United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal quarter ended: December 31, 2003
Commission file number: 333-62236
TELECOM COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
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)(Zip code)
(8620)8487 9179
(Registrant's telephone number, including area code)
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of February 15, 2004: 37,299,000 outstanding shares of common
stock, $.001 par value per share.
TELECOM COMMUNICATIONS, INC. AND SUBSIDIARIES
FORM 10-QSB
QUARTERLY PERIOD ENDED DECEMBER 31, 2003
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1 - Consolidated Financial Statements
Consolidated Balance Sheet
December 31, 2003 (Unaudited)........................................3
Consolidated Statements of Operations (Unaudited)
For the Three Months Ended December 31, 2003 and 2002................4
Consolidated Statements of Cash Flows (Unaudited)
For the Three Months Ended December 31, 2003 and 2002................5
Notes to Consolidated Financial Statements............................6-17
Item 2 - Management's Discussion and Analysis
or Plan of Operation............................................18-25
Item 3 - Controls and Procedures.....................................26-27
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings............................................. 27
Item 2 - Changes in Securities and Use of Proceeds...................27-28
Item 3 - Default upon Senior Securities.................................28
Item 4 - Submission of Matters to a Vote of Security Holders............28
Item 5 - Other Information..............................................28
Item 6 - Exhibits and Reports on Form 8-K...............................29
Signatures..............................................................30
TELECOM COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31,
2003
----------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash $ 1,416,986
Accounts receivable 546,430
Inventory of real estate held for sale 1,434,603
Costs and estimated earnings in excess of
billings on uncompleted contracts 5,772,046
Due from related party 25,295
Prepaid expenses and other current assets 757,065
--------------
Total Current Assets 9,952,425
--------------
PROPERTY AND EQUIPMENT - net 1,138,725
OTHER ASSETS 22,338
------------
Total Assets $ 11,113,488
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Loans payable $ 1,391,291
Accounts payable and accrued expenses 2,054,966
Customer deposits 3,378,652
Billings in excess of cost and estimated earnings
on uncompleted contracts 85,540
Due to related parties 159,406
-------------
Total Current Liabilities 7,069,855
LONG TERM LIABILITIES:
Due to related party 2,159,073
-------------
Total Liabilities 9,228,928
-------------
MINORITY INTEREST 1,583,280
------------
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;
37,299,000 shares issued and outstanding) 37,299
Additional paid-in capital 400,000
Accumulated deficit (118,919)
Accumulated other comprehensive loss (17,100)
-----------
Total Stockholders' Equity 301,280
-----------
Total Liabilities and Stockholders' Equity $ 11,113,488
============
See notes to unaudited consolidated financial statements
-3-
TELECOM COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended
December 31,
-----------------------------
2003 2002
--------------- ------------
(Unaudited) (Unaudited)
NET REVENUES $ 1,909,840 $ -
COST OF SALES 1,156,370 -
--------------- -------------
GROSS PROFIT 753,470 -
-------------- --------------
OPERATING EXPENSES:
Salaries 25,568 -
Selling, general and administrative 172,706 -
------------ --------------
Total Operating Expenses 198,274 -
------------ --------------
INCOME FROM OPERATIONS 555,196 -
------------- ---------------
OTHER INCOME (EXPENSE):
Interest income 2,106 -
Interest expense (24,725) -
------------- ---------------
Total Other Income (Expense) (22,619) -
------------- ---------------
INCOME BEFORE PROVISION FOR INCOME TAXES 532,577 -
PROVISION FOR INCOME TAXES (59,307) -
------------- ---------------
INCOME BEFORE DISCONTINUED OPERATIONS AND
MINORITY NTEREST 473,270 -
DISCONTINUED OPERATIONS:
Gain from sale discontinued operations 55,695
------------- ---------------
INCOME BEFORE MINORITY INTEREST 528,965 -
MINORITY INTEREST IN INCOME OF SUBSIDIARY (110,285) -
------------- ---------------
NET INCOME $ 418,680 $ -
============= ===============
Income per Common Share - Basic and Diluted $ 0.01 0.00
============= ===============
Weighted Average Common Shares Outstanding
- Basic and Diluted 37,299,000 37,299,000
============== ==============
See notes to unaudited consolidated financial statements
-4-
TELECOM COMMUNICATIONS, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended
December 31,
--------------------------------------
2003 2002
---------------- -------------------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income from continuing operations $ 362,985 $ -
Adjustments to reconcile net income to
net cash provided by operating activites:
Depreciation 193,407 -
Minority interest 110,285 -
Changes in assets and liabilities:
Accounts receivable 58,522 -
Inventory of real estate held for sale 1,310 -
Costs and estimated earnings in excess of
billings on uncompleted contracts (777,667) -
Due from related party (34)
Prepaid and other current assets 673,453 -
Other assets 3,761 -
Accrued payable and accrued expenses 1,550,802 -
Customer deposits (1,485,731) -
Billings in excess of costs and
estimated earnings on uncompleted
contracts (39,709) -
----------------- ----------------
NET CASH PROVIDED BY CONTINUING
OPERATING ACTIVITIES 651,384 -
----------------- ----------------
Income from discontinued operations 55,695 -
----------------- ----------------
NET CASH PROVIDED BY DISCONTINUED
OPERATING ACTIVITIES 55,695 -
----------------- ----------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 707,079 -
----------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (9,274) -
----------------- ----------------
NET CASH FLOWS USED IN INVESTING ACTIVITIES (9,274) -
----------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Due to related party 63,179 -
Payments on loan payable (485,641) -
----------------- ----------------
NET CASH FLOWS USED IN FINANCING ACTIVITIES (422,462) -
----------------- ----------------
EFFECT OF EXCHANGE RATE CHANGES IN CASH (13,792) -
----------------- ----------------
NET INCREASE IN CASH 261,551 -
CASH - beginning of year 1,155,435 -
----------------- ----------------
CASH - end of period $ 1,416,986 $ -
================= =================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Noncash investing and financing activities:
Capital contributed in connection with
accrued lawsuit settlement $ 400,000 $ -
================= =================
See notes to unaudited consolidated financial statements.
F-6
TELECOM COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
The Company
Telecom Communications, Inc. (the "Company" or "Telecom") was founded as a sole
proprietorship in 1995. The purpose of the Company was to provide low cost
access to long distance carriers for individuals needing to call Latin and South
America. The Company's long distance operated over the Internet. In addition,
the Company also provided various services such as check cashing, money wiring,
the sale of bus tokens and passes, and California lottery tickets.
Telecom has discontinued its current operations in the United States and will
focus on its newly acquired operations.
On September 30, 2003, Telecom Communications, Inc. consummated a Stock Purchase
Agreement with Arran Services Limited ("Arran") and its sole shareholder, Mr.
Fred Deng Chiyuan, for the acquisition of all of the capital stock of Arran, a
British Virgin Island corporation. In exchange for the capital interest, Mr.
Deng received a total of 22.8 million shares and one designate of Mr. Deng
received 1 million shares of Telecom common stock, representing approximately
64% of the outstanding shares of Telecom. The Stock Purchase Agreement has been
accounted for as a reverse acquisition under the purchase method for business
combinations. Accordingly, the combination of the two companies is recorded as a
recapitalization of Telecom, pursuant to which Arran is treated as the
continuing entity. In connection the recapitalization, the Company reclassified
negative paid-in capital of $89,099 to the accumulated deficit.
Arran conducts business in China through its two subsidiaries, Panyu No. 6
Construction Company Limited and IC Star MMS, Limited as follows:
Panyu No 6 Construction Company Limited, a 60 % owned Chinese company located in
Guangzhou, China ("Panyu"), 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 on 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.
-6-
TELECOM COMMUNICATIONS, INC., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (continued)
The Company -continued
IC Star MMS Limited (formerly known as Sino Super Limited) was an 80% owned
China-based local information and services affiliate network. Established in
December 1991, ICStarMMS.com links entertainment and lifestyle information to
local communities across China. On December 31, 2003, the Company was to suppose
to acquire the remaining 20% minority interest in its IC Star MMS subsidiary for
9,889,000 shares of common stock and 10,000,000 warrants to purchase an
additional 10,000,000 common shares at an exercise price of $2.00. In January
2004, this acquisition of the remaining 20% was cancelled and no shares and
warrants were issued.
On November 20, 2003, the Company sold a subsidiary of Arran, StarEastNet
Limited, for $200,000.
The accompanying consolidated financial statements include the accounts of
Telecom and its wholly-owned and partially-owned subsidiaries. All material
intercompany transactions and balances have been eliminated.
Net income per share
Basic income per share is computed by dividing net income by weighted average
number of shares of common stock outstanding during each period. Diluted income
per share is computed by dividing net income by the weighted average number of
shares of common stock, common stock equivalents and potentially dilutive
securities outstanding during each period.
Inventory of real estate held for sale
Real estate held for sale is carried at the lower of cost or fair value less
estimated selling costs. Costs relating to improvement of real estate are
capitalized. Allowance for losses are available to absorb losses incurred on
real estate and represents additions charged to expense, less net gains or
losses. In determining the allowance for losses to be maintained, management
evaluates current economic conditions, fair value of the underlying collateral
and risk characteristics of real estate held for sale. As of December 31, 2003,
the Company was holding $1,434,603 in real estate held for sale.
-7-
TELECOM COMMUNICATIONS, INC., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2003
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Revenue Recognition
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. Revenues are recognized on the completed-contract method for certain
other contracts. Contracts to manage, supervise, or coordinate the construction
activity of others are recognized only to the extent of the fee revenue.
The Company acts as a consultant to various contractors and performs
administrative services for a fixed percentage of the total contract price. Fees
are recognized as services are performed. Consulting revenue is included in net
revenues on the statements of operations for the three months ended December 31,
2003 and 2002.
The Company recognizes revenue from wireless services when services are
performed.
Foreign currency translation
Transactions and balances originally denominated in U.S. dollars are presented
at their original amounts. Transactions and balances in other currencies are
converted into U.S. dollars in accordance with Statement of Financial Accounting
Standards (SFAS) No. 52, "Foreign Currency Translation," and are included in
determining net income or loss.
For foreign operations with the local currency as the functional currency,
assets and liabilities are translated from the local currencies into U.S.
dollars at the exchange rate prevailing at the balance sheet date. Revenues,
expenses and cash flows are translated at the average exchange rate for the
period to approximate translation at the exchange rate prevailing at the dates
those elements are recognized in the financial statements. Translation
adjustments resulting from the process of translating the local currency
financial statements into U.S. dollars are included in determining comprehensive
loss.
-8-
TELECOM COMMUNICATIONS, INC., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2003
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Foreign currency translation (continued)
The functional currency of the Company's Chinese subsidiaries, IC China Star
East MMS, Limited, Honk Kong dollars (HKD) is the local currency and for its
subsidiary, Panyu No. 6 Construction Company Limited, Chinese Remnibi (RMB), is
the local currency. The financial statements of the subsidiaries are translated
to United States dollars using year-end rates of exchange for assets and
liabilities, and average rates of exchange for the period for revenues, costs,
and expenses. Net gains and losses resulting from foreign exchange transactions
are included in the consolidated statements of operations. The cumulative
translation adjustment and effect of exchange rate changes at December 31, 2003
was $17,023. As of December 31, 2003, the exchange rate for the Chinese Renminbi
(RMB) was $1 US for 8.28 RMB and for the Honk Kong dollar (HKD) was $1 US for
7.764 HKD.
Stock-based compensation
The Company accounts 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. The Company 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-valued based method
defined in SFAS No. 123 had been applied. The Company accounts for stock options
and stock issued to non-employees for goods or services in accordance with the
fair value method of SFAS 123.
Costs and Estimated Earnings in Excess of Billings on Uncompleted Contracts
Costs and estimated earnings in excess of billings on uncompleted contracts
arise when revenues are recorded on a percentage-of-completion basis but cannot
be invoiced under the terms of the contract. Such amounts are invoiced upon
completion of contractual milestones. Costs and estimated earnings in excess of
billings also include certain costs associated with unapproved change orders.
These costs are included when change order approval is probable. Amounts are
carried at the lower of cost or net realizable value. No profit is recognized on
costs incurred until change order approval is obtained. The amounts recorded
involve the use of judgments and estimates; thus, actual recoverable amounts
could differ from original assumptions.
-9-
TELECOM COMMUNICATIONS, INC., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003
(UNAUDITED)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (continued)
Costs and Estimated Earnings in Excess of Billings on Uncompleted Contracts
(continued)
Assets and liabilities related to costs and estimated earnings in excess of
billings as well as billings in excess of costs and estimated earnings have been
classified as current and non-current under the operating cycle concept whereby
all contract-related items are regarded as current regardless of whether cash
will be received or paid within a 12-month period.
Contract costs include all direct material and labor costs and those indirect
costs related to contract performance, such as indirect labor, supplies, tools,
repairs, and depreciation costs. Selling, general, and administrative costs are
charged to expense as incurred. Provisions for estimated losses on uncompleted
contracts are made in the period in which such losses are determined. Changes in
job performance, job conditions, and estimated profitability, including those
arising from contract penalty provisions, and final contract settlements may
result in revisions to costs and income and are recognized in the period in
which the revisions are determined. Profit incentives are included in revenues
when their realization is reasonably assured. An amount equal to contract costs
attributable to claims is included in revenues when realization is probable and
the amount can be reliably estimated.
The asset, "Costs and estimated earnings in excess of billings on uncompleted
contracts," represents revenues recognized in excess of amounts billed. The
liability, "Billings in excess of costs and estimated earnings on uncompleted
contracts," represents billings in excess of revenues recognized.
NOTE 2 - RELATED PARTY TRANSACTIONS
As of December 31, 2003, the Company's Panyu subsidiary had advanced $22,338 to
a company owned by Panyu's general manager. The advances are non-interest
bearing and are payable on demand.
In connection with the acquisition of one of the Company's subsidiaries, the
Company owes its principal shareholder and officer $2,201,192, of which
$2,159,073 was reflected as long-term.
An officer of the Company or companies owned by this officer advances funds to
the Company for working capital purposes. At December 31, 2003, the Company owed
this officer or his companies $117,287. The advances are non-interest bearing
and are payable on demand.
-10-
TELECOM COMMUNICATIONS, INC., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2003
(UNAUDITED)
NOTE 3 - ACQUISITIONS AND DISPOSITIONS
On January 1, 2003, the Company acquired from its principal shareholder 60%
ownership in Panyu No. 6 Construction Company Limited to the Company. The fair
market value of the net assets acquired from its principal shareholder was
$2,159,072 and was reflected as due to related party - long term on the
consolidated balance sheet.
On January 7, 2003, the Company's Arran subsidiary completed the acquisition of
Superb Quality Limited a British Virgin Island Company and its subsidiaries. The
purchase price of this acquisition was $65,562 with $100 payable to the
shareholders of the acquired entity and $65,462 payable to a related entity for
the assignment of a non-interest bearing demand note, payable by one of the
acquired Company's subsidiaries. The purchase price approximated the fair market
value of the assets acquired. On November 20, 2003, the Company sold a
subsidiary of Arran, Superb Quality Limited which holds 100% shareholding of
StarEastNet Limited, for $200,000. As a result of the sale of Superb Quality
Limited, the Company recorded a $55,695 gain from the sale in the quarter ended
December 31, 2003. StarEastNet Limited and Superb Quality Limited are reported
separately as a discontinued operation, and prior periods have been restated in
the Company's financial statements, related footnotes and the management's
discussion and analysis to conform to this presentation. In connection with this
sale the Company is due $3,128,340 in the form of loan receivable that was
originally owed to the Company by the sold subsidiary. The purchaser has agreed
to assume the liability and will make payments of approximately $136,000 per
month beginning in May 2004. The payments will continue for 23 months. If the
purchaser fails to make payments for six consecutive months the purchaser must
return the shares of the subsidiary to the Company. Due to the uncertainty
regarding the collection of the note, the Company will recognize the payments of
the receivable as gain on the sale of subsidiary as the payments are received.
Therefore, no gain was recognized during the quarter ended December 31, 2003
with respect to this note.
The following approximate unaudited pro forma consolidated results of operations
have been prepared as if the acquisitions of Panyu No. 6 Construction Company
Limited had occurred as of the following periods:
------------------------------ ----------------------
Three Months
Ended
December 31, 2002
------------------------------ ----------------------
Net Revenues $ 2,200,000
Net Income $ 50,000
Net Income per Share $ .00
Pro forma data does not purport to be indicative of the results that would have
been obtained had these events actually occurred at the beginning of the period
presented and is not intended to be a projection of future results.
-11-
TELECOM COMMUNICATIONS, INC., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2003
(UNAUDITED)
NOTE 3 - SEGMENT INFORMATION
The following information is presented in accordance with SFAS No. 131,
Disclosure about Segments of an Enterprise and Related Information. In the
periods ended December 31, 2003 and 2002, the Company operated in two reportable
business segments - (1) construction services (2) telecommunications and
related-services. The Company's reportable segments are strategic business units
that offer different products. They are managed separately based on the
fundamental differences in their operations.
Information with respect to these reportable business segments for the three
months ended December 31, 2003 and 2002 is as follows: `
For the Three Months For the Three Months
Ended Ended
December 31, 2003 December 31, 2002
----------------- -------------------
Net Revenues:
Construction services $ 1,276,377 $ -
Telecommunication and related-services 633,463 -
----------------- -------------------
Consolidated Net Revenue $ 1,909,840 -
================= ===================
Cost of Sales and Operating expenses:
Construction services $ 1,111,193 $ -
Telecommunication and related-services 238,348 -
================ ====================
Depreciation:
Construction services $ 5,103 $ -
Telecommunication and related-services - -
================ ====================
Interest Expense:
Construction services $ 24,725 $ -
Telecommunication and related-services - -
================ ====================
Net Income:
Construction services $ 46,894 $ -
Telecommunication and related-services 371,786 -
---------------- --------------------
Net Income $ 418,680 $ -
================ ====================
Total Assets at December 31, 2003
and 2002:
Construction services $ 10,571,992 -
Telecommunication and related-services 541,496 -
----------------- --------------------
Consolidated Asset Total $ 11,113,488 -
================= ====================
-12-
TELECOM COMMUNICATIONS, INC., INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2003
(UNAUDITED)
NOTE 3 - SEGMENT INFORMATION (Continued)
For the three months ended December 31, 2003, the Company derived 100% of its
revenue from its subsidiaries located in the People's Republic of China.
Additionally, all of the Company's identifiable assets are located in the
People's Republic of China.
Currently, the Company's revenues are derived from sale of construction services
and telecommunications 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.
-13-
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OR 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 therein, 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. for the year ended September 30, 2003 and notes
thereto contained on the report Form 10-KSB as filed with the Securities and
Exchange Commission.
Overview
We are currently holding a 60% interest in Panyu No.6 Construction Company
Limited ("Panyu") located at Guangzhou, China. Panyu is an integrated
construction company that has most of its construction project in the Guangzhou
area. It provides general construction for the area from residential community,
hospital, commercial and cultural building blocks as well as digital
communities. About 50% of its integrated construction project is on network
infrastructures which is mainly for communication through the setting up of
broadband and fiber cable system over communities, LAN/WAN and Wi-Fi,
Internet/intranet/TV and wireless data communications network infrastructure for
all telecom communications and electrical appliances.
-14-
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OR RESULTS OF OPERATIONS (continued)
Our primary mission is to develop real estate in China by taking advantage of
China's strong economic growth, which we believe, based on management's past
experience, will result in an increasing need for top quality office space and
high-end residential luxury homes. Currently, we plan to complete the
development of our existing land with residential homes and commercial space for
sale. Our primary investment objective is to realize capital appreciation from
the sale of the properties within three to five years after such properties have
been developed or purchased. Our secondary investment objective is to generate
cash from the properties by the leasing of commercial space; in particular,
ground level retail space. Once a project is completed and fully operational, we
intend to sell our interest in such project, thereby generating funds for
further development projects.
Additionally, we are a leading network infrastructures services company and
value-added information service provider for China and the global Chinese
communities. With a branded network of localized websites, targeting greater
China and overseas Chinese, we provide an array of services to our users
including region-focused online portals, mobile value-added services, online
games, virtual ISP, classified listings, e-commerce and enterprise CRM
solutions. In turn, we generate revenue through advertising, mobile value-added
services, fee-based services, e-commerce, community and enterprise services.
With 10 million registered users of channel partners in China at December 31,
2003, we believe ICStar is the most recognized online brand in China and among
Chinese communities world-wide.
One of our subsidiaries, IC Star MMS Ltd., or ICStar (formerly known as Sino
Super Ltd.),a network services company based in Hong Kong, began operations in
December 1999 as an internet alliance concept focused on providing solutions to
Chinese city local contents providers wishing to publish their news across
China. In May 2000, ICStar 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
office in Guangzhou China and 6 distinct web sites targeting Chinese community
users, education users and business users in China. In Jan 2003, we continued
our network expansion and entertainment contents providing by acquisition
stareastnet.com a leading entertainment and life information destination web
site targeting Chinese users in greater China. Today, we operate ICStarMMS web
sites in China, Hong Kong, Taiwan, and North America to provide Chinese content
and services that speak directly to the audience of each region, enriching the
online experience of their users.
We will derive our revenues from network infrastructures services and content
service sources. Network infrastructures services revenues are derived
principally from community and construction projects arrangements under which we
receive revenues mainly on a project basis, fixed payment from community and
companies, or a combination of them. Content service revenues are derived
primarily from mobile value-added services, community and companies network
information services, fee based services, e-commerce and enterprise services.
Mobile value-added services revenues mainly include services fees received from
offering user-customized information subscription, My Star Friend interactive
SMS, personal greetings, customized mobile phone screen decoration, personalized
ring tones, mobile Fans club service and wireless games. Such services are
charged on a monthly or per message basis. Fee based services revenues mainly
include services fees received from offering information subscriptions on our
web sites, online games, virtual ISP and paid network services. Enterprise
services revenues mainly include services charges on opt-in SMS classified
listings, call center and enterprise CRM solutions.
-15-
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OR RESULTS OF OPERATIONS (continued)
In November 2003, we sold our 80% ownership in Superb Quality Limited to a third
party investor for a consideration of $200,000 in cash dated on November 20,
2003. StarEastNet.com business model has not been profitable in the past several
years and 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. As a result of the sale of Superb Quality Limited and its subsidiary
SarEastNet Limited, the Company recorded a $55,695 gain from the sale in the
quarter ended December 31, 2003. Superb Quality Limited is reported separately
as a discontinued operation, and prior periods have been restated in the
Company's financial statements, related footnotes and the management's
discussion and analysis to conform to this presentation. In connection with this
sale the Company is due $3,128,340 in the form of loan receivable that was
originally owed to the Company by the sold subsidiary. The purchaser has agreed
to assume the liability and will make payments of approximately $136,000 per
month beginning in May 2004. The payments will continue for 23 months. If the
purchaser fails to make payments for six consecutive months the purchaser must
return the shares of the subsidiary to the Company. Due to the uncertainty
regarding the collection of the note, the Company will recognize the payments of
the receivable as gain on the sale of subsidiary as the payments are received.
Therefore, no gain was recognized during the quarter ended December 31, 2003
with respect to this note.
Business Partnership Developments
In October and November 2003, we have entered agreements to form strategic
partnership with, through our business partner Aixi Software Limited Guangzhou
China:
21CN.com a wholly-owned subsidiary of China Telecom Corporation Limited,
21cn.com is the largest Internet portal provider in Southern China region and
No. 4 Internet Portal provider behind SOHU.com, SINA.com, and Netease.com in
China.
Newpalm (China) Information Technology Company, Limited, a wholly owned
subsidiary of Hongkong.com (HK:08006). Chinadotcom (Nasdaq:China) is holding
81.37% of Hongkong.com (HK:08006).
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 Short Messaging Services (SMS) allows potential
access to virtually all of China's 185 million 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.
-16-
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OR RESULTS OF OPERATIONS (continued)
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.
Under the agreements, The partners started to market ICStar MMS's
short messages service (SMS), Multimedia Messages Services (MMS), ring tones,
broadband to its own multi millions users . ICStarMMS will provide entertainment
information celebrities as its core competency and other wireless contents such
as wall paper and gaming. Both companies will work together to provide better
customer preferred type of wireless/Internet products and services to lead a new
trend of entertainment era in China.
IC Star MMS Limited has been working with Aixi Software, Limited
(http://www.aixi.net) to develop a software program that is specifically
provided to service providers in the wireless messaging services in China. The
SMS/MMS Information Manager System software has generated sales via revenue
sharing model with service providers. This month the company will launch the
SMS/MMS Call Center CRM System (Enterprise version) for the service providers.
In the meantime, IC Star MMS, together with Aixi Software, will also launch
ICPhone Opt-in Classified List service. This service is specifically designed
for the service providers to offer information services software.
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.
-17-
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OR RESULTS OF OPERATIONS (continued)
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 DECEMBER 31, 2003 COMPARED TO THREE MONTHS ENDED
DECEMBER 31, 2002
Revenue for the three months ended December 31, 2003 was $1,909,840 as follows:
Net Revenues:
----------------------------------------------------- ----------------------
Construction services $ 1,276,377
Telecommunication and related-services 633,463
----------------------
Consolidated Net Revenue $ 1,909,840
======================
We did not have revenues for the three months ended December 31, 2002. Revenues
from constructions services 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. Revenues are recognized on the completed-contract
method for certain other contracts. Contracts to manage, supervise, or
coordinate the construction activity of others are recognized only to the extent
of the fee revenue. The Company recognizes revenue from wireless services when
services are performed.
For the three months ended December 31, 2003, costs of sales amounted to
$1,156,370 or 60.5% of net revenues and consists of direct material and labor
costs and those indirect costs related to contract performance, such as indirect
labor, supplies, tools, repairs, and depreciation costs as well as local taxes
incurred as well as costs associated with the performance of our
telecommunication services. These costs are directly attributable to our
construction projects
Cost of Sales:
% of Related
Amount Revenues
Construction services $ 1,029,677 80.7%
Telecommunication and related-services 126,693 20.0%
--------------- ---------------------
Consolidated Costs of Sales $ 1,156,370 60.5%
================ =====================
-18-
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OR RESULTS OF OPERATIONS (continued)
For the three months ended December 31, 2003, we incurred operating
expenses of $198,274. For the three months ended December 31, 2003, operating
expenses consisted of salaries of $25,568, and other selling, general and
administrative expenses of $172,706. For the three months ended December 31,
2002, we did not incur any operation expenses since we had no operations and
acquired all of our subsidiaries on January 2003.
For the three months ended December 31, 2003, we incurred interest
expense of $24,725 and interest income of $2,106.
For the three months ended December 31, 2003, we recorded minority
interest expense of $110,285 related the allocation of profits to our minority
interest holder.
For the three months ended December 31, 2003, we incurred foreign
income tax expense of $59,307 related to our foreign operations.
The following approximate unaudited pro forma consolidated results of
operations have been prepared as if the acquisitions of Panyu No. 6 Construction
Company Limited had occurred as of the following period:
Three Months
Ended December
31, 2002
--------------------------------------------- -----------------
Net Revenues $ 2,200,000
Net Income $ 50,000
Net Income per Share $ .00
Pro forma data does not purport to be indicative of the results that
would have been obtained had these events actually occurred at the beginning of
the periods presented and is not intended to be a projection of future results.
OVERALL
We reported net income for the three months ended December 31, 2003 of
$418,680. This translates to overall per-share income of $.01 for the three
months ended December 31, 2003.
-19-
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OR RESULTS OF OPERATIONS (continued)
Liquidity And Capital Resources
At December 31, 2003, we had a cash balance of $1,416,986 held in The
People's Republic of China. We currently have no cash positions in the United
States. We have been funding our operations from the receipt of customer
deposits on our constructions projects and from working capital loans as
described below:
- On July 9, 2002, our Panyu subsidiary, entered into a one-year
renewable working capital loan with a Chinese bank for $787,101. The
note was renewed in 2003 and is currently due on July 3, 2004 and
bears interest at 5.841% annually and is collateralized by certain
assets of the Company.
- On December 23, 2002, Panyu entered into a one-year renewable working
capital loan with a Chinese bank for $484,370. The note is due on
February 1, 2005, and currently bears interest at 5.31% per annum and
is collateralized by certain assets of the Company.
- We have three non-interest bearing loans from individuals totaling
$605,462. Such loans are payable on demand.
Management has invested substantial time evaluating and considering
numerous proposals for possible acquisition or combination 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 $707,079 for the three months ended
December 31, 2003 and was attributable to our net income from continuing
operations of $362,985, income from the sale of our subsidiary of $55,695, and
by non-cash activity such as depreciation of $193,407 and minority interest of
$110,285 as well as changes in the net assets of the Company of $40,325. 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 used in investing activities for the three months ended December
31, 2003 was $9,274 for capital expenditures.
Net cash used in financing activities were $422,462 for the three months
ended December 31, 2003 and related primarily to proceeds from related party
loans of $63,179 offset by payments of loans payable of $485,641.
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.
-20-
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OR RESULTS OF OPERATIONS (continued)
CRITICAL ACCOUNTING POLICIES
A summary of significant accounting policies is included in Note 1 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-valued 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. Revenues are recognized on the completed-contract method for certain
other contracts. Contracts to manage, supervise, or coordinate the construction
activity of others are recognized only to the extent of the fee revenue. The
Company recognizes revenue from wireless services when services are performed.
We act as a consultant to various contractors and performs administrative
services for a fixed percentage of the total contract price. Fees are recognized
as services are performed. Consulting revenue is included in net revenues on the
statements of operations for the three months ended December 31, 2003.
-21-
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OR RESULTS OF OPERATIONS (continued)
OPERATING RISK
Currently, the Company's revenues are primarily derived from the
construction of network infrastructure for residential, industrial and cultural
and commercial building blocks 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.
(b) Products risk
In addition to competing with other construction 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.
(c) 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.
(d) 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
regulations are changed by the PRC government, the Company's ability to operate
the PRC subsidiaries could be affected.
(e) Our future performance is dependent on its 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 effort
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, financial
conditions
-22-
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.
-23-
Part II - OTHER INFORMATION
Item 1.Legal Proceedings
On December 4th 2003, a writ of summons was issued by third parties
(as a contracted consultants group for Arran Services Limited )
against Arran Services Limited and the subsidiaries of the Company
claiming for unspecified damages for alleged breach of contract and
an injunction to restrain the subsidiaries to use some of the
entertainment contents. A defense letter was issued on December
24th 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 defense.
Accordingly, no provision for this Action has been provided in the
financial statements. "
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(1) Exhibits
Exhibit
Number Description
------- ----------------
31.1 Certification by Chief Executive Officer Pursuant to Section 302
31.2 Certification by Chief Financial Officer Pursuant to Section 302
32.1 Certification by Chief Executive Officer Pursuant to Section 906
32.2 Certification by Chief Financial Officer Pursuant to Section 906
(2) Reports on Form 8-K
None
-24-
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in Panyu, Guangzhou, China on February
20, 2004.
TELECOM COMMUNICATIONS, INC.
Date: February 20, 2004 By: /s/ Fred Deng
--------------------
Fred Deng
CEO, President and Chairman
In accordance with the Securities Exchange Act, the registrant has caused
this report to be signed on behalf by the undersigned that is duly authorized of
1934, this report has been signed by the following persons on behalf of the
registrant in the capacities and on the dates indicated.
Date: February 20, 2004 By: /s/ Fred Deng
--------------------
Fred Deng
CEO, President and Chairman
Date: February 20, 2004 By: /s/ Gary Lam,
--------------------------
Gary Lam
Principal Financial and
Accounting Officer
-25-