10QSB 1 gosun_march10-qsb.txt MARCH 31, 2002 QUARTERLY REPORT 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 March 31, 2002. [ ] Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ______ to ______. Commission file number: 000-18257 GOSUN COMMUNICATIONS LTD., INC. ------------------------------- (Exact name of small business issuer as specified in its charter) TEXAS 91-1939829 ------------------------------- ------------------- (State or other jurisdiction of (IRS Employer Incorporation or organization) Identification No.) 80 Zhong Shan Er Road Guangzhou, China 510080 --------------------------------------------- (Address of principal executive offices) 011-86-208-387-9773 ------------------- (Issuer's Telephone Number, Including Area Code) ------------------------------------------------ (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 March 31, 2002, there were 30,538,179 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 3 CONSOLIDATED STATEMENTS OF INCOME 5 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY 6 CONSOLIDATED STATEMENTS OF CASH FLOWS 7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION 9 PART II ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 12 SIGNATURES 13 -2- 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. GOSUN COMMUNICATIONS LTD., INC. CONSOLIDATED BALANCE SHEETS ASSETS March 31, December 31, 2002 2001 ------------ ------------ US$ US$ (Unaudited) Current assets Cash and cash equivalents 235,182 488,238 Accounts receivable, net of bad debt provision (US$27,596, US$9,107) 788,376 561,887 Advances to suppliers 24,270 2,302 Other receivables 682,512 450,621 Inventories 1,163,018 1,234,234 Amounts due from affiliates 1,641,096 1,500,954 ------------ ------------ Total current assets 4,534,454 4,238,236 Investment in an equity investee 57,831 50,585 Deposits 323,791 300,649 Property, plant and equipment, net 499,595 539,409 ------------ ------------ Total assets 5,415,671 5,128,879 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable 603,119 700,922 Accrued employee compensation and benefits 11,792 24,440 Other payables and accrued expenses 1,613,484 998,567 Income taxes payable 332,014 153,116 Amounts due to affiliates 120,406 90,581 Short term bank loans 1,062,802 1,690,821 ------------ ------------ Total current liabilities 3,743,617 3,658,447 Amount due to stockholder 178,744 178,744 Convertible note, net of debt discount of (US$73,676, US$89,400) 211,060 210,600 ------------ ------------ Total liabilities 4,133,421 4,047,791 ------------ ------------
-3- GOSUN COMMUNICATIONS LTD., INC. CONSOLIDATED BALANCE SHEETS (continued) 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$0.001 per share; 49,000,000 shares authorized; 30,538,179 (2001: 30,093,179) shares issued and outstanding 30,538 30,093 Unissued common stock - 39,375 Additional paid in capital 1,509,005 1,117,827 Accumulated losses (251,016) (113,182) ------------ ------------ 1,288,527 1,074,113 ------------ ------------ Minority interest (6,277) 6,975 ------------ ------------ Total liabilities and stockholders' equity 5,415,671 5,128,879 ============ ============
See accompanying notes to the consolidated financial statements. -4- GOSUN COMMUNICATIONS LTD., INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Three months ended Three months ended March 31, 2002 March 31, 2001 ------------------ ----------------- US$ US$ Revenue Sales of cellular phones and pagers 6,253,699 6,218,133 Sales of smart cards 5,929,122 3,591,035 Agency service 400,099 362,138 -------------- -------------- 12,582,920 10,171,306 Cost of revenue Cost of cellular phones and pagers 5,972,603 6,003,607 Cost of smart cards 5,406,414 3,337,307 Agency service 13,783 36,455 -------------- -------------- 11,392,800 9,377,369 -------------- -------------- Gross profit 1,190,120 793,937 Other operating income, net 51,830 50,020 -------------- -------------- 1,241,950 843,957 Selling expenses 521,977 494,294 General and administrative expenses 657,109 243,768 -------------- -------------- Operating income 62,864 105,895 Other income (expenses) Interest income 12 686 Interest expenses (38,487) (20,024) Share of profit (loss) of an equity investee 7,246 (1,983) -------------- -------------- Total other expenses, net (31,229) (21,321) -------------- -------------- Income before income taxes and minority interest 31,635 84,574 Income taxes 182,721 34,122 -------------- -------------- Income (loss) before minority interest (151,086) 50,452 Minority interests (13,252) 926 -------------- -------------- Net income (loss) (137,834) 49,526 ============== ============== Earnings per share - basic and diluted (0.00) 0.00 ============== ============== Weighted average common shares outstanding - basic and diluted 30,360,262 30,000,168 ============== ============== See accompanying notes to the consolidated financial statements. -5- GOSUN COMMUNICATIONS LTD., INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Unaudited) Retained Unissued Additional earnings Total Common stock common paid in (accumulated stockholders' Shares Amount stock capital losses) equity ---------- -------- --------- ----------- ------------ ------------- US$ US$ US$ US$ US$ Balance, December 31, 2001 30,093,179 30,093 39,375 1,117,827 (113,182) 1,074,113 Issuance of shares in connection with consulting services 410,000 410 (39,375) 391,365 - 352,400 Conversion of notes and interest payable to common stock at $0.5387 per share on March 13, 2002 5,000 5 - 2,688 - 2,693 Conversion of notes and interest payable to common stock at $0.4293 per share on March 25, 2002 25,000 25 - 10,708 - 10,733 Conversion of notes and interest payable to common stock at $0.4293 per share on March 26, 2002 5,000 5 - 2,141 - 2,146 Write back of debt discount - - - (15,724) - (15,724) Net income for the quarterly period ended March 31, 2002 - - - - (137,834) (137,834) ---------- -------- --------- ---------- ---------- ------------- Balance, March 31, 2002 30,538,179 30,538 - 1,509,005 (251,016) 1,288,527 ========== ======== ========= ========== ========== =============
See accompanying notes to the consolidated financial statements -6- GOSUN COMMUNICATIONS LTD., INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Three months ended Three months ended March 31, 2002 March 31, 2001 ------------------ ------------------ US$ US$ Cash flows from operating activities Net income (loss) (137,834) 49,526 Adjustments to reconcile net income to net cash used in operating activities Depreciation 43,177 27,501 Write off of property, plant and equipment 29,182 - Expenses compensated by common stock 218,525 - Interest on convertible note compensated by common stock 308 - Unparticipated loss (profit) of an equity investee (7,246) 1,983 Minority interests (13,252) 926 Increase (decrease) from changes in Accounts receivable (226,489) (136,754) Advances to suppliers (21,968) (302,932) Other receivables and deposits (121,158) (237,266) Income tax recoverable - 4,272 Inventories 71,216 (410,160) Amounts due from affiliates (110,317) (279,429) Accounts payable (97,803) 622,832 Accrued employee compensation and benefits (12,648) (15,261) Other payables and accrued expenses 614,917 13,239 Income taxes payable 178,898 31,686 ----------- ----------- Net cash provided by (used in) operating activities 407,508 (629,837) ----------- ----------- Cash flows from investing activities Acquisition of property, plant and equipment (32,545) (60,755) ----------- ----------- Net cash used in investing activities (32,545) (60,755) ----------- -----------
See accompanying notes to the consolidated financial statements -7- GOSUN COMMUNICATIONS LTD., INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (Unaudited) Three months ended Three months ended March 31, 2002 March 31, 2001 ------------------ ------------------ US$ US$ Cash flows from financing activities Advances from (repayment to) affiliates, net - 44,376 Proceeds from issuing common stock - 16,000 Repayment to stockholder - (51,932) Proceeds from short term bank loans 96,618 845,411 Repayment of short term bank loans (724,637) (241,547) ----------- ----------- Net cash provided by financing activities (628,019) 612,308 ----------- ----------- Net increase (decrease) in cash and cash equivalents (253,056) (78,284) Cash and cash equivalents, beginning of period 488,238 158,927 ----------- ----------- Cash and cash equivalents, end of period 235,182 80,643 =========== =========== Supplemental disclosure of cash flow information Interest paid 38,487 20,024 Income taxes paid 3,822 - Supplemental disclosure of significant non-cash transactions Issuance of common stock in connection with consulting services 218,525 - Conversion of notes and interest payable to common stock 15,572 - =========== ===========
See accompanying notes to the consolidated financial statements -8- 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 ended March 31, 2002 and March 31, 2001. The data should be read in conjunction with, and is qualified in its entirety by reference to, the consolidated financial statements included as part of the Quarterly Report: Three-Month Period Ended Three-Month Period Ended (In US$ 000) March 31, 2002 March 31, 2001 Revenue Sales of Cellular Phones and Pagers 6,254 6,218 Sales of Smart Cards 5,929 3,591 Agency Service 400 362 --------------- --------------- 12,583 10,171 Cost of Revenue Cost of Cellular Phones and Pagers (5,973) (6,004) Cost of Smart Cards (5,406) (3,337) Agency Service (14) (36) --------------- --------------- (11,393) (9,377) Gross Profit 1,190 794 Gross Profit Margin 9% 8% Other Income 52 50 Selling Expenses (522) (494) General and Administration Expenses (657) (244) Financing/Interest Expense(Net) (31) (21) --------------- --------------- Income before Income Taxes 32 85 Income Taxes (183) (34) Minority Interest 13 (1) --------------- --------------- Net Income (Loss) (138) (50) ========= =========
Three-Month Period Ended March 31, 2002 Compared To Three-Month Period Ended March 31, 2001 Revenue, Cost of Revenue, and Gross Profit Margin Total revenue for the three-month period ended March 31, 2002 increased by US$2.4 million or 23.7% to US$12.5 million, compared to US$10.2 million for the -9- three-month period ended March 31, 2001. The increase in total revenue was primarily the result of the Company's effort of promoting the corporate image in its respective industry as well as strategies regarding the opening of larger retail stores for attracting customers. For the three-month period ended March 31, 2002, 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 the two cellular communication providers in the PRC, China Mobile Communications Corporation. Of the total revenue of US$12.5 million for the three-month period ended March 31, 2002, 49.7% was generated from the sales of cellular phones and pagers; 47.1% from the sales of smart cards and 3.2% from agency service. Compared with the total revenue of US$10.2 million for the three-month period ended March 31, 2001, 61.1% was generated from the sales of cellular phones and pagers; 35.5% from the sales of smart cards; and 3.4% from agency service. As of March 31, 2002, there were 13 stores in the Guangdong Province that generated a total of US$9.6 million in total revenue and 1 store in Shanghai that generated a total of US$541,000 in total revenue. Comparing to the end of December 2001, there were 16 stores in Guangdong Province and 3 stores in Shanghai. During the three-month period ended March 31, 2002, 3 stores in Guangdong Province and 1 store in Shanghai were closed, but 2 mega stores were opened in Guangdong Province. The management believes that the Company's strategy to open relatively larger stores will continue. The management further believes that this strategy can capture economies of scale and can provide a variety of choices for consumers to choose from. Total cost of sales of cellular phones and pagers for the three-month period ended March 31, 2002 was US $6.0 million and was similar to that for the three-month period ended March 31, 2001. Total cost of sales of smart cards for the three-month period ended March 31, 2002 was US $5.4 million, compared to US$3.3 million for the same corresponding period in year 2001. Total cost of providing agency service for the three-month ended March 31, 2002 was US$14,000, compared to US$36,000 for the three-month period ended March 31, 2001, a decrease of 62%. The cost of sales of cellular phones and pagers represented 52.5% of the total costs of sales for the three-month period ended March 31, 2002, compared to 64.0% for the same corresponding period in year 2001. Total cost of sales of smart cards approximated 47.5% of the total costs of sales for the three-month period ended March 31, 2002, compared to 35.6% for the same corresponding period in year 2001. And the total cost of providing agency service represented a very minimal amount for the three-month period ended March 31, 2002, compared to 0.4% for the three-month period ended March 31, 2001. The 1.6% increase in gross profit margin from 7.8% for the three-month period ended March 31, 2001 to 9.4% for the three-month period ended March 31, 2002 was the result of the increase in competitiveness of the Company's cellular phones, pagers and smart cards and the increase in revenue. Management believes that competition on pricing of cellular phones and telecommunication products will continue to increase for the remaining periods in year 2002; however, management plans to increase the number of mega stores in Guangdong Province as well as in Shanghai and Beijing 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. -10- Other Income Other income for the three-month period ended March 31, 2002 increased by US$1,810, or 3.6% to US$51,830, compared to USD50,020 for the three-month ended March 31, 2001. The increase was mainly due to additional income generated from in-house repairs and maintenances of cellular phone services. Selling Expenses Selling expenses for the three-month period ended March 31, 2002 increased by USD27,683 or 0.56% to USD521,977, compared to USD494,294 for the three-month period ended March 31, 2001. The increase was mainly due to the following factors: a) Salaries and wages --- Salaries and wages increased mainly due to the increase in salespersons and in line with the increase in sales revenue. b) Rental expenses --- Rental expenses decreased for the three-month period ended March 31, 2002 primarily due to the closure of three stores in Guandong Province and the closure of one store in Shanghai. General and Administration Expenses General and administration expenses for the three-month period ended March 31, 2002 increased by US $413,341 or 170% to US $657,109, compared to US$243,768 for the three-month period ended March 31, 2001. The Company is in its development stage and aims to employ high caliber individuals 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 the number of employees. The following items contributed to most of the increase: a) Professional fees. Professional fees for the three-month period ended March 31, 2002 increased by US$270,076 to US$271,392, compared to US$1,316 for the three-month period ended March 31, 2001. The main expenses are US$218,525, calculated via disbursement of company shares to overseas financial advisors, promotion companies, PR companies, compared to none for the three-month period ended March 31, 2001. b) Consultancy fees - Consultancy fees for the three-month period ended March 31, 2002 increased by US$28,049 to US$28,985, compared to US$936 for the three-month period ended March 31, 2001. The fee was mainly used to pay the consulting fee for domestic enterprise coordination and development. c) Staff Insurance - Staff Insurance for the three-month period ended March 31, 2002 increased by US$ 15,156 to US$15,184, compared to US$28 for the three-month period ended March 31, 2001. The fee was mainly increased for insurance payments due to enhanced welfare for staff. d) Depreciation - Depreciation for the three-month period ended March 31, 2002 increased by US$ 14,323 to US$16,122, compared to US$1,799 for the three-month period ended March 31, 2001. -11- Financial Expenses Financing expenses was US$38,000 for the three-month period ended March 31, 2002, compared to US$20,000 for the three-month period ended March 31, 2001. The decrease was primarily the result of less short-term bank loans from commercial banks in the PRC for the provision of sufficient working capital which were partially repaid during year 2001. 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 and its subsidiaries and retail stores are in different stages of enjoying the above tax incentive program. Minority Interest Minority interest (loss) of US($13,252) for the three-month period ended March 31, 2002 was the result of sharing loss of the Shanghai Gosun Communication Chain Operation Co., Ltd. Net Income Net income (loss) was US$(137,834) for the three-month period ended March 31, 2002, a decrease of US$187,360 compared to US $49,526 for the three-month period ended March 31, 2001. The decrease was primarily due to increased general and administrative expenses and income taxes. Liquidity and Capital Resources Cash and cash equivalents were US$235,182 as of March 31, 2002. This represents a decrease from US $488,238 at December 31, 2001. The decrease was primarily due to repayment of short-term bank loans of $628,000, purchase of equipment of $32,000 offset by $407,000 net cash provided from operating activities. Management believes that the level of financial resources is a significant competitive factor in the cellular phone industry and 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. PART II ITEM 6. EXHIBITS AND REPORTS ON FORM 10-Q a) Exhibits: None. b) Reports on Form 8-K: None. -12- 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: June 14, 2002 By: /S/ YI-BIAO CHEN ------------------------- Yi-Biao Chen Chairman of the Board -13-