
of Securities
We
did
not repurchase any of shares of our common stock during the fourth quarter
of
2007.
Recent
Sales of Unregistered Securities
None.
Equity
Compensation Plan Information
In
June
2007, the Board of the Company approved options to purchase up to an additional
one million shares of common stock.
Forward
Looking Statements
We
have
included and from time to time may make in our public filings, press releases
or
other public statements, certain statements, including, without limitation,
those under “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” in Part II, Item 7. In some cases these statements are
identifiable through the use of words such as “anticipate,” “believe,”
“estimate,” “expect,” “intend,” “plan,” “project,” “target,” “can,” “could,”
“may,” “should,” “will,” “would” and similar expressions. You are cautioned not
to place undue reliance on these forward-looking statements. In addition, our
management may make forward-looking statements to analysts, investors,
representatives of the media and others. These forward-looking statements are
not historical facts and represent only our beliefs regarding future events,
many of which, by their nature, are inherently uncertain and beyond our
control.
ITEM
6.
SELECTED
FINANCIAL DATA
The
selected consolidated statement of income and comprehensive income data for
the
years ended December 31, 2007, 2006 and 2005 and the selected consolidated
balance sheet data as of December 31, 2007 and 2006 are derived from our audited
consolidated financial statements included elsewhere in this Report.
The
selected consolidated balance sheet data as of December 31, 2005, 2004 and
2003,
and the selected consolidated financial data for the years ended December 31,
2004 and 2003, are derived from our audited consolidated financial statements
not included in this annual report.
The
following selected consolidated historical financial information should be
read
in conjunction with our consolidated financial statements and related notes
and
the information contained in Item 7. “Management’s Discussion and Analysis of
Financial Condition and Results of Operations.”
|
|
|
Year
Ended December 31,
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
|
Statements
of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales,
net
|
|
|
276,026,673
|
|
|
148,218,848
|
|
|
32,588,634
|
|
|
24,701,995
|
|
|
9,260,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
226,656,242
|
|
|
125,411,758
|
|
|
28,325,332
|
|
|
21,577,365
|
|
|
7,864,411
|
|
|
Gross
profit
|
|
|
49,370,431
|
|
|
22,807,090
|
|
|
4,263,302
|
|
|
3,124,630
|
|
|
1,395,889
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative expenses
|
|
|
13,614,500
|
|
|
5,544,924
|
|
|
1,706,869
|
|
|
782,241
|
|
|
546,184
|
|
|
Income
from operations
|
|
|
35,755,931
|
|
|
17,262,166
|
|
|
2,556,433
|
|
|
2,342,389
|
|
|
849,705
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
(Income) Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
(88,413
|
)
|
|
(31,293
|
)
|
|
(10,156
|
)
|
|
(5,348
|
)
|
|
(4,569
|
)
|
|
Other
expense
|
|
|
74,215
|
|
|
100,646
|
|
|
17,364
|
|
|
9,440
|
|
|
4,871
|
|
|
Interest
expense
|
|
|
-
|
|
|
7,565
|
|
|
2,954
|
|
|
1,104
|
|
|
348
|
|
|
Total
Other (Income) Expense
|
|
|
-14,198
|
|
|
76,918
|
|
|
10,162
|
|
|
5,196
|
|
|
650
|
|
|
Income
before income taxes
|
|
|
35,770,129
|
|
|
17,185,248
|
|
|
2,546,271
|
|
|
2,337,193
|
|
|
849,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
|
12,850,429
|
|
|
5,908,122
|
|
|
1,088,021
|
|
|
231,096
|
|
|
-
|
|
|
Net
income
|
|
|
22,919,700
|
|
|
11,277,126
|
|
|
1,458,250
|
|
|
2,106,097
|
|
|
849,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
& diluted
|
|
|
0.44
|
|
|
0.24
|
|
|
0.04
|
|
|
0.06
|
|
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
& diluted
|
|
|
52,671,438
|
|
|
46,179,507
|
|
|
35,133,427
|
|
|
35,000,000
|
|
|
35,000,000
|
|
|
|
|
Year
Ended December 31,
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
|
Balance
Sheets Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
24,952,614
|
|
|
6,498,450
|
|
|
1,949,222
|
|
|
469.658
|
|
|
417,673
|
|
|
Working
capital
|
|
|
36,917,850
|
|
|
10,505,747
|
|
|
3,634,989
|
|
|
704,888
|
|
|
(1,407,920
|
)
|
|
Total
assets
|
|
|
63,196,805
|
|
|
39,987,575
|
|
|
4,020,266
|
|
|
1,492,006
|
|
|
1,404,597
|
|
|
Total
liabilities
|
|
|
5,792,722
|
|
|
9,061,180
|
|
|
341,615
|
|
|
735,830
|
|
|
2,754,517
|
|
|
Total
shareholders’ equity
|
|
|
57,404,083
|
|
|
30,926,395
|
|
|
3,678,651
|
|
|
756,176
|
|
|
(1,349,920
|
)
|
ITEM
7.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The
following discussion should be read in conjunction with the Consolidated
Financial Statements and Notes thereto appearing elsewhere in this Form 10-K.
The following discussion contains forward-looking statements. Our actual results
may differ significantly from those projected in the forward-looking statements.
Factors that may cause future results to differ materially from those projected
in the forward-looking statements include, but are not limited to, those
discussed in “Risk Factors” and elsewhere in this Form 10-K.
Overview
China
3C
Group was incorporated on August, 20, 1998 under the laws of the State of
Nevada. Capital Future Developments Limited (“CFDL”) was incorporated on July
22, 2004 under the laws of the British Virgin Islands. Zhejiang Yong Xin Digital
Technology Co., Ltd. (“Zhejiang”), Yiwu Yong Xin Communication Ltd. (“Yiwu”),
Hangzhou Wandga Electronics Co., Ltd. (“Wang Da”), Hangzhou Sanhe Electronic
Technology, Limited (“Sanhe”), and Shanghai Joy & Harmony Electronic
Development Co., Ltd. (“SJHE”) were incorporated under the laws of Peoples
Republic of China on July 11, 2005, July 18, 1997, March 30, 1998, April 12,
2004, and August 25, 2003 respectively. China 3C Group owns 100% of CFDL and
CFDL own 100% of the capital stock of SJHE and HSET. Until August 14, 2007,
when
it made the change to its ownership structure described in the next paragraph
in
order to comply with certain requirements of PRC law, CFDL owned 100% of the
capital stock of Zhenjiang.. Zhejiang owns 90% and Yiwu owns 10% of HWDA.
Zhejiang owns 90% and Wang Da owns 10% of Yiwu. Collectively the six
corporations are referred to herein as the Company.
On
December 21, 2005 CFDL became a wholly owned subsidiary of China 3C Group
through a merger with a wholly owned subsidiary of the Company. China 3C Group
acquired all of the issued and outstanding capital stock of CFDL pursuant to
a
Merger Agreement dated at December 21, 2005 by and among China 3C Group, XY
Acquisition Corporation, CFDL and the shareholders of CFDL (the “Merger
Agreement”). Pursuant to the Merger Agreement, CFDL became a wholly owned
subsidiary of China 3C Group and, in exchange for the CFDL shares, China 3C
Group issued 35,000,000 shares of its common stock to the shareholders of CFDL,
representing 93% of the issued and outstanding capital stock of China 3C Group
at that time and a cash consideration of $500,000. On August 15, 2007, in order
to comply with the requirements of PRC law, the Company recapitalized its
ownership structure. As a result, instead of CFDL owning 100% of Zhejiang as
previously was the case, CFDL entered into contractual agreements with Zhejiang
whereby CFDL owns a 100% interest in the revenues of Zhejiang. CFDL does not
have an equity interest in Zhejiang, but is deemed to have all the economic
benefits and liabilities by contract. Under this structure, Zhejiang is now
a
wholly foreign owned enterprise (WOFE) of CFDL. The contractual agreements
give
CFDL and its’ equity owners an obligation to absorb, any losses, and rights to
receive revenue. CFDL will be unable to make significant decisions about the
activities of Zhejiang and can not carry out its principal activities without
financial support. These characteristics as defined in Financial Accounting
Standards Board (FASB) interpretation 46, Consolidation of Variable Interest
Entities (VIEs), qualifies the business operations of (Zhejiang) to be
consolidated with (CFDL) and ultimately with China 3C Group.
As
a
result of the Merger Agreement, the reorganization was treated as an acquisition
by the accounting acquiree that is being accounted for as a recapitalization
and
as a reverse merger by the legal acquirer for accounting purposes. Pursuant
to
the recapitalization, all capital stock shares and amounts and per share data
have been retroactively restated. Accordingly, the financial statements include
the following:
(1)
The
balance sheet consists of the net assets of the accounting acquirer at
historical cost and the net assets of the legal acquirer at historical cost.
(2)
The
statements of operations include the operations of the accounting acquirer
for
the period presented and the operations of the legal acquirer from the date
of
the merger.
The
Company is now engaged in the business of mobile phone, facsimile machines,
DVD
players, stereo’s, speakers, MP3 and MP4 players, iPod, electronic dictionaries,
CD players, radios, Walkman, and audio systems distribution. We sell and
distribute products through retail stores and secondary
distributors.
Pursuant
to a share exchange agreement, dated August 3, 2006, we issued 915,751 shares
of
restricted common stock, to the former shareholders of Hangzhou Sanhe Electronic
Technology Ltd. The shares were valued at $3,750,000, which was the fair value
of the shares at the date of exchange agreement. This amount is included in
the
cost of net assets and goodwill purchased.
Pursuant
to a share exchange agreement, dated November 28, 2006, we issued 2,723,110
shares of newly issued shares of Common Stock to the former shareholders of
Shanghai Joy & Harmony Electronics Company Limited. The shares were valued
at $11,000,000, which was the fair value of the shares at the date of exchange
agreement. This amount is included in the cost of net assets and goodwill
purchased.
We
operate substantially all of our retail operations through our “store-in-store”
model. Under this model, the Company leases space in major department stores
and
retailers. Leasing costs can vary based on a percentage of sales, or can be
fixed. For the year ended 2007, approximately one-half of the Company’s leases
were variable based on sales, and the other half were fixed rents.
Results
of Operations
Year
Ended December 31, 2007 compared to Year Ended December 31,
2006
The
following table presents certain consolidated statement of operations
information stated as a percentage of total revenues. All financial information
is presented for the 12 months ended December 31, 2007 and 2006.
Net
sales
Net
sales
for 2007 totaled $276,026,673 compared to $148,218,848 for 2006. The large
increase amount was due to a combination of both organic growth and contribution
from subsidiaries acquired in the second half of 2006. Higher sales volume
and
the addition of new product lines were also factors. 2007 was a year in which
inflation sharply increased in China and we believe inflation had an effect
on
our sales in 2007.
Percentage
of sales
The
Company earned approximately 65% of its sales from its retail operations, and
the remaining 35% from wholesale operations.
Cost
of Sales
Cost
of
sales for 2007 totaled $226,656,242 or approximately 82.11% of net sales
compared to $125,411,758 or approximately 84.61% for 2006. The cost of sales
as
a percentage decreased during 2007 due to the introduction of new product models
with higher gross profit margin. The increased cost of sales was a direct result
of the large increase in purchases required to meet our sales
levels.
Top
Ten Suppliers of Each of Our Subsidiaries
|
|
YYXC
|
HWDA
|
HSET
|
Shanghai
|
|
1
|
Fengda
Technology Co., Ltd.
|
Shenzhen
Jiepulin Co., Ltd.
|
Zhejiang
Shaixinke Co., Ltd.
|
Guangzhou
Jinhuang Electronics Co., Ltd.
|
|
2
|
Shanghai
Zhongfang Electronics Co., Ltd.
|
Hangzhou
Telecommunication
Equipments
Co., Ltd.
|
Shenzhen
Aosike Electronics Co., Ltd.
|
Shenzhen
Dengjing Electronics Co., Ltd.
|
|
3
|
Shanghai
Rongduo Business Co., Ltd.
|
Shenzhen
Jinfeng Datong Technology Co., Ltd.
|
Hangzhou
Ruiqi Electronics Co., Ltd.
|
Dongguan
Desheng General Electronics Co., Ltd.
|
|
4
|
Ninbo
Zhongxun Electronics Co., Ltd.
|
Liansheng
Technology Co., Ltd.
|
Shenzhen
Deyuan Electronics Co., Ltd.
|
Shanghai
Network Equipment Co., Ltd
|
|
5
|
Hangzhou
Shenruida Trade Co., Ltd.
|
Shenzhen
Sunshine Xinke Digital Technology Co., Ltd.
|
Hangzhou
Wanlian Electronics Co., Ltd.
|
Shanghai
Hanshun Trade Co., Ltd.
|
|
6
|
Shanghai
Guangdian Equipment Co., Ltd.
|
Hangzhou
Tianchen Digital Telecommunication Co., Ltd.
|
Guangzhou
Fenda Audio Co., Ltd.
|
Dongwan
Gemei Electronics Co., Ltd.
|
|
7
|
Yiwu
Wantong Telecom Equipment Co., Ltd.
|
Shenzhen
Sangdahuitong Electronics Co., Ltd.
|
Shenzhen
Chuangwei-RGB Electronics Co., Ltd.
|
SONY-Shanghai
Co., Ltd.
|
|
8
|
Aomeng
Technology Co., Ltd.
|
Hangzhou
Qiuxin Internet Equipment Co., Ltd.
|
Guangzhou
Shengshida Electronics Company
|
Shenyou
Technology Co., Ltd.
|
|
9
|
Shanghai
Meiyun Industry Co., Ltd.
|
Huayu
Telecom Equipment Co., Ltd.
|
TCL
Electronics Co., Ltd.
|
Zhaohua
Digital Technology Co., Ltd.
|
|
10
|
Shanghai
Huoke Electronics Co., Ltd.
|
Hangzhou
Yingjie Trade Co., Ltd.
|
Hangzhou
Hengrong Trade Co., Ltd.
|
Zhongshan
Wanxin Electronics Co., Ltd.
|
Gross
Profit Margin
Gross
profit margin for 2007 increased to 17.9% compared to 15.4% for 2006. The
increase was partially due to the inclusion of the newly acquired subsidiaries.
The gross profit margin increased as we benefited from increasing economies
of
scale as the Company grew in size and scale. Higher sales of higher margin
products such as MP3 and DVD players were also critical factors.
Operating
Expense
General
and administrative expense for 2007 totaled $13,614,500 or approximately 4.93%
of net sales, compared to $5,544,924 or approximately 3.74% for 2006. The
increase was primarily due to the costs of managing a larger operation as the
Company integrated its newly acquired subsidiaries.
Income
from Operations
Income
from operations for 2007 was $35,755,931 or 12.95% of net sales as compared
to
income from operations of $17,262,166 for 2006 or 11.65% of net sales.
Increasing economies of scale were a critical factor for the larger margins,
as
were a higher margin product mix. 2007 was a year in which inflation sharply
increased in China and we believe inflation had an effect on our sales in
2007.
Net
Income
Net
income was $22,919,700 or 8.30% of net sales for 2007 compared to $11,277,126
or
7.61% of net sales for 2006. Increasing economies of scale, a higher margin
product mix and significant larger store were all key factors for the large
increase in net income.
Year
Ended December 31, 2006 compared to Year Ended December 31,
2005
Net
sales
Net
sales
for 2006 totaled $148,218,848 compared to $32,588,634 for 2005. The increase
was
partially due to the inclusion of $35,133,964 of revenue from two newly acquired
subsidiaries (HSET and Shanghai) during 2006. The increase was also due to
the
organic growth of YYXC and HWDA. In 2006, the revenue of YYXC and HWDA were
approximately $51 million and $62 million respectively, an increase of 122%
and
480% respectively compared with 2005.
Percentage
of sales
|
|
|
YYXC
|
|
HWDA
|
|
HSET
|
|
Shanghai
|
|
|
Retail
store
|
|
|
59.43
|
%
|
|
57.45
|
%
|
|
74.39
|
%
|
|
76.61
|
%
|
|
Secondary
Distributors
|
|
|
40.57
|
%
|
|
42.55
|
%
|
|
25.61
|
%
|
|
23.39
|
%
|
Cost
of Sales
Cost
of
sales for 2006 totaled $125,411,758 or approximately 84.61% of net sales
compared to $28,325,532 or approximately 86.90% for 2005. The cost of sales
as a
percentage decreased during 2006 due to the introduction of new product models
with higher gross profit margin. Also, we were able to obtain the maximum
discount privilege from our suppliers because of the substantial increase of
sales.
Top
Ten Suppliers of Each of Our Subsidiaries:
|
|
YYXC
|
HWDA
|
HSET
|
Shanghai
|
|
1
|
Fengda
Technology Co., Ltd.
|
Shenzhen
Jiepulin Co., Ltd.
|
Zhejiang
Shaixinke Co., Ltd.
|
Guangzhou
Jinhuang Electronics Co., Ltd.
|
|
2
|
Shanghai
Zhongfang Electronics Co., Ltd.
|
Hangzhou
Telecommunication
Equipments
Co., Ltd.
|
Shenzhen
Aosike Electronics Co., Ltd.
|
Shenzhen
Dengjing Electronics Co., Ltd.
|
|
3
|
Shanghai
Rongduo Business Co., Ltd.
|
Shenzhen
Jinfeng Datong Technology Co., Ltd.
|
Hangzhou
Ruiqi Electronics Co., Ltd.
|
Dongguan
Desheng General Electronics Co., Ltd.
|
|
4
|
Ninbo
Zhongxun Electronics Co.,Ltd.
|
Liansheng
Technology Co., Ltd.
|
Shenzhen
Deyuan Electronics Co., Ltd.
|
Shanghai
Network Equipment Co., Ltd.
|
|
5
|
Hangzhou
Shenruida Trade Co., Ltd.
|
Shenzhen
Sunshine Xinke Digital Technology Co., Ltd.
|
Hangzhou
Wanlian Electronics Co., Ltd.
|
Shanghai
Hanshun Trade Co., Ltd.
|
|
6
|
Shanghai
Guangdian Equipment Co., Ltd.
|
Hangzhou
Tianchen Digital Telecommunication Co., Ltd.
|
Guangzhou
Fenda Audio Co., Ltd.
|
Dongwan
Gemei Electronics Co., Ltd.
|
|
7
|
Yiwu
Wantong Telecom Equipment Co., Ltd.
|
Shenzhen
Sangdahuitong Electronics Co., Ltd.
|
Shenzhen
Chuangwei-RGB Electronics Co., Ltd.
|
SONY-Shanghai
Co., Ltd.
|
|
8
|
Aomeng
Technology Co., Ltd.
|
Hangzhou
Qiuxin Internet equipment Co., Ltd.
|
Guangzhou
Shengshida Electronics Company
|
Shenyou
Technology Co., Ltd.
|
|
9
|
Shanghai
Meiyun Industry Co., Ltd.
|
Huayu
Telecom Equipment Co., Ltd.
|
TCL
Electronics Co., Ltd.
|
Zhaohua
Digital Technology Co., Ltd.
|
|
10
|
Shanghai
Huoke Electronics Co., Ltd
|
Hangzhou
Yingjie Trade Co., Ltd.
|
Hangzhou
Hengrong Trade Co., Ltd.
|
Zhongshan
Wanxin Electronics Co., Ltd.
|
Gross
Profit Margin
Gross
profit margin for 2006 was 15.39% compared to 13.08% for 2005. The increase
was
partially due to the inclusion of the newly acquired subsidiaries. The average
profit margin for the newly acquired companies is approximately 18%. The
increase was also due to the increase in consumer demand and improvement in
product mix.
Operating
Expense
General
and administrative expense for 2006 totaled $5,544,924 or approximately 3.74%
of
net sales, compared to $1,706,869 or approximately 5.2% for 2005. The decrease
of 1.46% was due to the inclusion of the newly acquired
subsidiaries.
Income
from Operations
Income
from operations for 2006 was $17,262,166 or 11.65% of net sales as compared
to
income from operations of $2,556,433 for 2005 or 7.84% of net sales. The
increase was due to our acquisitions during 2006, an increase in consumer demand
and improvement in product mix.
Interest
Expense
Interest
expense for 2006 totaled $7,565 compared to $2,954 for 2005. The increase was
due to the inclusion in our financial statements of our newly acquired
subsidiary Shanghai Joy & Harmony Electronics Company Limited.
Net
Income
Net
income was $11,277,126 or 7.61% of net Sales for 2006 compared to $1,458,250
or
4.47% of net Sales for 2005. The increase in percentage was due to the factors
stated above, including lower cost of goods, lower operating expenses and high
profit margin from the newly acquired companies.
Liquidity
and Capital Resources
Cash
has
historically been generated from operations. Operations and liquidity needs
are
funded primarily through cash flows from operations and short-term borrowings.
Cash and cash equivalents were $24,952,614 at December 31, 2007 and current
assets totaled $42,710,572 at December 31, 2007. The Company’s total current
liabilities were $5,792,722 at December 31, 2007. Working capital at December
31, 2007 was $36,917,850. During 2007, net cash provided by operating activities
was $21,573,771.
Under
the
Shanghai Share Exchange Agreement, dated November 28, 2006, in exchange of
surrendering all their ownership in Shanghai, the Shanghai Shareholders received
both stock consideration and cash consideration. The cash consideration
consisted of $7,500,000 in cash is payable as follows: $3,000,000 within 10
business days after the closing of the transaction, and $4,500,000 payable
six
months after the closing of the transaction as evidenced by promissory notes
issued by us to the Shanghai Shareholders. The $4,500,000 loan was repaid in
the
second quarter of 2007. The loan was repaid as follows:
April
20,
2007- HWD repaid approximately $1.3 million of the outstanding
balance;
April
26,
2007- ZYXD repaid approximately $2.5 million of the outstanding balance;
and
April
30,
2007 -HSE repaid the remaining approximately $700,000 of the
balance.
The
Company believes it will be able to pay any debts that come due for the
foreseeable future.
Capital
Expenditures
Total
capital expenditures during 2007 were $64,325 for purchase of fixed assets
as
compared to $30,591 for 2006. Given the low level of capital requirements needed
to open additional “stores within stores” the Company believes its funds are
sufficient to support its organic growth. The Company’s cash resources grew from
approximately $6.5 million as of December 31, 2006 to approximately $25 million
as of December 31, 2007.
Working
Capital Requirements
Historically
operations and short term financing have been sufficient to meet our cash needs.
We believe that we will be able to generate revenues from sales and raise
capital through private placement offerings of our equity securities to provide
the necessary cash flow to meet anticipated working capital requirements.
However, our actual working capital needs for the long and short term will
depend upon numerous factors, including operating results, competition, and
the
availability of credit facilities, none of which can be predicted with
certainty. Future expansion will be limited by the availability of financing
products and raising capital.
Off-Balance
Sheet Arrangements
We
have
never entered into any off-balance sheet financing arrangements and have never
established any special purpose entities. We have not guaranteed any debt or
commitments of other entities or entered into any options on non-financial
assets.
Critical
Accounting Policies
Our
discussion and analysis of our financial condition and results of operations
is
based upon our consolidated financial statements, which have been prepared
in
accordance with accounting principles generally accepted in the United States.
The preparation of these consolidated financial statements requires us to make
estimates, judgments and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses, and the related disclosure of contingent
assets and liabilities. We base our estimates on historical experience and
on
various other assumptions that we believe are reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent
from
other sources. Actual results may differ from these estimates.
An
accounting policy is considered to be critical if it requires an accounting
estimate to be made based on assumptions about matters that are highly uncertain
at the time the estimates are made, and if different estimates that reasonably
could have been used, or changes in the accounting estimates that are reasonably
likely to occur, could materially impact the consolidated financial statements.
We believe the following critical accounting policies reflect the more
significant estimates and assumptions used in the preparation of the
consolidated financial statements.
Revenue
Recognition
Our
revenues are generated from sales of electronics products. All of our revenue
transactions contain standard business terms and conditions. We determine the
appropriate accounting for these transactions after considering (1) whether
a
contract exists; (2) when to recognize revenue on the deliverables; and (3)
whether all elements of the contract have been fulfilled and delivered. In
addition, our revenue recognition policy requires an assessment as to whether
collection is reasonably assured, which inherently requires us to evaluate
the
creditworthiness of our customers. Changes in judgments on these assumptions
and
estimates could materially impact the timing or amount of revenue
recognition.
Accounting
for Derivative Instruments
Statement
of Financial Accounting Standard (“SFAS”) No. 133, “Accounting for Derivative
Instruments and Hedging Activities,” as amended, requires all derivatives to be
recorded on the Company’s balance sheet at fair value.
In
September 2000, the Emerging Issues Task Force (“EITF”) issued EITF 00-19,
“Accounting for Derivative Financial Instruments Indexed to and Potentially
Settled in, a Company’s Own Stock,” (“EITF 00-19”) which requires freestanding
contracts that are settled in a company’s own stock, including common stock
warrants, to be designated as an equity instrument, asset or a liability. Under
the provisions of EITF 00-19, a contract designated as an asset or a liability
must be carried at fair value on a company’s balance sheet, with any changes in
fair value recorded in the company’s results of operations. A contract
designated as an equity instrument must be included within equity, and no fair
value adjustments are required.
ITEM
7A.
QUANTITATIVE
AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Foreign
Currency Exchange Rate Risk
Fluctuations
in the rate of exchange between the U.S. dollar and foreign currencies,
primarily the Chinese Renminbi, could adversely affect our financial results.
During the fiscal year ended December 31, 2007, approximately all of our sales
are denominated in foreign currencies. We expect that foreign currencies will
continue to represent a similarly significant percentage of our sales in the
future. Selling, marketing and administrative costs related to these sales
are
largely denominated in the same respective currency, thereby mitigating our
transaction risk exposure. We therefore believe that the risk of a significant
impact on our operating income from foreign currency fluctuations is not
substantial. However, for sales not denominated in U.S. dollars, if there is
an
increase in the rate at which a foreign currency is exchanged for U.S. dollars,
it will require more of the foreign currency to equal a specified amount of
U.S.
dollars than before the rate increase. In such cases and if we price our
products in the foreign currency, we will receive less in US. dollars than
we
did before the rate increase went into effect. If we price our products in
U.S.
dollars and competitors price their products in local currency, an increase
in
the relative strength of the U.S. dollar could result in our price not being
competitive in a market where business is transacted in the local
currency.
All
of
our sales denominated in foreign currencies are denominated in the Chinese
Renminbi. Our principal exchange rate risk therefore exists between the U.S.
dollar and this currency. Fluctuations from the beginning to the end of any
given reporting period result in the re-measurement of our foreign
currency-denominated receivables and payables, generating currency transaction
gains or losses that impact our non-operating income/expense levels in the
respective period and are reported in other (income) expense, net in our
combined consolidated financial statements. We do not currently hedge our
exposure to foreign currency exchange rate fluctuations. We may, however, hedge
such exposure to foreign currency exchange rate fluctuations in the future.
Interest
Rate Risk
Changes
in interest rates may affect the interest paid (or earned) and therefore affect
our cash flows and results of operations. However, we do not believe that this
interest rate change risk is significant.
Inflation
Inflation
has not had a material impact on the Company’s business in recent
years.
Currency
Exchange Fluctuations
All
of
the Company’s revenues are denominated in Chinese Renminbi, while its expenses
are denominated primarily in Chinese Renminbi (“RMB”). The value of the
RMB-to-U.S. dollar and other currencies may fluctuate and is affected by, among
other things, changes in political and economic conditions. Since 1994, the
conversion of Renminbi into foreign currencies, including U.S. dollars, has
been
based on rates set by the People’s Bank of China, which are set daily based on
the previous day’s inter-bank foreign exchange market rates and current exchange
rates on the world financial markets. Since 1994, the official exchange rate
for
the conversion of Renminbi to U.S. dollars had generally been stable and the
Renminbi had appreciated slightly against the U.S. dollar. However, on July
21,
2005, the Chinese government changed its policy of pegging the value of Chinese
Renminbi to the U.S. dollar. Under the new policy, Chinese Renminbi may
fluctuate within a narrow and managed band against a basket of certain foreign
currencies. Recently there has been increased political pressure on the Chinese
government to decouple the Renminbi from the United States dollar. At the recent
quarterly regular meeting of People’s Bank of China, its Currency Policy
Committee affirmed the effects of the reform on Chinese Renminbi exchange rate.
Since February 2006, the new currency rate system has been operated; the
currency rate of Renminbi has become more flexible while basically maintaining
stable and the expectation for a larger appreciation range is shrinking. The
Company has never engaged in currency hedging operations and has no present
intention to do so.
Concentration
of Credit Risk
Credit
risk represents the accounting loss that would be recognized at the reporting
date if counterparties failed completely to perform as contracted.
Concentrations of credit risk (whether on or off balance sheet) that arise
from
financial instruments exist for groups of customers or counterparties when
they
have similar economic characteristics that would cause their ability to meet
contractual obligations to be similarly affected by changes in economic or
other
conditions as described below:
|
·
|
The
Company’s business is characterized by rapid technological change, new
product and service development, and evolving industry standards
and
regulations. Inherent in the Company’s business are various risks and
uncertainties, including the impact from the volatility of the stock
market, limited operating history, uncertain profitability and the
ability
to raise additional capital.
|
|
·
|
All
of the Company’s revenue is derived from Asia and Greater China. Changes
in laws and regulations, or their interpretation, or the imposition
of
confiscatory taxation, restrictions on currency conversion, devaluations
of currency or the nationalization or other expropriation of private
enterprises could have a material adverse effect on our business,
results
of operations and financial
condition.
|
|
·
|
If
the Company is unable to derive any revenues from Greater China,
it would
have a significant, financially disruptive effect on the normal operations
of the Company.
|
ITEM
8.
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
The
financial statements of the Company are included following the signature page
to
this Form 10-K.
ITEM
9.
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM
9A(T). CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
Under
the
supervision and with the participation of our management, including our
principal executive officer and principal financial officer, we conducted an
evaluation of our disclosure controls and procedures, as such term is defined
in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934. Based
on this evaluation, our principal executive officer and principal financial
officer have concluded that during the period covered by this report, such
disclosure controls and procedures were effective to detect the inappropriate
application of US GAAP. The Public Company Accounting Oversight Board has
defined a material weakness as a “significant deficiency or combination of
significant deficiencies that results in more than a remote likelihood that
a
material misstatement of the annual or interim financial statements will not
be
prevented or detected.”
Management’s
Report on Internal Control over Financial Reporting
This
annual report includes an attestation report of our registered public accounting
firm regarding internal control over financial reporting. Management’s report
was 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. Our management is
responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange Act Rules 13a-15(f)
and
15d-15(f). Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer,
we
conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the framework in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. In addition, in 2007, we engaged a consulting firm to assist our
management in evaluating and strengthening our internal control over financial
reporting with the objective of full compliance with the Sarbanes-Oxley Act
of
2002. Based on our evaluation, our principal executive officer and principal
financial officer have concluded that during the period covered by this report,
our internal controls over financial reporting were effective.
Changes
in Internal Control over Financial Reporting
There
was
no change in our internal control over financial reporting that occurred during
the fourth fiscal quarter of the fiscal year covered by this Annual Report
on
Form 10-K that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
ITEM
9B. OTHER INFORMATION
There
is
no information required to be disclosed in a report on Form 8-K during the
fourth quarter of the fiscal year covered by this Form 10-K but not reported.
PART
III
ITEM
10.
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The
following table sets forth the name, age and position of each of our officers
and directors as of March 14, 2008.
|
Name
|
Age
|
Position
|
|
Zhenggang
Wang
|
39
|
Chief
Executive Officer,
|
|
|
|
Chairman
of the Board
|
|
Weidong
Huang
|
37
|
Chief
Financial Officer
|
|
Xiang
Ma
|
33
|
President
|
|
Chenghua
Zhu
|
32
|
Director
|
|
Mingjun
Zhu
|
39
|
Director
|
|
Rongjin
Weng
|
44
|
Director
|
|
Wei
Kang Gu
|
69
|
Director
|
|
Kenneth
T. Berents
|
60
|
Director,
Chairman Audit
Committee
|
|
Joseph
J. Levinson
|
31
|
Director
|
Zhenggang
Wang, Chairman of the Board, Chief Executive Officer, Chairman of the
Board
Mr. Wang,
has been the Company’s chairman and chief executive officer and a member of its
Board of Directors since December 2005. He is also the founder, chairman and
chief executive officer of Zhejiang Yong Xin Digital Technology Company Limited,
a holding company for the purpose of holding interests in Hangzhou Wang Da
Electronics Company, Limited
and
Yiwu
Yong Xin Telecommunication Company, Limited, both of which are based in China.
Mr. Wang established Yiwu Yong Xin Telecommunication Company, Limited in
1997, and he serves as its chairman and chief executive officer. In 1998,
Mr. Wang established Hangzhou Wang Da Electronics Company, Limited, which
is in the business of distributing cellular telephone phones. Mr. Wang is
the chairman and chief executive officer of Hangzhou Wang Da Electronics
Company, Limited.
Mr. Wang
does not hold any other directorships with reporting companies in the United
States. There are no family relationships between Mr. Wang and the
directors, executive officers, or persons nominated or chosen by the Company
to
become directors or executive officers. During the last two years, there have
been no transactions to which the Company was a party in which Mr. Wang (or
any member of his immediate family) had a direct or indirect material interest.
Weidong
Huang, Chief Financial Officer
Mr. Huang
has been the chief financial officer of the Company since October 2007. Prior
to
joining the Company, Mr. Huang was the Manager of Audit Department, Zhejiang
Yongxin Digital Technology Co., Ltd., a subsidiary of the Company, where he
has
been employed since July 2007. Prior to that he was General Manager of Hangzhou
Jinda Investment Consulting Company from August 2006 to June 2007 and Assistant
General Manager of Zhongcai Guoqi Investment Group Company from December 2003
to
July 2006. He was the General Manager of Zhongsheng Trade Company from April
1998 to November 2003. Mr. Huang received a degree in business administration
from the Government Institute of Jinhua Municipal Government.
Mr. Huang
does not hold any directorships with reporting companies in the United States.
There are no family relationships between Mr. Liu and the directors,
executive officers, or persons nominated or chosen by the Company to become
directors or executive officers. There have been no transactions to which the
Company was a party in which Mr. Huang (or any member of his immediate family)
had a direct or indirect material interest.
Xiang
Ma, President
Mr.
Ma
has been president of the Company since December 2005.
Mr.
Ma
was President of Yiwu Yong Xin Telecommunication Company Limited, China 3C’s
largest subsidiary, from 1999 to the present. During the past six years, Mr.
Ma’s expertise in marketing and management have contributed significantly to the
company’s rapid growth, where it has gone from a small business in the
distribution of 3C products, particularly fax machines, in Eastern China to
being a major presence in that market. Prior to that, from 1996 to 1999, Mr.
Ma
was the manager of Zhejiang Transfer Company Limited, a high-tech publicly
traded company in China. During his time at Zhejiang Transfer, Mr. Ma was also
responsible for the company’s corporate communications. Mr. Ma received his
Bachelor degree from Zhejiang University with a concentration in business
management.
Mr.
Ma
does not hold any other directorships with reporting companies in the United
States. There are no family relationships between Mr. Ma and the directors,
executive officers, or persons nominated or chosen by the Company to become
directors or executive officers. During the last two years, there have been
no
transactions to which the Company was a party in which Mr. Ma (or any member
of
his immediate family) had a direct or indirect material interest.
Chenghua
Zhu, Director
Ms.
Zhu
has been a director since June 2006.
Ms.
Zhu
is a senior project manager of Shanghai Shengzhang, a certified public
accounting firm. She was project manager at two CPA firms prior to joining
Shanghai Shengzhang, Shanghai Jiarui and Hubei Dahua.
Ms.
Zhu
does not hold any other directorships with reporting companies in the United
States. There are no family relationships between Ms. Zhu and the directors,
executive officers, or persons nominated or chosen by the Company to become
directors or executive officers. During the last two years, there have been
no
transactions to which the Company was a party in which Ms. Zhu (or any member
of
his immediate family) had a direct or indirect material interest.
Mingjun
Zhu, Director
Mr.
Zhu
has been a director of the Company since June 2006. Mr. Zhu is General Manager
of Zhejiang Mingda, a certified public accounting firm. He was General Manager
of Zhejiang Mingda Management Consulting Company. From 1993 to 2004, he was
Deputy Director of Yiwu Zhicheng, a CPA firm.
Mr.
Zhu
does not hold any other directorships with reporting companies in the United
States. There are no family relationships between Mr. Zhu and the directors,
executive officers, or persons nominated or chosen by the Company to become
directors or executive officers. During the last two years, there have been
no
transactions to which the Company was a party in which Mr. Zhu (or any member
of
his immediate family) had a direct or indirect material interest.
Rongjin
Weng, Director
Mr.
Weng
has been a director since December 2005.
Mr. Weng
is Chairman of Langsha Group. He established Langsha Knitting Company Limited
in
1995, and has served as its chairman and chief executive officer since that
time. The company has experienced a 500,000% growth in assets during the past
11
years. Currently, Langsha is the largest sock manufacturer in China with annual
revenue of $100 million. Mr. Weng holds a Master degree in Business
Administration.
Mr.
Weng
does not hold any other directorships with reporting companies in the United
States. There are no family relationships between Mr. Weng and the directors,
executive officers, or persons nominated or chosen by the Company to become
directors or executive officers. Other than the Merger Transaction, during
the
last two years, there have been no transactions to which the Company was a
party
in which Mr. Weng (or any member of his immediate family) had a direct or
indirect material interest.
Wei
Kang Gu, Director
Mr.
Gu
has been a director of the Company since December 2005. Mr. Gu is a Professor
of
Electronic Engineering at Zhejiang University. Founded in 1897, the University
has always been ranked among the few top universities in China and is today
the
third most recognized university in China. It is a major research university
comprised of 22 colleges. Mr. Gu also serves on the Board of Bird Ningbo
Company. Founded in 1992, Bird Ningbo has grown to be China’s leading domestic
manufacturer of mobile phones. He is also Vice Chairman of Zhejiang Electronic
Association. Mr. Gu received a bachelors’ degree from Zhejiang
University.
Mr.
Gu
does not hold any other directorships with reporting companies in the United
States. There are no family relationships between Mr. Gu and the directors,
executive officers, or persons nominated or chosen by the Company to become
directors or executive officers. Other than the Merger Transaction, during
the
last two years, there have been no transactions to which the Company was a
party
in which Mr. Gu (or any member of his immediate family) had a direct or indirect
material interest.
Kenneth
T. Berents, Director, Chairman Audit Committee
Mr.
Berents has a been a director of the Company since December 2006.
Mr.
Berents is a former managing director and senior portfolio manager for Goldman
Sachs Asset Management in Tampa, Fla., which manages $30 billion in growth
stocks. Before joining Goldman Sachs, he was the managing director and director
of equity research for First Union Securities, now Wachovia Securities, from
1993 to 2000. He holds a bachelor’s in history from Villanova University and a
master’s degree in journalism from the University of Missouri-Columbia. He also
was an Alfred P. Sloan Fellow in economics at Princeton University. He has
appeared on ABC’s Nightline, CNN, CNBC and is widely quoted in national and
trade publications.
Mr.
Berents does not hold any other directorships with reporting companies in the
United States. There are no family relationships between Mr. Berents and the
directors, executive officers, or persons nominated or chosen by the Company
to
become directors or executive officers. Other than the Merger Transaction,
during the last two years, there have been no transactions to which the Company
was a party in which Mr. Berents (or any member of his immediate family) had
a
direct or indirect material interest.
Joseph
J. Levinson
Mr.
Levinson has been a director of the Company since May 2007. Mr. Levinson was
employed from January 2006 to May 2007 as Chief Financial Officer and a member
of the Board of Directors of Global Pharmatech (OTCBB: GBLP), a Chinese
pharmaceutical manufacturer. Since 2006 Mr. Levinson has also served as an
Advisor to Broadline Capital, which is a private equity investment firm. From
2006 until February 2007 Mr. Levinson was employed as Chief Financial Officer
of
PacificNet, which is involved in call center outsourcing. From 2004 to 2006
Mr.
Levinson was employed as Chief Financial Officer for BDL Media, a company based
in China that marketed print and online media. Previously Mr. Levinson had
been
employed as a Manager by KPMG and Deloitte and Touche, international accounting
firms. In 1994 Mr. Levinson was awarded a B.S. by SUNY - Buffalo with a
concentration in accounting and finance.
Mr.
Levinson is also a director of China Aoxing Pharmaceutical Company, Inc., a
maker of analgesic drugs that is listed on the OTCBB. There are no family
relationships between Mr. Levinson and the directors, executive officers, or
persons nominated or chosen by the Company to become directors or executive
officers. Other than the Merger Transaction, during the last two years, there
have been no transactions to which the Company was a party in which Mr. Levinson
(or any member of his immediate family) had a direct or indirect material
interest.
Todd
Mavis
Todd
Mavis served as a member of the Board of Directors from January 2007 until
his
resignation in December 2007.
Family
Relationships
There
are
no family relationships among the officers and directors of the
Company.
Involvement
in Certain Legal Proceedings
To
our
knowledge, during the past five years, our officers and directors: have not
filed a petition under the federal bankruptcy laws or any state insolvency
law,
nor had a receiver, fiscal agent or similar officer appointed by a court for
the
business or present of such a person, or any partnership in which (s)he was
a
general partner at or within two years before the time of such filing, or any
corporation or business association of which (s)he was an executive officer
within two years before the time of such filing; were not convicted in a
criminal proceeding or named subject of a pending criminal proceeding (excluding
traffic violations and other minor offenses); were not the subject of any order,
judgment or decree, not subsequently reversed, suspended or vacated, of any
court of competent jurisdiction, permanently or temporarily enjoining him from
or otherwise limiting their respective activities.
Compliance
with Section 16 (a) of the Exchange Act
Based
solely upon a review of Forms 3 and 4 and amendments thereto furnished to us
pursuant to Rule 16a-3(e) under the Securities Exchange Act of 1934 during
our
most recent fiscal year and Forms 5 and amendments thereto furnished to us
with
respect to our most recent fiscal year, certain officers, directors and owners
of 10% or more of our outstanding shares have not filed Forms 3, 4 and 5
required by Section 16(a) of the Securities Exchange Act of 1934, as amended.
The following individuals have not filed Form 3s: Weidong Huang, Xiang Ma,
Weikang Gu and Joseph Levinson.
Code
of Ethics
In
2007
we adopted a corporate code of ethics. We believe our code of ethics is
reasonably designed to deter wrongdoing and promote honest and ethical conduct;
provide full, fair, accurate, timely and understandable disclosure in public
reports; comply with applicable laws; ensure prompt internal reporting of code
violations; and provide accountability for adherence to the code of ethics.
The
code of ethics is filed as Exhibit 14 to this annual report. A written copy
of
the code of ethics will be provided upon request at no charge by writing to
our
Chief Financial Officer, China 3C Group, 368 HuShu Nan Road, HangZhou City,
Zhejiang Province, China 310014.
Board
Committees and Designated Directors
The
Board
of Directors has a Compensation Committee, a Nominating and Corporate Governance
Committee and an Audit Committee.
Audit
Committee
Our
Audit
Committee consists of Chairman Kenneth T. Berents and members Rongjin Weng
and
Mingjun Zhu. The Board of Directors of the Company has determined that Mr.
Berents is the audit committee financial expert.
Compensation
Committee
The
Compensation Committee makes recommendations to the Board of Directors
concerning salaries and incentive compensation for our officers, including
our
Chief Executive Officer, and employees and administers our stock option plans.
Each of the members of the Committee is independent and none have served as
an
officer or employee of the Company.
Nominating
and Corporate Governance Committee
The
Nominating and Corporate Governance Committee assists the Board of Directors
in
identifying qualified individuals to become board members, in determining the
composition of the Board and in monitoring a process established to assess
Board
effectiveness. Each of the members of the Committee is independent and none
have
served as an officer or employee of the Company.
Changes
in Director Nomination Process for Stockholders
There
have been no material changes to the procedures by which security holders may
recommend nominees to the Company’s board of directors.
ITEM
11. EXECUTIVE COMPENSATION
Compensation
Discussion And Analysis
The
Compensation Committee of our board of directors and our CEO, CFO and head
of
Human Resources are collectively responsible for implementing and administering
all aspects of our benefit and compensation plans and programs, as well as
developing specific policies regarding compensation of our executive officers.
All of the members of our Compensation Committee, Mingjun Zhu and Wei Kang
Gu,
are independent directors.
Compensation
Objectives
Our
primary goal with respect to executive compensation has been to set compensation
at levels that attract and retain the most talented and dedicated executives
possible. Individual executive compensation is set at levels believed to be
comparable with executives in other companies of similar size and stage of
development operating in China. We also link long-term stock-based incentives
to
the achievement of specified performance objectives and to align executives’
incentives with stockholder value creation.
Elements
of Compensation
Base
Salary
.
All
full time executives are paid a base salary. For executives who are Chinese
nationals, including our CEO and Chairman, we do not have employment agreements.
Base salaries for our executives are established based on the scope of their
responsibilities, taking into account competitive market compensation paid
by
other companies in our industry for similar positions, professional
qualifications, academic background, and the other elements of the executive’s
compensation, including stock-based compensation. Our intent is to set
executives’ base salaries near the median of the range of salaries for
executives in similar positions with similar responsibilities at comparable
companies, in line with our compensation philosophy. Base salaries are reviewed
annually, and may be increased to align salaries with market levels after taking
into account the subjective evaluation described previously.
The
Company currently has no foreign employees and the amount of salary is primarily
determined by job requirements and each employee’s level in the corporate
hierarchy. The Company’s personnel department then makes salary decisions based
on these factors along with and job performance and market
conditions.
Equity
Incentive Compensation
.
We
believe that long-term performance is achieved through an ownership culture
participated in by our executive officers through the use of stock-based awards.
Currently, we do not maintain any incentive compensation plans based on
pre-defined performance criteria. The Compensation Committee has the general
authority, however, to award equity incentive compensation, i.e. stock options,
to our executive officers in such amounts and on such terms as the committee
determines in its sole discretion. The Committee does not have a determined
formula for determining the number of options available to be granted. Incentive
compensation is intended to compensate officers for accomplishing strategic
goals such as mergers and acquisitions and fund raising. The Compensation
Committee will review each executive’s individual performance and his or her
contribution to our strategic goals periodically and determine the amount of
incentive compensation towards the end of the fiscal year. Our Compensation
Committee grants equity incentive compensation at times when we do not have
material non-public information to avoid timing issues and the appearance that
such awards are made based on any such information.
Determination
of Compensation
Our
CEO,
CFO and head of Human Resources meet frequently during the last several weeks
of
our fiscal year to evaluate each non-executive employee’s performance and
determine his or her compensation for the following year.
The
following table sets forth the cash and other compensation paid by us in 2007
to
all individuals who served as our chief executive officer and chief financial
officer, who we collectively refer to as the named executive officers (“NEOs”).
No executive received total compensation greater than $100,000 in 2007.
|
SUMMARY
COMPENSATION TABLE
|
|
|
Name
and principal position
|
|
Year
|
|
Salary
($)
|
|
Bonus
($)
|
|
Stock
Awards ($)
|
|
Option
Awards ($)
|
|
Non-Equity
Incentive Plan Compensation ($)
|
|
Nonqualified
Deferred Compensation Earnings ($)
|
|
All
Other Compensation ($)
|
|
Total
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Zhenggang
Wang,
CEO
|
|
2007
2006
2005
|
|
$
$
$
|
59,600
15,000
15,000
|
|
|
-
-
-
|
|
|
-
-
-
|
|
|
-
-
-
|
|
|
-
-
-
|
|
|
-
-
-
|
|
|
-
-
-
|
|
$
$
|
15,000
15,000
|
|
|
Jian
Liu, Former CFO
|
|
2007
2
006
2005
|
|
$
$
$
|
53,000
15,000
15,000
|
|
|
-
-
-
|
|
|
-
-
-
|
|
|
-
-
-
|
|
|
-
-
-
|
|
|
-
-
-
|
|
|
-
-
-
|
|
$
$
|
15,000
15,000
|
|
|
Weidong
Huang, CFO
|
|
2007
|
|
$
|
5,000
(partial
year) (1
)
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
$
|
15,000
|
|
(1)
Through October 8, 2007.
Grants
of Plan-Based Awards
No
plan
based award was granted to any of the executive officers named in the Company’s
Summary Compensation Table as of December 31, 2007.
Outstanding
Equity Awards At Fiscal Year-end
There
were no outstanding unexercised options, unvested stock or other equity
incentive plan awards held by any of the executive officers named in the
Company’s Summary Compensation Table as of December 31, 2007.
Option
Exercises And Stock Vested
There
were no exercises of stock options, stock appreciation rights and/or similar
investment nor was there any vesting of stock, restricted stock, restricted
stock units or similar instruments during the year ended December 31, 2007
for
any of the executive officers named in the Company’s Summary Compensation
Table.
Pension
Benefits
We
do not
sponsor any qualified or non-qualified defined benefit plans.
Nonqualified
Deferred Compensation
We
do not
maintain any non-qualified defined contribution or deferred compensation plans.
Our Compensation Committee, which is comprised solely of “outside directors” as
defined for purposes of Section 162(m) of the Code, may elect to provide our
officers and other employees with non-qualified defined contribution or deferred
compensation benefits if the Compensation Committee determines that doing so
is
in our best interests.
Employment
Agreements
On
May 7,
2007 the Board of Directors appointed Joseph J. Levinson to serve as a member
of
the Board of Directors of the Company and to be in charge of the Company’s
investor relations. As compensation for his services, Mr. Levinson is entitled
to receive: (1) USD $60,000 per year, payable in equal quarterly installments;
(2) a monthly grant during his term of his services of 1,000 shares of the
Company’s common stock; and (3) an annual grant of Stock Options to purchase up
to 300,000 shares of common stock of the Company. In addition, the Company
agreed that Mr. Levinson would receive (1) $2,500 for each Board meeting that
he
attends, (2) $2,000 for each meeting of a committee of the Board that he
attends, (3) $5,000 upon being named the chairman of any Board committee, and
(4) $4,500 as a one time bonus upon joining the Board.
Potential
Payments Upon Termination or Change in Control
None.
Compensation
of Directors
In
general, members of the Board receive $2,500 per Board meeting that they attend
and $2,000 per meeting of a committee of the Board that they attend. In
addition, Board members receive $5,000 for serving as a chairman of a Board
committee. The Company entered into Board of Directors Agreement with Kenneth
Berents and Todd Mavis whereby the Company agreed to pay Messrs. Berents and
Mavis a $75,000 annual salary for service as a member of the Board.
The
following table summarizes compensation that our directors earned during 2007
for services as members of our Board.
|
DIRECTOR
COMPENSATION
|
|
|
Name
|
|
Fees
Earned
or
Paid
in
Cash
|
|
Stock
Awards
($)
(1)
|
|
Option
Awards
($)
(2)
|
|
Non-Equity
Incentive
Plan
Compensation
($)
|
|
Change
in
Pension
Value
and
Nonqualified
Deferred
Compensation
Earnings
($)
|
|
All
Other
Compensation
($)
|
|
Total
($)
|
|
|
Kenneth
T. Berents
|
|
$
|
75,000
|
|
|
|
|
|
97,230(3
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
172,230
|
|
|
Wei
Kang Gu
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Joseph
J. Levinson
|
|
$
|
16,000
|
|
|
13,930(6
|
)
|
|
967,500(4
|
)
|
|
-
|
|
|
-
|
|
|
|
|
|
-
|
|
|
Todd
Mavis
|
|
$
|
75,000
|
|
|
-
|
|
|
64,188(5
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
139,188
|
|
|
Chenghua
Zhu
|
|
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
Mingjun
Zhu
|
|
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Rongjin
Weng
|
|
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
(1)
Valuation based on dollar amount recognized for financial statement reporting
purposes pursuant to FAS 123(R) with respect to 2007.
(2)
Valuation based on the dollar amount of option grants recognized for financial
statement reporting purposes pursuant to FAS 123(R) with respect to
2007.
(3)
Mr.
Kenneth Berents received a stock option grant of 30,000 shares in December,
2007
at an exercise price equivalent to the prevailing market price of the stock,
all
of which vested are were exercisable as of December 31, 2007.
(4)
Mr.
Joseph Levinson received a stock option grant of 300,000 shares in May, 2007
at
an exercise price of $6.15 per share, all of which vested are were exercisable
as of December 31, 2007.
(5)
Mr.
Todd Mavis received a stock option grant of 50,000 shares in January, 2007
at an
exercise price equivalent to the prevailing market price of the Company’s stock,
all of which vested are were exercisable as of December 31, 2007.
(6)
Joseph Levinson was granted 5,000 shares of common stock in 2007. All 5,000
shares were granted in September 2007.
There
are
no relationships among any of the directors.
Compensation
Committee Interlocks and Insider Participation
Members
of our Compensation Committee of the Board of Directors were Mingjun Zhu and
Wei
Kang Gu. No member of our Compensation Committee was, or has been, an officer
or
employee of the Company or any of our subsidiaries.
No
member
of the Compensation Committee has a relationship that would constitute an
interlocking relationship with executive officers or directors of the Company
or
another entity.
Compensation
Committee Report (1)
The
goal
of the Company’s executive compensation policy is to ensure that an appropriate
relationship exists between executive compensation and the creation of
stockholder value, while at the same time attracting, motivating and retaining
experienced executive officers.
The
Compensation Committee has reviewed and discussed the discussion and analysis
of
the Company’s compensation which appears above with management, and, based on
such review and discussion, the Compensation Committee recommended to the
Company’s Board of Directors that the above disclosure be included in this
Annual Report on Form 10-K.
The
members of the Compensation Committee are:
Mingjun
Zhu, Chair
Wei
Kang
Gu
(1)
The
material in the above Compensation Committee reports is not soliciting material,
is not deemed filed with the SEC and is not incorporated by reference in any
filing of the Company under the Securities Act of 1933, or the Securities
Exchange Act of 1934, whether made before or after the date of this Form 10-K
and irrespective of any general incorporation language in such filing.
ITEM
12.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
The
following table sets forth certain information, as of March 14, 2008, concerning
shares of common stock of the Company, the only class of its securities that
are
issued and outstanding, held by (1) each shareholder known by the Company
to own beneficially more than five percent of the common stock, (2) each
director of the Company, (3) each executive officer of the Company, and
(4) all directors and executive officers of the Company as a group:
|
|
|
|
Amount
and Nature
|
|
|
|
|
|
|
|
of
Beneficial
|
|
Percentage
of
|
|
|
Name
and Address of Beneficial Owner (1)
|
|
|
Ownership
|
|
Common
Stock
|
|
|
|
|
|
|
|
|
(3)
|
|
|
Zhenggang
Wang
|
|
|
9,625,000
|
|
|
18.34
|
%
|
|
Weidong
Huang
|
|
|
0
|
|
|
0
|
|
|
Xiang
Ma
|
|
|
0
|
|
|
0
|
|
|
Chenghua
Zhu
|
|
|
0
|
|
|
0
|
|
|
Mingjun
Zhu
|
|
|
0
|
|
|
0
|
|
|
Rongjin
Weng
|
|
|
0
|
|
|
0
|
|
|
Wei
Kang Gu
|
|
|
0
|
|
|
0
|
|
|
Kenneth
T. Berents
|
|
|
80,000
|
(4)
|
|
*
|
|
|
Joseph
J. Levinson
|
|
|
305,000
|
(4)
|
|
0.59%*
|
|
|
Weiyi
Lv
|
|
|
5,495,000
|
|
|
10.47
|
%
|
|
Yimin
Zhang
|
|
|
5,495,000
|
|
|
10.47
|
%
|
|
Xiaochun
Wang
|
|
|
4,130,000
|
|
|
7.87
|
%
|
|
Wen-An
Chen (2)
|
|
|
4,000,000
|
|
|
7.62
|
%
|
|
Huoqing
Yang (2)
|
|
|
4,000,000
|
|
|
7.62
|
%
|
|
Zhongsheng
Bao
|
|
|
2,730,000
|
|
|
5.20
|
%
|
|
All
directors and executive officers as a group (9 persons)
|
|
|
9,725,000
|
|
|
18.53
|
%
|
*
Less
than One Percent.
|
(1)
|
|
Unless
otherwise indicated in the footnotes to the table, each shareholder
shown
on the table has sole voting and investment power with respect to
the
shares beneficially owned by him, her or it. Unless otherwise indicated
in
the footnotes to the table, the address for each shareholder is c/o:
368
HuShu Nan Road, HangZhou City, Zhejiang Province, China 310014.
Percentages of less than one percent have been omitted from the table.
|
|
|
(2)
|
|
Represents
shares of common stock held jointly by Wen-An Chen and Huoqing Yang.
|
|
|
(3)
|
|
Calculated
on the basis of 52,671,438
shares
of common stock issued and outstanding as of March 14, 2008 except
that
shares of common stock underlying options and warrants exercisable
within
60 days of the date hereof are deemed to be outstanding for purposes
of
calculating the beneficial ownership of securities of the holder
of such
options or warrants.
|
|
|
(4)
|
|
Represents
shares of common stock issuable upon exercise of outstanding stock
options
(as described above).
|
|
ITEM
13.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
Related
Transactions
Since
October 2005, Zhenggang Wang, our CEO and Chairman of the Board of
Directors, a former shareholder of CFDL and its sole director, has served as
the
chairman of the board and the chief executive officer of the Company and has
been a member of the board of directors of the Company. China US Bridge Capital
Limited, a former shareholder of CFDL, has been a holder of the Company’s common
stock since October 2005. Immediately prior to the Merger Transaction, it
held approximately 4.6% of the Company’s issued and outstanding common stock.
Except
as
otherwise disclosed herein or incorporated herein by reference, there have
not
been any transactions, or proposed transactions, during the last two years,
to
which the Company was or is to be a party, in which any director or executive
officer of the Company, any nominee for election as a director, any security
holder owning beneficially more than five percent of the common stock of the
Company, or any member of the immediate family of the aforementioned persons
had
or is to have a direct or indirect material interest.
Independent
Directors
The
following members of the Company’s Board of Directors are independent under the
listing standards of the Nasdaq Stock Market: Rongjin Weng, Weikang Gu, Mingjun
Zhu, Chenghua Zhu, and Kenneth Berents.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
On
April
20, 2006 the Company retained Morgenstern & Company, CPA’s, P.C.
(“Morgenstern”) to serve as the Company’s principal independent accountant.
The
following represents fees for professional audit services rendered by
Morgenstern for the fiscal year ended December 31, 2006 and December 31,
2007.
Audit
Fees
The
aggregate fees billed by our current auditors, Morgenstern, for professional
services rendered for the audit of our annual financial statements for the
year
ended December 31, 2007 and 2006 were $228,000 and $99,184.
Audit
Related Fees
We
incurred no audit related fees to Morgenstern and Kabani during the year ended
December 31, 2006.
Tax
Fees
Our
principal accountants did not render any services for tax compliance, tax advice
and tax planning during transition period ended December 31, 2007 and 2006
fiscal year, respectively.
All
Other Fees
Our
principal accountants did not bill us any additional fees that are not disclosed
under audit fees, audit related fees or tax fees in each of the last two
calendar years.
Audit
Committee Pre-Approval Process, Policies and Procedures
We
have
an Audit Committee which is composed of Kenneth T. Berents (Chairman), Chenghua
Zhu and Rongjin Weng. Our principal accountants have performed their audit
procedures in accordance with pre-approved policies and procedures established
by our Audit Committee. Our principal auditors have informed our Audit
Committee of the scope and nature of each service provided.
In
accordance with the SEC’s auditor independence rules, the Audit Committee has
established the following policies and procedures by which it approves in
advance any audit or permissible non-audit services to be provided to the
Company by its independent auditor.
Prior
to
the engagement of the independent auditor for any fiscal year’s audit,
management submits to the Audit Committee for approval lists of recurring audit,
audit-related, tax and other services expected to be provided by the auditor
during that fiscal year. The Audit Committee adopts pre-approval schedules
describing the recurring services that it has pre-approved, and is informed
on a
timely basis, and in any event by the next scheduled meeting, of any such
services rendered by the independent auditor and the related fees.
The
fees
for any services listed in a pre-approval schedule are budgeted, and the Audit
Committee requires the independent auditor and management to report actual
fees
versus the budget periodically throughout the year. The Audit Committee will
require additional pre-approval if circumstances arise where it becomes
necessary to engage the independent auditor for additional services above the
amount of fees originally pre-approved. Any audit or non-audit service not
listed in a pre-approval schedule must be separately pre-approved by the Audit
Committee on a case-by-case basis. Every request to adopt or amend a
pre-approval schedule or to provide services that are not listed in a
pre-approval schedule must include a statement by the independent auditors
as to
whether, in their view, the request is consistent with the SEC’s rules on
auditor independence.
The
Audit
Committee will not grant approval for:
|
·
|
any
services prohibited by applicable law or by any rule or regulation
of the
SEC or other regulatory body applicable to the
Company;
|
|
·
|
provision
by the independent auditor to the Company of strategic consulting
services
of the type typically provided by management consulting firms;
or
|
|
·
|
the
retention of the independent auditor in connection with a transaction
initially recommended by the independent auditor, the tax treatment
of
which may not be clear under the Internal Revenue Code and related
regulations and which it is reasonable to conclude will be subject
to
audit procedures during an audit of the Company’s financial
statements.
|
Tax
services proposed to be provided by the auditor to any director, officer or
employee of the Company who is in an accounting role or financial reporting
oversight role must be approved by the Audit Committee on a case-by-case basis
where such services are to be paid for by the Company, and the Audit Committee
will be informed of any services to be provided to such individuals that are
not
to be paid for by the Company.
In
determining whether to grant pre-approval of any non-audit services in the
“all
other” category, the Audit Committee will consider all relevant facts and
circumstances, including the following four basic guidelines:
|
·
|
whether
the service creates a mutual or conflicting interest between the
auditor
and the Company;
|
|
·
|
whether
the service places the auditor in the position of auditing his or
her own
work;
|
|
·
|
whether
the service results in the auditor acting as management or an employee
of
the Company; and
|
|
·
|
whether
the service places the auditor in a position of being an advocate
for the
Company.
|
DECEMBER
31, 2007
Note
1 -
ORGANIZATION
China
3C
Group was incorporated on August, 20, 1998 under the laws of the State of
Nevada. Capital Future Developments Limited - BVI (Capital) was incorporated
on
July 22, 2004 under the laws of the British Virgin Islands. Zhejiang Yong Xin
Digital Technology Co., Ltd. (Zhejiang), Yiwu Yong Xin Communication Ltd.
(Yiwu), Hangzhou Wandga Electronics Co., Ltd. (Wang Da), Hangzhou Sanhe
Electronic Technology, Limited (“Sanhe”), and Shanghai Joy & Harmony
Electronics Company Limited (Joy & Harmony) were incorporated under the laws
of Peoples Republic of China on July 11, 2005, July 18, 1997, March, 30, 1998,
April 12, 2004, and August 20, 2003 respectively.
On
December 21, 2005 Capital became a wholly owned subsidiary of China 3C Group
through a reverse merger. China 3C Group acquired all of the issued and
outstanding capital stock of Capital pursuant to a Merger Agreement dated at
December 21, 2005 by and among China 3C Group, XY Acquisition Corporation,
Capital and the shareholders of Capital (the “Merger Agreement”). Pursuant to
the Merger Agreement, Capital became a wholly owned subsidiary of China 3C
Group
and, in exchange for the Capital shares, China 3C Group issued 35,000,000 shares
of its common stock to the shareholders of Capital, representing 93% of the
issued and outstanding capital stock of China 3C Group at that time and a cash
consideration of $500,000. On August 15, 2007, the Company changed the ownership
structure. As a result, instead of (Capital) owning 100% of (Zhejiang) as
previously disclosed, (Capital) has entered into contractual agreements with
(Zhejiang) whereby (Capital) owns a 100% interest in the revenues of (Zhejiang).
(Capital) does not have an equity interest in (Zhejiang), but enjoys all the
economic benefits. Under this structure, (Zhejiang) is now a wholly foreign
owned enterprise (WOFE) of Capital. The contractual agreements give (Capital)
and its’ equity owners an obligation, and having ability to absorb, any losses,
and rights to receive returns. (Capital) will be unable to make significant
decisions about the activities of the company and can not carry out its
principal activities without financial support. These characteristics as defined
in Financial Accounting Standards Board (FASB) interpretation 46, Consolidation
of Variable Interest Entities (VIEs), qualifies the business operations of
(Zhejiang) to be consolidated with (Capital) and ultimately with China 3C
Group.
The
Company is now engaged in the business of mobile phone, facsimile machines,
DVD
players, stereo’s, speakers, MP3 and MP4 players, iPod, electronic dictionaries,
CD players, radios, Walkman, and audio systems distribution.
Note
2 -
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
The
accompanying consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America.
The Company’s functional currency is the Chinese Renminbi, however the
accompanying consolidated financial statements have been translated and
presented in United States Dollars.
Translation
Adjustment
As
of
December 31, 2007 and December 31, 2006, the accounts of Zhejiang, Wang Da,
Yiwu, Sanhe, and Joy & Harmony were maintained, and its financial statements
were expressed, in Chinese Yuan Renminbi (CNY). Such financial statements were
translated into U.S. Dollars (USD) in accordance with Statement of Financial
Accounts Standards (SFAS) No. 52, Foreign Currency Translation, with the CNY
as
the functional currency. According to the Statement, all assets and liabilities
were translated at the current exchange rate, stockholders equity are translated
at the historical rates and income statement items are translated at the average
exchange rate for the period. The resulting translation adjustments are reported
under other comprehensive income in accordance with SFAS No. 130, Reporting
Comprehensive Income as a component of shareholders equity. Transaction gains
and losses are reflected in the income statement.
CHINA
3C GROUP AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
Note
2 -
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Use
of
Estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles 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 revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Principles
of Consolidation
The
consolidated financial statements include the accounts of China 3C Group and
its
wholly owned subsidiaries Capital, Zhejiang, Wang Da, Yiwu, Joy and Harmony,
and
Sanhe, collectively referred to within as the Company. All material intercompany
accounts, transactions and profits have been eliminated in
consolidation.
Risks
and Uncertainties
The
Company is subject to substantial risks from, among other things, intense
competition associated with the industry in general, other risks associated
with
financing, liquidity requirements, rapidly changing customer requirements,
limited operating history, foreign currency exchange rates and the volatility
of
public markets.
Contingencies
Certain
conditions may exist as of the date the financial statements are issued, which
may result in a loss to the Company but which will only be resolved when one
or
more future events occur or fail to occur. The Company’s management and legal
counsel assess such contingent liabilities, and such assessment inherently
involves an exercise of judgment. In assessing loss contingencies related to
legal proceedings that are pending against the Company or unasserted claims
that
may result in such proceedings, the Company’s legal counsel evaluates the
perceived merits of any legal proceedings or unasserted claims as well as the
perceived merits of the amount of relief sought or expected to be
sought.
If
the
assessment of a contingency indicates that it is probable that a material loss
has been incurred and the amount of the liability can be estimated, then the
estimated liability would be accrued in the Company’s financial statements. If
the assessment indicates that a potential material loss contingency is not
probable but is reasonably possible, or is probable but cannot be estimated,
then the nature of the contingent liability, together with an estimate of the
range of possible loss if determinable and material would be disclosed.
Loss
contingencies considered to be remote by management are generally not disclosed
unless they involve guarantees, in which case the guarantee would be
disclosed.
CHINA
3C GROUP AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
Note
2 -
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED
)
Cash
and Cash Equivalents
Cash
and
cash equivalents include cash in hand and cash in time deposits, certificates
of
deposit and all highly liquid debt instruments with original maturities of
three
months or less.
Accounts
Receivable
The
Company maintains reserves for potential credit losses on accounts receivable.
Management reviews the composition of accounts receivable and analyzes
historical bad debts, customer concentrations, customer credit worthiness,
current economic trends and changes in customer payment patterns to evaluate
the
adequacy of these reserves. Terms of the sales vary. Reserves are recorded
primarily on a specific identification basis. Allowance for doubtful debts
amounted to $ 103,803 and $90,780 as at December 31, 2007 and December 31,
2006
respectively.
Inventories
Inventories
are valued at the lower of cost (determined on a weighted average basis) or
market. The Management compares the cost of inventories with the market value
and allowance is made for writing down their inventories to market value, if
lower. As of December 31, 2007 and December 31, 2006 inventory consisted of
finished goods valued at $ 6,725,371 and $ 2,779,506 respectively.
Property,
Plant & Equipment
Property
and equipment are stated at cost. Expenditures for maintenance and repairs
are
charged to earnings as incurred; additions, renewals and betterments are
capitalized. When property and equipment are retired or otherwise disposed
of,
the related cost and accumulated depreciation are removed from the respective
accounts, and any gain or loss is included in operations. Depreciation of
property and equipment is provided using the straight-line method for
substantially all assets with estimated lives of:
|
Furniture
and Fixtures & Office Equipment
|
5
years
|
|
Automobile
|
5
years
|
As
of
December 31, 2007 and 2006 Property, Plant & Equipment consist of the
following:
|
|
|
2007
|
|
2006
|
|
|
Automobile
|
|
$
|
138,330
|
|
$
|
103,749
|
|
|
Office
equipment
|
|
|
105,612
|
|
|
75,869
|
|
|
|
|
|
243,942
|
|
|
179,618
|
|
|
Accumulated
depreciation
|
|
|
(154,528
|
)
|
|
(113,815
|
)
|
|
|
|
$
|
89,414
|
|
$
|
65,803
|
|
CHINA
3C GROUP AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
Note
2 -
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED
)
Long-Lived
Assets
Effective
January 1, 2002, the Company adopted Statement of Financial Accounting Standards
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS
144), which addresses financial accounting and reporting for the impairment
or
disposal of long-lived assets and supersedes SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,
and
the accounting and reporting provisions of APB Opinion No. 30, ¡§Reporting the
Results of Operations for a Disposal of a Segment of a Business. The Company
periodically evaluates the carrying value of long-lived assets to be held and
used in accordance with SFAS 144. SFAS 144 requires impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
are present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets carrying amounts. In that event, a loss is
recognized based on the amount by which the carrying amount exceeds the fair
market value of the long-lived assets. Loss on long-lived assets to be disposed
of is determined in a similar manner, except that fair market values are reduced
for the cost of disposal. Based on its review, the Company believes that, as
of
December 31, 2007 there were no significant impairments of its long-lived
assets.
Fair
Value of Financial Instruments
Statement
of financial accounting standard No. 107, Disclosures about fair value of
financial instruments, requires that the Company disclose estimated fair values
of financial instruments. The carrying amounts reported in the statements of
financial position for current assets and current liabilities qualifying as
financial instruments are a reasonable estimate of fair value.
Revenue
Recognition
The
Company’s revenue recognition policies are in compliance with Staff accounting
bulletin (SAB) 104. Sales revenue is recognized at the date of shipment to
customers when a formal arrangement exists, the price is fixed or determinable,
the delivery is completed, no other significant obligations of the Company
exist
and collectibility is reasonably assured. Payments received before all of the
relevant criteria for revenue recognition are satisfied are recorded as unearned
revenue.
Stock-Based
Compensation
In
October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation. SFAS No. 123 prescribes accounting and reporting standards for
all
stock-based compensation plans, including employee stock options, restricted
stock, employee stock purchase plans and stock appreciation rights. SFAS No.
123
requires compensation expense to be recorded (i) using the new fair value method
or (ii) using the existing accounting rules prescribed by Accounting Principles
Board Opinion No. 25, Accounting for stock issued to employees¨ (APB 25) and
related interpretations with proforma disclosure of what net income and earnings
per share would have been had the Company adopted the new fair value method.
The
Company uses the intrinsic value method prescribed by APB 25 and has opted
for
the disclosure provisions of SFAS No.123.
CHINA
3C GROUP AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
Note
2 -
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED
)
Advertising
Advertising
expenses consist primarily of costs of promotion for corporate image and product
marketing and costs of direct advertising. The Company expenses all advertising
costs as incurred.
Income
Taxes
The
Company utilizes SFAS No. 109, Accounting for Income Taxes, which requires
the
recognition of deferred tax assets and liabilities for the expected future
tax
consequences of events that have been included in the financial statements
or
tax returns. Under this method, deferred income taxes are recognized for the
tax
consequences in future years of differences between the tax bases of assets
and
liabilities and their financial reporting amounts at each period end based
on
enacted tax laws and statutory tax rates applicable to the periods in which
the
differences are expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized.
Basic
and Diluted Earnings per Share
Earnings
per share are calculated in accordance with the Statement of financial
accounting standards No. 128 (SFAS No. 128), Earnings per share. SFAS No. 128
superseded Accounting Principles Board Opinion No.15 (APB 15). Net loss per
share for all periods presented has been restated to reflect the adoption of
SFAS No. 128. Basic net loss per share is based upon the weighted average number
of common shares outstanding. Diluted net loss per share is based on the
assumption that all dilutive convertible shares and stock options were converted
or exercised. Dilution is computed by applying the treasury stock method. Under
this method, options and warrants are assumed to be exercised at the beginning
of the period (or at the time of issuance, if later), and as if funds obtained
thereby were used to purchase common stock at the average market price during
the period.
Statement
of Cash Flows
In
accordance with SFAS No. 95, Statement of Cash Flows, cash flows from the
Company’s operations is based upon the local currencies. 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.
CHINA
3C GROUP AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
Note
2 -
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Concentration
of Credit Risk
Financial
instruments that potentially subject the Company to concentrations of credit
risk are cash, accounts receivable and other receivables arising from its normal
business activities. The Company places its cash in what it believes to be
credit-worthy financial institutions. The Company has a diversified customer
base, most of which are in China. The Company controls credit risk related
to
accounts receivable through credit approvals, credit limits 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.
Segment
Reporting
Statement
of Financial Accounting Standards No. 131 (SFAS 131), Disclosure about Segments
of an Enterprise and Related Information requires use of the management
approach¨ model for segment reporting. The management approach model is based on
the way a company’s management organizes segments within the company for making
operating decisions and assessing performance. Reportable segments are based
on
products and services, geography, legal structure, management structure, or
any
other manner in which management disaggregates a company.
Recent
accounting pronouncements
In
December 2004, the FASB issued FASB Statement No. 123R, “Share-Based Payment”,
an Amendment of FASB Statement No. 123” (“FAS No. 123R”). FAS No. 123R requires
companies to recognize in the statement of operations the grant- date fair
value
of stock options and other equity-based compensation issued to employees. FAS
No. 123R is effective beginning in the Company’s first quarter of fiscal 2006.
In
May
2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections.”
This statement applies to all voluntary changes in accounting principle and
requires retrospective application to prior periods’ financial statements of
changes in accounting principle, unless this would be impracticable. This
statement also makes a distinction between “retrospective application” of an
accounting principle and the “restatement” of financial statements to reflect
the correction of an error. This statement is effective for accounting changes
and corrections of errors made in fiscal years beginning after December 15,
2005.
In
June
2005, the EITF reached consensus on Issue No. 05-6, Determining the Amortization
Period for Leasehold Improvements (“EITF 05-6.”) EITF 05-6 provides guidance on
determining the amortization period for leasehold improvements acquired in
a
business combination or acquired subsequent to lease inception. The guidance
in
EITF 05-6 will be applied prospectively and is effective for periods beginning
after June 29, 2005. EITF 05-6 is not expected to have a material effect on
its
consolidated financial position or results of operations.
CHINA
3C GROUP AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
Note
2 -
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In
June
2005, the FASB Staff issued FASB Staff Position 150-5 (FSP 150-5), Issuers
Accounting under FASB Statement No. 150 for Freestanding Warrants and Other
Similar Instruments on Shares that are Redeemable. FSP 150-5 addresses
whether freestanding warrants and other similar instruments on shares that
are
redeemable, either puttable or mandatorily redeemable, would be subject to
the
requirements of FASB Statement No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity, regardless
of
the timing or the redemption feature or the redemption price. The FSP is
effective after June 30, 2005.
On
February 16, 2006, FASB issued SFAS No. 155, Accounting for Certain Hybrid
Financial Instruments. SFAS No. 155 amends SFAS No 133, Accounting for
Derivative Instruments and Hedging Activities¨, and SFAF No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.
SFAS No. 155, permits fair value re-measurement for any hybrid financial
instrument that contains an embedded derivative that otherwise would require
bifurcation, clarifies which interest-only strips and principal-only strips
are
not subject to the requirements of SFAS No. 133, establishes a requirement
to
evaluate interest in securitized financial assets to identify interests that
are
freestanding derivatives or that are hybrid financial instruments that contain
an embedded derivative requiring bifurcation, clarifies that concentrations
of
credit risk in the form of subordination are not embedded derivatives, and
amends SFAS No. 140 to eliminate the prohibition on the qualifying
special-purpose entity from holding a derivative financial instrument that
pertains to a beneficial interest other than another derivative financial
instrument. This statement is effective for all financial instruments acquired
or issued after the beginning of the Company’s first fiscal year that begins
after September 15, 2006.
In
March
2006, the FASB issued FASB Statement No. 156, Accounting for Servicing of
Financial Assets - an amendment to FASB Statement No. 140. Statement 156
requires that an entity recognize a servicing asset or servicing liability
each
time it undertakes an obligation to service a financial asset by entering into
a
service contract under certain situations. The new standard is effective for
fiscal years beginning after September 15, 2006. The Company does not
expect its adoption of this new standard to have a material impact on its
financial position, results of operations or cash flows.
In
September, 2006, FASB issued SFAS 157 ‘Fair Value Measurements’. This Statement
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles (GAAP), and expands disclosures about
fair value measurements. This Statements applies under other accounting
pronouncements that require or permit fair value measurements, the Board having
previously concluded in those accounting pronouncements that fair value is
the
relevant measurement attribute. Accordingly, this Statement does not require
any
new fair value measurements. However, for some entities, the application of
this
Statement will change current practice. This Statement is effective for
financial statements issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. The management is currently
evaluating the effect of this pronouncement on financial
statements.
CHINA
3C GROUP AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
Note
2 -
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In
September 2006, FASB issued SFAS 158 ‘Employers’ Accounting for Defined Benefit
Pension and Other Postretirement Plans - an amendment of FASB Statements No.
87,
88, 106, and 132(R)’ This Statement improves financial reporting by requiring an
employer to recognize the over funded or under funded status of a defined
benefit postretirement plan (other than a multiemployer plan) as an asset or
liability in its statement of financial position and to recognize changes in
that funded statues in the year in which the changes occur through comprehensive
income of a business entity or changes in unrestricted net assets of a
not-for-profit organization. This Statement also improves financial reporting
by
requiring an employer to measure the funded status of a plan as of the date
of
its year-end statement of financial position, with limited exceptions. An
employer with publicly traded equity securities is required to initially
recognize the funded status of a defined benefit postretirement plan and to
provide the required disclosures as of the end of the fiscal year ending after
December 15, 2006. An employer without publicly traded equity securities is
required to recognize the funded status of a defined benefit postretirement
plan
and to provide the required disclosures as of the end of the fiscal year ending
after June 15, 2007. However, an employer without publicly traded equity
securities is required to disclose the following information in the notes to
financial statements for a fiscal year ending after December 15, 2006, but
before June 16, 2007, unless it has applied the recognition provisions of this
Statement in preparing those financial statements.
|
a.
|
A
brief description of the provisions of this
Statement
|
|
b.
|
The
date that adoption is required
|
|
c.
|
The
date the employer plans to adopt the recognition provisions of this
Statement, if earlier.
|
The
requirement to measure plan assets and benefit obligations as of the date of
the
employer’s fiscal year-end statement of financial position is effective for
fiscal years ending after December 15, 2008.
The
Company believes that the adoption of these standards will have no material
impact on its financial statements.
In
September 2006, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 108 (SAB 108). SAB 108 was issued to provide interpretive guidance
on how the effects of the carryover reversal of prior year misstatements should
be considered in quantifying a current year misstatement. The provisions of
SAB
108 are effective for the Company for its December 31, 2006 year-end. The
adoption of SAB 108 had no impact on the Company’s consolidated financial
statements.
In
February, 2007, FASB issued SFAS 159 ‘The Fair Value Option for Financial Assets
and Financial Liabilities’ - Including an Amendment of FABS Statement No. 115.
This statement permits entities to choose to measure many financial instruments
and certain other items at fair value. This statement is expected to expand
the
use of fair value measurement, which is consistent with the Board’s long-term
measurement objectives for accounting for financial instruments. This statement
is effective as of the beginning of an entity’s first fiscal year that begins
after November 15, 2007. The management is currently evaluating the effect
of
this pronouncement on financial statements.
Note
3 -
ADVANCE
TO SUPPLIER
Advance
to suppliers represents payments to suppliers for payments of finished goods.
As
of December 31, 2007 and December 31, 2006 the company had paid $2,572,285
and
$2,215,841, respectively as advances to supplies.
CHINA
3C GROUP AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
Note
4-
NOTES
PAYABLE
Notes
Payable - Former Shareholders Shanghai Joy & Harmony Electronics Company
Limited as consideration for acquisition shares. Due six months after closing
as
evidenced by a promissory note.
December
31, 2006 $
4,500,000
Note
5 -
COMMON
STOCK
On
December 20, 2005, the Company completed a private offering of 1,000,000 shares
of its common stock at a per share price of $0.10 to an unaffiliated individual,
resulting in gross proceeds to the Company of $100,000. The proceeds were to
be
used for the Company’s proposed plan to identify and complete a merger or
acquisition with private entities.
On
December 20, 2005, the Company issued a warrant to purchase 4,000,000
shares of its common stock to two individuals at $0.10 per share, which was
the
fair value of the shares at the date of issuance. The warrant was issued as
consideration for financial consulting services to be provided from December
20,
2005 to December 19, 2006. The warrants were exercised on December 30, 2005.
The
shares were issued subsequently in 2006.
On
December 21, 2005, the Company agreed to purchase all of the issued and
outstanding shares of Capital from its shareholders for approximately $500,000
in cash and 35,000,000 shares of the Company’s common stock, or approximately
93% of the total issued and outstanding shares.
On
December 21, 2005, the Company announced a plan named the China 3C Group 2005
Equity Incentive Plan¨ (Plan¨) for providing incentives to attract, retain and
motivate eligible persons whose presence and potential contributions are
important to the success of the Company. 5,000,000 shares of common stock were
allocated to the plan.
On
December 21, 2005, the Company agreed to issue 4,980,000 shares under the
plan to a number of consultants who were engaged to provide various services
to
the Company during the period from January 1, 2005 to December 20, 2005. These
shares were valued at $0.10 per share, or $498,000, and were expensed as
consulting fees in the statements of operations. The shares were issued
subsequently in 2006.
On
March
6, 2007, the Company issues 180,000 shares of common stock, $.001 par value,
issuable pursuant to the China 3C Group amended 2005 Equity Incentive Plan.
These shares under rule 405 and rule 144, respectively, under the Securities
Act
of 1933, as amended, are deemed “restricted securities”.
CHINA
3C GROUP AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
Note
5 -
COMMON
STOCK (continued)
On
December 21, 2005, the Company issued 2,256,795 shares of the Company’s common
stock to a company for guarantee fees related to the acquisition of Capital.
The
guarantee was valued at $225,680, which was the fair value of the shares issued
at the date of the transaction and was expensed as consulting fees in the
statement of operations.
Pursuant
to share exchange agreement, dated August 3, 2006, the company issued 915,751
shares of restricted common stock, to the former shareholders of Hangzhou Sanhe
Electronic Technology Ltd. The shares were valued at $3,750,000, which was
the
fair value of the shares at the date of exchange agreement. This amount is
included in the cost of net assets and goodwill purchased.
Pursuant
to share exchange agreement, dated November 28, 2006, the company issued
2,723,110 shares of newly issued shares of Common Stock to the former
shareholders of Shanghai Joy & Harmony Electronics Company Limited. The
shares were valued at $11,000,000, which was the fair value of the shares at
the
date of exchange agreement. This amount is included in the cost of net assets
and goodwill purchased.
Note
6 -
STOCK
WARRANTS, OPTIONS, AND COMPENSATION
On
December 20, 2005, the Company issued a warrant for 4,000,000 shares to two
individuals with an exercise price of $0.10. The warrants were issued for
consulting services to be provided from December 20, 2005 to December 19, 2006.
The warrant was exercisable immediately and was exercised on December 30,
2005.
The
Company is amortizing the fair value of the warrants, $400,000, over the period
of the agreement. The fair value of the warrants was calculated assuming 293%
volatility, term of the warrant of 3 years
,
risk
free rate of 4% and dividend yield of 0%. For the year ended December 31, 2006
and December 31, 2005, $387,945 and $12,055 of consulting fee was expensed
relating to the warrants, respectively.
On
December 8, 2006 the company issued, to a newly appointed Board member, an
option grant (incentive Stock Options) to purchase 50,000 shares of common
stock
at the closing price as of December 7, 2006. Options expire 10 years from
issuance.
On
January 2, 2007 the company issued, to an other newly appointed Board member,
an
option grant (incentive Stock Options) to purchase 50,000 shares of common
stock
at the closing price as of January 2 2007. Options expire 10 years from
issuance. As of December 17, 2007, the Board member resigned .
On
May 7,
2007 the Board of Directors appointed Joseph Levinson to serve as a member
of
the Board of Directors of the Company. Mr. Levinson has been named chairman
of
the Nominating Committee of the Company. In addition, Mr. Levinson will be
in
charge of Investor Relations for the Company.
As
compensation for the services set forth herein, Mr. Levinson will
receive:
|
|
|
A
monthly grant during his Term of 1,000 shares of the Company’s Common
Stock,
|
|
|
|
An
annual grant of Stock Options to purchase 300,000 shares of common
stock
of the Company. The annual grant of Stock Options shall vest immediately
upon issuance. The exercise price of the initial grant of Stock Options
shares shall be based on the closing price of the common stock of
the
Company on May 7, 2007.
|
CHINA
3C GROUP AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
Note
6 -
STOCK
WARRANTS, OPTIONS, AND COMPENSATION (continued)
Stock
options—The three Stock options have a ten-year life and were fully vested upon
issuance. The option holder has no voting or dividend rights. The grant price
was equal the market price at the date of grant. The company records the expense
of the stock options over the related vesting period. The options were valued
using the Black-Scholes option-pricing model at the date of grant stock option
pricing
|
|
|
Year
ended
|
|
|
|
|
December
31, 2007
|
|
|
|
|
|
|
|
Expected
Volatility
|
|
|
130%
|
|
|
Expected
term (in years)
|
|
|
|
|
|
Todd
L. Mavis
|
|
|
2
|
|
|
Kenneth
T. Berents
|
|
|
9
|
|
|
Joseph
Levinson
|
|
|
9
|
|
|
Expected
dividends
|
|
|
-
|
|
|
Risk-free
rate of return (weighted average)
|
|
|
2%
|
|
|
Weighted
average grant-date fair value
|
|
|
3.8-6.15
|
|
Expected
volatility is based on the historical volatility of the Company’s stock price.
The expected term represents the estimated average period of time that the
options remain outstanding. No dividend payouts were assumed, as the Company
has
no plans to declare dividends during the expected term of the stock options.
The
risk-free rate of return reflects the weighted average interest rate offered
for
zero coupon treasury bonds over the expected term of the options.
The
Company did not grant any option during the year ended December 31,
2007
|
|
|
|
|
|
|
|
|
Aggregate
|
|
|
|
|
|
|
Exercise
|
|
Remaining
|
|
Intrinsic
|
|
|
|
|
Total
|
|
Price
|
|
Life
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OUTSTANDING,
DECEMBER 2006
|
|
|
50,000
|
|
|
4.16
|
|
|
9
|
|
$
|
-
|
|
|
Granted
in 2007
|
|
|
50,000
|
|
|
3.8
|
|
|
2
|
|
|
-
|
|
|
|
|
|
300,000
|
|
|
6.15
|
|
|
9
|
|
|
-
|
|
|
Exercised
in 2007
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
OUTSTANDING,
DECEMBER 2007
|
|
|
400,000
|
|
|
|
|
|
|
|
|
-
|
|
Note
7 -
STOCK
EXCHANGE
AGREEMENT
On
December 21, 2005 Capital Future Developments Ltd - BVI became a wholly owned
subsidiary of China 3C Group through a reverse merger. China 3C Group acquired
all of the issued and outstanding capital stock of Capital Future Developments
Ltd. - BVI pursuant to a Merger Agreement dated at December 21, 2005 by and
among China 3C Group, XY Acquisition Corporation, Capital Future Developments
Ltd. - BVI and the shareholders of Capital Future Developments Ltd - BVI (the
“Merger Agreement”). Pursuant to the Merger Agreement, Capital Future
Developments Ltd. - BVI became a wholly owned subsidiary of China 3C Group
and,
in exchange for the Capital Future Developments Ltd. - BVI shares, China 3C
Group issued 35,000,000 shares of its common stock to the shareholders of
Capital Future Developments Ltd. - BVI, representing 93% of the issued and
outstanding capital stock of China 3C Group at that time and a cash
consideration of $500,000.
As
a
result of the exchange agreement, the reorganization was treated as an
acquisition by the accounting acquirer that is being accounted for as a
recapitalization and as a reverse merger by the legal acquirer for accounting
purposes. Pursuant to the recapitalization, all capital stock shares and amounts
and per share data were retroactively restated.
CHINA
3C GROUP AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
Note
8 -
COMPENSATED
ABSENCES
Regulation
45 of local PRC labor law entitles employees to annual vacation leave after
1
year of service. In general all leave must be utilized annually, with proper
notification, any unutilized leave is cancelled.
Note
9 -
INCOME
TAXES
The
Company through its subsidiaries, Zhejiang, Wang Da, Sanhe, and Yiwu, is
governed by the Income Tax Laws of the PRC. Operations in the United States
of
America have incurred net accumulated operating losses of approximately
$1,700,000 as of December 31, 2006 for income tax purposes. However, a hundred
percent allowance has been created on the deferred tax asset of approximately
$680,000 due to uncertainty of its realization.
Pursuant
to the PRC Income Tax Laws, the Enterprise Income Tax (“EIT) is at a statutory
rate of 33%, which is comprises of 30% national income tax and 3% local income
tax.
|
The
following is a reconciliation of income tax expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/31/2007
|
|
|
U.S.
|
|
|
State
|
|
|
International
|
|
|
Total
|
|
|
Current
|
|
$
|
-
|
|
$
|
800
|
|
$
|
2,683,687
|
|
$
|
2,684,487
|
|
|
Deferred
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Total
|
|
$
|
-
|
|
$
|
800
|
|
$
|
2,683,687
|
|
$
|
2,684,487
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/31/2006
|
|
|
U.S.
|
|
|
State
|
|
|
International
|
|
|
Total
|
|
|
Current
|
|
$
|
-
|
|
$
|
800
|
|
$
|
5,907,322
|
|
$
|
5,908,122
|
|
|
Deferred
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Total
|
|
$
|
-
|
|
$
|
800
|
|
$
|
5,907,322
|
|
|
S
5,908,122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation
of the differences between the statutory U.S. Federal income tax
rate and
the effective rate is as follows:
|
|
|
|
|
12/31/2007
|
|
|
12/31/2006
|
|
|
|
|
|
|
|
|
US
statutory tax rate
|
|
|
34
|
%
|
|
34
|
%
|
|
|
|
|
|
|
|
Foreign
income not recognized in US
|
|
|
34
|
%
|
|
34
|
%
|
|
|
|
|
|
|
|
PRC
income tax
|
|
|
33
|
%
|
|
33
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective
rate
|
|
|
33
|
%
|
|
33
|
%
|
|
|
|
|
|
|
CHINA
3C GROUP AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
Note
10 -
COMMITTMENTS
The
Company leases various office facilities under operating leases that terminate
thru 2011. The Company also has management agreements that terminate in 2007.
The future minimum obligations under these agreements are as
follows:
|
|
|
$
|
140,775
|
|
|
2009
|
|
$
|
62,380
|
|
|
2010
|
|
$
|
34,812
|
|
|
2011
|
|
$
|
16,450
|
|
Note
11 -
STATUTORY
RESERVE
In
accordance with the laws and regulations of the PRC, a wholly-owned Foreign
Invested Enterprises income, after the payment of the PRC income taxes, shall
be
allocated to the statutory surplus reserves and statutory public welfare fund.
Prior to January 1, 2006 the proportion of allocation for reserve was 10 percent
of the profit after tax to the surplus reserve fund and additional 5-10 percent
to the public affair fund. The public welfare fund reserve was limited to 50
percent of the registered capital. Effective January 1, 2006, there is now
only
one fund requirement. The reserve is 10 percent of income after tax, not to
exceed 50 percent of registered capital.
Statutory
Reserve funds are restricted for set off against losses, expansion of production
and operation or increase in register capital of the respective company.
Statutory public welfare fund is restricted to the capital expenditures for
the
collective welfare of employees. These reserves are not transferable to the
Company in the form of cash dividends, loans or advances. These reserves are
therefore not available for distribution except in liquidation. As of December
31, 2007 and December 31, 2006, the Company had allocated $7,234,295 and
$3,320,755, respectively, to these non-distributable reserve funds.
Note
12 -
OTHER
COMPREHENSIVE INCOME
Balances
of related after-tax components comprising accumulated other comprehensive
income, included in stockholders equity, at December 31, 2007 and 2006 are
as
follows:
|
|
|
Foreign
Currency Translation Adjustment
|
|
Accumulated
Other Comprehensive Income
|
|
|
Balance
at December 31, 2005
|
|
$
|
74,950
|
|
$
|
74,950
|
|
|
Change
for 2006
|
|
|
352,666
|
|
|
352,666
|
|
|
Balance
at December 31, 2006
|
|
|
427,616
|
|
|
427,616
|
|
|
Change
for 2007
|
|
|
1,444,718
|
|
|
1,444,718
|
|
|
Balance
at December
31
,
2007
|
|
$
|
1,872,334
|
|
$
|
1,872,334
|
|
CHINA
3C GROUP AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
Note
13
-
CURRENT
VULNERABILITY DUE TO CERTAIN RISK FACTORS
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, by the general state
of
the PRC’s economy. The Company’s business may be influenced 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
14 -
MAJOR
CUSTOMERS AND CREDIT RISK
During
the years ended December 31, 2007, no customer accounted for more than 10%
of
the company’s sales or accounts receivable. At December 31, 2007 four (4)
vendors comprised more than 31% of the company’s accounts payable. No vendors
accounted for more than 10% of the company’s purchases during 2007.
Note
15 -
SUBSEQUENT
EVENTS
On
July
13, 2007, China 3C Group (the “Company”) entered into a Securities Purchase
Agreement (the “Purchase Agreement”) with certain investors (the “Investors”)
for the sale of an aggregate of 2,095,714 shares of the Company’s common stock,
$.001 par value per share (the “Shares”) and at a purchase price of $5.60 per
Share for an aggregate purchase price equal to approximately $11.74 million
in a
transaction exempt from registration under the Securities Act of 1933, as
amended. In connection with the Transaction, the Company has agreed to provide
the Investors rights to register the Shares pursuant to the terms of a
registration rights agreement (the “Registration Rights Agreement”) to be
entered into upon the closing of the Transaction. The issuance of the Shares
was
exempt from registration. As of September 30, 2007, the Company has received
notices from all investors that they have exercised their rights to terminate
their obligation under the agreement and not participate in the transaction.
On
October 8, 2007 the Company issued press release, upon the resignation of former
CFO, the Company appointed Mr. Mr. Weidong Huang, CFO, to fill vacancy effective
as of this date.
On
January 2, 2008, the Company entered into a Consignment Agreement with Hangzhou
Lotour Digital Products Business Company Limited (“Lotour”), whereby Lotour
would act as an exclusive, value added reseller of the Company’s audio-visual
products, small household appliance, mobile phones and mobile phone accessories,
until December 31, 2008.
