▌ News Releases

Form 10QSB for EVER-GLORY INTERNATIONAL GROUP, INC.

Add: 2006   Update: 2009/03/21

Quarterly Report

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

OVERVIEW

Ever-Glory and its subsidiaries (the "Company") manufacture apparel for men, women and children for primarily middle to high-grade well-known casual wear, outerwear and sportswear brands and for a variety of companies. Most of our products are exported to Japan, EU countries and the United States. The Company's customers include large retailers and well-known brands. The Company is the result of a merger of Andean Development Corporation, a corporation organized under the laws of the State of Florida ("Andean"); and Perfect Dream Limited, a corporation organized under the laws of British Virgin Islands ("Perfect Dream"). Andean was formed on October 19, 1994 and engaged in the business of providing engineering and project management services and electrical and mechanical equipment for energy and private works projects. As of June 30, 2005, Andean had zero assets and liabilities of $57,000. Perfect Dream was incorporated on July 1, 2004 in the British Virgin Islands. In January of 2005, Perfect Dream acquired 100% of Goldenway Nanjing Garments Co., Ltd ("Goldenway").

Goldenway is a limited liability company, which was incorporated in the People's Republic of China (the "PRC") on December 31, 1993. Until December 2004, Goldenway was a subsidiary of Jiangsu. After its acquisition by Perfect Dream and effective as of April 20, 2005, Goldenway changed its status to that of a wholly foreign owned enterprise and increased its registered capital from $2,512,106 to $20,000,000. The increased registered capital will be paid-in in installments within three years of the issuance of Goldenway's updated business license. As of March 31, 2006, the Company has paid $2.6 million of its registered capital requirements. The remaining $14.9 million is due on February 1, 2008.

In the three months ended March 31, 2006, approximately 58% of the Company's revenues came from customers in the EU, 7% from customers in Japan, 26% from customers in the United States and 7% from customers in China. In the three months ended March 31, 2006, three customers represented approximately 63% of the Company's sales. Management believes that the relationship with these customers is good.

The Company purchases the majority of its raw materials directly from numerous local fabric and accessories suppliers. The Company may also purchase finished goods from other contract manufacturers. Two suppliers represented approximately 26% of the Company's raw materials purchases in the three months ended March 31, 2006. The Company has not experienced difficulty in obtaining raw materials essential to its business and management believes that the relationship with its suppliers is good.

The Company currently operates one factory in the Nanjing Jiangning Economic and Technological Development Zone of mainland, China. The factory covers an area of 10,000 square meters and is equipped with highly advanced, state-of-the-art equipment. The Company has put a deposit on 113,220 square meters of land in Nanjing Jiangning Economic and Technological Development Zone, which includes an existing facility of 26,629 square meters, which includes manufacturing and office space. The Company expects to sign the purchase agreement and complete the purchase in the second or third quarter 2006. However, the Company has been allowed to take possession of the property prior to consummation of the purchase. The Company expects the new manufacturing facility to be in full production by late 2006, which will replace the Company's current manufacturing facility.

The factory employs a staff of over 700 people with an annual production capacity of over 1,000,000 pieces. All of the Company's work force is non-union, and the Company considers its relations with its employees to be satisfactory.

In 2005, export quotas on most categories of the Company's products were eliminated. In July 2005, the United States and the EU reinstituted export quotas on certain clothing categories. The Chinese government allocated a portion of the export quota to the Company based upon the amount of product that the Company exported in the prior year. Although certain of the Company's apparel products fall within the categories subject to the safeguards in the U.S. and the EU, the imposition of quotas as of March 31, 2006 did not have a material affect on the Company's net sales, although it did impact its gross margin. See Results of Operations below. As a result of the Company's prior export performance, it was awarded a sufficient portion of the export quotas to enable it to increase its sales to customers in the EU and the U.S. despite the reinstitution of export quotas. In

--------------------------------------------------------------------------------

order to increase the Company's allocation of future export quotas, however, the Company accepted more orders for lower margin products, which had an adverse affect on the Company's gross margins. The Company believes that its customer mix and its ability to adjust the types of apparel it manufactures will mitigate its exposure to such trade restrictions in the future.

Under the laws of the PRC, as a wholly foreign owned enterprise, in the fiscal year ended December 31, 2004, Goldenway was entitled to a 50% reduction in its income tax rate, from 24% to 12%. In the fiscal year ended December 31, 2005, Goldenway as a wholly foreign owned enterprise that exported over 70% of its products outside the PRC, is eligible for a 50% reduction in its tax rate from 24% to 12%.

The Company markets and sells its products through a combination of international distributors and direct sales primarily in Japan, Europe and the United States.

Our cost of net revenues consists of raw materials, garment finishing fees, direct labor and manufacturing overhead, including the Company's contributions to a government mandated multi-employer defined contribution plan, packing materials and others. In addition, from time to time we subcontract manufacturing, which costs are included in our cost of net revenues.

Selling expenses consist primarily of salaries, commissions and related expenses for personnel engaged in marketing, sales and customer support functions, as well as costs associated with trade shows, promotional activities, transportation expenses and inspection expenses including export quota fees.

General and administrative expenses consist primarily of salaries and related expenses for executive, finance, accounting, facilities and human resources personnel, office expenses and professional fees.

Results of Operations

Three Months Ended March 31, 2006 Compared To Three Months Ended March 31, 2005

Revenues, Cost of Revenues and Gross Margin

Revenues for the quarter ended March 31, 2006 were $5,229,520, an increase of 272% from $1,407,196 for same quarter in 2005. Our increase in revenues was primarily attributable to an overall increase in sales to customers in the EU, the US, Japan and Russia. As of March 31, 2006, sales to customers in the EU increased by $2,195,902 or 268%, sales to customers in the U.S. increased by approximately $1,180,615 or 720% , sales to customers in Japan increased by approximately $262,347 or 239% and sales to customers in Russia increased by $144,271 as compared to 2005.

Cost of sales for the quarter ended March 31, 2006 was $4,320,640, an increase of $3,179,595 from $1,141,045 for the quarter ended March 31, 2005. As a percentage of revenues, cost of sales increased to approximately 83 % for the three months ended March 31, 2006 from approximately 81% for the quarter ended March 31, 2005 . Consequently, gross margin as a percentage of revenues decreased to approximately 17% for the three months ended March 31, 2006 from approximately 19% for the three months ended March 31, 2005. The increase in cost of sales and the decrease in gross margin were attributable to the export quota factor. In July 2005, the Chinese government reinstituted textile export quotas in certain hot categories because of substantial increases in exports from China to the U.S. and European markets. As a result, in order to maintain the Company's export quotas allocated by the Chinese government for 2006 and the next year, the Company accepted more orders with lower gross margins.

Selling ,General and Administrative Expenses

Selling expenses as of March 31, 2006 increased by 681% from $15,259 in 2005 to $119,175 in 2006. The increase in selling expenses was mainly attributable to an increase in transportation and logistic costs as well as an increase in export quota fees.

General and Administrative expenses totaled $321,594 for the three months ended March 31, 2006, an increase of $131,503 from $190,091 for the three months ended March 31, 2005. The increase in general and administrative expenses was mainly due to the activities associated with the trading of the Company's shares on the Over The Counter Bulletin Board of $47,028 as well as the increase of our management salaries of $64,194.

--------------------------------------------------------------------------------

Income before taxes for the three months ended March 31, 2006 was $457,442 a increase of $402, 017 from $55,425 for the three months ended March 31, 2005. The increase was largely due to the increase in our net income.

LIQUIDITY AND CAPITAL RESOURCES

As of March 31, 2006, the Company had cash and cash equivalents of $1,287,239, other current assets of $2,717,526 and current liabilities of $4,156,494. To date, the Company has financed its operations primarily from operations and cash flow from operations is expected to continue to be the Company's primary source of funds to finance its short-term cash needs.

Net cash provided by operating activities as of March 31, 2006 was $302,814, compared with same quarter $91,368 in 2005. The Company's primary source of operating cash flow was net income of $390,590. The increase in our net cash was attributable to an increase in our net income as compared to the same quarter of 2005.

Net cash used in investing activities was approximately $569,881 as of March 31, 2006, compared with $174,419 in the same quarter of 2005. The increase was primarily attributable to construction costs of approximately $489,860 associated with our new office building and factory.

Capital Commitments

The Company has a continuing program for the purpose of improving its manufacturing quality. As of March 31, 2006, the Company had commitments for capital projects in progress of approximately $4.16 million. The Company anticipates that cash flows from operations will be used to pay for these capital commitments. Pursuant to the Articles of Association of Goldenway, registered capital of approximately $17.5 million must be paid into Goldenway by February 1, 2008. The increased registered capital will be paid-in in installments within three years of the issuance of Goldenway's updated business license. As of March 31, 2006, the Company has paid $2.6 million of its registered capital requirements. The remaining $14.9 million is due on February 1, 2008.

The Company has put a deposit on 113,220 square meters of land in Nanjing Jiangning Economic and Technological Development Zone, which includes an existing manufacturing facility of 26,629 square meters The Company expects to sign the purchase agreement and complete the purchase in 2006. However, the Company has been allowed to take possession of the property prior to consummation of the purchase. The Company expects the new manufacturing facility to be in production by late 2006, which will replace the Company's current manufacturing facility. The Company expects to invest approximately $3.5 million in 2006 for improvements to this new facility, which the Company's expects to fund from cash from operations.

Uses of Liquidity

The Company's cash requirements as of March 31, 2006 are primarily to fund operations and to complete the construction of its new manufacturing facility in Nanjing. The Company also plans to acquire additional manufacturing capacity in the future to strengthen and stabilize its manufacturing base. The Company is also looking to establish its own distribution and logistics channels in overseas markets and to launch its own brand directly to the Chinese market. In addition, the Company will need to make the required capital contributions to its subsidiary, Goldenway.

On August 23, 2005, the Company entered into a short-term loan agreement with Shanghai Pudong Development Bank Nanjing Branch pursuant to which we borrowed approximately $610,000 at an interest rate of 6.138% per annum, all of which were outstanding as of March 31, 2006. The funds were used for the purchase of raw materials. The loan matures on August 23, 2006, however, the loan may be extended for an additional year. The borrowings were guaranteed by Jiangsu Ever-Glory Group, a related company.

As of March 31, 2006, the Company did not have any standby letters of credit or standby repurchase obligations.

--------------------------------------------------------------------------------

Sources of Liquidity

The Company's primary source of liquidity for its short-term cash needs is expected to be cash flow generated from operations, and cash and cash equivalents currently on hand. The Company believes that will be able to borrow additional funds if needed.

The Company believes its cash flow from operations together with its cash and cash equivalents currently on hand will be sufficient to meet its working capital, capital expenditure and other commitments through December 2006. For its long-term cash needs, the Company is currently considering a number of different financing opportunities including debt and equity financing. Adequate funds may not be available on terms acceptable to it. If additional funds are raised through the issuance of equity securities, dilution to existing stockholders may result. If funding is insufficient at any time in the future, the Company may be unable to develop or enhance its products or services, take advantage of business opportunities or respond to competitive pressures, any of which could have a material adverse effect on its financial position, results of operations and cash flows.

Foreign Currency Translation Risk.

The Company's major operations are in the PRC, which may give rise to significant foreign currency risks from fluctuations and the degree of volatility of foreign exchange rates between the United States dollar and the Chinese Renminbi. Sales of the Company's products are in dollars. During 2003 and 2004 the exchange rate of RMB to the dollar remained constant at 8.26 RMB to the dollar. On July 21, 2005, the Chinese government adjusted the exchange rate from 8.26 to 8.09 RMB to the dollar. As a result, orders received prior to the adjustment were at prices based on the prior exchange rate, which negatively impacted our gross margins for the year ended December 31, 2005. We now negotiate price adjustments with most of our customers, which we believe will reduce our exposure to exchange rate fluctuations in the future. However, if in the future the Chinese government should decide to adjust the RMB to dollar exchange rate unexpectedly, our gross margins and results of operations and cash flows could be adversely affected.

The financial statements of Goldenway (whose functional currency is the RMB) are translated into US$ using the closing rate method. The balance sheet items are translated into US$ using the exchange rates at the respective balance sheet dates. The capital and various reserves are translated at historical exchange rates prevailing at the time of the transactions while income and expenses items are translated at the average exchange rate for the year. All exchange differences are recorded within equity. Translation gain for the periods ended March 31, 2006 and 2005 were $87,061 and $Nil respectively.

RISK FACTORS

Our business is subject to certain risks, and we want you to review these risks while you are evaluating our business and our historical results. Please keep in mind that any of the following risks discussed below and elsewhere in this Annual Report could materially and adversely affect us, our operating results, our financial condition and our projections and beliefs as to our future performance. As such, our results could differ materially from those projected in our forward-looking statements. Additional risks and uncertainties not currently known to us or those we currently deem to be immaterial may also materially and adversely affect our business.

Risks Relating to the Industry in Which We Compete

Our sales are influenced by general economic cycles.

Apparel is a cyclical industry that is dependent upon the overall level of consumer spending. Our customers anticipate and respond to adverse changes in economic conditions and uncertainty by reducing inventories and canceling orders. As a result, any substantial deterioration in general economic conditions, increases in energy costs or interest rates, acts of war, acts of nature or terrorist or political events that diminish consumer spending and confidence in any of the regions in which we compete, could reduce our sales and adversely affect our business and financial condition.

--------------------------------------------------------------------------------

Intense competition in the worldwide apparel industry could reduce our sales and prices.

We face a variety of competitive challenges from other apparel manufacturers both in China and elsewhere. Some of these competitors have greater financial and marketing resources than we do and may be able to adapt to changes in consumer preferences or retail requirements more quickly, devote greater resources to the marketing and sale of their products or adopt more aggressive pricing policies than we can. As a result, we may not be able to compete successfully with them.

The success of our business depends upon our ability to offer innovative and upgraded products at attractive price points.

The worldwide apparel industry is characterized by constant product innovation due to changing consumer preferences and by the rapid replication of new products by competitors. As a result, our success depends in large part on our ability to continuously and rapidly respond to customer requirements for innovative and stylish products at a competitive pace, intensity, and price. Failure on our part to regularly and rapidly respond to customer requirements could adversely affect our ability to retain our existing customers or to acquire new customers which would limit our sales growth.

The worldwide apparel industry is subject to ongoing pricing pressure.

The apparel market is characterized by low barriers to entry for both suppliers and marketers, global sourcing through suppliers located throughout the world, trade liberalization, continuing movement of product sourcing to lower cost countries, ongoing emergence of new competitors with widely varying strategies and resources, and an increasing focus on apparel in the mass merchant channel of distribution. These factors contribute to ongoing pricing pressure throughout the supply chain. This pressure has and may continue to:

?require us to reduce wholesale prices on existing products;

?result in reduced gross margins across our product lines;

?increase pressure on us to further reduce our production costs and our operating expenses.

Any of these factors could adversely affect our business and financial condition.

Increases in the price of raw materials or their reduced availability could increase our cost of goods and decrease our profitability.

The prices we charge for our products are dependent in part on the market price for raw materials used to produce them. The price and availability of our raw materials may fluctuate substantially, depending on a variety of factors, including demand, crop yields, weather, supply conditions, transportation costs, government regulation, economic climates and other unpredictable factors. Any raw material price increases could increase our cost of goods and decrease our profitability unless we are able to pass higher prices on to our customers. Moreover, any decrease in the availability of our raw materials could impair our ability to meet our production requirements in a timely manner.

Risks Relating to Our Business

We depend on a group of key customers for a significant portion of our sales. A significant adverse change in a customer relationship or in a customer's performance or financial position could harm our business and financial condition.

Net sales to our ten largest customers totaled approximately 81% and 74% of total net sales in 2005 and 2004, respectively. Our largest customer accounted for approximately 22% and 12% of net sales in 2005 and 2004. The garment manufacturing industry has experienced substantial consolidation in recent years, which has resulted in increased customer leverage over suppliers, greater exposure for suppliers to credit risk and an increased emphasis by customers on inventory management and productivity.

A decision by a major customer, whether motivated by competitive considerations, strategic shifts, financial requirements or difficulties, economic conditions or otherwise, to decrease its purchases from us or to change its manner of doing business with us, could adversely affect our business and financial condition. In addition, while we have long-standing customer relationships, we do not have long term contracts with any of our customers.

--------------------------------------------------------------------------------

As a result, purchases generally occur on an order-by-order basis, and the relationship, as well as particular orders, can generally be terminated by either party at any time.

We are subject to export quotas imposed by governments which could adversely affect our business.

Pursuant to the World Trade Organization (WTO) Agreement, effective January 1, 2005, the United States and other WTO member countries removed quotas from WTO members. In certain instances, the elimination of quotas affords the Company greater access to foreign markets; however, as the removal of quotas resulted in an import surge from China, the U.S. took action in May 2005 and imposed safeguard quotas on seven categories of goods. Exports of each specified product category will continue to be admitted into the United States in the ordinary course until the restraint level for that category is reached, after which further exports will be embargoed and will not be cleared until after January 2006. Additionally, on June 10, 2005, in response to the surge of Chinese imports into the European Union (EU), the EU Commission signed a Memorandum of Understanding (MOU) with China in which ten categories of textiles and apparel will be subject to restraints and on November 8, 2005, the U.S. and China entered into an MOU in which 21 categories of textiles and apparel will be subject to restraints. Certain of the Company's apparel products fall within the categories subject to the safeguards in the U.S. and the EU, which could adversely affect the Company's ability to export and sell these products. There can be no assurance that additional trade restrictions will not be imposed on the exports of the Company's products in the future. Such actions could result in increases in the cost of its products generally and may adversely affect the Company's results of operations. The Company continues to monitor the developments described above.

We must maintain sufficient development and manufacturing capacity to meet the needs of our customers.

We must maintain sufficient development and manufacturing capacity in an environment characterized by continuing cost pressure and demands for product innovation and speed-to-market. We have made a deposit on 113,220 square meters of land in Nanjing Jiangning Economic and Technological Development Zone, which includes an existing manufacturing facility of 26,629 square meters. The Company expects to sign the purchase agreement and complete the purchase in 2006. However, the Company has been allowed to take possession of the property prior to consummation of the purchase. The Company expects the new manufacturing facility to be in production by late 2006 and will replace the Company's current manufacturing facility. If we are unable for any reason to consummate the purchase of this facility, our manufacturing capacity will be seriously adversely affected. In addition, the cost to bring this facility into full production may exceed our expectations, which would have an adverse affect on our results of operations and our liquidity.

In addition, garment design changes rapidly as a result of a number of factors, including changing fashion trends, changing consumer tastes, and new fabrics and design techniques. In order to meet customer demands and changing customer preferences, we have to continually update our manufacturing equipment and technology. If we are unable to acquire state-of-the-art equipment and technology, we may not be able to meet customer demands, which could result in loss of customers and sales, which would have an adverse affect on our results of operations and our liquidity.

The success of our business depends on our ability to attract and retain qualified employees.

We need talented and experienced personnel in a number of areas including our core business activities. An inability to retain and attract qualified personnel, especially our key executives, could harm our business. Turnover among our employees and senior management could have a material adverse effect on our ability to implement our strategies and on our results of operations.

We will be required to evaluate our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act.

Failure to timely comply with the requirements of Section 404 or any adverse results from such evaluation could result in a loss of investor confidence in our financial reports and have an adverse effect on the trading price of our debt securities.

We are not currently an "accelerated filer" as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended. Beginning with our Annual Report for the year ending December 31, 2007, Section 404 of the Sarbanes-Oxley Act of 2002 will require us to include an internal control report with our Annual Report on

--------------------------------------------------------------------------------

Form 10-KSB. That report must include management's assessment of the effectiveness of our internal control over financial reporting as of the end of the fiscal year. This report must also include disclosure of any material weaknesses in internal control over financial reporting that we have identified. Additionally, our independent registered public accounting firm will be required to issue reports on management's assessment of our internal control over financial reporting and their evaluation of the operating effectiveness of our internal control over financial reporting. Our assessment requires us to make subjective judgments and our independent registered public accounting firm may not agree with our assessment.

Achieving compliance with Section 404 within the prescribed period may require us to incur significant costs and expend significant time and management resources. We cannot assure you that we will be able to complete the work necessary for our management to issue its management report in a timely manner, or that we will be able to complete any work required for our management to be able to conclude that our internal control over financial reporting is operating effectively. If we are not able to complete the assessment under Section 404 in a timely manner, we and our independent registered public accounting firm would be unable to conclude that our internal control over financial reporting is effective as of December 31, 2007. As a result, investors could lose confidence in our reported financial information, which could have an adverse effect on the trading price of our debt securities. In addition, our independent registered public accounting firm may not agree with our management's assessment or . . .