U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________
FORM 10-QSB
____________________
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2004
| | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
For the transition period from ________ to ________
Commission file number 333-62236
____________________
TELECOM COMMUNICATIONS, INC.
(Exact name of small business issuer as specified in its charter)
____________________
INDIANA 35-2089848
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ROOM 1602, 16/F., 5-9 OBSERVATORY COURT, TST, HONG KONG
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(852)2782 0983
ISSUER'S TELEPHONE NUMBER
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
____________________
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes |X| No | |
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 70,188,000 shares of Common Stock,
$.001 Par Value Per Share, outstanding as of January 28, 2005.
Transitional Small Business Disclosure Format (Check One): Yes | | No |X|
TABLE OF CONTENTS
Page
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PART I. FINANCIAL INFORMATION..................................................1
ITEM 1. FINANCIAL INFORMATION............................................1
Condensed Consolidated Balance Sheet as of December 31, 2004.....1
Condensed Consolidated Statements of Operations for the
Three Months Ended December 31, 2004 and 2003.................2
Condensed Consolidated Statements of Cash Flows for the Three
Months Ended December 31, 2004 and 2003.......................4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS........................................7
ITEM 3. CONTROLS AND PROCEDURES.........................................14
PART II. OTHER INFORMATION...................................................14
ITEM 1. LEGAL PROCEEDINGS...............................................14
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.......................14
ITEM 3. EXHIBITS AND REPORTS ON FORM 8-K................................14
SIGNATURES....................................................................16
PART I. FINANCIAL INFORMATION
TELECOM COMMUNICATIONS, INC. AND SUBSIDIARIES
ITEM 1. FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEET
December 31,
2 0 0 4
-------
(Unaudited)
-----------
Assets
------
Current assets
Cash and cash equivalents $ 324,702
Accounts receivable 1,311,026
Due from a related party -
Prepaid expenses and other current assets 34,143
------------
Total current assets 1,669,871
Property, plant and equipment, net 3,962,810
------------
Total assets $ 5,632,681
============
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities
Accounts payable and accrued expenses 385,971
Other loan 60,808
Due to a related party 162,181
------------
Total current liabilities 608,960
------------
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
70,188,000 shares issued and outstanding) 70,188
Additional paid in capital 14,029,406
Accumulated other comprehensive income 248
Accumulated deficit (9,076,121)
-------------
Total stockholders' equity 5,023,721
------------
Total liabilities and stockholders' equity $ 5,632,681
============
The accompanying notes are an integral part of the condensed
consolidated financial statements.
TELECOM COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
------------------
December 31,
------------
2 0 0 4 2 0 0 3
------- -------
(Unaudited) (Unaudited)
----------- -----------
Net Revenues 1,575,338 632,578
Cost of sales (786,557) (126,516)
------------- -------------
Gross profit 788,781 506,062
------------- -------------
Operating expenses:
Selling, general and administrative (432,968) (111,442)
------------- -------------
Income/(Expense) from operations 355,813 394,620
------------- -------------
Other Income/(Expense):
Interest income 112 -
Other income 7,590 -
Interest expense (550) (58)
Acquisition costs - -
------------- -------------
Total Other Income/(Expense) 7,152 (58)
------------- -------------
Income/(Expense) from operations 362,965 394,562
before income taxes
Provision for income taxes -
------------- -------------
Income from continuing operations 362,965 394,562
Income from discontinued operations, - 103,030
------------- -------------
Profit before minority interest - 497,592
Minority interest in income of subsidiary - (78,912)
------------- --------------
Net Income $ 362,965 $ 418,680
============= =============
Earnings per Common Share -
Discontinued Operations
Basic & diluted $ - $ 0.01
============= =============
Earnings per Common Share-
Continuing Operations
Basic & diluted $ 0.01 $ 0.01
============= =============
Weighted Average Common Share
outstanding - Basic & diluted $ 69,629,000 $ 37,299,000
============= =============
The accompanying notes are an integral part of the condensed
consolidated financial statements.
2
TELECOM COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
December 31,
------------
2 0 0 4 2 0 0 3
------- -------
(Unaudited) (Unaudited)
-----------------------------
Net cash provided by/(used in) operating activities 64,851 (100,046)
Cash flows from investing activities
Cash acquired in acquisition - 219,321
Capital expenditure (67,672) (59,603)
-----------------------------
Net cash flows (used in)/provided by investing activities (67,672) 159,718
-----------------------------
Cash flows from financing activities
Due to related party (3,162) 64,046
Repayment of finance lease (6,137) -
Proceeds from loan payable - 1,090,682
-----------------------------
Net cash flows (used by)/provided by financing activities: (9,299) 1,154,728
Effect of exchange rate changes in cash 115 (58,965)
-----------------------------
Net (decrease)/increase in cash and cash equivalents (12,005) 1,155,435
Cash and cash equivalents - beginning of period 336,707 -
-----------------------------
Cash and cash equivalents - end of period 324,702 1,155,435
=============================
Supplemental disclosure of cash flow information:
Non cash investing and financing activities:
Common stock issued for acquisition of software 2,000,000 -
=============================
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 the condensed
consolidated financial statements.
3
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and with the
instructions to Form 10-QSB and Item 310 of Regulation S-B. Accordingly, they do
not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for annual
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. The accounts of the Company and all of its subsidiaries are
included in the condensed consolidated financial statements. All significant
intercompany accounts and transactions are eliminated in consolidation.
Operating results for the interim periods are not necessarily indicative of the
results that may be expected for the year ending September 30, 2005. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's Form 10-KSB for the year ended September 30,
2004.
BUSINESS DESCRIPTION AND ORGANIZATION
THE COMPANY
Telecom Communications, Inc. (the "Company" or "Telecom") was incorporated on
January 6, 1997 in the State of Indiana.
On September 30, 2003, Telecom consummated a Stock Purchase Agreement with Arran
Services Limited ("Arran") and its sole shareholder (the "majority
shareholder"), for the acquisition of all of the capital stock of Arran, a
British Virgin Island corporation. In exchange for the capital interest, the
majority shareholder and his designate received a total of 23.8 million shares
of Telecom'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 then majority shareholder of the Company, the remaining
20% interest of IC Star together with 100% interest of Huiri Electric (Panyu)
Limited ("Huiri") 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 and Huiri. This transfer was deemed to be a transfer between entities
under common control and was therefore recorded on the Company's records at its
historical cost basis. In connection to the new issuance of 9,889,000 shares of
Telecom common stock and 10,000,000 warrants (expire March 15, 2006), the excess
of the purchase consideration of $8,322,295 over the book value of the net
assets of $195,378 acquired amounted to $8,126,917 and was recorded in the
consolidated statement of operations as acquisition expense.
On December 15, 2003, the Company formed Alpha Century Holdings Limited
("Alpha"), which is a wholly owned subsidiary registered in British Virgin
Islands and was formed for investment holdings. On March 31, 2004, Arran sold
its interest in Huiri to Alpha for approximately $13,000.
In July 2004, Telecom started to conduct its business through Alpha and the
principal activity of Alpha was the provision of (i) total solution software
with entertainment and lifestyle information and (ii) a mobile message service
platform.
Panyu No.6 Construction Company ("Panyu"), was a 60% owned subsidiary located in
Guangzhou, China, and its business was an integrated construction company. The
Company sold Panyu on April 16, 2004. Panyu's operating results for the three
months ended December 31, 2003 are shown as Discontinued Operations in the
consolidated statements of income.
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.
4
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The condensed consolidated financial statements of the Company, include the
accounts of Telecom, Arran, Alpha, IC Star 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
Arran, Alpha and IC Star and the People's Republic of China Chinese Yuan
Renminbi, to be the functional currency of Huiri. There were no material gains
or losses or effect of exchange rate changes on cash recognized as a result of
translating foreign currencies to the U.S. dollars due to the stability of the
currency. No assurance however, can be given as to the future valuation of the
foreign currencies and how further movements in the foreign currencies could
affect future earnings of the Company.
The balance sheets of all foreign subsidiaries were translated at period end
exchange rates. All of the Company's material long-lived assets are located in
the People's Republic of China at December 31, 2004. Expenses were translated at
exchange rates in effect during the year, substantially the same as the period
end rates.
RELATED PARTY AND STOCKHOLDERS' LOANS
The caption "Due to related party" 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 are 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
EARNINGS PER SHARE
Basic earnings per common share ("EPS") is calculated by dividing net earnings
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.
5
3. RELATED PARTY TRANSACTIONS
An officer of the Company, or companies owned by this officer, advanced funds to
the Company for working capital purposes. At December 31, 2004, the Company owed
this officer or his companies $162,181. The advances are non-interest bearing
and are payable on demand and are shown as a current liability.
Grace Motion, Inc., a company in which a director of the Company has a
beneficial interest, was paid a consulting fee amounting to US $11,538.
A personal guarantee was granted by Mr. Gary Lam for the lease of an automobile
for $76,923.
4. STOCK TRANSACTIONS
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 that was paid to the Company in the form of software.
5. 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 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. The Company has
available approximately $ 344,968 of unused operating loss carryforwards and
based on a 33% tax rate has a deferred tax asset of approximately $113,840. The
Company recorded a valuation allowance for the same amount at December 31, 2004.
No provision for Hong Kong profits tax is made as the Company's income is
sourced outside Hong Kong.
The company will withhold and pay income taxes on its employees' wages, which
funds the Chinese government's sponsored health and retirement programs of all
the employees.
6. SUBSEQUENT EVENTS
On January 14, 2005, the Company filed a preliminary proxy statement with the
SEC for the following proposals.
Proposal 1 - To consider and approve the reincorporation of the Company in the
State of Delaware (the "Reincorporation Proposal") and to adopt a new
certificate of incorporation and bylaws as part of the merger. Proposal 1
requires the affirmative vote of a majority of the outstanding shares of Common
Stock.
Proposal 2 - To authorize the Board of Directors to amend the Articles of
Incorporation (the "Company's Articles") to effectuate a reverse split of the
outstanding shares of common stock of the Company on a 2 to 1 basis. If Proposal
2 is approved, a reverse split would be adopted regardless of whether the
Reincorporation Proposal is approved. If the Reincorporation Proposal is
approved, Proposal 2 will require the affirmative vote of a majority of the
outstanding shares of Common Stock. If the Reincorporation Proposal is not
approved, Proposal 2 will require the affirmative vote of a majority of votes
cast as is required under Indiana law; and
Proposal 3 - To elect directors to serve on the Board of Directors for a term of
one year expiring at the 2006 annual meeting of stockholders or until their
successors are duly elected. The 5 directors receiving the most number of votes
shall be elected.
On January 27, 2005, a written charter of the Audit Committee of the Board of
Directors was approved by the full Board.
As set forth in more detail in the charter, the Audit Committee's primary
responsibilities fall into three broad categories:
a. the Committee is charged with monitoring the preparation of quarterly
and annual financial reports by our Management, including discussions
with our Mangagement and the outside auditors about draft annual
financial statements and key accounting and reporting matters;
b. the Committee is responsible for matters concerning the relationship
between us and the outside auditors, including their appointment or
removal; reviewing the scope of their audit services and related fees,
as well as any other services being provided to us; and determining
whether the outside auditors are independent (based in part on the
annual letter provided to us pursuant to Independence Standards Board
Standard No. 1); and
c. the Committee oversees Management's implementation of effective
systems of internal controls, including review of policies relating to
legal and regulatory compliance, ethics and conflicts of interests.
On January 27, 2005, a written charter of the Audit Committee of the Board of
Directors was approved by the full Board.
As set forth in more detail in the charter, the Audit Committee's primary
responsibilities are as set forth below:
It is the duty of the Compensation Committee to develop, administer and review
our compensation plans, programs, and policies; to monitor the performance and
compensation of executive officers; and to make appropriate recommendations and
reports to the Board of Directors relating to executive compensation.
On January 27, 2005, a written Code of Ethics for Senior Financial Officers was
approved by the full Board.
As set forth in more detail in the charter, the Code of Ethics outlines the
duties and responsibilities of the Senior Financial Officers, including honest
and ethical conduct, filing and maintenance of financial records and periodic
reports, and compliance with applicable laws, rules and regulations.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This periodic report contains certain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 with respect to
the financial condition, results of operations, business strategies, operating
efficiencies or synergies, competitive positions, growth opportunities for
existing products, plans and objectives of management. Statements in this
periodic report that are not historical facts are hereby identified as
"forward-looking statements" for the purpose of the safe harbor provided by
Section 21E of the Exchange Act and Section 27A of the Securities Act.
Prospective shareholders should understand that several factors govern whether
any forward-looking statement contained herein will be or can be achieved. Any
one of those factors could cause actual results to differ materially from those
projected herein. These forward-looking statements include plans and objectives
of management for future operations, including plans and objectives relating to
the products and the future economic performance of the Company. Assumptions
relating to the foregoing involve judgments with respect to, among other things,
future economic, competitive and market conditions, future business decisions,
and the time and money required to successfully complete development projects,
all of which are difficult or impossible to predict accurately and many of which
are beyond the control of the Company. Although we believe that the assumptions
underlying the forward-looking statements contained herein are reasonable, any
of those assumptions could prove inaccurate and, therefore, there can be no
assurance that the results contemplated in any of the forward-looking statements
contained herein will be realized. Based on actual experience and business
development, the Company may alter its marketing, capital expenditure plans or
other budgets, which may in turn affect the our results of operations. In light
of the significant uncertainties inherent in the forward-looking statements
included herein, the inclusion of any such statement should not be regarded as a
representation by the Company or any other person that the objectives or plans
of the Company will be achieved.
The following analysis of the results of operations and financial condition of
the Company should be read in conjunction with the financial statements of
Telecom Communications, Inc. ("TCOM") for the year ended September 30, 2004 and
notes thereto contained in the report on Form 10-KSB as filed with the
Securities and Exchange Commission.
OVERVIEW
We are a leading value-added information service provider for China and the
global Chinese community. 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, 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 facilitate the collaboration of key business processes such as,
corporate and marketing communications, membership distance interactive program,
product development, customer relationship management and content management by
allowing dispersed enterprise users to collaborate in real time with multimedia
message services.
Our business model is built on the integration of strong entertainment &
lifestyle content, network database and the application of technology. Network
database was established by signing contracts with strategic partners and
collected 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 MMS
Limited (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
of local artists in the world. By integrating the network database and contents
7
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 on entertainment and
lifestyle contents 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 as a result of increased customer acceptance. We will target the
enterprise multimedia communications market in China which we believe has
significant growth potential. We have been able to sign three contracts with
business partners since October 2004 because our latest products, SEO4Miblie
(Search Engine Optimization for mobile phones) and AdMaxB2Search, have proved
our strength in innovative and creative value-added service.
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 AdMaxB2Search platform by entering into business contracts with
enterprises for a fixed monthly fee. The management of Telecom is especially
confident that SEO4Mobile and AdMaxB2Search platform will provide excellent
revenue when these two products gain popularity within the mobile phone users.
BUSINESS PARTNERSHIP DEVELOPMENTS
On October 26, 2004, IC Star MMS Limited (http://www.icstarmms.com) has entered
into a cooperation with Baidu.com (http://www.baidu.com), the number one Chinese
internet search engine. Under the agreement, IC Star MMS will work with
Baidu.com to develop Short Messaging Service (SMS), Multimedia Messaging Service
(MMS), and other wireless content 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 Vision Technology
Limited 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 such content. Aries Vision Technology is
currently producing an animated feature films to be broadcast on Cartoon Channel
in China during the second quarter of 2005. Gold Swallow Shop has invested 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 grant a first
right for exclusive arrangement wireless value-added service of all products and
contents that are developed by the joint venture from time to time.
On November 15, 2004, IC Star MMS Limited (http://www.icstarmms.com), has
entered into cooperation with the wireless business division of Beijing eLong
Information Techlonogy 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 MMS will utilize the best of its pool of
celebrity and their 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.
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
8
base and revenues. Linktone's current focus on SMS allows potential access to
virtually all of China's 185 million Global System for Mobile communications
("GSM") subscribers, among users of SMS, and familiarity with its functions,
continues to increase rapidly month to month. Linktone's consumer services focus
on entertainment, messaging and personalized information.
Linktone has also established itself as a provider of innovative enterprise
solutions. In May 2002, Linktone partnered with McDonald's Corporation (China)
to launch a first of its kind, nationwide SMS promotion for the 2002 World Cup
Tournament in Japan and Korea. Linktone has also worked to promote feature
films, television programs, major entertainment events, and consumer goods.
Although SMS remains Linktone's core focus, the Company has developed offerings
for the mobile operators that include WAP over GPRS, WAP over CDMA, EMS, MMS,
location-based and cell-broadcasting content and applications, as well as a
number of products, scheduled for release later this year, for China Mobile's
new 2.5G GPRS network. Linktone's headquarters are located in Shanghai, and the
Company maintains regional offices in Beijing, Guangzhou, Fuzhou, Qingdao and
Xian.
5Wan.com
5wan International concentrates on tens of millions of cell phone users offering
the finest in humanization, high technology, and mobile entertainment. They are
working hard to provide top level and exciting entertainment services for
Chinese mobile users, and provide much better WAP games. In China, 5wan has
already launched several WAP games, and achieved great success. Their first
release was the first role play WAP game - "SYZF"; 5wan then introduced the
release of the first multi-person SMS game - "king of fighter". () 5wan's
products and services are based on WAP, SMS, GPRS, Java and MPEG4. Also, 5wan is
the first software developer to pass the Ericsson GPRS test. Ericsson (ERICY)
has already used 5wan's game software into its application integration,
recommended formally by China Mobile (CHL).
3721 Inter China Network Software Co. Ltd
3721 Inter China Network Software Co. Ltd (www.3721.com), which was acquired by
Yahoo! Holdings (Hong Kong) Ltd., a wholly owned subsidiary of Yahoo!, Inc.
Under the agreements, the partners started to market ICStar MMS's short messages
service (SMS), Multimedia Messages Services (MMS), ring tones, broadband to its
own multi-millions users . ICStarMMS will provide entertainment information
celebrities as its core competency and other wireless contents such as wall
paper and gaming. Both companies will work together to provide better customer
preferred type of wireless/Internet products and services to lead a new trend of
entertainment era in China.
Tencent Company Limited
Tencent is one of the first Internet Instant Messaging (IM) software developers
in China, and a leading provider for Internet and mobile value-added services
with a focus on IM and related value-added services. Its holding company,
Tencent Holdings Limited, has been listed on the Hong Kong Stock Exchange since
June 2004. Tencent was founded in November 1998 in Shenzhen, China. In February
1999, Tencent launched its first IM software--"Tencent QQ." Over the past five
years, Tencent has strived to pursue technological advancement while maintaining
a steady high growth in users. The vast community of Tencent QQ users
demonstrates Tencent's technological strength in operating massive online
application systems and IM-related applications.
Tencent users can communicate real time with each other via our IM platform with
their PCs, mobile and fixed line phones, as well as various terminal devices.
Not only can users communicate via text, images, audio, video and email, but
they also have access to various Internet services and mobile value-added
services designed to enhance the community experience, including mobile games,
dating, content downloads and other entertainment services.
Under the agreements, the partners started to market IC Star's and ACH's short
messages service (SMS), Multimedia Message Services, ring tones, and broadband
to their own multi-millions of users. IC Star will provide entertainment
9
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 to lead a new trend of offering
Total Solutions to corporations through wireless and Internet communications in
China.
IMPACT OF INFLATION
We believe that inflation has had a negligible effect on operations during the
period. We believe that we can offset inflationary increases in the cost of
sales by increasing sales and improving operating efficiencies.
TRENDS, EVENTS, AND UNCERTAINTIES
Demand for the Company's products will be dependent on, among other things,
market acceptance of the Company's concept, the quality of its products and
general economic conditions, which are cyclical in nature. Inasmuch as a major
portion of the Company's activities is the receipt of revenues from the sales of
its products, the Company's business operations may be adversely affected by the
Company's competitors and prolonged recessionary periods.
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMER 31, 2004 COMPARED TO THREE MONTHS ENDED
DECEMBER 31, 2003
The following table shows the selected unaudited condensed consolidation income
statement data of the Company and its subsidiaries for the three-month period
ended December 31, 2004. The data should be read in conjunction with the audited
and unaudited Condensed Consolidated Financial Statements of the Company and
related notes thereto.
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
December 31,
---------------------------------
2004 2003
-------------- --------------
Net revenues $ 1,575,338 $ 632,578
Cost of sales (786,557) (126,516)
-------------- --------------
Gross profit 788,781 506,062
Operating expenses (432,968) (111,442)
-------------- --------------
Income from operations 355,813 394,620
-------------- --------------
Other income (expense):
Interest income 112 -
Other income 7,590 -
Gain on disposal of subsidiary - -
Interest expense (550) (58)
Acquisition costs - -
-------------- --------------
Total other income/ (expense) 7,152 (58)
-------------- --------------
Income from operations before income taxes 362,965 394,562
Provision for income taxes - -
-------------- --------------
Income from continuing operations
before discontinued operations 362,965 394,562
Income from discontinued operations - 103,030
-------------- --------------
Profit before minority interest - 497,592
Minority interest in income of subsidiary - (78,912)
-------------- --------------
Net Income/(loss) $ 362,965 $ 418,680
============== ==============
Earnings per common share -
Discontinued operations
Basic & diluted $ - $ 0.01
============== ==============
Earnings per common share -
Continued operations
Basic & diluted $ 0.01 $ 0.01
============== ==============
Weighted average common share Outstanding -
basic & diluted 69,629,000 37,299,000
-------------- --------------
REVENUES
Revenues recorded at $1,575,338 for the three month period ended December 31,
2004 compared to $632,578 for the same period ended December 31, 2003, an
increase of $942,760 reflecting the change of our business model from profit
sharing to fixed monthly fee income by contracting with clients. Revenues for
the period ended December 31, 2004 were generated from communication services
including our products namely Total Solutions and SEO4Mobile.
COSTS AND EXPENSES
Cost of sales was $786,557 for the three month period ended December 31, 2004
or 50% of net revenue compared to $126,516 for the same corresponding period
ended December 2003. Cost of sales consists of purchase of various contents and
other later stage production from raw contents and costs associated with the
performance of our communication services.
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For the three months ended December 31, 2004, we incurred operating expenses of
$432,968 as compared to $111,442 for the same period at December 31, 2003. The
$432,968 of 2004 included general operating expenses of $116,511 or 7.4% of net
revenue and depreciation expense of $316,368 or 20.1% of net revenue.
Interest expense was recorded at $550 and interest income was $112 for the three
months ended December 2004 representing 0.03% and 0.01% of net revenue
respectively.
Other income of $7,590 was recorded as the collection of loan receivable that
was originally owed to the Company by the sold subsidiary in November 2003.
OVERALL
We reported net income for the three months ended December 31, 2004 of $362,965.
This translates to overall per-share profit of $.01 for the three months ended
December 31, 2004.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2004, we had a cash balance of $324,702 held in The People's
Republic of China, Hong Kong. We currently have no cash positions in the United
States. We have been funding our operations from the receipts from customers.
At December 31, 2004, the Company owed one officer or his companies $162,181.
The advances are non-interest bearing and are payable on demand.
Management has invested substantial time evaluating and considering numerous
proposals for possible acquisitions or combinations developed by management or
presented by investment professionals, the Company's advisors and others. We
continue to consider acquisitions, business combinations, or start up proposals,
which could be advantageous to shareholders. No assurance can be given that any
such project, acquisition or combination will be concluded.
Our Company's future operations and growth will likely be dependent on our
ability to raise capital for expansion and to implement our strategic plan.
Net cash provided by operations was $64,851 for the three months ended December
31, 2004. In the future, we may use cash in our operations due to the continuing
implementation of our business model and increased expenses from costs
associated with being a public company.
Net cash used in investing activities for the three months ended December 31,
2004 was $67,672, all of which was used for capital expenditures.
Net cash required by financing activities was $9,299.
We currently have no material commitments for capital expenditures. Our future
growth is dependent on our ability to raise capital for expansion, and to seek
additional revenue sources. If we decide to pursue any acquisition opportunities
or other expansion opportunities, we may need to raise additional capital,
although there can be no assurance such capital-raising activities would be
successful.
OPERATING RISK
Currently, the Company's revenues are primarily derived from the reselling of
software to enterprises, large corporations, and the academic sector, as well as
telecom-related services to customers in the Peoples Republic of China ("PRC").
The Company hopes to expand its operations to countries outside the PRC,
however, such expansion has not been commenced and there are no assurances that
the Company will be able to achieve such an expansion successfully. Therefore, a
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downturn or stagnation in the economic environment of the PRC could have a
material adverse effect on the Company's financial condition.
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
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.
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.
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.
OUR BUSINESS DEPENDS SIGNIFICANTLY UPON THE PERFORMANCE OF OUR SUBSIDIARIES,
WHICH IS UNCERTAIN.
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
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:
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- 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 for our common stock may have a depressive effect on the
market price for our common stock.
ITEM 3. CONTROLS AND PROCEDURES
Our Chief Executive Officer and Chief Financial Officer (collectively, the
"Certifying Officers") are responsible for establishing and maintaining
disclosure controls and procedures for us. Based upon such officers' evaluation
of these controls and procedures as of a date within 45 days of the filing of
this Quarterly Report, and subject to the limitations noted hereinafter, the
Certifying Officers have concluded that our disclosure controls and procedures
are effective to ensure that information required to be disclosed by us in this
Quarterly Report is accumulated and communicated to management, including our
principal executive officers as appropriate, to allow timely decisions regarding
required disclosure.
The Certifying Officers have also indicated that there were no significant
changes in our internal controls or other factors that could significantly
affect such controls subsequent to the date of their evaluation, and there were
no corrective actions with regard to significant deficiencies and material
weaknesses.
Our management, including each of the Certifying Officers, does not expect that
our disclosure controls or our internal controls will prevent all error and
fraud. A control system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control
system are met. In addition, the design of a control system must reflect the
fact that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within a Company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people or by management
override of the control. The design of any systems of controls also is based in
part upon certain assumptions about the likelihood of future events, and their
can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions. Over time, control may become inadequate
because of changes in conditions, or the degree of compliance with the policies
or procedures may deteriorate. Because of these inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur and
not be detected.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On October 7, 2004, Telecom entered into a stock purchase agreement with Taikang
Capital Managements Company ("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. The proceeds were used to
purchase an asset in relation to our latest products SEOO4Mobile.
ITEM 3. EXHIBITS
(A) EXHIBITS
EXHIBIT NUMBER
--------------
14
31.1 Rule 13a-14(a)/15d-14(a) Certification (CEO)*
31.2 Rule 13a-14(a)/15d-14(a) Certification (CFO)*
32.1 Section 1350 Certification (CEO)*
32.2 Section 1350 Certification (CFO)*
*Filed herewith.
(B) REPORTS ON FORM 8-K
o Form 8-K dated July 22, 2004;
o Form 8-K dated July 22, 2004;
o Form 8-K dated August 16, 2004;
o Form 8-K dated September 17, 2004;
o Form 8-K dated October 7, 2004;
o
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
Date: February 1, 2005 TELECOM COMMUNICATIONS, INC.
By: /s/ Shanhe Yang
-----------------------------
Shanhe Yang
President and CEO
(Principal Executive Officer)
Date: February 1, 2005 By: /s/ Gary Lam
-----------------------------
Gary Lam
Principal Financial and
Accounting Officer
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