UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly report under Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the quarterly period ended September 30, 2001.
[ ] Transition report under Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from ______ to ______.
Commission file number:
GOSUN COMMUNICATIONS LTD., INC.
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(Exact name of small business issuer as specified in its charter)
TEXAS 91-1939829
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(State or other jurisdiction of (IRS Employer
Incorporation or organization) Identification No.)
80 Zhong Shan Er Road Guangzhou,
China 510080
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(Address of principal executive offices)
011-86-208-387-9773
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(Issuer's Telephone Number, Including Area Code)
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(Former name, address and fiscal year, if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 12
months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant has filed all documents and reports required
to be filed by Sections 12, 13, or 15(d) of the Exchange Act subsequent to
the distribution of securities under a plan confirmed by a court.
Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
As of September 30, 2001, there were 30,215,384 shares of common stock
issued and outstanding.
-1-
FORM 10-QSB
GOSUN COMMUNICATIONS LIMITED, INC.
TABLE OF CONTENTS
PART I
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET
CONSOLIDATED STATEMENTS OF INCOME
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
-2-
PART I
ITEM 1. FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited financial
statements included in this Form 10-QSB reflect all adjustments (consisting
only of normal recurring accruals) necessary for a fair presentation
of the results of operations for the periods presented. The results
of operations for the periods presented are not necessarily indicative of
the results to be expected for the full year.
-3-
GOSUN COMMUNICATIONS LTD., INC.
CONSOLIDATED BALANCE SHEET
ASSETS
September 30, December 31,
2001 2000
------------ ------------
(Unaudited)
US$ US$
Current assets
Cash and cash equivalents 282,342 158,927
Accounts receivable 394,326 152,498
Advances to suppliers 439,179 224,019
Other receivables 674,843 393,763
Income tax recoverable - 4,272
Inventories 2,298,668 780,798
Amounts due from affiliates 1,520,457 937,319
---------- ----------
Total current assets 5,609,815 2,651,596
Investment in an equity investee 54,507 -
Advance capital contribution - 59,179
Deposits 267,854 199,746
Property, plant and equipment, net 461,222 476,551
---------- ----------
Total assets 6,393,398 3,387,072
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable 1,887,552 725,049
Accrued employee compensation
and benefits 16,999 34,500
Other payables and accrued expenses 1,391,041 936,705
Income tax payable 74,842 -
Amounts due to affiliates 385,481 17,448
Short term bank loans 1,690,821 483,092
--------- ---------
Total current liabilities 5,446,736 2,196,794
Amount due to stockholder 124,396 156,401
--------- ---------
Total liabilities 5,571,132 2,353,195
--------- ---------
Commitments and contingencies
Stockholders' equity
Preferred stock series A, par value
US$0.001 per share;
100,000 shares authorized; no shares
issued and outstanding - -
Preferred stock series B, par value
US$0.001 per share; 5,000 shares
authorized, no shares issued and
outstanding - -
Common stock, par value US$0.001
per share; 49,000,000 shares authorized;
30,215,384 (2000: 28,855,205) shares
issued and outstanding 30,215 28,855
Additional paid in capital 879,505 864,865
(Accumulated losses) Retained earnings (133,465) 89,847
--------- -------
776,255 983,567
--------- -------
Minority interests 46,011 50,310
--------- -------
Total liabilities and
stockholders' equity 6,393,398 3,387,072
--------- ---------
See accompanying notes to the consolidated financial statements.
-4-
GOSUN COMMUNICATIONS LTD., INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
---------------------- --------------------
2001 2000 2001 2000
---------------------- --------------------
US$ US$ US$ US$
Revenue
Sales of cellular phones and pagers 6,246,949 3,172,950 18,110,230 7,341,106
Sales of smart cards 18,301,263 - 29,054,272 -
Agency service 521,499 470,485 1,409,453 1,475,829
---------- --------- ---------- ---------
25,069,711 3,643,435 48,573,955 8,816,935
---------- --------- ---------- ---------
Cost of revenue
Cost of cellular phones and pagers 6,084,792 2,928,053 17,644,897 6,775,560
Cost of smart cards 18,121,906 - 28,469,817 -
Agency service 63,919 117,690 238,663 299,085
---------- --------- ---------- ---------
24,270,617 3,045,743 46,353,377 7,074,645
---------- --------- ---------- ---------
---------- --------- ---------- ---------
Gross profit 799,094 597,692 2,220,578 1,742,290
Other operating income, net 137,852 29,062 272,654 63,115
---------- --------- --------- ---------
936,946 626,754 2,493,232 1,805,405
Selling expenses 674,308 319,759 1,818,857 923,410
General and administrative expenses 243,592 231,101 757,366 580,736
---------- --------- --------- ---------
Operating income (loss) 19,046 75,894 (82,991) 301,259
---------- --------- --------- ---------
Other income (expenses)
Interest income 137 599 1,341 3,171
Interest expenses (30,369) (5,178) (64,594) (5,311)
Share of loss of an equity investee (10,765) - (4,672) -
---------- --------- --------- ---------
Total other income (expenses) (40,997) (4,579) (67,925) (2,140)
---------- --------- --------- ---------
---------- --------- --------- ---------
Income (loss) before income taxes and
minority interest (21,951) 71,315 (150,916) 299,119
Income taxes 38,406 - 76,695 -
Minority interests 3,688 - (4,299) -
---------- --------- --------- ---------
Net income (loss) (64,045) 71,315 (223,312) 299,119
---------- --------- --------- ---------
Earnings per share
- - basic and diluted (0.00) 0.00 (0.01) 0.01
---------- --------- --------- ---------
Weighted average common shares
Outstanding
- - basic and diluted 30,215,384 28,855,205 30,215,384 28,855,205
---------- --------- --------- ---------
See accompanying notes to the consolidated financial statements.
-5-
GOSUN COMMUNICATIONS LTD., INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
(Restated)
Additional Retained Total
Common Stock paid in earnings stockholders'
Shares Amount capital (Accumulated equity
Losses)
---------- ---------- ---------- ----------- -----------
US$ US$ US$ US$
Balance, December 31, 2000 28,855,205 28,855 864,865 89,847 983,567
Fractional shares issued 179 - - - -
Options exercised 1,360,000 1,360 14,640 - 16,000
Net loss for the nine months ended
September 30, 2001 - - - (223,312) (223,312)
---------- ---------- ---------- ----------- -----------
Balance, September 30, 2001 30,215,384 30,215 879,505 (133,465) 776,255
========== ========== ========== =========== ===========
See accompanying notes to the consolidated financial statements.
-6-
GOSUN COMMUNICATIONS LTD., INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months ended
September 30,
-------------------------
2001 2000
------------- ----------
US$ US$
Cash flows from operating activities
Net income (loss) (223,312) 299,119
Adjustments to reconcile net income to
net cash used in operating activities
Depreciation 95,779 63,364
Unparticipated loss of an equity
investee 4,672 -
Minority interests (4,299) -
Increase (decrease) from changes in
Accounts receivable (241,828) (323,568)
Advances to suppliers (215,160) (478,506)
Other receivables and deposits (349,188) (816,125)
Income tax recoverable 4,272 (4,272)
Inventories (1,517,870) (524,786)
Amounts due from affiliates (583,138) (392,527)
Accounts payable 1,162,503 1,011,784
Accrued employee compensation
and benefits (17,501) 25,419
Other payables and accrued expenses 454,336 614,475
Income tax payable 74,842 -
Note payable - (133,400)
---------- ----------
Net cash used in operating activities (1,355,892) (659,023)
---------- ----------
Cash flows from investing activities
Acquisition of property, plant
and equipment (80,450) (175,046)
---------- ----------
Net cash used in investing activities (80,450) (175,046)
---------- ----------
Cash flows from financing activities
Advances from affiliates 368,033 107,659
Capital contributed by minority interest
of subsidiary - 60,386
Proceeds from capital injection - 700,483
Proceeds from issuing common stock 16,000 -
Advances from (repayment to) stockholder (32,005) 172,705
Proceeds from short term bank loans 2,294,686 483,092
Repayment of short term bank loans (1,086,957) -
---------- ----------
Net cash provided by financing activities 1,559,757 1,524,325
---------- ----------
Net increase in cash and cash equivalents 123,415 690,256
Cash and cash equivalents, beginning of
period 158,927 290,493
---------- ----------
Cash and cash equivalents, end of period 282,342 980,749
Supplemental disclosure of cash flow
information
Interest paid 64,594 5,311
Income taxes paid 1,814 -
Supplemental disclosure of significant
non-cash transactions
Acquisition of inventories satisfied
by a note payable - 295,930
---------- ----------
See accompanying notes to the consolidated financial statements.
-7-
Note 1 - Basis of Financial Statement Presentation
Organisation
Gosun Communications Ltd., Inc. ("GOSUN" or "the Company") was
organized under the laws of the State of Texas on January 20, 1998,
under the name of Blackwing Corporation. On April 4, 1989, Blackwing
Corporation, a publicly held corporation, acquired all of the issued
and outstanding shares of a company known as Surface Tech, Inc.,
which was originally known as Holmes Microsystems, Inc.. The transaction
had been accounted for as a recapitalization of Holmes
Microsystems, Inc. in a manner similar to a reverse acquisition.
Accordingly, Holmes Microsystems, Inc. has been treated as the surviving
entity. As part of this transaction, Blackwing Corporation changed its
name to Holmes Microsystems, Inc. ("Holmes") and the original Holmes
Microsystems, Inc. which was then a wholly owned subsidiary, was dissolved.
On January 12, 2001, the shareholders of Holmes entered into an
exchange agreement with the equity owners of Guangdong Gosun
Communication Equipment Sales Co, Ltd. ("GD Gosun"). Pursuant to the
exchange agreement, the GD Gosun equity owners transferred all of their
equity interests in GD Gosun to Holmes in exchange for 89% of the issued
and outstanding shares of Holmes after giving effect to the share
exchange. The exchange agreement resulted in the equity owners of GD Gosun
obtaining a majority voting interest in Holmes and GD Gosun was treated as
the acquiring entity in the transaction for accounting purposes according to
generally accepted accounting principles. The reverse acquisition process
utilized the capital structure of Holmes and the assets and liabilities of GD
Gosun were recorded at predecessor cost. Being the continuing operating
entity, the historical financial statements of GD Gosun prior to December
31, 2000 are included for financial reporting purposes. The financial
year end date of Holmes has also been changed from January 31 to December
31 effective from the financial year ended December 31, 2000. As part of
this transaction,Holmes Microsystems, Inc. changed its name to Gosun
Communications Ltd., Inc..
Basis of Presentation
The consolidated condensed interim financial statements included herein
have been prepared by the Company, without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are
adequate to make the information presented not misleading.
These statements reflect all adjustments, consisting of normal
recurring adjustments which, in the opinion of management, are
necessary for fair presentation of the information contained therein. It
is suggested that these consolidated condensed financial statements be
read in conjunction with the financial statements and notes thereto included
in the Company's annual audited financial statements for the year ended
December 31, 2000. The Company follows the same accounting policies in
preparation of interim reports.
Results of operations for the interim periods are not necessarily
indicative of annual results.
-8-
Note 1 - Basis of Financial Statement Presentation - Continued
Business Conducted
The principal activities of the Company and its subsidiaries are the
retail sale and distribution of telecommunication equipment including
cellular phones, pagers, cellular phone smart cards and value-refill smart
cards, and acting as an agent of cellular and paging services providers.
The Company is a primary agent of an affiliate, Guangdong Gosun
Communication Development Company Limited ("GGCD"), a paging service
provider in the PRC and a licensed primary agent of China Mobile
Communications Corporation, one of two exclusive cellular communications
providers in the PRC. As of September 30, 2001, the Company has twenty
directly owned chain stores operating in the PRC.
Note 2 - Inventories
Inventories represent purchased finished goods and are stated at the
lower of cost or market.
Note 3 - Investment in an Equity Investee
Dongguan Gosun Network Science & Technology Co. Ltd. ("DGNST") is a
company incorporated in Dongguan, PRC. It is jointly established by the
Company and an affiliate, Guangdong Gosun Internet Information Industry
Co., Ltd. On January 11, 2001 and is owned as to 49% by the Company.
DGNST is engaged in the retailing of telecommunication equipment and
operating ISP business.
Note 4 - Short Term Bank Loans
Short term loans are obtained from creditworthy commercial banks in
PRC to finance operations. The loans are guaranteed by an affiliate, Guangdong
Gosun Network Science & Technology Inc.. Details of the bank loans are as
follows:
Outstanding Prevailing Maturity
Principal interest rate Date
------------------- ------------ ---------
US$
RMB equivalent
DECEMBER 31, 2000
Loan 1 5,000,000 603,864 6.138% January 17, 2002
Loan 2 2,000,000 241,546 6.435% January 23, 2002
Loan 3 3,000,000 362,319 6.435% February 17, 2002
Loan 4 2,000,000 241,546 6.435% March 14, 2002
Loan 5 2,000,000 241,546 6.435% August 21, 2002
---------- ---------
14,000,000 1,690,821
---------- ---------
-9-
Note 4 - Short Term Bank Loans - Continued
Outstanding Prevailing Maturity
Principal interest rate Date
------------------- ------------ ---------
US$
RMB equivalent
SEPTEMBER 30, 2001
Loan 1 2,000,000 241,546 5.115% March 25, 2001
Loan 2 2,000,000 241,546 5.3625% August 20, 2001
---------- ---------
4,000,000 483,092
---------- ---------
Note 5 - Capital Stock
During the nine months ended September 30, 2001, the Company completed a
1 for 1.7 forward split. An additional 179 common shares were issued as
fractional shares due to rounding up to the next whole share. These
financial statements have been retro-actively re-stated to reflect the
change.
Note 6 - Income Taxes
Income is subject to tax in the countries in which the Company and
its subsidiaries operate. The standard enterprise income tax rate in
the PRC is 33% of which 30% is attributable to the central government and
3% to the provincial government. Newly established commercial
enterprises, on application and approval by the tax bureau, are exempted
from enterprise income taxes in respect of income earned during their first
year of operation.
Significant components of the Company's estimated deferred tax assets
and liabilities as of September 30, 2001 and December 31, 2000 are as follows:
September 30, 2001 December 31, 2000
------------------ -----------------
US$ US$
Deferred tax assets
Net operating loss carry
forwards in PRC 63,730 26,527
Pre-operating expenses 6,319 7,223
Accrued expenses 77,496 7,871
Property, plant and equipment 19,220 15,028
Inventory reserves 5,580 -
---------- ---------
Net deferred tax assets 172,345 56,649
Valuation allowance for net
deferred tax assets (172,345) (56,649)
---------- ---------
Net deferred tax assets - -
---------- ---------
-10-
Note 6 - Income Taxes - Continued
The principal differences between taxes on income computed at the
applicable statutory income tax rates and recorded income tax expenses are
as follows:
Nine months ended
September 30,
-----------------
2001 2000
-------- -------
US$ US$
-------- -------
PRC statutory tax rates applied to
income (loss) before income taxes (79,913) 98,709
Changes in valuation allowance 115,696 19,259
Income tax incentive program - (117,816)
Non deductible expenses 24,072 -
Prior year's under accrual 16,282 -
Others 558 (152)
-------- -------
76,695 -
Note 7 - Commitments and Contingencies
Lease Commitments
Future minimum lease payments under operating leases with non-cancelable
lease terms in excess of one year are as follows:
US$
THREE MONTHS ENDING DECEMBER 31, 2001 132,318
YEAR ENDING DECEMBER 31,
2002 507,921
2003 375,895
2004 282,257
2005 and thereafter 1,080,851
----------
2,379,242
----------
Other contingencies
The Company is a guarantor for an affiliate, Guangdong Gosun
Communication Development Company Limited, in respect of a bank
loan granted amounting to RMB18,000,000, equivalent to US$2,173,913.
-11-
GOSUN COMMUNICATIONS LTD., INC.
Consolidated Financial Statements (Unaudited)
For the quarterly period ended
September 30, 2001
-12-
ITEM 1. MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the consolidated financial statements and the notes thereto, included as
part of this Quarterly Report.
RESULTS OF OPERATIONS
The following table shows the selected consolidated income statement
data of the Company and its subsidiaries for the three-month period and nine-
month period ended September 30, 2001 and September 30, 2000. The data
should be read in conjunction with, and is qualified in its entirety by
reference to, the consolidated financial statements and the notes thereto
included as part of the Quarterly Report:
(In US$ 000) THREE-MONTHS PERIOD ENDED NINE-MONTH PERIOD
ENDED
-------------------------------------------------
SEPTEMBER 30 SEPTEMBER 30
------------ ------------
2001 2000 2001 2000
Revenue
Sales of Cellular Phones and Pagers 6,247 3,173 18,110 7,341
Sales of Smart Cards 18,301 -- 29,054 --
Agency Service 522 470 1,409 1,476
25,070 3,643 48,573 8,817
Cost of Revenue
Cost of Cellular Phones and Pagers (6,085) (2,928) (17,645) (6,776)
Cost of Smart Cards (18,122) -- (28,470) --
Agency Service (64) (118) (238) (299)
(24,271) (3,046) (46,353) (7,075)
Gross Profit 799 597 2,220 1,742
Gross Profit Margin 3% 16% 5% 20%
Other Income 138 29 273 63
Selling Expenses (674) (320) (1,819) (923)
General and Administrative Expenses (244) (231) (757) (581)
Financing/Interest Expenses (41) (4) (68) (2)
Income before Income Taxes (22) 71 (151) 299
Income Taxes (38) -- (77) --
Minority Interest (4) -- 4 --
Net Income (Loss) (64) 71 (224) 299
-13-
Three-Month Period Ended September 30, 2001 Compared To Three-Month Period
Ended September 30, 2000
REVENUE, COST OF REVENUE, AND GROSS PROFIT MARGIN
Total revenue for the three-month period ended September 30, 2001
increased by US$21.4 million or 588.2% to US$25.0 million, compared to
US$3.6 million for the three-month period ended September 30, 2000. The
increase in total revenue was primarily the result of the Company's continuous
iffort on promoting the corporate image in its respective industry
as well as strategies to the opening of larger retail stores for attracting
customers. For the three-month period ended September 30, 2001, the Company
has three major sources of revenue, namely from selling cellular phones and
pagers, selling of smart cards and acting as a licensed primary agent for
cellular communication providers in the PRC. Of the total revenue of US$25.0
million for the three-month period ended September 30, 2001, 25.0% was
generated from the sales of cellular phones and pagers; 73.0% from the sales
of smart cards and 2.0% from agency service. Compared with the total revenue
of US$3.6 million for the three-month Period ended September 30, 2000, 87.1%
was generated from the sales of cellular phones and pagers; none from the
sales of smart cards; and 12.9% From agency service.
As of September 30, 2001, there were 17 stores in the Guangdong Province
that generated a total of US$24.5 million in total revenue and 3 stores in
Shanghai that generated a total of US$517,000 in total revenue. During the
three-month period ended September 30, 2001, the Company has closed down
several under performing stores and opened stores in better location and
bigger in size in the Guangdong Province. There was one additional store
opened during the three-month period ended September 30, 2001. The
management believes that the Company's strategy to open relatively larger
store will continue. The management further believes that this strategy
can capture the economy of scale and can provide variety of choices for
consumers to choose from.
Total cost of sales of cellular phones and pagers for the three-month
period ended September 30, 2001 was US$6.1 million, an increase of 108% or
US$3.2 million over US$2.9 million for the three-month period ended September
30, 2000. Total cost of sales of smart cards for the three-month period ended
September 30, 2001 was US$18.1 million, compared to none for the same
corresponding period in year 2000. Total cost of providing agency service
for the three-month ended September 30, 2001 was US$64,000, compared to
US$118,000 for the three-month period ended September 30, 2000, a decrease
Of 45.7%. The cost of sales of cellular phones and pagers represented 25.1%
Of the total costs of sales for the three-month period ended September 30,
2001, compared to 96.1% for the same corresponding period in year 2000.
Total cost of sales of smart cards approximated 74.7% of the total costs of
sales for the three-month period ended September 30, 2001, compared to none for
the same corresponding period in year 2000. And the total cost of
providing agency service represented a very minimal amount for the three-
month period ended September 30, 2001, compared to 3.9% for the three-month
period ended September 30, 2000.
-14-
The 13% decreased in gross profit margin from 16% for the three-month
period ended September 30, 2000 to 3% for the three-month period ended
September 30, 2001 was the result of the increase in competition of selling
cellular phones, pagers and smart cards. Management believes that
competition on pricing of cellular phones and telecommunication products
will continue to increase for the remaining periods in year 2001. However,
management plans to increase the number of mega stores in Guangdong
Province as well as in Shanghai in order to improve sales revenue.
Management also plans to offer other value-added services for customers, for
example, discounted repair and maintenance bundles when purchasing cellular
phones and related products.
OTHER INCOME
Other income for the three-month period ended September 30, 2001
increased by US$109,000, or 375.9% to US$138,000, compared to US$29,000 for
the three- month ended September 30, 2000. The increase was mainly due to
additional income generated from in-house repairs and maintenances of
cellular phone services. During the three-month period ended September 30,
2001, the Company has been appointed as the Grade A agent for a number of
cellular phone manufacturers to provide repairs and maintenance services to
end-users.
SELLING EXPENSES
Selling expenses for the three-month period ended September 30, 2001
increased by US$354,000 or 110.6% to US$674,000, compared to US$320,000 for
the three-month period ended September 30, 2000. The increase was mainly due
to the following factors:
a) Salaries and wages --- Salaries and wages increased by US$62,000,
or 33.8% for the three-month period ended September 30, 2001 to
US$244,000, compared to US$182,000 for the three-month period
ended September 30, 2000. The increase was mainly due to the
increase in salespersons as a result of the increase in number of
mega store retail outlets. On average, there was 40 staff working
in a mega store.
b) Rental expenses --- Rental expenses increased by US$110,000, or
399.0% for the three-month period ended September 30, 2001 to
US$137,000, compared to US$27,000 for the three-month period
ended September 30, 2000. The increase was primarily due to the
increase of number of mega retail stores in the year 2001.
c) Communication expenses - Communication expenses which include
telephone and postal expenses increased by US$17,000, or 183.0%
for the three-month period ended September 30, 2001 to US$26,000,
compared to US$9,000 for the three-month ended September 30,
2000. The increase was the result of improvement of communication
channels in the domestic provinces.
-15-
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the three-month period ended
September 30, 2001 increased by US$13,000 or 5.6% to US$244,000, compared
to US$231,000 for the three-month period ended September 30, 2000. The
Company continues its development of the businesses and aims to employ high
caliber individual to continue to improve the efficiency of its operation.
Thus, most of the increase in general and administrative expenses was related
to the increase in number of manpower and head-counts. The following items
contributed to most of the increase:
a) Salaries - Salaries for the three-month ended September 30, 2001
increased by US$34,000 or 112% to US$65,000, compared to
US$31,000 for the three-month period ended September 30, 2000. The
increase was mainly the result of increase number of administrative
staff during year 2001.
b) Pre-operating/set-up expenses --- Pre-operating expenses for the
three-month period ended September 30, 2001 increased by US$8,000
or 133% to US$14,000, compared to US$6,000 for the three-month
period ended September 30, 2000. The increase was mainly the
result of additional stores being opened during the three-month
period ended September 30, 2001.
c) Professional Fees - Professional fees increased by US$21,700 for
the three-month period ended September 30, 2001, compared to
US$660 for the same corresponding period in year 2000. The
audit/accounting fee was spent on the preparation and review of
quarterly financial reports and for the corporate compliance as a
US listed company.
The above increase in general and administrative expenses for the
three-month period ended September 30, 2001 was offset by the decrease in
building maintenance related expenses, in communication related expenses and
in consultancy fee.
FINANCIAL EXPENSES
Financing expenses was US$41,000 for the three-month period ended
September 30, 2001, compared to US$4,000 interest income for the three-
month period ended September 30, 2000. The increase was primarily the result
of five outstanding short-term bank loans obtained from commercial banks in
the PRC for the provision of sufficient working capital.
INCOME TAXES
The standard enterprise income tax rate in the PRC is 33% of which 30%
is attributable to the central government and 3% to the provincial
government. Newly established commercial enterprises, on application and
approval by the tax bureau, are exempted from enterprise income taxes in
respect of income earned during their first year of operation. The Company's
subsidiaries are in different stages of enjoying the above tax incentive
program.
-16-
MINORITY INTEREST
Minority interest of US$4,000 for the three-month period ended September
30, 2001 was the result of proportion sharing loss of the Shanghai Gosun
Communication Chain Operation Co., Ltd by minority shareholders.
NET INCOME/LOSS
Net loss was US$64,000 for the three-month period ended September 30,
2001, a decrease of US$135,000 or 190.1% as compared to a net income of
US$71,000 for the three-month period ended September 30, 2000. The
decrease was primarily due to thinner margin on telecommunication products as
a result of increase competition and increase expenses related to the
corporate strategy to build additional mega stores. It is also the strategy
of the Company to offer discount to a variety of models and services in
order to improve revenue and to acquire market share.
Nine-Month Period Ended September 30, 2001 Compared To Nine-Month Period
Ended September 30, 2000
REVENUE, COST OF REVENUE, AND GROSS PROFIT MARGIN
Total revenue for the nine-month period ended September 30, 2001
increased by US$39.7 million or 450.9% to US$48.6 million, compared to US$8.8
million for the nine-month period ended September 30, 2000. The increase in
total revenue was primarily the result of the Company's continuous effort on
promoting the corporate image in its respective industry, increasing
variety of telecommunication products for customers as well as strategies to
the opening of larger retail stores for attracting customers. For the nine-
month period ended September 30, 2001, the Company has three major sources of
revenue, namely from selling cellular phones and pagers, selling of smart
cards and acting as a licensed primary agent for one of cellular
communication providers in the PRC. Of the total revenue of US$48.6
million for the nine-month period ended September 30, 2001, 37.3% was
generated from the sales of cellular phones and pagers; 59.8% from the sales
of smart cards and 2.9% from agency service. Compared with the total revenue
of US$8.8 million for the nine-month period ended September 30, 2000, 83.3%
was generated from the sales of cellular phones and pagers; none from the
sales of smart cards; and 16.7% from agency service.
As of September 30, 2001, there were 17 stores in the Guangdong Province
that generated a total of US$47.2 million in total revenue and 3 stores in
Shanghai that generated a total of US$1.3 million in total revenue.
Comparing to the end of December 2000, there were 17 stores in Guangdong
Province and 4 stores in Shanghai. The management believes that the
Company's strategy to open relatively larger store will continue. The
management further believes that this strategy can capture the economy of
scale and can provide variety of choices for consumers to choose from.
Total cost of sales of cellular phones and pagers for the nine-month
period ended September 30, 2001 was US$17.6 million, an increase of 160.4%
or US$10.9 million over US$6.8 million for the nine-month period ended
September 30, 2000. Total cost of sales of smart cards for the nine-month
period ended September 30, 2001 was US$28.5 million, compared to none for the
same Corresponding period in year 2000. Total cost of providing agency
service for the nine-month ended September 30, 2001 was US$239,000, compared
to US$299,000 for the nine- month period ended September 30, 2000, a decrease
of 20.0%. The cost of sales of cellular phones and pagers represented 38.1%
Of the total costs of sales for the nine-month period ended September 30,
2001, compared to 95.8% for the same corresponding period in year 2000.
Total cost of sales of smart cards approximated 61.4% of the total costs of
sales for the nine-month period ended September 30, 2001, compared to none
for the same corresponding period in year 2000. And the total cost of
providing agency service represented a very minimal amount for the nine-month
period ended September 30, 2001, compared to 4.2% for the nine-month period
ended September 30, 2000.
The 15% decreased in gross profit margin from 20% for the nine-month
period ended September 30, 2000 to 5% for the nine-month period ended
September 30, 2001 was the result of the increase in competition of selling
cellular phones, pagers and smart cards. Management believes that
competition on pricing of cellular phones and telecommunication products
will continue to increase for the remaining periods in year 2001. However,
management plans to increase the number of mega stores in Guangdong
Province as well as in Shanghai in order to improve sales revenue. Management
also plans to offer other value-added services for customers, for example,
discounted repair and maintenance bundles when purchasing cellular phones
and related products.
OTHER INCOME
Other income for the nine-month period ended September 30, 2001
increased By US$210,000, or 333.3% to US$273,000, compared to US$63,000 for
the nine- Month period ended September 30, 2000. The increase was mainly due
to Additional income generated from in-house repairs and maintenances of
cellular phone services. During the three-month period ended September 30,
2001, the Company has been appointed as the Grade A agent for a number of
cellular phone manufacturers to provide repairs and maintenance services to
end-users.
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SELLING EXPENSES
Selling expenses for the nine-month period ended September 30, 2001
increased by US$896,000 or 97.1% to US$1.8 million, compared to US$923,000
for the nine-month period ended September 30, 2000. The increase was
mainly due to the following factors:
a) Salaries and wages --- Salaries and wages increased by
US$305,000,or 61.9% for the nine-month period ended September 30,
2001 to US$798,000, compared to US$493,000 for the nine-month
period ended September 30, 2000. The increase was mainly due to
the increase in salespersons as a result of the increase in number
of mega store retail outlets.
b) Rental expenses --- Rental expenses increased by US$241,000, or
181.2% for the nine-month period ended September 30, 2001 to
US$374,000, compared to US$133,000 for the nine-month period
ended September 30, 2000. The increase was primarily due to the
Increase of number of mega retail stores in the year 2001.
c) Communication expenses - Communication expenses increased by
US$73,000 for the nine-month period ended September 30, 2001 to
US$82,000, compared to US$9,000 for the nine-month ended June 30,
2000. The increase was the result of improvement of
communication channels in the domestic provinces as well as
increase international communication as a US listed company.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the nine-month period ended
September 30, 2001 increased by US$176,000 or 30.3% to US$757,000, compared
to US$581,000 for the nine-month period ended September 30, 2000. The
Company continues its development strategies and aims to employ high
caliber Individual to continue to improve the efficiency of its operation.
thus, most of the increase in general and administrative expenses was related
to the increase in number of manpower and head-counts. The following items
contributed to most of the increase:
a) Salaries - Salaries for the nine-month ended September 30, 2001
increased by US$126,000 or 140.0% to US$216,000, compared to
US$90,000 for the nine-month period ended September 30, 2000.
The increase was mainly the result of increase number of
administrative staff during the year 2001.
b) Pre-operating/set-up expenses --- Pre-operating expenses
increased by US$45,000 for the nine-month period ended September
30, 2001, compared to only US$6,000 for the nine-month period ended
September 30, 2000. The increase was mainly the result of
additional stores being opened during the nine-month period ended
September 30, 2001.
c) Professional Fees - Professional fees increased by US$44,000 for
the nine-month period ended September 30, 2001, compared to
US$1,900 for the same corresponding period in year 2000. The
professional fees were spent on the preparation and review of
quarterly financial reports and on corporate compliance as a US
listed company.
FINANCIAL EXPENSES
Financing expenses was US$68,000 for the nine-month period ended
September30, 2001, compared to US$2,000 interest income for the nine-month
period ended September 30, 2000. The increase was primarily the result of
five short-term bank loans obtained from commercial banks in the PRC for
the provision of sufficient working capital.
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INCOME TAXES
The standard enterprise income tax rate in the PRC is 33% of which 30%
is attributable to the central government and 3% to the provincial government
newly established commercial enterprises, on application and approval by
the tax bureau, are exempted from enterprise income taxes in respect of
income earned during their first year of operation. The Company's
subsidiaries are in different stages of enjoying the above tax incentive
program.
MINORITY INTEREST
Minority interest of US$4,000 for the nine-month period ended September
30, 2001 was the result of proportion sharing loss of the Shanghai Gosun
Communication Chain Operation Co., Ltd by minority shareholders.
NET INCOME/LOSS
Net loss was US$224,000 for the nine-month period ended September 30,
2001,a decrease of US$523,000 or 174.9% as compared to a net income of
US$299,000 for the nine-month period ended September 30, 2000. The
decrease was primarily due to thinner margin on telecommunication products as
a result of increase competition. It is also the strategy of the Company
to offer discount to a variety of models and services in order to improve
market share.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were US$282,000 as of September 30, 2001.
This represents an increase of US$123,000 from December 31, 2000. The
increase was primarily due to a positive cash flow from financing
activities of proceeds from short-term bank loans, which was partially
offset by a negative cash flow from operating activities.
Management believes that the level of financial resources is a
significant competitive factor in the cellular phone industry accordingly
may choose at any time to raise additional capital through debt or equity
financing to strengthen its financial position, facilitate growth and provide
the Company with additional flexibility to take advantage of business
opportunities.
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PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits: None.
b) Reports on Form 8-K: None.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
GOSUN COMMUNICATIONS LTD., Inc.
Date: November 14, 2001 By: /S/ YI-BIAO CHEN
-------------------------
Yi-Biao Chen
Chairman of the Board
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