UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal period ended September 30, 2004
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 333-62236
TELECOM COMMUNICATIONS, INC.
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(Exact name of small business issuer as specified in its charter)
Indiana 35-2089848
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(State or other jurisdiction of (IRS Employer identification No.)
incorporation or organization)
Room 1602, 16/F., 5-9 Observatory Court, TST, Hong Kong
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(Address of principal executive offices)
(852) 2782 0983
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(Issuer's telephone number)
Securities registered under Section 12(b) of the
Securities Exchange Act of 1934:
Name of Each Exchange
Title of Each Class on Which Registered
------------------- -------------------
None None
Securities registered under Section 12(g) of the
Securities Exchange Act of 1934: None; report is filed pursuant to section 15D
COMMON STOCK, PAR VALUE $.001 PER SHARE
(Title of Class)
Check whether the registrant: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or an
amendment to this Form 10-KSB. [ X ]
State issuer's net revenues for its most recent fiscal year: $1,431,473
State the aggregate market value of the voting stock held by non-affiliates of
the registrant on December 1, 2004 computed by reference to the closing bid
price of its Common Stock as reported by the OTC Bulletin Board on that date
($0.70 per share): $27,999,300 million.
Transitional Small Business Disclosure Format (check one): Yes [ ] No[X]
Number of shares of common stock outstanding as of December 1, 2004: 70,188,000
Number of shares of preferred stock outstanding as of December 1, 2004: None
2
TELECOM COMMUNICATIONS, INC.
FORM 1O-KSB
TABLE OF CONTENTS
Page
PART I.........................................................................1
ITEM 1. DESCRIPTION OF BUSINESS............................................1
ITEM 2. PROPERTIES........................................................13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............13
PART II.......................................................................13
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
SECURITY HOLDER MATTERS...........................................13
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS........16
ITEM 7. FINANCIAL STATEMENTS..............................................23
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE..........................................24
ITEM 8A. CONTROLS AND PROCEDURES...........................................24
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT................ 25
ITEM 10. EXECUTIVE COMPENSATION............................................27
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT....28
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................30
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K..................................30
Form 8-K dated July 22, 2004...............................................31
Form 8-K dated July 22, 2004...............................................31
Form 8-K dated August 16, 2004.............................................31
Form 8-K dated September 17, 2004..........................................31
Form 8-K dated October 7, 2004.............................................32
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES............................32
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Telecom Communications Inc. was incorporated on January 6, 1997 in the State of
Indiana under the corporate name MAS Acquisition XXI Corp. Prior to December 21,
2000, we were a blank check company seeking a business combination with an
unidentified business. On December 21, 2000, we acquired Telecom Communications
of America, a sole proprietorship doing business in Los Angeles, California
since August 15, 1995, and changed our name to Telecom Communications Inc. In
connection with this acquisition, Aaron Tsai, our former sole officer and
director was replaced by Telecom Communications of America's owners and
associates. We issued 9,000,000 shares of our common stock or 90% of our total
outstanding common stock after giving effect to the acquisition. MAS Capital
Inc. returned 7,272,400 shares of common stock for cancellation without any
consideration.
On September 30, 2003, Telecom Communications, Inc. (the "Company" or "Telecom")
consummated a Stock Purchase Agreement (the "Stock Purchase Agreement") with
Arran Services Limited ("Arran") and its sole shareholder, Mr. Fred Chi Yuan
Deng, for the acquisition of all of the capital stock of Arran, a British Virgin
Islands corporation. In exchange for the capital interest, Mr. Deng and his
designate received a total of 23,800,000 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, Mr. Deng was elected chairman
and CEO of the Company. In addition, Mr. Ou Zhixiong, and Ms. Lijian Deng were
elected as directors of the Company. In connection with the acquisition, Mr. Tak
Hiromoto resigned as chairman and CEO of Telecom, but continued as President and
as a director of Telecom. Ms. Elizabeth Hiromoto continued as a director and
Secretary of Telecom. On December 31, 2003, Mr. Tak Hiromoto and Ms. Elizabeth
Hiromoto resigned as director, President and Secretary, respectively. Mr. Fred
Deng was appointed as President while Ms. Lijian Deng was appointed as
Secretary.
The Company sold its 80% ownership in StarEastNet to a third party investor for
a consideration of $200,000 in cash on November 20, 2003. StarEastNet's business
model had not been profitable in the past several years and Management believed
it would not help the Company in the long run, as the Company shifted its core
business to wireless short/multimedia messaging services.
On March 16, 2004, Telecom acquired the remaining 20% interest of IC Star MMS
Limited ("IC Star") not owned by Arran from Auto Treasure Holdings Limited, a
company wholly owned by the majority shareholders of the Company, for the
consideration of 9,889,000 shares of Telecom common stock and warrants to
purchase 10,000,000 shares of Telecom common stock at $2 per share.
On April 16, 2004, Telecom Communications, Inc., through Arran, sold its 60%
beneficial share ownership in Panyu No. 6 Construction Company Limited ("Panyu")
to a related party [Aries Vision Technology Limited ("Aries"), a limited
liability company incorporated in the British Virgin Islands] for the
consideration of $2,580,390.
On June 6, 2004, Telecom entered into a subscription agreement (the
"Subscription Agreement") with Taikang Capital Managements Corporation
("Taikang"), under which the Company has agreed to issue and sell to Taikang 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"). Taikang converted $500,000 of
the Notes into 2,500,000 shares of Telecom common stock with par value $0.001 on
July 22, 2004. On July 22, 2004, Telecom entered into a stock purchase agreement
with Taikang, for the purchase of 7,500,000 shares of the Company's common
stock, par value $.001 per share for an aggregate purchase price of $1,500,000.
On July 22, 2004, Deng Chi Yuan (Fred Chi Yuan Deng), the majority shareholder
of Telecom then 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. 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 October 7, 2004, Telecom entered into a stock purchase agreement with
Taikang, an affiliate of the Company, for the purchase of 10,000,000 shares of
the Company's common stock, par value $.001 per share for an aggregate purchase
price of $2,000,000.
Overview
Telecom is a Total Solutions Provider that offers Integrated Communications
Network Solutions and is a leading Internet and telecommunications value-added
service provider doing business through 2 major wholly-owned subsidiaries, Arran
Services Limited ("Arran") and Alpha Century Holdings Limited ("Alpha"), both
are limited companies incorporated in the British Virgin Islands.
Arran was founded on December 3, 2001 and commenced its operations in January
2003. Arran, through its acquisition of 60% ownership in Panyu No. 6
Construction Company Limited ("Panyu") in January 2003, is engaged in the
construction of communication infrastructure and residential and commercial
buildings. The participation in communication infrastructure construction,
through regular construction companies, allows the Company to leverage its
strength of content development in delivering its services to broader
communities. Network infrastructure has always been considered the necessary
fundamental necessity for telecommunication industry. Arran, through its
wholly-owned subsidiary IC Star MMS Limited ("IC Star"), is also a content
provider focused on design and development of entertainment content. IC Star has
contracted with more than 2000 websites and collected all of their Internet and
mobile phone users to be the online/offline members. ICStarMMS.com, through IC
China network, links entertainment and lifestyle information to local
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communities by Short Message Service, Multimedia Messaging Service or other
wireless devices to mobile subscribers across China.
Alpha was formed in December 2003 to hold certain assets of the Company and
commenced operations in providing Total Solutions System to its clients. It
offers integrated communications network solutions and Internet content service
in universal voice, video and data web, and mobile communication for interactive
media applications, technology and content leader in interactive multimedia
communications, develops, markets and sells universal media software solutions
for enterprise-wide deployment of integrated communication and media
application.
INDUSTRY BACKGROUND
INTRODUCTION OF MOBILE BUSINESS
The Internet and world-wide web have introduced a new set of business
challenges. It offers no time constraints or geographical boundaries, and opens
up more communication, interaction and transaction channels than ever before.
Fixed line Internet access has propelled many "bricks-and-mortar" companies into
the Internet age. The convergence of wireless devices and the Internet create
the second wave of change across industries.
Mobile business represents the convergence of mobile telephony and Internet
technologies and a removal of the limitation or restrictions that exist today in
the "wired" world. It is characterized by its ability to deliver multiple
information types from multiple devices over multiple networks to users with
multiple needs, as demonstrated in the following table:
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SERVICES DEVICES COMMUNICATION TECHNOLOGY APPLICATION/CONTENTS
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Communications PC FIXED Information Portal
Information Hand-Held Device o Analogue Phone Infrastructure
Finance Data-Enabled Mobile o ISDN Applications
Commerce Phone o Broadband End User Applications
Advertising (ADSL, XDSL) E-Markets
Entertainment ITV MOBILE Legacy
Set-Top Box o 2G (e.g. GSM)
Internet-Capable o 2.5G (e.g. GRPS)
Console o 3G (e.g. UMTS)
Home PC Substitute SHORT RANGE
Screen Phone o Blue Tooth
o 802.11
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NETWORK TECHNOLOGIES
GSM - GSM (Global System for Mobile Communication) operates in the 900 MHz and
the 1800 MHz (1900MHz in the US) frequency bands and is the prevailing mobile
standard in Europe and most of the countries in the Asia Pacific region. It
provides simple wireless voice transmission and minimal data services.
3
GPRS - GPRS (General Packet Radio Service) is a packet switched wireless
protocol as defined in the GSM standard that offers instant access to data
networks. It permits a fast transmission speed of up to 115 Kbps. The advantage
of GPRS is that it provides an " always on" connection (i.e. instant IP
connectivity) between the mobile terminal and the network. GPRS is the first
transport mode to allow full instant Internet access and will enable a wide
range of applications.
3G - 3rd Generation (3G) is the generic term for the next big step in mobile
technology development. It is a new generation of mobile communication service
that has surpassed the limited services of the existing voice communication with
higher speed of transmission and bandwidth. It can be used to transmit text,
digitized voice, video and multimedia data at a rate up to 2 Mbps in a fixed or
stationary wireless environment and 384-Kbps in a mobile environment.
SERVICE TECHNOLOGIES
SMS - SMS (Short Message Service) has provided the ability to send and receive
text message to and from mobile phones. Each message can contain up to 160
alphanumeric characters. About 90% of SMS message are voice mail notifications
or simple person-to-person messaging. The remaining are various information
services, such as news, stock prices, sports, weather, horoscopes, jokes, etc.
In addition, SMS e-mail notification, SMS chat and downloading of ringing tones
have also have been offered. SMS is an ideal technology for pushing information
from one-to-one or one-to-few.
WAP - WAP (Wireless Application Protocol) is an open, global standard for mobile
solutions, including connecting mobile terminals to the Internet. WAP based
technology permits the design of interactive, real-time mobile services for
smart phones or communicators. The advantage of WAP is that it is user friendly
and much easier to receive and react to information on a mobile telephone.
MMS - MMS (multimedia messaging service) is one of the recent developments in
mobile messaging. MMS provides automatic and immediate delivery of personal
messages. Unlike the SMS however, MMS allows mobile phone users to enhance their
messages by incorporating sound, images, and other rich content, transforming it
into a personalized visual and audio message. With MMS, it is not only possible
to send your multimedia messages from one phone to another, but also from phone
to email, and vice versa. This feature dramatically increases the possibilities
of mobile communication, both for private and corporate use.
TELECOMMUNICATIONS IN CHINA
The telecommunications industry in China has experienced rapid growth in recent
years. According to the Ministry of Information Industry, the total number of
wireless access lines in service increased from 108.8 million at the end of
1999 to 249.9 million by the end of September 2003, representing a compound
annual growth rate of 24.6%. As the result of the increasing demand for
information demand and technology development, the market for data communication
and Internet services in China also experienced a rapid growth during the same
period. The number of Internet users in China increased from 8.9 million at the
end of 1999 to 53.8 million at the end of September 2003, representing a
compound annual growth rate of 60%.
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According to Strategy Analytics, an independent international research and
consulting firm, there will be approximately 1.5 billion mobile phone
subscribers by 2004 in developed markets. In addition, Strategy Analytics
reports that cellular data services will become more important in the future and
will account for approximately 36% of total mobile revenue in 2010.
MOBILE DATA USAGE
China's mobile phone users sent 90 billion short messages last year, accounting
for about a quarter of the total in the world. A latest survey conducted by
Kongzhong.com, a value-added mobile service provider based in Beijing, showed
about 40% of users between 18 and 60 have used the SMS service. Approximately
57% are using SMS to chat and play online games, ranking first among all
applications. Other major applications of SMS include online news, financial
information, handset pictures and ring tone downloads. Subscription services
account for a large share of mobile data's increased popularity. The new
services are being aggressively promoted by service providers, including the
listed Internet portals Sohu.com, Sina.com and Netease.com and many smaller
players. Dating services and games with cash prizes have emerged as leading
drivers of mobile data use. Long offered on mainstream Internet sites, their
mobile incarnations generally require customers to subscribe, driving up revenue
for service providers.
The most significant growth for the sector, however, is likely to come from
increased SMS usage by existing SMS users. China Mobile's "Monternet" and
Unicom's "Uni-Info" mobile data revenue-sharing schemes are now well established
with consumers and with third party service providers that offer content. With
the models in place and revenue sharing between operators and service providers
now taking place, the structure is positioned to scale as new service providers
attract more SMS usage with a diversity of new content and services targeting
the growing base of mobile subscribers.
DRIVERS OF SMS GROWTH IN CHINA
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Ease of Use No need to register, no complicated set up required
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Low Price RMB 0.1/message for contract subscribers;
RMB 0.15/message for pre-paid
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Viral Marketing Friends send to friends, teaching each other how to
send and receive
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Always On Service is available whenever and wherever the
mobile phone is turned on
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According to WTO accords, foreign firms are now permitted to invest in service
providers, further boosting China's SMS market. Service providers and the
operators themselves are actively exploring cross-media SMS events that bridge
television and print media together with SMS. SMS interconnection between China
Mobile and Unicom networks in 2002 and 2003 was also a major driver of SMS
growth.
THE WARMING UP OF MMS
According to www.thefeature.com, building on the success of SMS messaging in
China with 90 billion SMS messages sent in 2002, analysts are expecting MMS to
be a huge phenomenon in the wireless communication scene. Three factors are
expected to drive the mass adoption of MMS. Firstly, half of the nation-wide
subscriber base changes mobile handsets yearly. Color-screen handsets from both
foreign and domestic manufacturers are just being introduced and are expected to
generate significant sales among early adopters this year. Secondly, the
introduction of new GPRS- and MMS-based services that will fully utilize the
features on those new handsets, has led many to believe that 2.5 G is almost
assured of success in China. Thirdly, to encourage Internet service providers to
develop more MMS content, China Mobile raised the revenue share ratio, and now
85% of the MMS revenue goes to the Internet service providers, while the company
takes the remaining 15%. This compares favorably to the 80:20 revenue share
ratio for plain -text SMS services.
Gartner Dataquest predicts that SMS traffic will peak around 2003 before it is
to be overtaken by multimedia messaging traffic. MMS revenue will double from
the current $13.4 billion to around $22.3 billion by 2006. Other analysts are
even more bullish, Ovum says that by 2007, the MMS market will be worth around
$70 billion.
THE GROWTH OF MOBILE AND TELECOMMUNICATIONS VALUE-ADDED SERVICES IN CHINA
Mobile subscribers in China are increasingly using their mobile handsets to
access a wider range of value-added services, including instant message,
information services and games applications. Both China Mobile and China Unicom
have assisted the growth of value-added services by launching its Monternet
platform and Uni-Info platform to expand their mobile data services. Both
companies adopted similar business models of partnering with Internet content
and service providers who developed mobile content and data services while
mobile operators provide the transmission network, billing systems, and fee
collection services for the service providers based on revenue sharing
arrangements.
Compared to mobile voice communications, mobile data communications is still at
an early stage in China, accounting for only 9.4% of total mobile revenues in
2002, according to Pyramid Research. We believe that telecommunications
operators in China will continue to develop mobile network infrastructure which
will provide new opportunities for the growth of mobile value-added services and
applications as well as stimulate the market demand for these services.
The following shows the forecast for the growth of the mobile data services
industry in China from 2002-2007:
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US$ million 2002A 2003E 2004E 2005E 2006E 2007E CAGR (02-07)
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Value-added service &
SMS revenues
2,521 3,882 5,871 8,426 11,658 15,219 43.3%
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GPRS revenues 25 70 237 463 1,044 2,066 141.8%
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A: actual data
E: estimated data
CAGR: Compound Average Growth Rate
Source: Pyramid Research
PRODUCTS AND SERVICES
General Construction and Network Infrastructure Construction - Through its
construction company in Guangzhou, the [Group] provides general construction to
residential community, commercial, cultural and digital community. Construction
includes setting up of broadband and fiber cable system over communities,
LAN/WAN and Wi-Fi, internet/intranet/TV and wireless data communications network
infrastructure. This operation ceased in April 2004 due to the disposal of the
subsidiary. However, the participation in this operation had expanded the
Company's network connection and client base in China.
My Star Friends - We have created the original Star SMS/MMS called "My Star
Friends" community. It allowed subscribers to communicate with [the Star] by
SMS/MMS using service provider's platform.
Entertainment News - Via the platform of service providers and mobile operators,
subscribers can receive the latest entertainment news about Asia stars.
Total Solutions -Information Manager System & SMS/MMS Call Center CRM System -
Total Solution system offered integrated communications network solutions and
Internet content service in voice, data and video through mobile and Internet
network with interactive media applications. Telecom, through IC Star and Alpha
delivered the Information Manager System advantage and services of providing
consistent, quality customer care and infortainment support services. In
addition, it offers the client high-value, low-cost sales and service solutions
using the highly scalable interactive MMS response (IMR), interactive voice
responses (IVR) and speech recognition solutions, combined with an extensive
network of Asia contract centers for live operator support and provide their
clients opt-in subscriptions of Short Message Services (SMS) and Multimedia
Message Services (MMS). It offers corporations advanced Internet and wireless
capabilities without the need of the installation of expensive hardware at
customer locations. Each user gets a unique code number and an associated web
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page to manage incoming and outgoing short messages, multimedia messages, phone
calls, voice mails and emails with one single common interface. The Total
Solution also allows simple, rapid administration of a company's telecom
services, including adding new customers and moving telephone number locations
online (VoIP) without the cost of a telecom support department. Users can
consolidate their multiple phone numbers (office, home, mobile) with a single
personal telephone number so callers reach them wherever they are. Further, a
virtual SMS/MMS number handles all incoming faxes plus a unified virtual mailbox
conveniently manages voicemail and faxes like e-mail.
Search Engine Optimization for mobile phone (SEO4Mobile) - SEO4Mobile offers
wireless mobile phone providers the ability to use a short message service (SMS)
search feature. Users who enter a relevant keyword or keyword phrase, along with
a geographic identifier, can send searches to mobile operator via an SMS and
receive a multimedia response that has been processed through a search engine on
the Internet. By specifically laying out a separate search SMS for the
geographic portion, SEO4Mobile helps structure the search in a simple and
efficient way for the searcher. SEO4Mobile will then parse out its advertiser
keyword ads that have a local identifier as it sends them to its distribution
partners, thereby returning targeted results for mobile searches.
AdMaxB2Search - The Advertiser maximum bid listing system for mobile phone
service providers is developed for small to mid-sized businesses that want to
offer valuable advertising content to SEO4Mobile users quickly and simply,
without impacting their design or operations. Through a step-by-step,
wizard-driven set up, advertisers and partners of Telecom can log in to an
Intranet site to bid on listing and directory functionality or upload a link
over the Internet to a website of advertising distributors. With all their
network distribution partners, users of AdMaxB2Search will share a percentage of
the revenue earned by distributors when their users search for an ad and are
sent to that SEO4Mobile. Advertisers who use this service will be given access
to SEO4Mobile service providers and their users through search engine
optimizers.
BUSINESS STRATEGIES
Our goal is to be the leading Internet and telecommunications value-added
content provider in China. We have expanded our connection to local communities
by participating in the telecommunication infrastructure industry through Panyu
No. 6 Construction Company which we sold in April 2004. Our strong client/user
database, through IC China network, and valuable entertainment and lifestyle
information data, are the fundamental strengths of Telecom. We believe our large
user base through contracting with various service providers in China, is one of
the important business drivers as it provides us with the opportunity to market
and deliver our value-added services and products. Our distinctive entertainment
information database also provides us the opportunity to distribute
online/offline content such as music, video and other forms of multimedia
content through mobile operators to the end-users.
In order to leverage our strong user database and information content, we have
sought appropriate software to enhance the value of our resources. We believe
the integration of our user database, information content and appropriate
software shall lead us to penetrate into the value-added content provider market
rapidly. To satisfy a low cost objective for a growing company, we rely on third
8
party software at this stage rather than maintain a research & development
department for the creation of software. We will continue to expand our client
database by entering into cooperation agreements with local Chinese service
providers. We intend to develop and enrich our content from self production and
internal efforts and cooperation with third-party content providers. We will
also seek mobile operators and mobile phone manufacturers who will bundle our
products like SEO4Mobile into mobile phones. We will enter into strategic
relationships with various enterprise software providers in China with which we
co-market, and bundle or distribute our Total Solutions with their products.
IC STAR MMS LIMITED
IC Star is a China-based local information and services affiliate network. It
has contracted with more than 2,000 websites and collected all of their internet
and mobile phone users to be the online/offline members. It 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, IC Star
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. ICStarMMS.com, through IC China network,
links lifestyle infotainment with local communities across China. It has created
the original Star SMS/MMS called "My Star Friends" community. It allowed
subscribers of the contracted Service Providers to communicate with the [Star]
by SMS/MMS through China Mobile's network. 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. As previously discussed, on
December 31, 2003 the Company acquired the remaining interests of IC Star it did
not already own. Today, we operate IC Star web sites to provide Chinese content
and services that speak directly to the audience of each region, enriching the
online experience of their users.
ALPHA CENTURY HOLDINGS LIMITED
Alpha was established in December 2003 as an investment holding company having
interest in Huiri Electric (Panyu) Limited, a company in China with limited
turnover on trading business. Alpha also holds certain assets for the group such
as computer equipment and developing software. It signed contracts with clients
by offering communications networks from IC Star's data base and content plus
Alpha's asset to form integrated Total Solution. Alpha has developed products
like Information Manager System, SMS/MMS Call Center System, SEO4Mobile, and the
latest AdMaxB2Search.
RISK FACTORS AFFECTING OUR FUTURE RESULTS OF OPERATIONS
Our future results of operations involve a number of risks and uncertainties.
With any business undertaking and their inherent unforeseeable risk in
conducting business, the following paragraphs discuss a number of risks that
could impact the Company's financial condition and results of operations.
9
(a) Country risk
Currently, the Company's revenues are derived from sale of its contents,
software and 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 yet 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
Our revenue-producing operations are limited and the information available about
us makes an evaluation of us difficult. We have conducted limited operations and
we have little operating history that permits you to evaluate our business and
our prospects based on prior performance. You must consider your investment in
light of the risks, uncertainties, expenses and difficulties that are usually
encountered by companies in their early stages of development, particularly
those engaged in international commerce. In addition to competing with other
telecommunication and web 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 in general, it 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 generates revenue and incurs expenses and liabilities in Chinese
renminbi, Hong Kong dollars and U.S. dollars. As a result, the Company is
subject to the effects of exchange rate fluctuations with respect to any of
these currencies. Since 1994, the official exchange rate for the conversion of
renminbi to U.S. dollars has generally been stable and the renminbi has
appreciated slightly against the U.S. dollar. However, given recent economic
instability and currency fluctuations in the world, the Company can offer no
assurance that the renminbi will continue to remain stable against the U.S.
dollar or any other foreign currency. The Company's results of operations and
financial condition may be affected by changes in the value of renminbi and
other currencies in which its earnings and obligations are denominated. The
Company has not entered into agreements or purchased instruments to hedge its
exchange rate risks, although the Company may do so in the future.
(d) Our future performance is dependent on our ability to retain key
personnel
Our future success depends on the continued services of executive management in
China. The loss of any of their services would be detrimental to us and could
have an adverse effect on our business development. We do not currently maintain
key-man insurance on their lives. Our future success is also dependent on our
ability to identify, hire, train and retain other qualified managerial and other
employees. Competition for these individuals is intense and increasing.
(e) Our business depends significantly upon the performance of our
subsidiaries, which is uncertain.
10
Currently, a majority of our revenues are derived via the operations of our
subsidiaries. Economic, governmental, political, industry and internal company
factors outside our control affect each of our subsidiaries. If our subsidiaries
do not succeed, the value of our assets and the price of our common stock could
decline. Some of the material risks relating to our partner companies include:
- Our subsidiaries are located in China and have specific risks associated
with that; and
- Intensifying competition for our products and services and those of our
subsidiaries, which could lead to the failure of some of our subsidiaries.
(f) A visible trading market for our common stock may not develop.
Our common stock is currently traded on the Over-the-Counter Bulletin Board
under the symbol "TCOM". The quotation of our common stock on the OTCBB does not
assure that a meaningful, consistent and liquid trading market currently exists.
We cannot predict whether a more active market for our common stock will develop
in the future. In the absence of an active trading market:
- investors may have difficulty buying and selling or obtaining market
quotations; and
- market visibility for our common stock may be limited; and
- a lack of visibility for our common stock may have a depressive effect on
the market price for our common stock.
(g) Liability risk
We act as a total solution provider on our contracted projects. Insurance
companies in China offer limited business insurance products. As a result, we do
not have any business liability or disruption insurance coverage for our
operations in China, and our coverage may not be adequate to compensate for all
losses that may occur, particularly with respect to loss of business and
reputation. Any business disruption litigation or natural disaster could expose
us to substantial costs and losses.
OTHER RISK FACTORS
There are several risks and uncertainties, including those relating to the
Company's ability to raise money and grow its business and potential
difficulties in integrating new acquisitions, especially as they pertain to
foreign markets and market conditions. These risks and uncertainties can
materially affect the results predicted. Other risks include the Company's
limited operating history, the limited financial resources, domestic or global
economic conditions, activities of competitors and the presence of new or
additional competition, and changes in Federal or State laws and conditions of
equity markets.
The Company's future operating results over both the short and long term will be
subject to annual and quarterly fluctuations due to several factors, some of
which are outside the control of Telecom. These factors include but are not
limited to fluctuating market demand for our services, and general economic
conditions.
11
GOVERNMENTAL REGULATION
Effect of Probable Governmental Regulation on the Business
As we expand our efforts to develop new products and services, we will have to
remain attentive to relevant federal and state regulations. We intend to comply
fully with all laws and regulations, and the constraints of federal and state
restrictions could impact the success of our efforts.
As our services are available in multiple states and foreign countries, these
jurisdictions may claim that we are required to qualify to do business as a
foreign corporation in each such state and foreign country. New legislation or
the application of laws and regulations from jurisdictions in this area could
have a detrimental effect upon our business. We cannot predict the impact, if
any, that future regulatory changes or developments may have on our business,
financial condition, or results of operation.
The PRC government heavily regulates its Internet and value-added
telecommunications services sectors, including content restrictions on the
Internet and value-added telecommunications services and the licensing and
permit requirements for companies in the said industry. Because these laws and
regulations and the legal requirements with regard to the Internet and
value-added telecommunications services are relatively new, their interpretation
and enforcement involve significant uncertainty. It has created substantial
uncertainties regarding the legality of existing and future operations and
activities of the Internet and telecommunications service in China, including
our business. In some cases, our current and previous services or business could
be deemed to be in violation of PRC laws or regulations, in which case we may be
subject to fines or other penalties and/or may have to cease such business or
services.
COST AND EFFECTS OF COMPLIANCE WITH ENVIRONMENTAL LAWS
Our business is not subject to regulation under the state and federal laws
regarding environmental protection and hazardous substances control. We are
unaware of any bills currently pending in Congress that could change the
application of such laws so that they would affect us.
COMPETITION
The market for Internet and value-added telecommunications services in PRC is
competitive and the competition is expected to increase in the future when the
market matures and is opened. As the industry is relatively new and is growing
rapidly, the basis of competition may shift, offering opportunities for new
competitors to enter the market. In addition, as China opens its value-added
telecommunications service market to foreign investors, we may face increased
competition from international competitors with experience developed in overseas
markets and significantly greater financial, technical and marketing resources
than we have. Such competitors could also attempt to increase their presence in
our markets by forming strategic alliances with other competitors, by offering
new or improved products or by increasing their efforts to gain and retain
market share through competitive pricing. As a result, our competitors may be
able to adapt more quickly to changes in customer needs or to devote greater
resources than we can to the sales of our real estate projects. Currently, our
main competitors in the overall Internet and value-added telecommunications
services market in China are local Internet portals such as Sina.com and
12
Sohu.com We believe our niche in the integrated total solution offering software
with entertainment and lifestyle online/offline information, plus our client
database has provided us a better position in the specialized Internet and
value-added communications services market in China at the moment. However, as
the market for Internet and value-added telecommunications services matures,
price competition and ability to develop better products has intensified and is
likely to continue to intensify. Such competition has adversely affected, and
likely will continue to adversely affect, our gross profits, margins and results
of operations. There can be no assurance that we will be able to continue to
compete successfully with existing or new competitors.
EMPLOYEES
We believe that the success of our business will depend, in part, on our ability
to attract, retain and motivate highly qualified sales, technical and management
personnel, and upon the continued service of our senior management personnel. As
of the date of this annual report, we have 20 full-time employees. We consider
our employee relations to be good and we have never experienced any work
stoppages. We cannot assure you that we will be able to successfully attract,
retain and motivate a sufficient number of qualified personnel to conduct our
business in the future.
ITEM 2. PROPERTIES
The Company leases an office at Room 1602, Honkwok TST center, 5-9 Observatory
Court, TST Kowloon, Hong Kong with approximately 120 square meters. The lease
was signed in May 2003 and expires in April 2005 with current rent payment of
$1,175 per month. Huiri Electric (Panyu) Limited leases an office at #62
Cunqiandajie Daping Shiqiao Panyu Guangzhou GD.511490 China. The rent is under
negotiation with the landlord.
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote during the year.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS
MARKET INFORMATION
Our common stock is currently traded on a limited basis on the Over-the Counter
Bulletin Board under the symbol "TCOM". The quotation of our common stock on the
OTCBB does not assure that a meaningful, consistent and liquid trading market
currently exists. We cannot predict whether a more active market for our common
stock will develop in the future. In the absence of an active trading market:
13
- Investors may have difficulty buying and selling or obtaining market
quotations;
- Market visibility for our common stock may be limited; and
- A lack of visibility of our common stock may have a depressive effect on
the market price for our common stock.
The reported high and low sale prices for the common stock are shown below for
the periods indicated. The prices reflect inter-dealer prices, without retail
mark-up, markdown or commissions, and may not always represent actual
transactions. As of September 30, 2004, we had approximately 190 stockholders of
record.
Period High Low
Quarter ended December 31, 2003 $2.64 $0.40
Quarter ended March 31, 2004 $0.98 $0.52
Quarter ended June 30, 2004 $0.73 $0.17
Quarter ended September 30, 2004 $0.34 $0.09
On December 1, 2004, TCOM was quoted at $0.70 per share.
DIVIDENDS
There are no present material restrictions that limit the ability of the Company
to pay dividends on common stock or that are likely to do so in the future. The
Company has not paid any dividends with respect to its common stock, and does
not intend to pay dividends in the foreseeable future.
THE APPLICATION OF THE "PENNY STOCK REGULATION" COULD HARM THE MARKET PRICE OF
OUR COMMON STOCK
Our common stock currently trades on the OTC Bulletin Board. Since our common
stock continues to trade below $5.00 per share, our common stock is considered a
"penny stock" and is subject to SEC rules and regulations, which impose
limitations upon the manner in which our shares can be publicly traded.
These regulations require the delivery, prior to any transaction involving a
penny stock, of a disclosure schedule explaining the penny stock market and the
associated risks. Under these regulations, certain brokers who recommend such
securities to persons other than established customers or certain accredited
investors must make a special written suitability determination regarding such a
purchaser and receive such purchaser's written agreement to a transaction prior
to sale. These regulations have the effect of limiting the trading activity of
our common stock and reducing the liquidity of an investment in our common
stock.
Stockholders should be aware that, according to the Securities and Exchange
Commission Release No. 34- 29093, the market for penny stocks has suffered in
recent years from patterns of fraud and abuse. These patterns include:
- Control of the market for the security by one or a few broker-dealers
that are often related to the promoter or issuer;
14
- Manipulation of prices through prearranged matching of purchases and
sales and false and misleading press releases;
- "Boiler room" practices involving high pressure sales tactics and
unrealistic price projections by inexperienced sales persons;
- Excessive and undisclosed bid-ask differentials and markups by
selling broker-dealers; and
- The wholesale dumping of the same securities by promoters and
broker-dealers after prices have been manipulated to a desired level, along with
the inevitable collapse of those prices with consequent investor losses.
Furthermore, the "penny stock" designation may adversely affect the development
of any public market for the Company's shares of common stock or, if such a
market develops, its continuation. Broker-dealers are required to personally
determine whether an investment in "penny stock" is suitable for customers.
Penny stocks are securities (i) with a price of less than five dollars per
share; (ii) that are not traded on a "recognized" national exchange; (iii) whose
prices are not quoted on the NASDAQ automated quotation system (NASDAQ-listed
stocks must still meet requirement (i) above); or (iv) of an issuer with net
tangible assets less than $2,000,000 (if the issuer has been in continuous
operation for at least three years) or $5,000,000 (if in continuous operation
for less than three years), or with average annual revenues of less than
$6,000,000 for the last three years.
Section 15(g) and Rule 15g-2 of the Exchange Act require broker-dealers dealing
in penny stocks to provide potential investors with a document disclosing the
risks of penny stocks and to obtain a manually signed and dated written receipt
of the document before effecting any transaction in a penny stock for the
investor's account. Potential investors in the Company's common stock are urged
to obtain and read such disclosure carefully before purchasing any shares that
are deemed to be "penny stock."
Rule 15g-9 requires broker-dealers in penny stocks to approve the account of any
investor for transactions in such stocks before selling any penny stock to that
investor. This procedure requires the broker-dealer to (i) obtain from the
investor information concerning his or her financial situation, investment
experience and investment objectives; (ii) reasonably determine, based on that
information, that transactions in penny stocks are suitable for the investor and
that the investor has sufficient knowledge and experience as to be reasonably
capable of evaluating the risks of penny stock transactions; (iii) provide the
investor with a written statement setting forth the basis on which the
broker-dealer made the determination in (ii) above; and (iv) receive a signed
and dated copy of such statement from the investor, confirming that it
accurately reflects the investor's financial situation, investment experience
and investment objectives. Compliance with these requirements may make it more
difficult for the Company's stockholders to resell their shares to third parties
or to otherwise dispose of them.
15
FUTURE SALES OF LARGE AMOUNTS OF COMMON STOCK COULD ADVERSELY EFFECT THE
MARKET PRICE OF OUR COMMON STOCK AND OUR ABILITY TO RAISE CAPITAL.
Future sales of our common stock by existing stockholders pursuant to Rule 144
under the Securities Act of 1933, or following the exercise of future option
grants, could adversely affect the market price of our common stock. Our
directors and executive officers and their family members are not under lockup
letters or other forms of restriction on the sale of their common stock. The
issuance of any or all of these additional shares upon exercise of options will
dilute the voting power of our current stockholders on corporate matters and, as
a result, may cause the market price of our common stock to decrease. Further,
sales of a large number of shares of common stock in the public market could
adversely affect the market price of the common stock and could materially
impair our future ability to generate funds through sales of common stock or
other equity securities.
RECENT SALES OF UNREGISTERED SECURITIES
None
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN 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
16
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, 2004 and notes
thereto contained in this Report on Form 10-KSB of Telecom Communications, Inc.
OVERVIEW
We are a leading value-added information service provider for China and the
global Chinese community. Our specialized product Total Solutions System offers
integrated communications network solutions and Internet content service in
universal voice, video, data, web and mobile communication for interactive media
applications and technology and content leaders in interactive multimedia
communications. Telecom 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 Telecom's
Internet content and database and integrated into the Information Manager System
and SMS/MMS Call Center CRM System core software, the Total Solutions
application facilitates 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 the integration of strong entertainment and
lifestyle content, our network database and the application of technology. Our
network database was established by signing contracts with strategic partners
and collecting all of their Internet and mobile phone users to be the
online/offline members in China. We 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 (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 content into a
software that TCOM sources from the market, we can leverage the functions of the
software and target it to various industries.
We believe that we are one of the leading Internet and value-added
telecommunications services providers specializing in entertainment and
lifestyle content in China. Since the launch of our Total Solutions -
Information System and the SMS/MMS CRM in July, we have signed various contracts
with clients which showed customer acceptance. It proved that our expectation on
the reception of the integrated Internet and value-added telecommunication
service is on the right track. We will target the enterprise multimedia
communications market in China where we believe there is significant growth
potential. Our latest products SEO4Mobile (Search Engine Optimization for mobile
phones) and AdMaxB2Search have proved our strength in innovative and creative
value-added service. As a result, three contracts have been signed with business
partners.
17
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 with 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
an office 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 expansion and entertainment content provided by the
acquisition of stareastnet.com, a leading entertainment and life information
destination web site targeting Chinese users in greater China. Today, ICStarMMS
web sites serves local Chinese communities with its enriched and diversified
content focused on entertainment and life-style information.
We will derive our revenues from the offering of our products Total Solutions
System - Information Manager System, SMS/MMS CRM System, SEO4Mobile and
AdMaxB2Search. Revenues are derived principally from providing integrated
solutions and the AdMaxB2Search platform by entering into business contracts
with enterprises for a fixed monthly fee.
BUSINESS PARTNERSHIP DEVELOPMENTS
---------------------------------
On October 26, 2004, IC Star (http://www.icstarmms.com) entered into a
cooperation agreement with Baidu.com (http://www.baidu.com), the number one
Chinese internet search engine. Under the agreement, IC Star will work with
Baidu.com to develop Short Messaging Service (SMS), Multimedia Messaging Service
(MMS), and other wireless contents such as artist profiles and gaming. Baidu
will provide the technical platform and take part in promoting this new
operation to its users that have 60 million keyboard resolutions every day.
On November 1, 2004, Telecom reached an agreement with Aries and Gold Swallow
Shop Limited to form Animation Studio, a joint venture to create, develop and
produce computer generated or flash animated feature films, videos and
multimedia content, and to develop and distribute digital videos and other
products based on the content and program. Aries is currently in production on
animated feature films to be broadcast on the Cartoon Channel in China during
the second quarter of 2005. Gold Swallow Shop has investments to develop related
software and run a distribution chain of home videos, music and games software
in China. Gold Swallow develops home videos and distributes products that ignite
customers to become better and more active participants in the China experience.
In addition to the joint venture, TCOM will be granted a first right for
exclusive arrangement wireless value-added service of all products and contents
developed by the joint venture from time to time.
On November 15, 2004, IC Star, entered into a cooperation agreement with the
wireless business division of Beijing eLong Information Technology Limited, a
company of eLong Inc. (Nasdaq: LONG) (http://www.elong.com), the leading online
travel service provider and community in China. Under the agreement, IC Star
will utilize the best of its pool of celebrity and artistic resources, in
conjunction with eLong's development of Short Messaging Service (SMS),
Multimedia Messaging Service (MMS) and Coloring Ring Back Tone service. eLong
will provide the technical platform and promote these new services to its users.
18
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 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, which continue 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 (http://www.5wan.com) concentrates on tens of millions cell
phone users by offering humanization, high technology, and mobile entertainment.
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."
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 in 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) was acquired by Yahoo!
Holdings (Hong Kong) Ltd., a wholly owned subsidiary of Yahoo!, Inc. Under the
agreements, the partners started to market ICStar short messages service (SMS),
Multimedia Messages Services (MMS), ring tones, broadband to its own
multi-millions users. ICStar will provide entertainment information celebrities
as its core competency and other wireless contents such as wall paper and
19
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.
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 their 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 Alpha's short
messages service (SMS), Multimedia Message Services, ring tones, and broadband
to their own multi-millions of users. IC Star will provide entertainment
information 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 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
20
its products, the Company's business operations may be adversely affected by the
company's competitors and prolonged recessionary periods.
RESULTS OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 2004 COMPARED THE YEAR ENDED SEPTEMBER 30, 2003
Revenue for the year ended September 30, 2004 was $1,431,473. $834,752 was
generated from our IC Star subsidiary doing business in telecommunication
add-value service through SMS and MMS in a profit sharing model. $596,721 was
generated from Alpha doing business in Total Solutions commencing from September
2004. We did not have revenues for the year ended September 30, 2003. The
Company recognizes revenue when there is persuasive evidence of an arrangement,
delivery has occurred, the fee is fixed or determinable, collectibility is
reasonably assured, and there are no substantive performance obligations
remaining.
For the year ended September 30, 2004, costs of sales amounted to $685,958 for
48% of net revenues and consists of direct material or contents 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. These costs are directly attributable to our contractual projects.
For the year ended September 30, 2004, we incurred operating expenses of
$2,618,084 as compared to $488,568 for the year ended September 30, 2003. For
the year ended September 30, 2004, operating expenses consisted of salaries of
$436,329, consultancy fee of $1,306,000, depreciation expenses of $262,027 and
other selling, general and administrative expenses of $613,728. For the year
ended September 30, 2003, operating expenses consisted of settlement expense
related to settlement of a lawsuit of $400,000, and other selling, general and
administrative expenses of $88,568.
For the year ended September 30, 2004, we incurred interest income of $45 and no
interest expense. A total of $753,695 was recorded as the Company recognized
other income consisting primarily of the settlement of a liability and the
received payment and sale proceeds from the sale of a subsidiary in November
2003. Acquisition cost of $8,126,917 for the additional 20% of IC Star was
arrived at from the issuance of common shares.
For the year ended September 30, 2004, we recorded minority interest expense of
$35,824 related to the allocation of profits to our minority interest holder.
For the year ended September 30, 2004, we recorded a net income of $518,360 from
discontinued operations, which was net of income tax of $89,076, and a loss on
the sale of the discontinued operations of $138,277.
OVERALL
We reported a net loss for the year ended September 30, 2004 of $8,901,487. This
translates to an overall per-share loss of $.19 for the year ended September 30,
2004.
21
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2004, we had a cash balance of $325,131 held in Hong Kong, the
Special Administrative Region of The People's Republic of China, and $11,576
held in PRC. We currently have no cash positions in the United States. We have
been funding our operations from the receipt of customer deposits on our
construction projects and receipt of sales proceeds of disposal of subsidiaries.
We also funded our operation by issuing common stock for a consideration of
$2,000,000 on July 22, 2004
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.
At September 30, 2004, our Company had stockholders equity of $2,660,641. 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 operating activities was $562,741 for the year ended
September 30, 2004 and was attributable to our net loss $8,901.487 offset by
non-cash activity such as depreciation on discontinued/continued operation of
$469,100, loss on disposal of equipment of $150,310, minority interest of
$310,489, acquisition cost of $8126,917 and common stock issued for service of
$1,740,000 as well as gain on disposal of subsidiary of $61,723. We may continue
to 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 year ended September 30, 2004 was
$1,780,239 compared to net cash provided by investing activities of $159,718 for
the year ended September 30,2003. For the year ended September 30, 2004, we
received $200,000 of cash from the disposal of a subsidiary, which was off set
by sales proceeds on disposal of the subsidiary net of cash in the amount
of $1,343,810, and capital expenditures of $636,429.
Net cash provided by financing activities was $393,180 for the year ended
September 30, 2004. Net cash provided by financing activities consisted of
proceeds from related party loans of $69,117, proceeds from loans payable of
$304,063 and proceeds from the issuance of common stock accounted for $20,000. .
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.
22
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has recently issued several new
accounting pronouncements:
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities. This statement addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force ("EITF") Issue No. 94-3, Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring). This statement applies to
costs associated with an exit activity that does not involve an entity newly
acquired in a business combination or with a disposal activity covered by SFAS
No. 144. These costs include, but are not limited to, termination benefits
provided to current employees that are involuntarily terminated under the terms
of a benefit arrangement that, in substance, is not an ongoing benefit
arrangement or an individual deferred compensation contract, costs to terminate
a contract that is not a capital lease and costs to consolidate facilities or
relocate employees. This statement does not apply to costs associated with the
retirement of a long-lived asset covered by SFAS No. 143, Accounting for Asset
Retirement Obligations. This statement was adopted effective January 1, 2004,
and it did not have an impact on the Company's current financial position or its
results of operations.
On December 31, 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure. SFAS No. 148 amends SFAS No. 123,
Accounting for Stock-Based Compensation, to provide alternative methods of
transition to SFAS No. 123's fair value method of accounting for stock-based
employee compensation. SFAS No. 148 also amends the disclosure provisions of
SFAS No. 123 and APB Opinion No. 28, Interim Financial Reporting, to require
disclosure in the summary of significant accounting policies of the effects of
an entity's accounting policy with respect to stock-based employee compensation
on reported net income and earnings per share in annual and interim financial
statements. While SFAS No. 148 does not amend SFAS No. 123 to require companies
to account for employee stock options using the fair value method, the
disclosure provisions of SFAS No. 148 are applicable to all companies with
stock-based employee compensation, regardless of whether they account for that
compensation using the fair value method of SFAS No. 123 or the intrinsic value
method of APB Opinion No. 25. The Company adopted the required disclosure
provisions of SFAS No. 148 effective January 1, 2003, and its application did
not have an impact on the Company's current financial position or its results of
operations.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150
establishes standards for how companies classify and measures certain financial
instruments with characteristics of both liabilities and equity. It requires
companies to classify a financial instrument that is within its scope as a
liability (or an asset in some circumstances). SFAS No. 150 is effective
beginning with the second quarter of fiscal 2004. This statement was adopted
effective January 1, 2004, and it did not have an impact on the Company's
current financial position or its results of operations.
ITEM 7. FINANCIAL STATEMENTS
See "Index to Financial Statements" for the financial statements included in
this Form 10-KSB.
23
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Robert G. Ercek, CPA resigned as independent certified public accountant and
independent auditor on December 31, 2003. His report on our financial statements
for the years ended September 30, 2002 and 2001 did not contain an adverse
opinion or disclaimer of opinion, nor were they qualified or modified as to
uncertainty, audit scope or accounting principles other than the uncertainty
related to our ability to continue as a going concern through September 30,
2002. During the fiscal years ended September 30, 2002 and 2001, there were no
disagreements with Robert G. Ercek, CPA on any matters of accounting principles
or practices, financial statement disclosure or auditing scope or procedure,
which, if not resolved to the satisfaction of Robert G. Ercek, CPA, would have
caused it to make reference to the subject matter of the disagreement in
connection with its report on these financial statements for those periods.
Sherb and Company, LLP ("Sherb"), was retained as independent certified
accountants and independent auditor in December 2003 and resigned on April 12,
2004. Its report on our financial statements for the years ended September 30,
2003 and the subsequent interim period through April 11, 2004, did not contain
an adverse opinion or disclaimer of opinion, nor were they qualified or modified
as to uncertainty, audit scope or accounting principles other than the
uncertainty related to our ability to continue as a going concern. There were no
disagreements between Telecom and Sherb on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedures,
which disagreements, if not resolved to Sherb's satisfaction, would have caused
Sherb to make reference to the subject matter of the disagreement in connection
with their reports on these financial statements for those periods.
On April 12, 2004, Livingston, Wachtell & Co., LLP ("LWC"), was retained as
independent certified accountants and independent auditor and resigned on
September 17, 2004. LWC's reports on the Company's financial statements for the
past two fiscal years did not contain an adverse opinion, disclaimer of opinion,
nor were they qualified or modified as to uncertainty, audit scope or accounting
principles. During the Company's two most recent fiscal years and through
September 17, 2004, there were no disagreements with LWC on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which disagreements, if not resolved to the satisfaction of
LWC, would have caused it to make reference to the subject matter of the
disagreements in connection with its report. No reportable events of the type
described in item 304(a)(1)(iv)(B) of Regulation S-B occurred during the two
most recent fiscal years.
Effective September 17, 2004, Child, Sullivan & Company was appointed as the new
independent registered public accounting firm for the Company.
ITEM 8A. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, we conducted an evaluation,
under the supervision and with the participation of the Chief Executive Officer
and Chief Financial Officer, of our disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934 (the "Exchange Act")). Based on this evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that the Company's disclosure
24
controls and procedures are effective to ensure that information required to be
disclosed by the Company in reports that it files or submits under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms. There was no
change in the Company's internal control over financial reporting during the
Company's most recently completed fiscal quarter that has materially affected,
or is reasonably likely to materially affect, the Company's internal control
over financial reporting.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
DIRECTORS AND EXECUTIVE OFFICERS
The following table includes the names, positions held and ages of our executive
officers and directors.
NAME AGE POSITION
62 Chairman of the Board
Guosheng Liu
30 CEO, President and Director
Shanhe Yang
31 Controller, Secretary and Director
Lijian Deng
24 Chief Information Officer and Director
Lirong Liu
48 CFO and Director
Gary Lam
25
GUOSHENG LIU, CHAIRMAN
----------------------
Mr. Liu has more than 35 years experience in Chinese news process and media
industry in China. He obtained his Master degree from Chinese Academy of Social
Science. Prior to this, Mr. Liu had served Heilongjiang Daily as reporter for 7
years. After his graduation from the Chinese Academy of Social Science, Mr. Liu
worked for People's Daily as Senior Reporter for the period 1981-2003. He has
an extensive relationship with the media industry and government bodies.
SHANHE YANG, CEO, PRESIDENT AND DIRECTOR
----------------------------------------
Mr. Yang joined the Company in 1999 and has extensive management experience in
multimedia industry in China. Mr. Yang is responsible for planning analysis and
researching and developing of software products, as well as responsible for
technical support, alliance's networking developing, and business development.
He holds a post in various kinds of business categories, such as technical
support, training, marketing and management. The main developing direction is
Internet and mobile network business application. Prior to joining the group,
Mr. Yang has engaged in enterprise's information system and electronic business
system development in Shenzhen, Guangdong. Mr. Yang was trained as a computer
network engineer in Beijing University of Post and Telecom.
LIJIAN DENG, CONTROLLER, SECRETARY AND DIRECTOR
-----------------------------------------------
Ms. Deng joined the company in 1994. Ms. Deng has been responsible for
management of the export department and has been accumulating administration
operation experience for 10 years in international trade and corporate
management. Ms. Deng attended an advanced study in FUDAN University Shanghai
prior to joining the Company.
GARY LAM, CFO
-------------
Mr. Lam joined the Company in late 2003 and has over 16 years of extensive
experience in treasury management. Mr. Lam is an affiliated member of the Hong
Kong Securities Institute. Mr. Lam was appointed as director of Renren Holdings
Limited (a public company in HK) during May 2001-September 2002.
LIRONG LIU, CHIEF INFORMATION OFFICER AND DIRECTOR
--------------------------------------------------
Ms. Liu joined the Company in 2004. She spent 4 years in broadcasting and
communications after graduation from college. Prior to joining the group, Ms.
Liu had worked for various foreign conglomerates in the electronics industry in
Zhuhai where she had served in different departments. With more than four years
experience in Internet and the virtual media market, Ms. Liu was recognized as
an outstanding information/content integration professional when she worked for
Aixi Software Limited before joining our Company.
AUDIT COMMITTEE
---------------
We do not have an audit committee. The entire Board of Directors serves as the
audit committee. Because of the small size of the Company and the risk attendant
to a small public company, we are currently unable to attract an audit committee
26
financial expert to our Board of Directors. There are no other committees of the
Board of Directors.
Code of Ethics
--------------
See Exhibit 14 for the Company's Code of Ethics.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth in summary form the compensation received during
each of the Company's last three completed fiscal years by the President and
Secretary/ Treasurer of the Company.
Summary Compensation Table
The following table sets forth information relating to all compensation awarded
to, earned by or paid by us during the past three fiscal years to: (a) our Chief
Executive Officer; and (b) each of our executive officers who earned more than
$100,000 during the last three fiscal periods ended September 30, 2004, 2003 and
2002:
Annual Compensation Long-Term Compensation
----------------------- ------- ----------------------------- ------------- -------------------------------- -------------------
Name and Principal Fiscal Salary ($) Bonus ($) Other Restricted Securities All Other
Annual
Compensation Stock Awards Underlying
Position Year ($) ($) Options SAR (#) Compensation
----------------------- ------- --------------- ------------- ------------- --------------- ---------------- -------------------
Shanhe Yang 2004 $ 124,000 $ - $ - $ - - -0-
Chief Executive 2003 $ - $ - $ - $ - - -0-
Officer, President 2002 $ - $ - $ - $ - - -0-
and Director
Lijian Deng 2004 $ 124,000 $ - $ - $ - - -0-
Controller, Secretary 2003 $ - $ - $ - $ - - -0-
and Director 2002 $ - $ - $ - $ - - -0-
Lirong Liu 2004 $ 124,000 $ - $ - $ - - -0-
Chief Information 2003 $ - $ - $ - $ - - -0-
Officer and Director 2002 $ - $ - $ - $ - - -0-
OPTION GRANTS IN LAST FISCAL YEAR
---------------------------------
None
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION/SAR VALUES
-------------------------------------------------------
None
TERM OF OFFICE
--------------
The term of office of the current directors shall continue until new directors
are elected or appointed.
EMPLOYMENT AGREEMENTS
---------------------
The Company has entered into employment agreements with management officers. The
terms of the employment have been disclosed above. There are no employment
27
contract established with our employees in China as it is not common to have
employment contract in China for non-management employee.
TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL ARRANGEMENT
-----------------------------------------------------------
There are no compensatory plans or arrangements, including payments to be
received from the Company, with respect to any person named in the Summary
Compensation Table set out above which would in any way result in payments to
any such person because of his or her resignation, retirement or other
termination of such person's employment with the Company or its subsidiaries, or
any change in control of the Company, or a change in the person's
responsibilities following a change in control of the Company.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
-----------------------------------------
We indemnify to the fullest extent permitted by, and in the manner permissible
under the laws of the State of Indiana, any person made, or threatened to be
made, a party to an action or proceeding, whether criminal, civil,
administrative or investigative, by reason of the fact that he/she is or was a
director or officer of our Company, or served any other enterprise as director,
officer or employee at our request. Our board of directors, in its discretion,
shall have the power on behalf of the Company to indemnify any person, other
than a director or officer, made a party to any action, suit or proceeding by
reason of the fact that he/she is or was our employee.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) Security Ownership of Certain Beneficial Owners
The following table sets forth, as of [December 20], 2004, information known to
us relating to the beneficial ownership of shares of common stock by: each
person who is the beneficial owner of more than five percent of the outstanding
shares of common stock; each director; each executive officer; and all executive
officers and directors as a group.
We believe that all persons named in the table have sole voting and investment
power with respect to all shares of common stock beneficially owned by them
except as stated therein.
Under the securities laws, a person is considered to be the beneficial owner of
securities that can be acquired by him within 60 days from the date of this
filing upon the exercise of options, warrants or convertible securities. We
determine beneficial owner's percentage ownership by assuming that options,
warrants or convertible securities that are held by him, but not those held by
any other person and which are exercisable within 60 days of the date of this
filing, have been exercised or converted. As of December 20, 2004, there were
70,188,000 shares of our common stock issued and outstanding.
The following table sets forth, as of [December 20], 2004, information known to
us relating to the beneficial ownership of shares of common stock by: each
person who is the beneficial owner of more than ten percent of the outstanding
shares of common stock; each director; each executive officer; and all executive
officers and directors as a group.
28
We believe that all persons named in the table have sole voting and investment
power with respect to all shares of common stock beneficially owned by them
except as stated therein.
Name and address of
Title of Class beneficial owner Number of Shares Percent of Class
--------------------------------------------------------------------------------
Common Taikang Capital 20,000,000 28.5%
Managements
Corporation
Common Lijian Deng 20,089,000(1) 14.4%
Common Shanhe Yang 20,089,000(2) 14.4%
Common Lirong Liu 20,089,000(3) 14.4%
Common Gary Lam 100,000(4) 0.1%
Directors and executive officers 10,589,000 15.09%
as a group (4 persons)
----------
(1) Consists of (i) 200,000 shares held directly by Ms. Deng (ii)(a) 9,889,000
shares of common stock plus (ii)(b) shares of commonstock underlying
warrants held indirectly by Auto Treasure Limited pursuant to 51%
co-ownership of all shares of Auto Treasure Limited, and assumes Auto
Treasure Limited does not exercise its right to purchase 10,000,000 shares
at an exercise price of $2.00 pursuant to warrant issued by the Company,
which vested as of March 16, 2006.
(2) Consists of 200,000 shares held directly by Mr. Yang (i) 9,889,000 plus
(ii) warrants held indirectly by Auto Treasure Limited pursuant to 51%
co-ownership of all shares of Auto Treasure Limited, and assumes Auto
Treasure Limited does not exercise its right to purchase 10,000,000 shares
at an exercise price of $2.00 pursuant to warrant issued by the Company,
which vested as of March 16, 2006.
(3) Consists of 200,000 shares held directly by Ms. Liu (i) 9,889,000 plus (ii)
warrants held indirectly by Auto Treasure Limited pursuant to 51%
co-ownership of all shares of Auto Treasure Limited, and assumes Auto
Treasure Limited does not exercise its right to purchase 10,000,000 shares
at an exercise price of $2.00 pursuant to warrant issued by the Company,
which vested as of March 16, 2006.
(4) Consists of 100,000 shares held directly by Mr. Lam
(b) Changes in Control
We know of no contractual arrangements which may at a subsequent date result in
a change of control in the Company.
29
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
An officer of the Company or companies owned by this officer advanced funds to
the Company for working capital purposes. At September 30, 2004, the Company
owed this officer or his companies $165,343. The advances are non-interest
bearing and are payable on demand and are shown as a current liability.
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 $483,234 to Arran. Loss on disposal amounted to $138,277.
On May 3, 2004, Alpha Century Holdings Limited ("ACH"), a wholly owned
subsidiary of Telecom Communications, Inc., (the "Company") entered into the
Software ASP Reseller Agreement (the "Agreement") with Taikang Capital
Managements Corporation d/b/a Taikang Insurance Agencies Managements in China
("Taikang"). Subsequent to the signing of the Agreement, Taikang became an
affiliate of the Company on July 22, 2004, as a result of entering into a stock
purchase agreement with the Company.
Grace Motion, Inc. a company in which a director of the Company has a beneficial
interest, was paid a consulting fee amounting to US $37,180.
The Company advance $5,327 to a company in which a shareholder of the Company
has a beneficial interest. The advances are non-interest bearing and are payable
on demand.
A personal guarantee was granted from Mr. Gary Lam for the lease of an
automobile for $76,923.
TO BE INPUT
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Our financial statements follow the signature page starting on page F-1
3.1 Articles of Incorporation as amended and bylaws are incorporated by
reference to Exhibit No. 3 of Form SB-2 as amended filed November 28, 2001.
(1)
3.11 Certificate of Incorporation of MAS Acquisition XXI Corp. (1)
30
3.2 Articles of Amendment of the Article of Incorporation -
MAS Acquisition XXI Corp. (1)
3.5 By-laws (1)
10.1 Standard Office Lease Gross (1)
10.2 Standard Industrial/Commercial Multi-Tenant Lease (1)
10.3 Amendment to Lease (1)
10.4 Consulting Agreement between Telecom Communications Inc. and GreenTree
Financial Group, Inc. (1)
10.5 Inter-Tel.net Agreement (1)
14 Code of Ethics
31.1 Certification of CEO pursuant to section 302 of the Sarbanes-Oxley Act
of 2002.*
31.2 Certification of CFO pursuant to section 302 of the Sarbanes-Oxley Act
of 2002.*
32.1 Certification of CEO pursuant to section 906 of the Sarbanes-Oxley Act
of 2002.*
32.2 Certification of CFO pursuant to section 906 of the Sarbanes-Oxley Act
of 2002.*
(1) Incorporated by reference to exhibits filed with our registration
statement on form SB-2/A file on 11/28/01.
(*) Filed herewith
(b) Reports on Form 8-K
Form 8-K dated July 22, 2004;
Form 8-K dated July 22, 2004;
Form 8-K dated August 16, 2004;
Form 8-K dated September 17, 2004; and
31
Form 8-K dated October 7, 2004.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
AUDIT FEES
The aggregate fees billed by the Company's auditors for professional services
rendered in connection with the audit of the Company's annual consolidated
financial statements for fiscal 2004 and 2003 and reviews of the consolidated
financial statements included in the Company's Forms 10-KSB for fiscal 2004 and
2003 were approximately $50,000 and $30,000, respectively.
AUDIT-RELATED FEES
The Company's auditors did not bill any additional fees for assurance and
related services that are reasonably related to the performance of the audit or
review of the Company's financial statements and are not reported under "Audit
Fees" above.
TAX FEES
The aggregate fees billed by the Company's auditors for professional services
for tax compliance, tax advice, and tax planning were $0 and $0 for fiscal 2004
and 2003, respectively.
ALL OTHER FEES
The aggregate fees billed by the Company's auditors for all other non-audit
services rendered to the Company, such as attending meetings and other
miscellaneous financial consulting, in fiscal 2004 and 2003 were $0 and $0,
respectively.
32
TELECOM COMMUNICATIONS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
Report of Independent Registered Public Accounting Firm F-2
Consolidated Financial Statements:
Consolidated Balance Sheet F-3
Consolidated Statements of Operations F-4
Consolidated Statement of Stockholders' Equity (Deficit) F-5
Consolidated Statements of Cash Flows F-6 to F-7
Notes to Consolidated Financial Statements F-8 to F-18
CHILD, SULLIVAN & COMPANY
A PROFESSIONAL CORPORATION OF CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------------------------------------
1284 W. FLINT MEADOW DR., SUITE D, KAYSVILLE, UT 84037
PHONE: (801) 927-1337 FAX: (801) 927-1344
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To The Stockholders
Telecom Communications, Inc.
We have audited the accompanying consolidated balance sheet of Telecom
Communications Inc. and Subsidiaries as of September 30, 2004, and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing standards
as established by the AICPA's Auditing Standards Board and in accordance with
the standards of the Public Company Accounting Oversight Board (United States of
America). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Telecom
Communications, Inc. and Subsidiaries as of September 30, 2004, and the results
of their operations and their cash flows for the year then ended, in conformity
with accounting principles generally accepted in the United States of America.
Child, Sullivan and Company
Salt Lake City, Utah
F-2
TELECOM COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEET
September 30,
2 0 0 4
-------
Assets
------
Current assets
Cash and cash equivalents $ 336,707
Accounts receivable 568,294
Due from a related party 5,327
Prepaid expenses and other current assets 94,025
------------
Total current assets 1,004,353
Property, plant and equipment, net 2,208,625
------------
Total assets $ 3,212,978
============
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities
Accounts payable and accrued expenses 356,994
Due to a related party 165,343
------------
Total current liabilities 552,337
------------
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
60,188,000 shares issued and outstanding) 60,188
Additional paid in capital 12,039,406
Accumulated other comprehensive income 133
Accumulated deficit (9,439,086)
------------
Total stockholders' equity 2,660,641
------------
Total liabilities and stockholders' equity $ 3,212,978
============
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
TELECOM COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended
September 30,
-------------
2 0 0 4 2 0 0 3
------- -------
Net Revenues 1,431,473 -
Cost of sales (685,958) -
-------------- ------------
Gross profit 745,515 -
------------- ------------
Operating expenses:
Selling, general and administrative 2,618,084 488,568
------------- ------------
(Loss) from operations (1,872,569) (488,568)
-------------- -------------
Other Income (Expense):
Interest income 45 -
Other income 553,695 -
Gain on disposal of a subsidiary 200,000 -
Acquisition costs (8,126,917) -
-------------- ------------
Total Other (Expense) (7,373,177) -
-------------- ------------
(Loss) from continuing operations (9,245,746) (488,568)
before minority interest
Minority interest in income of subsidiary (35,824) -
-------------- ------------
(Loss) from continuing operations (9,281,570) (488,568)
Income from discontinued operations,
net of income tax of $89,076 518,360 40,068
Loss on sale of discontinued operations (138,277) --
-------------- ------------
Net Income (Expense) $ (8,901,487) $ (448,500)
============== =============
Income per Common Share -
Discontinued Operations $ 0.01 $ -
Loss per Common Share - Continuing
Operations $ (0.20) $ (0.01)
-------------- -------------
Total loss per Common Share -
Basic & diluted $ (0.19) $ (0.01)
============== =============
Weighted Average Common Share
utstanding - Basic & diluted 45,919,882 37,299,000
============= ============
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
TELECOM COMMUNICATIONS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEAR ENDED SEPTEMBER 30, 2003 AND 2004
Common Stock Accumulated
$.001 Par Value Additional Other Total
--------------- Paid In Comprehensive Accumulated Comprehensive Stockholders'
Number of Amount Capital Income(Loss) Deficit Income(Loss) Equity
--------- ------ ------- ------------ ------- ------------ ------
Shares
------
Balance, September 30, 2002 23,800,000 23,800 $ - $ - $ (23,800) $ $ -
Recapitalization of company 13,499,000 13,499 - (65,299) (51,800)
Other comprehensive loss:
Net loss (448,500) (448,500) (448,500)
Comprehensive income - unrealized loss
on foreign currency translation (7,166) (7,166) (7,166)
Total comprehensive loss - - - (455,666) - - -
---------- ------ ---------- ------------ ---------- ----------- -----------
Balance, September 30, 2003 37,299,000 37,299 - (537,599) (7,166) (507,466)
Shares issued in acquisition 9,889,000 9,889 8,312,406 8,322,295
Shares issued for services 3,000,000 3,000 1,737,000 1,740,000
Shares Issued for debt conversion 2,500,000 2,500 497,500 500,000
Shares Issued for software 7,500,000 7,500 1,492,500 1,500,000
Other comprehensive loss:
Net loss (8,901,487) (8,901,487) (8,901,487)
Comprehensive income - unrealized gain
on foreign currency translation 7,299
Total comprehensive loss - - - (8,894,188) - 7,299 7,299
---------- ------ ---------- ------------ ---------- ----------- -----------
Balance, September 30, 2004 60,188,000 60,188 12,039,406 (9,439,086) 133 2,660,641
---------- ------ ---------- ------------ ---------- ----------- -----------
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
TELECOM COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended
September 30,
-------------
2 0 0 4 2 0 0 3
------- -------
Cash flows from operating activities
Net loss (8,901,487) (448,500)
Adjustments to reconcile net loss to net cash provided
by operating activities :
Depreciation - continuing operations 262,027 136,863
Depreciation - discontinued operations 207,073 -
Loss on disposal of equipment 150,310 -
Minority interest 310,489 37,471
Acquisition cost 8,126,917 -
Impairment of goodwill - 32,181
Common Stock issued for services 1,740,000 -
Gain on disposal of subsidiary (200,000) -
Loss on disposal of subsidiary 138,277 -
Changes in operating assets and liabilities :
Accounts receivable 1,010,260 (604,390)
Inventory of real estate held for sale (33,965) (1,551)
Costs and estimated earnings in excess of billings
on uncompleted contracts (3,043,649) 309,171
Retention receivables (669,995) -
Due from related party (4,153) (25,261)
Prepaid and other current assets 425,069 (44,658)
Other assets 11,983 (26,099)
Accrued payable and accrued expenses 762,494 (218,482)
Customer deposits 233,351 627,960
Billings in excess of costs and estimated earnings on 37,740 125,249
uncompleted contract
-------------------------
Net cash provided by(used in) operating activities 562,741 (100,046)
-------------------------
Cash flows from investing activities
Proceeds from sales of discontinued operations 200,000 -
Sales proceeds of disposal of subsidiary net of cash (1,343,810) -
Cash acquired in acquisition - 219,321
Capital expenditure (636,429) (59,603)
-------------------------
Net cash flows provided by (used in) investing activities (1,780,239) 159,718
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
TELECOM COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from financing activities
Due to related party 69,117 64,046
Proceeds from loan payable 304,063 1,090,682
Proceeds from issuance of common stock 20,000 -
-------------------------
Net cash flows provided by financing activities: 393,180 1,154,728
Effect of exchange rate changes in cash 5,590 (58,965)
-------------------------
Net increase (decrease) in cash (818,728) 1,155,435
Cash - beginning of year 1,155,435 -
-------------------------
Cash - end of period 336,707 1,155,435
=========================
Supplemental disclosure of cash flow information:
Non cash investing and financing activities:
Common stock issued for acquisition of software $ 1,500,000 $ -
=========================
Common stock issued for recapitalization $ - $ 217,597
=========================
Acquisition details:
Fair value of assets acquired $ - $ 9,743,773
=========================
Liabilities assumed $ - $ 9,743,773
=========================
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
TELECOM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
1. BUSINESS DESCRIPTION AND ORGANIZATION
THE COMPANY
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. This acquisition gave the Company the ability to
provide low cost access to long distance carriers for individuals needing to
call Latin and South America. The Company's long distance business 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 the sale of
California lottery tickets. Upon making this acquisition, the Company changed
its name to Telecom Communications, Inc.
ACQUISITION OF THE OPERATING SUBSIDIARY AND THE SHARE EXCHANGE
In September 2003, the Company discontinued its above operations and 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 Islands corporation. In exchange for the capital interest, the
majority shareholder and his designate received a total of 23.8 million shares
of Telecom's common stock, representing approximately 64% of the outstanding
shares of Telecom. On the closing of the Stock Purchase Agreement, the majority
shareholder was elected chairman and CEO of the Company.
Telecom conducts all of its business in China through Arran's subsidiary IC Star
MMS Limited ("IC Star"). 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, 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 with 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
F-8
TELECOM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
statement of operations as acquisition expense. On December 15, 2003, the
Company formed Alpha Century Holdings Limited ("Alpha") which is a wholly owned
subsidiary registered in the British Virgin Islands and was formed for
investment holdings. On March 31, 2004, Arran sold its interest in Huiri
Electric (Panyu) Limited ("Huiri") to Alpha for approximately $13,000.
Panyu No.6 Construction Company ("Panyu"), was a 60% owned subsidiary located in
Guangzhou, China, and its business was 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 Company sold Panyu on April 16, 2004 (refer to note 5). For the
year ended September 30, 2003, all operating activity and financial results of
the Company are related to Panyu. Panyu's operating results for the years ended
September 30, 2004 and 2003 are shown as Discontinued Operations.
CONTROL BY PRINCIPAL STOCKHOLDERS
The directors, executive officers and their affiliates or related parties, own
beneficially and in the aggregate, the majority of the voting power of the
outstanding shares of the common stock of the Company. Accordingly, the
directors, executive officers and their affiliates, if they voted their shares
uniformly, would have the ability to control the approval of most corporate
actions, including increasing the authorized capital stock of the Company and
the dissolution, merger or sale of the Company's assets or business.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The consolidated financial statements of the Company, include the accounts of
Telecom, Arran, Alpha, IC Star and Huiri. The 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
F-9
TELECOM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
the People's Republic of China at September 30, 2004. Expenses were translated
at exchange rates in effect during the year, substantially the same as the
period end rates.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONT'D)
CASH AND CASH EQUIVALENTS
For purpose of the cash flow statements, the Company considers all highly liquid
investments with original maturities of three months or less at time of purchase
to be cash equivalents.
TRADE ACCOUNTS RECEIVABLE
Trade accounts receivable are recorded at the invoiced amount and do not bear
interest. The allowance for doubtful accounts represents the Company's best
estimate of the amount of probable credit losses in the existing accounts
receivable balance. The Company determines the allowance for doubtful accounts
based upon historical write-off experience and current economic conditions. The
Company reviews the adequacy of its allowance for doubtful accounts on a regular
basis. Receivable balances past due over 90 days, which exceed a specified
dollar amount, are reviewed individually for collectibility. Account balances
are charged off against the allowance after all means of collection have been
exhausted and the potential for recovery is considered remote. The Company does
not have any off-balance sheet credit exposure related to its customers.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is calculated using
the straight-line method over the expected useful life of the asset. The Company
generally uses the following depreciable lives for its major classifications of
property and equipment:
DESCRIPTION USEFUL LIVES
----------------- ------------
COMPUTER HARDWARE 3 YEARS
COMPUTER SOFTWARE 3 YEARS
F-10
TELECOM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONT'D)
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived tangible assets and definite-lived intangible assets are reviewed for
possible impairment whenever events or changes in circumstances indicate that
the carrying amount of such assets may not be recoverable. The Company uses an
estimate of undiscounted future net cash flows of the assets over the remaining
useful lives in determining whether the carrying value of the assets is
recoverable. If the carrying values of the assets exceed the expected future
cash flows of the assets, the Company recognizes an impairment loss equal to the
difference between the carrying values of the assets and their estimated fair
values. Impairment of long-lived assets is assessed at the lowest levels for
which there are identifiable cash flows that are independent from other groups
of assets. The evaluation of long-lived assets requires the Company to use
estimates of future cash flows. However, actual cash flows may differ from the
estimated future cash flows used in these impairment tests.
RELATED PARTY AND STOCKHOLDERS' LOANS
The caption "Due to related party" 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.
SIGNIFICANT ESTIMATES
Several areas require management's estimates relating to uncertainties for which
it is reasonably possible that there will be a material change in the near term.
The more significant areas requiring the use of management estimates related to
valuation of the useful lives of the Company's equipment and valuation of tax
and other contingent liabilities and the valuation of the stock warrants and
options issued and outstanding.
F-11
TELECOM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONT'D)
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 when there is persuasive evidence of an
arrangement, delivery has occurred, the fee is fixed or determinable,
collectibility is reasonably assured, and there are no substantive performance
obligations remaining.
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.
The functional currency of the Company's Chinese subsidiary, IC Star, is the
Hong Kong dollar (HKD), and for its subsidiary, Panyu No. 6 Construction Company
Limited, Chinese Renminbi (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 for the year ended September 30, 2004 was $7,299.
F-12
TELECOM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
COMPREHENSIVE LOSS
Comprehensive loss includes changes to equity accounts that were not the result
of transactions with shareholders. Comprehensive loss is comprised of net loss
and other comprehensive income and loss items. The Company's comprehensive
income and losses generally consist of changes in the fair value of changes in
the cumulative foreign currency translation adjustment.
INCOME TAXES
Income taxes are accounted for under the asset and liability method in
accordance with SFAS No. 109 "Accounting for Income Taxes". Deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the financial carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax credit
carry forwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
Deferred tax assets are reduced by a valuation allowance to the extent that the
recoverability of the asset is not considered to be more likely than not. The
Company did not provide any current or deferred income tax provision or benefit
for any periods presented to date because it has experienced a net operating
loss since inception and other than the net operating loss, has no other
deferred tax assets or liabilities.
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.
F-13
TELECOM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
3. PROPERTY AND EQUIPMENT
Property and equipment, which is located in China, consisted of the following at
September 30, 2004:
Computer hardware 451,521
Computer software 1,980,000
---------
2,431,521
Less: accumulated depreciation (222,896)
---------
2,208,625
=========
4. RELATED PARTY TRANSACTIONS
An officer of the Company or companies owned by this officer advanced funds to
the Company for working capital purposes. At September 30, 2004, the Company
owed this officer or his companies $165,343. The advances are non-interest
bearing and are payable on demand and are shown as a current liability.
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 $483,234 to Arran. Loss on disposal amounted to $138,277.
On May 3, 2004, Alpha Century Holdings Limited ("ACH") a wholly owned subsidiary
of Telecom Communications, Inc., (the "Company") entered into the Software ASP
Reseller Agreement (the "Agreement") with Taikang Capital Managements
Corporation d/b/a Taikang Insurance Agencies Managements in China ("Taikang").
Subsequent to the signing of the Agreement, Taikang became an affiliate of the
Company on July 22, 2004, as a result of entering into a stock purchase
agreement with the Company. Grace Motion, Inc. a company in which a director of
the Company has a beneficial interest, was paid a consulting fee amounting to US
$37,180.
A personal guarantee was granted from an officer for the lease of an automobile
for $76,923.
The Company advanced $5,327 to a company in which a shareholder of the Company
has a beneficial interest. The advances are non-interest bearing and are payable
on demand.
5. LEASE OBLIGATIONS
Operating Leases
Lessee Costs - In the normal course of business, the Company leases office space
and data centers under noncancelable operating lease agreements. The Company
F-14
TELECOM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
rents office space, primarily for regional sales administration offices, in
commercial office complexes that are conducive to administrative operations. The
majority of the Company's data centers are leased in different locations to
computer servers storage with hosting and facility services. These operating
lease agreements generally contain renewal options that may be exercised at the
Company's discretion after the completion of the base rental term. In addition,
many of the rental agreements provide for regular increases to the base rental
rate at specified intervals, which usually occur on an annual basis. At
September 30, 2004, the Company had operating leases that have remaining terms
of one year. The following table summarizes the Company's future minimum lease
payments under operating lease agreements at September 30, 2004 :
YEAR ENDED
SEPTEMBER 30,
-----------------------------
2005 $17,036
=======
The Company recognizes lease expense on a straight-line basis over the life of
the lease agreement. Contingent rent expense is recognized as it is incurred.
Total rent expense in continuing operations from operating lease agreements was
$27,699 and $ 5,400, for fiscal years 2004 and 2003.
6. CONTINGENT LIABILITIES
During the year, the Company was involved in a lawsuitt brought by third parties
claiming for unspecified damages for alleged breach of contract and an
injunction to restrain them from using items with entertainment content. 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.
7. STOCK TRANSACTIONS
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, par value
F-15
TELECOM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
$.001 per share for an aggregate purchase price of $1,500,000.Simultaneous with
this transaction, Taikang converted the $500,000 Convertible Promissory Note
into 2,500,000 shares of Common Stock. 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. Total shares issued for services rendered was 1,740,000.
8. 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 carried forward 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 $ 49,037 of unused operating loss carryforwards and based on a 30%
tax rate has a deferred tax asset of approximately $14,711. The Company recorded
a valuation allowance for the same amount at September 30, 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.
9. DISCONTINUED OPERATIONS
During the year, the Company sold the operations of Panyu. Under the provisions
of SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets,
the financial results of these operations were classified as discontinued
operations in the accompanying consolidated statements of operations, net of
tax, in 2004. The net income (loss) from discontinued operations consisted of
the following during the year:
F-16
TELECOM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
Total pre-tax profit from discontinued
operations 607,436
Total income tax provision from discontinued
operations (89,076)
-----------
Income from discontinued operations, net of
income tax $ 518,360
===========
10. RECENT ACCOUNTING PRONOUNCEMENTS
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities. This statement addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force ("EITF") Issue No. 94-3, Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring). This statement applies to
costs associated with an exit activity that does not involve an entity newly
acquired in a business combination or with a disposal activity covered by SFAS
No. 144. These costs include, but are not limited to, termination benefits
provided to current employees that are involuntarily terminated under the terms
of a benefit arrangement that, in substance, is not an ongoing benefit
arrangement or an individual deferred compensation contract, costs to terminate
a contract that is not a capital lease and costs to consolidate facilities or
relocate employees. This statement does not apply to costs associated with the
retirement of a long-lived asset covered by SFAS No. 143, Accounting for Asset
Retirement Obligations. This statement was adopted effective January 1, 2004,
and it did not have an impact on the Company's current financial position or its
results of operations.
On December 31, 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure. SFAS No. 148 amends SFAS No. 123,
Accounting for Stock-Based Compensation, to provide alternative methods of
transition to SFAS No. 123's fair value method of accounting for stock-based
employee compensation. SFAS No. 148 also amends the disclosure provisions of
SFAS No. 123 and APB Opinion No. 28, Interim Financial Reporting, to require
disclosure in the summary of significant accounting policies of the effects of
an entity's accounting policy with respect to stock-based employee compensation
on reported net income and earnings per share in annual and interim financial
statements. While SFAS No. 148 does not amend SFAS No. 123 to require companies
to account for employee stock options using the fair value method, the
disclosure provisions of SFAS No. 148 are applicable to all companies with
stock-based employee compensation, regardless of whether they account for that
compensation using the fair value method of SFAS No. 123 or the intrinsic value
method of APB Opinion No. 25. The Company adopted the required disclosure
provisions of SFAS No. 148 effective January 1, 2003, and its application did
F-17
TELECOM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
not have an impact on the Company's current financial position or its results of
operations.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150
establishes standards for how companies classify and measure certain financial
instruments with characteristics of both liabilities and equity. It requires
companies to classify a financial instrument that is within its scope as a
liability (or an asset in some circumstances). SFAS No. 150 is effective
beginning with the second quarter of fiscal 2004. This statement was adopted
effective January 1, 2004, and it did not have an impact on the Company's
current financial position or its results of operations.
11. CAPITAL COMMITMENT
As of the balance sheet date, the Company has a capital commitment on a purchase
of motor vehicles for an aggregate purchase price of USD $84,617.
12. SUBSEQUENT EVENTS
On October 7, 2004, Telecom entered into a stock purchase agreement with
Taikang, an affiliate of the Company, for the purchase of 10,000,000 shares of
the Company's common stock, par value $.001 per share for an aggregate purchase
price of $2,000,000.
F-18
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
as amended, the registrant caused this report to be signed on its behalf by the
undersigned and duly authorized on December 29, 2004.
Telecom Communications, Inc..
By: /s/ Shanhe Yang
-------------------------------------
Shanhe Yang
Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this report to be signed on its behalf by the undersigned,
hereunto duly authorized.
TELECOM COMMUNICATIONS, INC.
Date: December 29, 2004 By: /s/ Guosheng Liu
------------------------------------
Guosheng Liu
Chairman of the Board
Date: December 29, 2004 By: /s/ Shanhe Yang
------------------------------------
Shanhe Yang
CEO, and President
Date: December 29, 2004 By: /s/ Lijian Deng
------------------------------------
Lijian Deng
Secretary , Treasurer and Director
Date: December 29, 2004 By: /s/ Gary Lam
------------------------------------
Gary Lam
Principal Financial and Accounting
Officer
Date: December 29, 2004 By: /s/Lirong Liu
------------------------------------
Lirong Liu
Chief Information Officer and
Director