U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-QSB
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|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
For the transition period from ________ to ________
Commission file number 333-62236
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TELECOM COMMUNICATIONS, INC.
(Exact name of small business issuer as specified in its charter)
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INDIANA 35-2089848
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
74 SHANAN ROAD PANYU, GUANGZHOU, GD 511490, CHINA
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(8620) 8487 9179
ISSUER'S TELEPHONE NUMBER
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
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Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the 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 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: 50,188,000 shares of Common Stock,
$.001 Par Value Per Share, outstanding as of [June 30, 2004]
Transitional Small Business Disclosure Format (Check One): Yes |_| No |X|
TABLE OF CONTENTS
Page
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PART I. FINANCIAL INFORMATION.................................................1
ITEM 1. FINANCIAL INFORMATION.........................................1
Condensed Consolidated Balance Sheet as of June 30, 2004.....1
Condensed Consolidated Statements of Operations for the
Nine Months Ended June 30, 2004 and 2003 and
the Three Months Ended June 30, 2004 and 2003.............2
Condensed Consolidated Statements of Cash Flows for
the Nine Months Ended June 30, 2004 and 2003..............3
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS..........................8
ITEM 3. CONTROLS AND PROCEDURES......................................16
PART II. OTHER INFORMATION...................................................16
ITEM 1. LEGAL PROCEEDINGS............................................16
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS....................16
ITEM 3. EXHIBITS AND REPORTS ON FORM 8-K.............................17
SIGNATURES...................................................................18
PART I. FINANCIAL INFORMATION
TELECOM COMMUNICATIONS, INC. AND SUBSIDIARIES
ITEM 1. FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 2004
(UNAUDITED)
Assets
------
Current assets
Cash and cash equivalents $ 179,795
Accounts receivable 87,744
Inventory - real estate held for sale 140,519
Prepaid expenses and other current assets 82,923
----------------
Total current assets 490,981
----------------
Property, plant and equipment - at cost 643,536
Less: accumulated depreciation (71,504)
----------------
572,032
Due from related company 485,262
----------------
Total assets $ 1,548,275
================
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities
Accounts payable and accrued expenses $ 413,513
Due to related parties 2,631
----------------
Total current liabilities 416,144
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Long-term debt
Due to stockholder 97,004
----------------
Total liabilities 513,148
----------------
Stockholders' equity
--------------------
Preferred stock ($.001 par value: 20,000,000 shares
authorized; no shares issued and outstanding) -
----------------
Common stock ($.001 par value: 80,000,000 shares authorized
50,188,000 shares issued and outstanding) 50,188
Additional paid in capital 10,449,406
Accumulated other comprehensive loss 608
Accumulated deficit (9,465,075)
Total stockholders' equity 1,035,127
----------------
Total liabilities and stockholders' equity $ 1,548,275
================
The accompanying notes are an integral part of the condensed
consolidated financial statements.
1
TELECOM COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Nine Months Ended Three Months Ended
June 30, June 30,
-------- --------
2004 2003 2004 2003
---- ---- ---- ----
Net revenues $ 856,827 $ - $ 224,658 $ -
Cost of sales 164,382 - 15,269 -
-------------- ------------- ------------- --------------
Gross profit 692,445 - 209,389 -
Operating expenses 2,149,674 - 1,953,118 -
-------------- ------------- ------------- --------------
Loss from operations (1,457,229) - (1,743,729) -
-------------- ------------- ------------- --------------
Other income (expense):
Interest income 1,971 - 1,971 -
Interest expense - - - -
Acquisition expense (8,146,780) - (19,872) -
Other income 130,220 - 138,999 -
Gain on disposal of subsidiary 200,772 - - -
-------------- ------------- ------------- --------------
Total other income (expense) (7,813,817) - 121,098 -
-------------- ------------- ------------- --------------
Income (loss) before provision for income
taxes and discontinued operations
(9,271,046) - (1,622,631) -
Provision for income taxes - - (10,160) -
-------------- ------------- ------------- --------------
Loss before discontinued operations (9,271,046) - (1,612,471) -
Discontinued operations
(Note 3) income (loss) from
operations of discontinued subsidiary 343,570 (30,922) (155,959) (21,827)
-------------- ------------- ------------- -------------
Net loss $ (8,927,476) $ (30,922) (1,768,430) $ (21,827)
============== ============= ------------- =============
Income per common share -
Income per common share -basic & diluted $ (.21) $ - $ (.04) $ -
============== ============= ============= ==============
Weighted average common share outstanding
- basic & diliuted 41,893,285 10,050,000 49,502,286 10,050,000
============== ============= ============= ==============
The accompanying notes are an integral part of the condensed
consolidated financial statements.
2
TELECOM COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
June 30,
--------
2004 2003
---- ----
Cash flows from operating activities
Net cash provided by (used in) operating activities $ 69,329 $ (2,692,475)
---------------- ----------------
Cash flows from investing activities
Purchase of property and equipment (639,001) (2,458,592)
Long-term investments 200,000
(592,106)
Due from related party 486,965
Net proceeds from sale of subsidiary 758,669 -
---------------- ----------------
Net cash provided by investing activities 806,633 (3,050,698)
Cash flows from financing activities:
Due to related party (93,596) 63,173
Loan payable 304,063 2,011,218
Proceeds from new issuance of common stock - 2,941,603
Due to stockholder, net (2,062,069) 2,113,642
---------------- ----------------
Net cash provided by (used in) financing activities (1,851,602) 7,129,636
---------------- ----------------
Net increase (decrease) in cash (975,640) 1,386,463
Cash - beginning of period 1,155,435 -
---------------- ----------------
Cash - end of period $ 179,795 $ 1,386,463
================ ================
Supplemental disclosures of non-cash investing activity:
Net book value of subsidiary sold $ 2,726,012 $ -
================ ================
The accompanying notes are an integral part of the condensed
consolidated financial statements.
3
TELECOM COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and with the
instructions to Form 10-QSB and Item 310 of Regulation S-B. Accordingly, they do
not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for annual
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. The accounts of the Company and all of its subsidiaries are
included in the condensed consolidated financial statements. All significant
intercompany accounts and transactions are eliminated in consolidation.
Operating results for the interim periods are not necessarily indicative of the
results that may be expected for the year ending September 30, 2004. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's Form 10-KSB for the year ended September 30,
2003.
1. BUSINESS DESCRIPTION AND ORGANIZATION
Telecom Communications, Inc. (the "Company" or "Telecom") was incorporated on
January 6, 1997 in the State of Indiana under the corporate name MAS Acquisition
XXI Corp. Prior to December 21, 2000, the Company was a blank check company
seeking a business combination with an unidentified business. On December 21,
2000, the Company acquired Telecom Communications of America, which was a sole
proprietorship conducting business as a provider of long distance telephone
carriers to individuals. The Company changed its name to Telecom Communications,
Inc.
On September 30, 2003, Telecom consummated a Stock Purchase Agreement with Arran
Services Limited ("Arran") and its sole shareholder (the "majority
shareholder"), for the acquisition of all of the capital stock of Arran, a
British Virgin Island corporation. In exchange for the capital interest, the
majority shareholder and his designate received a total of 23.8 million shares
of Telecom common stock, representing approximately 64% of the outstanding
shares of Telecom. On September 30, 2003, Telecom discontinued its operations in
the U.S. On the closing of the Stock Purchase Agreement, the majority
shareholder was elected chairman and CEO of the Company.
Telecom conducts business in China through its subsidiaries as follows:
Panyu, a 60% owned Chinese company located in Guangzhou, China, is an
integrated construction company. Panyu is focused on both general construction
as well as the construction of network infrastructure for residential,
industrial, cultural and commercial building communities. The construction of
network infrastructure is mainly for communication through the setting up of
broadband and telephone lines, intranet network within the community, as well as
television cable, electricity wire and air conditioning. The Company sold Panyu
on April 16, 2004 (refer to note 5). For the period ending June 30, 2003, all
operating activity and financial results of the Company are related to Panyu.
IC Star MMS Limited ("IC Star") (formerly known as Sino Super Limited) was an
80% owned China-based local information and services affiliate network.
Established in December 1991, IC Star links entertainment and lifestyle
information to local communities across China.
On March 16, 2004, the Company acquired from Auto Treasure Holdings Limited, an
entity 100% owned by the majority shareholder of the Company, the remaining 20%
interest of IC Star for a consideration of 9,889,000 shares of Telecom common
stock and 10,000,000 warrants to purchase 10,000,000 shares of Telecom common
stock at $2 per share. As a result, as of March 16, 2004, Telecom owned 100% of
IC Star. This transfer was deemed to be a transfer between entities under common
control and was therefore recorded on the Company's records at its historical
cost basis. In connection to the new issuance of 9,889,000 shares of Telecom
common stock and 10,000,000 warrants (expire March 15, 2006), the excess of the
purchase consideration of $8,322,295 over the book value of the net assets of
$195,378 acquired amounted to $8,126,917 and was recorded in the consolidated
statement of operations as acquisition expense.
On December 15, 2003, the Company formed Alpha Century Holdings Limited
("Alpha"), a wholly owned subsidiary registered in the British Virgin Islands,
for investment holdings. On March 31, 2004, Arran sold its interest in Huiri
Electric (Panyu) Limited ("Huiri") to Alpha for approximately $13,000.
4
TELECOM COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The condensed consolidated financial statements of the Company, include the
accounts of Telecom, Arran, Alpha, IC Star, Panyu and Huiri. The condensed
consolidated statements have been prepared in accordance with accounting
principles generally accepted in the United States of America. All significant
intercompany transactions have been eliminated.
The Company has determined Hong Kong dollars, to be the functional currency of
IC Star and the People's Republic of China Chinese Yuan Renminbi, to be the
functional currency of Panyu. There were no material gains or losses or effect
of exchange rate changes on cash recognized as a result of translating foreign
currencies to the U.S. dollars due to the stability of the currency. No
assurance however, can be given as to the future valuation of the foreign
currencies and how further movements in the foreign currencies could affect
future earnings of the Company.
The balance sheets of all foreign subsidiaries were translated at period end
exchange rates. All of the Company's material long-lived assets are located in
the People's Republic of China in June, 2004. Expenses were translated at
exchange rates in effect during the year, substantially the same as the period
end rates.
RELATED PARTY AND STOCKHOLDERS' LOANS
The caption "Due to related party" and "Due to Stockholder" are loans that are
unsecured, non-interest bearing and have no fixed terms of repayment, and
therefore, are deemed payable on demand.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
LOSS PER SHARE
Basic loss per common share ("LPS") is calculated by dividing net loss by the
weighted average number of common shares outstanding during the period. Diluted
earnings per common share are calculated by adjusting the weighted average
outstanding shares, assuming conversion of all potentially dilutive stock
options.
REVENUE RECOGNITION
The Company recognizes revenue from the sale of its products in accordance with
the U.S. Securities and Exchange Commission's (SEC) Staff Accounting Bulletin
No. 101, Revenue Recognition in Financial Statements. In SAB No. 101, the SEC
expressed its view that revenue was realizable and earned when the following
four criteria were met: (1) persuasive evidence of an arrangement exits; (2)
delivery has occurred and title has passed according to the sale terms, (3) the
seller's price to the buyer is fixed or determinable; and (4) collectibility is
reasonably assured.
3. RELATED PARTY TRANSACTIONS
An officer of the Company or companies owned by this officer advanced funds to
the Company for working capital purposes. At June 30, 2004, the Company owed
this officer or his companies $97,004. The advances are non-interest bearing and
are payable on demand.
5
TELECOM COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
On April 16, 2004, the Company sold its 60% interest in Panyu to Aries Vision
Technology Limited ("Aries"), a related party, for approximately $2,580,390.
Approximately $2,095,128 is payable to the majority shareholder and the
remaining $485,262 to Arran. Loss of disposal amounted to $145,622.
Grace Motion, Inc. a company in which a director of the Company has a beneficial
interest, was paid a consulting fee amounting to US $11,583.
4. CONTINGENT LIABILITIES
During the period, the Company was involved in a law suit brought by third
parties claiming for unspecified damages for alleged breach of contract and an
injunction to restrain them to use some of entertainment contents. The Company
intends to contest the claims strongly and, while the final outcome of the
proceedings is uncertain, it is the management's opinion that the ultimate
liability, if any, will not have a material impact upon the Company's financial
position. Accordingly, no provision for these claims has been made in the
accompanying financial statements.
5. EQUITY TRANSACTIONS
On June 6, 2004, Telecom Communications, Inc. (the "Company") entered into a
subscription agreement, under which the Company has agreed to issue and sell to
the Subscribers in a private placement certain promissory notes each having a
maturity date as set forth therein, in the total aggregate principal amount of
$1,000,000, bearing interest at a rate of 6% per annum (the "Notes"). The Notes
are convertible into the Company's common stock, $.001 par value, at a price of
$.20 per share. The conversion price of the Notes and the amount of shares
issuable upon conversion of the Notes will be subject to anti-dilution
adjustments under certain circumstances. At June 30, 2004, there were no
promissory notes issued and outstanding.
On April 12, 2004, the Company issued 2,600,000 shares at market price of $.62
to the various employees and consultants resulting in an expense of $1,612,000.
On June 17, 2004, the Company issued 400,000 shares at a market price of $.32 to
a consultant resulting in an expense of $128,000.
6. INCOME TAXES
The Company accounts for income taxes in accordance with the provisions of SFAS
No. 109, "Accounting for Income Taxes."
Income tax expense is based on reported income before income taxes. Deferred
income taxes reflect the effect of temporary differences between assets and
liabilities that are recognized for financial reporting purposes and the amounts
that are recognized for income tax purposes. In accordance with SFAS No. 109,
"Accounting for Income Taxes", these deferred income taxes are measured by
applying currently enacted tax laws.
There are net operating loss carryforwards allowed under the Hong Kong and
China's governments' tax systems. In China, the previous five years net
operating losses are allowed to be carryforward five years to offset future
taxable income. In Hong Kong, prior years net operating losses can be carried
forward indefinitely to offset future taxable income. The Company has available
approximately $2,228,000 of unused operating loss carryforwards and based on a
30% tax rate has a deferred tax asset of approximately $668,000 in which the
company recorded a valuation allowance for the same amount at March 31, 2004.
The company will withhold and pay income taxes on its employees' wages, which
funds the Chinese government's sponsored health and retirement programs of all
the employees.
6
TELECOM COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. VARIABLE INTEREST ENTITIES
The Company is currently evaluating the impact and the adoption of FIN 46
"Consolidation of Variable Interest Entities" on its financial statements.
8. SEGMENT INFORMATION
The Company now operates in one line of business.
9. SUBSEQUENT EVENTS
On July 22, 2004, Deng Chi Yuan (Fred Chiyuan Deng), the majority shareholder of
Telecom Communications, Inc. (the "Company") entered into stock purchase
agreements (the "Agreements") with each of three (3) accredited investors, under
which he agreed to sell shares of the Company's common stock, $.001 par value
(the "Common Stock"), at a price equal to $.16 per share (the "Shares").
Pursuant to the Agreements, 6,000,000 Shares were purchased by Telecom Value
Added, Inc.; 6,000,000 Shares were purchased by Bloomen Limited; and 5,800,000
Shares were purchased by Bon Air Group Limited, respectively. The shares
purchased in the aggregate represent approximately 30% of all the Company's
issued and outstanding shares. The total purchase price of the shares was
$2,848,000. In a concurrent transaction, Deng transferred 51 shares (51% percent
of the outstanding shares) of Auto Treasure Holdings Limited, a company which
holds approximately 16% of all the Company's issued and outstanding shares, as
well as warrants exercisable to purchase 10,000,000 shares of Common Stock to
key officers of the Company. On July 22, 2004, the Company entered into a stock
purchase agreement (the "Purchase Agreement") with Taikang Capital Managements
Company ("Taikang"), under which the Company has agreed to issue and sell to the
purchasers in a private placement 7,500,000 shares of the Company's Common
Stock. Simultaneous with this transaction, Taikang converted the $500,000
Convertible Promissory Note into 2,500,000 shares of Common Stock pursuant to
the Subscription Agreement described in the 8-K filed on June 24, 2004. Deng Chi
Yuan resigned as President, CEO and Chairman of the Board of Directors of the
Company as of July 22, 2004. Deng's resignation as director did not involve any
disagreements with the Company on any matter relating to the Company's
operations, policies or practices. The Board of Directors appointed Shanhe Yang,
as President, CEO and director of the Company effective as of July 22, 2004.
Shanhe Yang has served as Vice President of the Company since September 30,
2003.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This periodic report contains certain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 with respect to
the financial condition, results of operations, business strategies, operating
efficiencies or synergies, competitive positions, growth opportunities for
existing products, plans and objectives of management. Statements in this
periodic report that are not historical facts are hereby identified as
"forward-looking statements" for the purpose of the safe harbor provided by
Section 21E of the Exchange Act and Section 27A of the Securities Act.
Prospective shareholders should understand that several factors govern whether
any forward-looking statement contained herein will be or can be achieved. Any
one of those factors could cause actual results to differ materially from those
projected herein. These forward-looking statements include plans and objectives
of management for future operations, including plans and objectives relating to
the products and the future economic performance of the Company. Assumptions
relating to the foregoing involve judgments with respect to, among other things,
future economic, competitive and market conditions, future business decisions,
and the time and money required to successfully complete development projects,
all of which are difficult or impossible to predict accurately and many of which
are beyond the control of the Company. Although we believe that the assumptions
underlying the forward-looking statements contained herein are reasonable, any
of those assumptions could prove inaccurate and, therefore, there can be no
assurance that the results contemplated in any of the forward-looking statements
contained herein will be realized. Based on actual experience and business
development, the Company may alter its marketing, capital expenditure plans or
other budgets, which may in turn affect the our results of operations. In light
of the significant uncertainties inherent in the forward-looking statements
included herein, the inclusion of any such statement should not be regarded as a
representation by the Company or any other person that the objectives or plans
of the Company will be achieved.
The following analysis of the results of operations and financial condition of
the Company should be read in conjunction with the financial statements of
Telecom Communications, Inc. ("TCOM") for the year ended September 30, 2003 and
notes thereto contained in the report on Form 10-KSB as filed with the
Securities and Exchange Commission.
OVERVIEW
We are a leading value-added information service provider for China and the
global Chinese community and are a Total Solutions Provider offering integrated
Communications Network Solutions and Internet Content Service, as well as
up-to-date technology in universal voice, video, data, web and mobile
communication for interactive media applications. TCOM develops, markets and
sells a universal media software solution for enterprise-wide deployment of
integrated voice, video, data, web, and mobile communication for media
applications. Designed around TCOM's Internet content and integrated into the
Information Manager System and Short Messaging Services/Multimedia Message
Services ("SMS"/"MMS") Call Center CRM System core software, the Total Solutions
Provider application suites facilitate the collaboration of key business
processes such as, corporate and marketing communications, membership distance
interactive program, product development, customer relationship management and
content management by allowing dispersed enterprise users to collaborate in real
time with multimedia message services.
Our business model is built on network database technology and integrated
contents. We have established our network database through signing contracts
with Chinese Service Providers through our business partners. We have also
established the network database from the construction company that we
previously owned, Panyu No. 6 Construction Company Limited ("Panyu"), that
provided network construction and general construction to the region. Our
content was built through our business alliance in which IC Star MMS Limited or
IC Star (formerly known as Sino Super Ltd.) (http://www.ICSTARMMS.com), one of
our subsidiaries and a network services provider based in Hong Kong, links
entertainment and lifestyle information to local communities across China. IC
Star, which was originally created as the Star SMS/MMS called "My Star Friends"
community, was first invented as a SMS/MMS interactive between IC Star and fans
in the world. By integrating the network database and contents into a software
that TCOM sources from the market, we can leverage the functions of the software
and target it to various industries.
IC Star began operations in December 1999 as an internet alliance concept
focused on providing solutions to Chinese city local content providers wishing
to publish their news across China. In May 2000, IC Star launched our affiliate
network, then called goongreen.org, offering Chinese-language local news,
information and community features such as publishing services targeted at
online users in China. In October 2002, ICStar expanded its affiliate network by
partnering with Aixi Software Limited, a leading network Internet/Intranet
development Company with offices in Guangzhou, China and 6 distinct web sites
targeting Chinese community users, education users and business users in China.
In January 2003, we continued our network and entertainment content expansion by
the acquisition of stareastnet.com a leading entertainment and life information
destination web site targeting Chinese users in greater China. Today, we operate
IC Star MMS web sites to provide Chinese content and services that speak
directly to the audience of each region, enriching the online experience of
their users.
8
In April 2004, we sold our 60% ownership in Panyu to a third party investor for
consideration of approximately $2,580,000 in cash because the management of TCOM
concluded that the profit margin from general and network infrastructure
construction has a risk of becoming a loss as raw materials for construction in
China had been fluctuating which might lead to an unexpected increase in cost.
Further, the Company has re-focused on its core business communication and
telecom-related products.
On March 16, 2004 we acquired the remaining 20% of IC Star in order to have full
control of the entity. Management has considered the strength of the background
of IC Star which had signed contracts with local Chinese Service Providers
through its strategic partner. Moreover, the acquisition also included the legal
ownership of a Chinese incorporated company named Huiri Electric (Panyu) Limited
Company ("Huiri") which we think would allow our direct access into the Chinese
market. The management of the Company strongly believed that with Huiri, our
business in China would be effectively expanded.
On November 20, 2003, we sold our 80% ownership in Superb Quality Limited to a
third party investor for consideration of $200,000 in cash. StarEastNet.com
business model has not been profitable in the past several years and the
Management believes it will not help the Company in the long run, as the Company
shifts its core business to wireless short/multimedia messaging services.
BUSINESS PARTNERSHIP DEVELOPMENTS
On May 2, 2004, Alpha Century Holdings Limited ("ACH"), a wholly owned
subsidiary of TCOM, purchased a software system called Information Manager
System and SMS/MMS Call Center CRM System from Gold Swallow Shop Limited for US$
1,900,000 (payment made July 2004). The management of the Company has decided to
shift its revenue sharing model, which provided inconsistent and uncontrollable
revenue, to a fixed revenue model. The management made a decision to acquire
this software so that TCOM can resell this software, with the integration of our
contents and network databases, for a better return. On May 3, 2004, we signed a
software reseller agreement with Taikang Corp. where Taikang acquired from ACH,
SMS/MMS Call Center CRM System, a software system providing SMS/MMS over
wireless protocol and Voice over Internet Protocol (VoIP) solutions to
businesses, as well as other related assets, licenses, copyright, and goodwill.
The agreement will allow ACH to receive a monthly fee of US $120,000 from
Taikang.
9
In March 2004, we signed a joint venture agreement with Energy Producers Inc.
("EGPI") (NASDAQ-OTCBB:EGPI) for the purposes of expanding its marine and
commercial sales and brokerage divisions in Mainland China. The joint venture
agreement between EGPI and TCOM calls for the formation of a separate company
with $1,000,000 of initial capitalization to be invested equally by TCOM and
EGPI. This newly formed company will then utilize EGPI's marine sales business
model and TCOM's contacts within China to interface in both the private leisure
and commercial marine sales markets bringing Chinese built vessels to the global
markets while supplying Chinese demand for western vessels. The biggest barrier
to trade has always been language and culture. This joint venture is
specifically tasked with creating a solid marketing and sales conduit for the
marine sector both in to and out of China. On July 27, 2004, TCOM notified EGPI
of its termination of the agreement due to the uncertainty of market conditions.
Since October 2003, the Company or its subsidiaries, through our strategic
partner Aixi Software Ltd., has signed contracts with various Service Providers
in China in order to expand our network database. The Service Providers
include:.
Shanghai Linktone
Founded in October 1999, Linktone has emerged as an acknowledged leader in
China's fast-growing wireless services sector. By developing a wide range of
attractive content and applications for the paying end user, and by establishing
nearly nationwide coverage through China's mobile operators, China Mobile and
China Unicom, Linktone has enjoyed substantial, sustained growth in its user
base and revenues.
Linktone's current focus on SMS allows potential access to virtually all of
China's 185 million Global System for Mobile communications ("GSM") subscribers,
among users of SMS, and familiarity with its functions, continues to increase
rapidly month to month. Linktone's consumer services focus on entertainment,
messaging and personalized information. Linktone has also established itself as
a provider of innovative enterprise solutions. In May 2002, Linktone partnered
with McDonald's Corporation (China) to launch a first of its kind, nationwide
SMS promotion for the 2002 World Cup Tournament in Japan and Korea. Linktone has
also worked to promote feature films, television programs, major entertainment
events, and consumer goods.
Although SMS remains Linktone's core focus, the Company has developed offerings
for the mobile operators that include WAP over GPRS, WAP over CDMA, EMS, MMS,
location-based and cell-broadcasting content and applications, as well as a
number of products, scheduled for release later this year, for China Mobile's
new 2.5G GPRS network. Linktone's headquarters are located in Shanghai, and the
Company maintains regional offices in Beijing, Guangzhou, Fuzhou, Qingdao and
Xian.
5Wan.com
5wan International concentrates on tens of millions cell phone users offering
the finest in humanization, high technology, and mobile entertainment. They are
working hard to provide top level and exciting entertainment services for
Chinese mobile users, and provide much better WAP games. In China, 5wan has
already launched several WAP games, and achieved great success. Their first
release was the first role play WAP game - "SYZF"; 5wan then introduced the
release of the first multi-person SMS game - "king of fighter"
(http://www.5wan.com) .
5wan's products and services are based on WAP, SMS, GPRS, Java and MPEG4. Also,
5wan is the first software developer to pass the Ericsson GPRS test. Ericsson
(ERICY) has already used 5wan's game software into its application integration,
recommended formally by China Mobile (CHL).
3721 Inter China Network Software Co. Ltd
3721 Inter China Network Software Co. Ltd (www.3721.com), which was recently
acquired by Yahoo! Holdings (Hong Kong) Ltd., a wholly owned subsidiary of
Yahoo!, Inc.
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Tencent Company Limited
Tencent is one of the first Internet Instant Messaging ("IM") software
developers in China, and a leading provider for Internet and mobile value-added
services with a focus on IM and related value-added services. Its holding
company, Tencent Holdings Limited, has been listed on the Hong Kong Stock
Exchange since June 2004. Tencent was founded in November 1998 in Shenzhen,
China. In February 1999, Tencent launched its first IM software--"Tencent QQ."
Over the past five years, Tencent has strived to pursue technological
advancement while maintaining a steady high growth in users. The vast community
of Tencent QQ users demonstrates Tencent's technological strength in operating
massive online application systems and IM-related applications.
Tencent users can communicate real time with each other via our IM platform with
their PCs, mobile and fixed line phones, as well as various terminal devices.
Not only can users communicate via text, images, audio, video and email, but
they also have access to various Internet services and mobile value-added
services designed to enhance the community experience, including mobile games,
dating, content downloads and other entertainment services.
Under the agreements, the partners started to market IC Star's and ACH's
SMS/MMS, ring tones, and broadband to their own multi-millions of users. IC Star
will provide entertainment information regarding celebrities as its core
competency and other integrated contents. Both companies will work together to
provide better customer preferred types of wireless/Internet products and
services and to lead a new trend of offering Total Solutions to corporations
through wireless and Internet communications in China.
IMPACT OF INFLATION
We believe that inflation has had a negligible effect on operations during the
period. We believe that we can offset inflationary increases in the cost of
sales by increasing sales and improving operating efficiencies.
TRENDS, EVENTS, AND UNCERTAINTIES
Demand for the Company's products will be dependent on, among other things,
market acceptance of the Company's concept, the quality of its products and
general economic conditions, which are cyclical in nature. Inasmuch as a major
portion of the Company's activities is the receipt of revenues from the sales of
its products, the Company's business operations may be adversely affected by the
Company's competitors and prolonged recessionary periods.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2004 COMPARED TO THREE MONTHS ENDED JUNE 30, 2003
The following table shows the selected unaudited condensed consolidation income
statement data of the Company and its subsidiaries for the three-month period
ended June 30, 2004. The data should be read in conjunction with the audited and
unaudited Condensed Consolidated Financial Statements of the Company and related
notes thereto. For the period ending July 30, 2003, all operating results were
generated from Panyu and are shown as a discontinued operation on the
consolidated income statement. Therefore, no comparisons were made for the
periods ending June 30, 2003.
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
June 30,
---------------------------------
2004 2003
---------------- ----------------
Net revenues $ 224,658 $ -
Cost of sales 15,269 -
---------------- ----------------
Gross profit 209,389 -
Operating expenses 1,953,118 -
---------------- ----------------
Loss from operations (1,743,729) -
---------------- ----------------
Other income (expense):
Interest income 1,971 -
Interest expense - -
Acquisition expense (19,872) -
Other income 138,999 -
Gain on disposal of subsidiary - -
---------------- ----------------
Total other income (expense) 121,098 -
Income (loss) before provision for income
taxes and discontinued operations (1,622,631) -
Provision for income taxes (10,160) -
---------------- ----------------
Loss before discontinued operations (1,612,471) -
Discontinued operations (Note 3) income
(loss) from operations of discontinued
subsidiary (155,959) (21,827)
---------------- ----------------
Net loss $ (1,768,430) $ (21,827)
================ ================
Income per common share - basic & diluted $ (.04) $ -
================ ================
Weighted average common share Outstanding
- basic & diluted 49,502,286 10,050,000
---------------- ----------------
REVENUES
Revenues were $224,658 for the three months period ended June 30, 2004.
Revenues were generated from wireless and telecommunication services as well as
software add value services.
COSTS AND EXPENSES
Cost of sales was $15,269 for the three months period ended June 30, 2004 or
6.8% of net revenue. Cost of sales consists of purchase of various contents and
other later stage production from raw contents and costs associated with the
performance of our telecommunication services.
For the three months ended June 30, 2004, we incurred operating expenses of
$1,953,118 which included a compensation expense of $1,740,000 paid to employee
and consultants with a 2 year contract. Other operating expenses accounted for
$213,118 or 94.9% of revenue.
No interest expense was recorded and interest income was $1,971 for the three
months ended June 30, 2004 representing 0.9% of net revenue.
Other income of $138,999 was recorded as the collection of loan receivable that
was originally owed to the Company by the sold subsidiary in November 2003.
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NINE MONTHS ENDED JUNE 30, 2004 COMPARED TO NINE MONTHS ENDED JUNE 30, 2003
The following table shows the selected unaudited condensed consolidation income
statement data of the Company and its subsidiaries for the nine-month period
ended June 30, 2004. The data should be read in conjunction with the audited and
unaudited Condensed Consolidated Financial Statements of the Company and related
notes thereto.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Nine Months Ended
June 30,
---------------------------------
2004 2003
---------------- --------------
Net revenues $ 856,827 $ -
Cost of sales 164,382 -
---------------- --------------
Gross profit 692,445 -
Operating expenses 2,149,674 -
---------------- --------------
Loss from operations (1,457,229) -
---------------- --------------
Other income (expense): -
Interest income 1,971 -
Interest expense - -
Acquisition expense (8,146,780) -
Other income 130,220 -
Gain on disposal of subsidiary 200,772 -
---------------- --------------
Total other income (expense) (7,813,817) -
---------------- --------------
Income (loss) before provision for income
taxes and discontinued operations (9,271,046) -
Provision for income taxes - -
---------------- --------------
Loss before discontinued operations (9,271,046) -
Discontinued operations (Note 3) income
(loss) from operations of discontinued
subsidiary 343,570 (21,827)
Net loss $ (8,927,476) $ (21,827)
================ ==============
Income per common share - basic & diluted $ (.21) $ -
================ ==============
Weighted average common share outstanding
- basic & diluted 41,893,285 10,050,000
---------------- --------------
REVENUES
Revenues were $856,827 for the nine month period ended June 30, 2004. Revenues
were generated from wireless and telecommunication services as well as software
add value services.
COSTS AND EXPENSES
Cost of sales was $164,382 for the nine month period ended June 30, 2004 or
19.2% of net revenue. Cost of sales consists of purchase of various contents and
other later stage production from raw contents and costs associated with the
performance of our telecommunication services.
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For the nine months ended June 30, 2004, we incurred operating expenses of
$2,149,674 which included a compensation expense of $1,740,000 paid to employee
and consultants with a 2 year contract. Other operating expenses accounted for
$409,674 or 47.8% of revenue.
No interest expense was recorded and interest income was $1,971 for the nine
months ended June 30, 2004 representing 0.2% of net revenue.
An acquisition expense was recorded for the acquisition of 20% of IC Star by the
new issuance of 9,889,000 shares of common stock and 10,000,000 warrants. The
acquisition expenses amounted to $8,146,780.
Other income expense-net of $130,220 was recorded for the nine months ended June
30, 2004, of which, income of $104,450 was recorded as the collection of loan
receivable that was originally owed to the Company by the sold subsidiary in
November 2003.
A gain on the disposal of a subsidiary of $200,772 was recorded for the disposal
of one the subsidiaries on November 2003.
OVERALL
We reported a net loss for the nine months ended June 30, 2004 of $8,927,476.
This translates to an overall per-share loss of $.21 for the nine months ended
June 30, 2004.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2004, we had a cash balance of $179,795 held in The People's
Republic of China, Hong Kong. We currently have no cash positions in the United
States. We have been funding our operations from the receipts from customers.
At June 30, 2004, the Company owed one officer or his companies $97,004. The
advances are non-interest bearing and are payable on demand.
Management has invested substantial time evaluating and considering numerous
proposals for possible acquisitions or combinations developed by management or
presented by investment professionals, the Company's advisors and others. We
continue to consider acquisitions, business combinations, or start up proposals,
which could be advantageous to shareholders. No assurance can be given that any
such project, acquisition or combination will be concluded.
Our Company's future operations and growth will likely be dependent on our
ability to raise capital for expansion and to implement our strategic plan.
Net cash provided by operations was $69,329 for the nine months ended June 30,
2004. In the future, we may use cash in our operations due to the continuing
implementation of our business model and increased expenses from costs
associated with being a public company.
Net cash provided by investing activities for the nine months ended June 30,
2004 was $806,633 of which $639,001 was used for capital expenditures.
Net cash provided by financing activities was ($1,851,602) relating to ($93,596)
due to a related party, $304,063 of loan payable and ($2,062,069) due to a
stockholder. The proceeds from the sale of Panyu were used to pay a loan due to
the stockholder.
We currently have no material commitments for capital expenditures. Our future
growth is dependent on our ability to raise capital for expansion, and to seek
additional revenue sources. If we decide to pursue any acquisition opportunities
or other expansion opportunities, we may need to raise additional capital,
although there can be no assurance such capital-raising activities would be
successful.
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CRITICAL ACCOUNTING POLICIES
A summary of significant accounting policies is included in Note 2 to the
audited consolidated financial statements included herein. Management believes
that the application of these policies on a consistent basis enables the Company
to provide useful and reliable financial information about the Company's
operating results and financial condition.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results may differ from those estimates.
We account for stock options issued to employees in accordance with the
provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations. As such,
compensation cost is measured on the date of grant as the excess of the current
market price of the underlying stock over the exercise price. Such compensation
amounts, if any, are amortized over the respective vesting periods of the option
grant. We adopted the disclosure provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation" and SFAS 148, "Accounting for Stock-Based Compensation
-Transition and Disclosure", which permits entities to provide pro forma net
income (loss) and pro forma earnings (loss) per share disclosures for employee
stock option grants as if the fair-value-based method defined in SFAS No. 123
had been applied. We account for stock options and stock issued to non-employees
for goods or services in accordance with the fair value method of SFAS 123.
Revenues are recognized on the percentage-of-completion method for certain of
these contracts, measured by the percentage of costs incurred to date to
estimated total costs for each contract. This method is used because management
considers costs incurred to be the best available measure of progress on these
contracts.
OPERATING RISK
Currently, the Company's revenues are primarily derived from the reselling of
software to enterprises, large corporations, and the academic sector, as well as
telecom-related services to customers in the Peoples Republic of China ("PRC").
The Company hopes to expand its operations to countries outside the PRC,
however, such expansion has not been commenced and there are no assurances that
the Company will be able to achieve such an expansion successfully. Therefore, a
downturn or stagnation in the economic environment of the PRC could have a
material adverse effect on the Company's financial condition.
PRODUCTS RISK
In addition to competing with other similar companies, the Company could have to
compete with larger US companies who have greater funds available for expansion,
marketing, research and development and the ability to attract more qualified
personnel if access is allowed into the PRC market. If US companies do gain
access to the PRC markets, they may be able to offer products at a lower price.
There can be no assurance that the Company will remain competitive should this
occur.
EXCHANGE RISK
The Company can not guarantee that the current exchange rate will remain steady,
therefore there is a possibility that the Company could post the same amount of
profit for two comparable periods and because of a fluctuating exchange rate
actually post higher or lower profit depending on exchange rate of the Chinese
(RMB) or the Hong Kong Dollar (HK$) converted to US dollars on that date. The
exchange rate could fluctuate depending on changes in the political and economic
environments without notice.
POLITICAL RISK
Currently, PRC is in a period of growth and is openly promoting business
development in order to bring more business into PRC. Additionally, PRC allows a
Chinese corporation to be owned by a United States corporation. If the laws or
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regulations are changed by the PRC government, the Company's ability to operate
the PRC subsidiaries could be affected.
OUR FUTURE PERFORMANCE IS DEPENDENT ON OUR ABILITY TO RETAIN KEY PERSONNEL
Our performance is substantially dependent on the performance of our senior
management. In particular, the Company's success depends on the continued
efforts of our Senior Management to maintain all contact with our Chinese
subsidiaries. The Company's inability to retain Senior Management could have a
material adverse effect on our prospects, businesses, Chinese operations and
financial conditions.
ITEM 3. CONTROLS AND PROCEDURES
Our Chief Executive Officer and Chief Financial Officer (collectively, the
"Certifying Officers") are responsible for establishing and maintaining
disclosure controls and procedures for us. Based upon such officers' evaluation
of these controls and procedures as of a date within 45 days of the filing of
this Quarterly Report, and subject to the limitations noted hereinafter, the
Certifying Officers have concluded that our disclosure controls and procedures
are effective to ensure that information required to be disclosed by us in this
Quarterly Report is accumulated and communicated to management, including our
principal executive officers as appropriate, to allow timely decisions regarding
required disclosure.
The Certifying Officers have also indicated that there were no significant
changes in our internal controls or other factors that could significantly
affect such controls subsequent to the date of their evaluation, and there were
no corrective actions with regard to significant deficiencies and material
weaknesses.
Our management, including each of the Certifying Officers, does not expect that
our disclosure controls or our internal controls will prevent all error and
fraud. A control system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control
system are met. In addition, the design of a control system must reflect the
fact that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within a Company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people or by management
override of the control. The design of any systems of controls also is based in
part upon certain assumptions about the likelihood of future events, and their
can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions. Over time, control may become inadequate
because of changes in conditions, or the degree of compliance with the policies
or procedures may deteriorate. Because of these inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur and
not be detected.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On December 4, 2003, a writ of summons was issued by third parties (a contracted
consultants group for Arran Services Limited ) against Arran Services Limited
and the subsidiaries of the Company claiming unspecified damages for an alleged
breach of contract and an injunction to restrain the subsidiaries use of certain
entertainment content. A defense letter was issued on December 24, 2003 by
Arran's legal advisor, claiming the Action by the plaintiff is entirely
misconceived and without merit. The directors are of the view that the Company
has solid grounds to defend such claims. Accordingly, no provision for this
Action has been provided in the financial statements."
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On July 22, 2004, the Company entered into a stock purchase agreement with
Taikang Capital Managements Company ("Taikang"), under which the Company has
agreed to issue and sell to the purchasers in a private placement 7,500,000
16
shares of the Company's Common Stock. Simultaneous with this transaction,
Taikang converted the $500,000 Convertible Promissory Note (proceeds from note
received July 2004) into 2,500,000 shares of Common Stock pursuant to the
Subscription Agreement described in the 8-K filed on June 24, 2004.
ITEM 3. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
EXHIBIT NUMBER
--------------
31.1 Rule 13a-14(a)/15d-14(a) Certification (CEO)*
31.2 Rule 13a-14(a)/15d-14(a) Certification (CFO)*
32.1 Section 1350 Certification (CEO)*
32.2 Section 1350 Certification (CFO)*
*Filed herewith.
(B) REPORTS ON FORM 8-K
o Form 8-K was filed on April 23, 2004 to report the changes of
registrant's certifying accountant.
o Form 8-K was filed on June 15, 2004 to report the disposal of 60%
holdings of Panyu No.6 Construction Company Limited.
o Form 8-K was filed on June 24, 2004 to report that the Company to had
entered into a Subscription Agreement with Taikang Capital Management
Corp.
o Form 8-K was filed on July 26, 2004 to report the changes in
registrant resulting from (i) Mr. Deng ChiYuan ("Deng") entering into
a stock purchase agreement to sell a total of 17.8 million shares of
the Company to three individual third parties; (ii) Deng's transfer of
51% shareholding in Auto Treasure Holdings Limited, a company that
holds about 16% of the issued and outstanding shares of the Company as
well as warrants exercisable to purchase 10,000,000 shares of the
common stock, to key officers of the Company (iii) the Company
entering into a stock purchase agreement with Taikang Capital
Management Corporation, under which, the Company agreed to issue and
sell to the purchaser in a private placement 7,500,000 shares of
common stock and Taikang simultaneously converted the $500,000
convertible notes into 2,500,000 shares of common stock; (iv) Mr. Deng
resigned as President, CEO and Chairman of the Board of the Company
and (v) Mr. Shanhe Yang was appointed as CEO, President and director
of the Company.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
Date: August 16, 2004 TELECOM COMMUNICATIONS, INC.
By: /s/ Shanhe Yang
---------------------------------
Shanhe Yang
President and CEO
(Principal Executive Officer)
Date: August 16, 2004 By: /s/ Gary Lam
---------------------------------
Gary Lam
Principal Financial and Accounting
Officer
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