-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CExmB8TFDK7EHa/ySSZQgksO5eedUfYV51ihGFXErKWv1Oe8bbyomPN/I634hWgf ZWPG7JQOj1Ll6LVXkoBVrg== 0001113182-01-500062.txt : 20020411 0001113182-01-500062.hdr.sgml : 20020411 ACCESSION NUMBER: 0001113182-01-500062 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011119 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GOSUN COMMUNICATIONS LTD INC CENTRAL INDEX KEY: 0000832100 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER PERIPHERAL EQUIPMENT, NEC [3577] IRS NUMBER: 760238860 STATE OF INCORPORATION: TX FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-18257 FILM NUMBER: 1795462 BUSINESS ADDRESS: STREET 1: 57 WEST 200 SOUTH STREET 2: SUITE 310 CITY: SALT LAKE CITY STATE: UT ZIP: 84119 BUSINESS PHONE: 8013599300 MAIL ADDRESS: STREET 1: 57 WEST 200 SOUTH STREET 2: SUITE 310 CITY: SALT LAKE CITY STATE: UT ZIP: 84101 FORMER COMPANY: FORMER CONFORMED NAME: BLACK WING CORP DATE OF NAME CHANGE: 19890426 FORMER COMPANY: FORMER CONFORMED NAME: HOLMES MICROSYSTEMS INC DATE OF NAME CHANGE: 19920703 10QSB 1 gsq310q.txt 10-QSB 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. ----------------------------------------------------------------------- (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 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. -17- 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. -18- 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. -19- PART II ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) Exhibits: None. b) Reports on Form 8-K: None. -20- 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 -21- -----END PRIVACY-ENHANCED MESSAGE-----