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, 2003
[ ] 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)
74 Shanan Road, Panyu, Guangzhou, GD 511490, China
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(Address of principal executive offices)
(8620)8487 9179
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(Issuer's telephone number)
Securities registered under Section 12(b) of the
Securities Exchange Act of 1934:
Title of Each Class Name of Each Exchange 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
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(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: $6,960,725
State the aggregate market value of the voting stock held by non-affiliates of
the registrant on December 31, 2003 computed by reference to the closing bid
price of its Common Stock as reported by the OTC Bulletin Board on that date
($0.90 per share): $4.95 million.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
Number of shares of common stock outstanding as of December 31, 2003: 47,188,000
Number of shares of preferred stock outstanding as of December 31, 2003: None
ii
TELECOM COMMUNICATIONS, INC.
FORM 1O-KSB
TABLE OF CONTENTS
Page
PART I.........................................................................1
Item 1. Description of Business...........................................1
Item 2. Description of Property...........................................8
Item 3. Legal Proceedings.................................................8
Item 4. Submission of Matters to a Vote of Security Holders...............9
PART II........................................................................9
Item 5. Market for Common Equity and Related Stockholder Matters..........9
Item 6. Management's Discussion and Analysis or Plan of Operation........11
Item 7. Financial Statements.............................................18
Item 8. Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure ......................................18
Item 8A. Controls and Procedures.........................................18
PART III......................................................................19
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(1) of the Exchange Act..............19
Item 10. Executive Compensation...........................................20
Item 11. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters................................21
Item 12. Certain Relationships and Related Transactions...................21
Item 13. Exhibits and Reports on Form 8-K.................................22
Item 14. Principal Accountant Fees and Services...........................23
iii
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 that was 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 shares after giving effect to the acquisition. MAS Capital
Inc. returned 7,272,400 shares of common stock for cancellation without any
consideration.
On September 30th, 2003, Telecom Communications, Inc. ("Telecom") consummated a
Stock Purchase Agreement with Arran Services Limited ("Arran") and its sole
shareholder, Mr. Fred Chiyuan Deng, for the acquisition of all of the capital
stock of Arran, a British Virgin Island corporation. In exchange for the capital
interest, Mr. Deng and his designate received a total of 23.8 million shares of
Telecom common stock, representing approximately 64% of the outstanding shares
of Telecom. On December 31, 2003, TCOM acquired extra 20% interest of IC Star
MMS from Auto Treasure Holdings Limited, 100% owned by Mr. Fred Deng, for a
consideration of 9,889,000 shares of TCOM common stock and 10,000,000 warrants
to purchase 10,000,000 TCOM common stock at $2 per share. As a result, TCOM owns
100% of IC Star MMS as of December 31, 2003.
On the closing of the Stock Purchase Agreement, Mr. Deng was elected chairman
and CEO. Mr. Ou Zhixiong, and Ms. Lijian Deng were elected as directors. In
connection with the acquisition, Mr. Tak Hiromoto resigned as chairman and CEO
of Telecom, but continues as President and as a director of Telecom. Ms.
Elizabeth Hiromoto continues 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.
On September 30, 2003, Telecom discontinued its current operations in the U.S.
OVERVIEW
Our wholly-owned subsidiary, Arran Services Limited ("The Company") was founded
on December 3, 2001 and commenced its operations in January 2003. Arran, through
its acquisition of partially-owned subsidiaries, is engaged in the construction
of communication infrastructure and residential and commercial buildings and is
a content provider focused on design and development of entertainment content.
Arran is targeting users of mobile devices such as mobile phone and PDA's. The
Company has been working together with other local Chinese companies to develop
telecommunication value-added service application software and system
integration for commercial, industrial, cultural and educational usage.
The participation in the communication infrastructure construction, through
regular construction company, allows the Group to leverage its strength of
content development in delivering its services to boarder communities. Network
infrastructure has always been considered as the necessary fundamental necessity
for telecommunication industry.
By contracting with various service providers, the Company expands its delivery
capacity across China by providing lifestyle information to end-users through
Short Message Service, Multimedia Messaging Service or other wireless devices.
IC Star MMS Limited, one of its subsidiaries, has entered into a service
agreement with a distribution partner in China, namely IC Soft. The aforesaid
service agreement would enable the Company to distribute its latest
entertainment news and lifestyle information contents through the distribution
partner to subscribers of China Mobile and China Unicom across China.
On January 1, 2003, the Company acquired from its principal shareholder his 60%
ownership in Panyu No. 6 Construction Company Limited.
1
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, following which 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:
COMMUNICATION APPLICATION/
SERVICES DEVICES TECHNOLOGY 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
Advertising (ADSL, XDSL) Applications
Entertainment ITV MOBILE E-Markets
Set-Top Box o 2G (e.g. GSM) Legacy
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
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.
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 nest 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 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 messages are various st of
them is mobile information services, such as news, stock process, sport,
weather, horoscope, 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 user friendly and much
easier to receive and react to information on mobile telephone.
2
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.
TELECOMMUNICATION IN CHINA
The telecommunications industry in China has experienced a rapid growth in
recent years. According to the Ministry of Information Industry, the total
number of wireless access lines in services 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%.
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
considered that cellular data services will become more important in the future
and it will account for approximately 36% of total mobile revenue in 2010.
MOBILE DATA USAGE
According to Interfax Information Services, China's mobile phone users are
expected to send more than 120 billion short messages this year, creating a
market value as high as RMB 12 billion (USD 1.4 billion) for the year of 2003.
By the end of June 2003, China Mobile has recorded a total of 40.7 billion SMS
for the first six month of 2003 and Unicom also recorded 11.7 billion of SMS for
the same period. 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 the 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
------------------------------------------------------------------------------
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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3
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, many 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 too 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.
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. Also, our primary mission is to develop real estate in China by
taking advantage of China's strong economic growth, which we believe, based on
management's past experience, will result in an increasing need for top quality
office space and residential homes.
MY STAR FRIENDS - Besides the construction business that provided us the
opportunity of penetrating our brand name, products and services into small
community, 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 - a monthly package for subscribers to receive latest
entertainment news about Asia stars.
SOFTWARE PROGRAM DEVELOPMENT - IC Star MMS Ltd, a subsidiary of the Group, has
been working with Aixi Software Limited to develop software programs that is
specifically provided to service providers in the wireless messaging services in
China. One of this software is the SMS/MMS Information Manager System software
that will generate sales via revenue sharing model with service providers. The
company is to launch SMS/MMS Call Center CRM System (Enterprise version) to
service providers in the coming months.
BUSINESS STRATEGIES
Currently, we have participated in the telecommunication infrastructure industry
through the construction company. In future, we hope to grow rapidly through the
signing of cooperation agreement with local Chinese service providers who have
huge user base in order to increase our market share in the content provider
service sector. We will also diversify our business by developing telecom and
Internet value-added products and software to our existing contracted service
providers and its user base. A multiple effect on sales volume is expected when
more agreement is entered into with local service providers across China.
4
We will leverage our huge wireless and Internet user base, through service
providers, by providing up-to-dated content, including Stars interactive
messaging, games, news, ring-tone and other trendy products to meet our expected
growth.
STAREASTNET LIMITED
StarEastNet Limited, an 80% owned subsidiary, is a Hong Kong company with its
major business in entertainment services. It maintains a website
www.stareastnet.com which collects information on celebrities of Hong Kong and
Asia. www.stareastnet.com is considered to be the first such Internet webpage
that targets global Chinese for Asian stars. Arran Services Limited acquired 80%
of its holding company, Superb Quality Limited on January 2003 for its
entertainment content and its present in the Chinese community. StarEastNet
Limited has been recording a loss since the acquisition. The Group has decided
to sell it on November 20, 2003 for a consideration of $200,000.
PANYU NO.6 CONSTRUCTION COMPANY LIMITED
We are currently holding a 60% interest in Panyu No.6 Construction Company
Limited ("Panyu") located at Guangzhou, China. Panyu is an integrated
construction company that has most of its construction project in the Guangzhou
area. It provides general construction for the area from residential community,
hospital, commercial and cultural building blocks as well as digital
communities. About 50% of its integrated construction project is on network
infrastructures which is mainly for communication through the setting up of
broadband and fiber cable system over communities, LAN/WAN and Wi-Fi,
Internet/intranet/TV and wireless data communications network infrastructure for
all telecom communications and electrical appliances.
Our primary mission is to develop real estate in China by taking advantage of
China's strong economic growth, which we believe, based on management's past
experience, will result in an increasing need for top quality office space and
high-end residential luxury homes. Currently, we plan to complete the
development of our existing land with residential homes and commercial space for
sale. Our primary investment objective is to realize capital appreciation from
the sale of the properties within three to five years after such properties have
been developed or purchased . Our secondary investment objective is to generate
cash from the properties by the leasing of commercial space; in particular,
ground level retail space. Once a project is completed and fully operational, we
intend to sell our interest in such project, thereby generating funds for
further development projects.
IC STAR MMS LIMITED (FORMERLY KNOWN SINO SUPER LIMITED)
IC Star MMS Limited 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.
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 allows subscribers of the contracted Service
Providers to communicate with the Star by SMS/MMS through China Mobile's
network. On December 31, 2003, TCOM acquired extra 20% interest of IC Star MMS
from Auto Treasure Holdings Limited, 100% owned by Mr. Fred Deng, for a
consideration of 9,889,000 shares of TCOM common stock. As a result, TCOM owns
100% of IC Star MMS as of December 31, 2003.
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.
5
(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 been commenced and there are no assurances that the
Company will be able to achieve such an expansion successfully. Therefore, a
downturn or stagnation in the economic environment of the PRC could have a
material adverse effect on the Company's financial condition.
(b) PRODUCTS RISK
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, 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.
Our real estate development business is subject to various risks including,
without limitation, risks relating to the ability to locate and consummate the
acquisition of suitable parcels of land, the availability and timely receipt of
zoning, land-use, building, occupancy and other required regulatory permits or
approvals, the cost and timely completion of construction (including risks from
causes beyond our control, such as weather, labor conditions or material costs
and shortages) and the availability of financing on favorable terms. These risks
could result in substantial unanticipated delays or expense and, under certain
circumstances, could prevent completion of development activities, any of which
could have a material adverse effect on our business.
(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 ITS ABILITY TO RETAIN KEY PERSONNEL
Our future success depends on the continued services of executive management in
the 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.
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:
6
- our subsidiaries are located in China and have specific risks
associated with that;
- 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;
- 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 general contractor on our construction projects. Construction services
are performed by us and by unaffiliated subcontractors. As a general contractor,
we are responsible for the performance of the entire contract, including work
assigned to unaffiliated subcontractors, and may be liable for personal injury
or property damage caused by the subcontractors. It is a common business
practice in China not to carry liability insurance. Should an uninsured loss or
a loss in excess of insured limits under its general liability or excess
liability insurance occur, such loss could have a material adverse effect on our
business.
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 Genesis. These factors include but are not
limited to fluctuating market demand for our services, and general economic
conditions.
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.
7
Our construction projects are subject to various laws and governmental
regulations relating to our business operations and project developments, such
as zoning requirements. We believe we are currently in compliance with all laws,
rules and regulations applicable to our projects and properties and such laws,
rules and regulations do not currently have a material impact on our operations.
However, due to the increasing popularity and growth in development in the areas
of China where our present and future projects will be developed and operated,
it is possible that new laws, rules and/or regulations may be adopted with
respect to our projects or proposed projects. The enactment of any such laws,
rules or regulations in the future may have a negative impact on our projected
growth, which could in turn decrease our projected revenues or increase our cost
of doing business.
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
Certain regions in China are currently being heavily expanded and
developed with the assistance of its government. We anticipate that there will
be extensive competition from other companies and businesses, including some
large, multi-national hotel and resort developers. Our competitors include
established real estate development companies. Many of our current and potential
competitors have longer operating histories and financial, sales, marketing and
other resources substantially greater than those of the Company. 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. 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 the market for real estate development
matures, price competition and ability to purchase prime real estate for
development 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 259
full-time and 73 part-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. DESCRIPTION OF PROPERTY
The Company leased an office at Room 1601-02, 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. Panyu No.6 Construction Company Limited owns a
property at Shops 1 & 2, 4/F and 501-5 on 5/F Jein Yien Building, #79 Tung Wan
Road, Panyu, Guandzhou, China for the operation of the company. The Chairman of
TCOM, Mr. Fred Deng, has lend out part of the building at #74 Shanan Road,
Panyu, Guangzhou, GD China for management operation of the Company free of
charge until the end of this financial year. Future rent is under negotiation.
ITEM 3. LEGAL PROCEEDINGS
Mas Financial Corp and Aaron Tsai filed a claim against us in August, 2002 in
the Vanderburgh Circuit Court, County of Vanderburgh, State of Indiana alleging
breach of contract. The Company and its counsel believe that the claim is
without merit and immaterial, and are vigorously defending against this claim.
8
The company executed the Consulting Agreement in reliance upon the fraudulent
misrepresentations made by Mas Financial Corp. and its parties. The company is
seeking relief to rescind the Consulting Agreement and to have restored to us of
all sum paid by us to Mas parties as consideration under the Consulting
Agreement. We filed a counterclaim against Aaron Tsai for fraud and breach of
contract. On December 12, 2003, Mas Financial Corp and Aaron Tsai agreed to the
stipulate to the dismissal with prejudice of the within cause, counterclaim, and
third-party claim, each party bearing their own costs and attorney fees. Mas
Financial Corp and Aaron Tsai dropped its claim against the company via a
settlement with a third party.
On December 4th 2003, a writ of summons was issued by third parties (as a
contracted consultants group for Arran Services Limited ) against Arran Services
Limited and the subsidiaries of the Company claiming for unspecified damages for
alleged breach of contract and an injunction to restrain the subsidiaries to use
some of the entertainment contents. A defense letter was issued on December 24th
2003 by Arran's legal advisor claiming the Action by the plaintiff is entirely
misconceived and without merit. The directors are of the view that the Company
has solid grounds to defense. Accordingly, no provision for this Action has been
provided in the financial statements. "
ITEM 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:
- 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, 2003, we had approximately194 stockholders of
record.
Period High Low
------ ---- ---
Quarter ended March 31, 2003 $0.53 $0.10
Quarter ended June 30, 2003 $0.50 $0.30
Quarter ended September 30, 2003 $0.55 $0.28
Quarter ended December 31, 2003 $2.64 $0.40
On December 31, 2003, TCOM was quoted at $0.90 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.
9
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;
- 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) of the Exchange Act, and Rule 15g-2 of the Commission
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 of the Commission 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
10
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.
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
forward-looking statements included therein, the inclusion of any such statement
should not be regarded as a representation by the company or any other person
that the objectives or plans of the company will be achieved.
The following analysis of the results of operations and financial condition of
the Company should be read in conjunction with the financial statements of
Telecom Communications, Inc. for the year ended September 30, 2003 and notes
thereto contained in this Report on Form 10-KSB of Telecom Communications, Inc.
11
OVERVIEW
We are currently holding a 60% interest in Panyu No.6 Construction Company
Limited ("Panyu") located at Guangzhou, China. Panyu is an integrated
construction company that has most of its construction project in the Guangzhou
area. It provides general construction for the area from residential community,
hospital, commercial and cultural building blocks as well as digital
communities. About 50% of its integrated construction project is on network
infrastructures which is mainly for communication through the setting up of
broadband and fiber cable system over communities, LAN/WAN and Wi-Fi,
Internet/intranet/TV and wireless data communications network infrastructure for
all telecom communications and electrical appliances.
Our primary mission is to develop real estate in China by taking advantage of
China's strong economic growth, which we believe, based on management's past
experience, will result in an increasing need for top quality office space and
high-end residential luxury homes. Currently, we plan to complete the
development of our existing land with residential homes and commercial space for
sale. Our primary investment objective is to realize capital appreciation from
the sale of the properties within three to five years after such properties have
been developed or purchased . Our secondary investment objective is to generate
cash from the properties by the leasing of commercial space; in particular,
ground level retail space. Once a project is completed and fully operational, we
intend to sell our interest in such project, thereby generating funds for
further development projects.
Additionally, we are a leading network infrastructures services company and
value-added information service provider for China and the global Chinese
communities. With a branded network of localized websites, targeting greater
China and overseas Chinese, we provide an array of services to our users
including region-focused online portals, mobile value-added services, online
games, virtual ISP, classified listings, e-commerce and enterprise CRM
solutions. In turn, we generate revenue through advertising, mobile value-added
services, fee-based services, e-commerce, community and enterprise services.
With 10 million registered users of channel partners in China at December 31,
2003, we believe ICStar is the most recognized online brand in China and among
Chinese communities world-wide.
One of our subsidiaries, IC Star MMS Ltd., or ICStar (formerly known as Sino
Super Ltd.),a network services company based in Hong Kong, began operations in
December 1999 as an internet alliance concept focused on providing solutions to
Chinese city local contents providers wishing to publish their news across
China. In May 2000, ICStar launched our affiliate network, then called
goongreen.org, offering Chinese-language local news, information and community
features such as publishing services targeted at online users in China. In
October 2002, ICStar expanded its affiliate network by partnering with Aixi
Software Limited, a leading network Internet/Intranet development company with
office in Guangzhou China and 6 distinct web sites targeting Chinese community
users, education users and business users in China. In Jan 2003, we continued
our network expansion and entertainment contents providing by acquisition
stareastnet.com a leading entertainment and life information destination web
site targeting Chinese users in greater China. Today, we operate ICStarMMS web
sites in China, Hong Kong, Taiwan, and North America to provide Chinese content
and services that speak directly to the audience of each region, enriching the
online experience of their users.
We will derive our revenues from network infrastructures services and content
service sources. Network infrastructures services revenues are derived
principally from community and construction projects arrangements under which we
receive revenues mainly on a project basis, fixed payment from community and
companies, or a combination of them. Content service revenues are derived
primarily from mobile value-added services, community and companies network
information services, fee based services, e-commerce and enterprise services.
Mobile value-added services revenues mainly include services fees received from
offering user-customized information subscription, My Star Friend interactive
SMS, personal greetings, customized mobile phone screen decoration, personalized
ring tones, mobile Fans club service and wireless games. Such services are
charged on a monthly or per message basis. Fee based services revenues mainly
include services fees received from offering information subscriptions on our
web sites, online games, virtual ISP and paid network services. Enterprise
12
services revenues mainly include services charges on opt-in SMS classified
listings, call center and enterprise CRM solutions.
In November 2003, we sold our 80% ownership in StarEastNet to a third party
investor for a consideration of $200,000 in cash dated on November 20, 2003.
StarEastNet.com business model has not been profitable in the past several years
and Management believes it will not help the company in the long run, as the
company shifts its core business to wireless short/multimedia messaging
services.
On December 31, 2003, we acquired extra 20% interest of IC Star MMS from Auto
Treasure Holdings Limited for a consideration of 9,889,000 shares of our newly
issued common stock and 10,000,000 warrants to purchase an additional 10,000,000
common shares (the "Warrants") at an exercise price of $2.00 per share. The
Warrants will expire on December 31, 2005. As a result of the acquisition of
shares and warrants pursuant to the Acquisition Agreement, Mr. Fred Deng
beneficially owns 75% of the common shares of the Company.
BUSINESS PARTNERSHIP DEVELOPMENTS
In October and November 2003, we have entered agreements to form strategic
partnership with, through our business partner Aixi Software Limited Guangzhou
China:
21CN.com a wholly-owned subsidiary of China Telecom Corporation Limited,
21cn.com is the largest Internet portal provider in Southern China region and
No. 4 Internet Portal provider behind SOHU.com, SINA.com, and Netease.com in
China.
21CN is the fourth largest Internet portal provider in China and the number one
biggest player in Southern China. Also, it is the pioneer company in terms of
China's New Internet Age. Being a well-known Internet portal provider, 21CN
leads the mutual entertainment activities and holds accurate information. It
provides customers the most outstanding full line of services.
21CN uses its information advantage and a sense of the fashions to form a
practical, speedy, advanced, hot business of South China. Based on the concept
of entertainment business sales, 21CN takes position of city frontier, providing
different levels of entertaining type of information to customers. Combining
games, short messages, colorful messages, broadband, multiple interactive,
pleasant experiences, it provides an excellent foundation for information sales
and spread.
21CN is the "Happiness Provider" in the entertaining new economic era. It
combines innovative concepts and knowledge as a valuable commercial product. To
make it simple, 21CN provides entertainment and lets customers have happy
experiences from the point of view of customers.
Newpalm (China) Information Technology Company, Limited, a wholly owned
subsidiary of Hongkong.com (HK:08006). Chinadotcom (Nasdaq:China) is holding
81.37% of Hongkong.com (HK:08006).
Newpalm (China) Information Technology Co., Ltd. was founded in April of 2000.
Based in Beijing, China, Newpalm is a leading provider of both mobile Internet
enabling technology and application services. Our products and services enable
carriers and enterprises to deploy a broad range of wireless applications in a
speedy and cost-effective manner as well as empower mobile subscribers with
instant access to time-sensitive, personalized services. We are committed to
expanding the scope and depth of our products and services and in bringing the
Internet to the palm of any mobile user -- anytime, anywhere. For more
information, please visit http://english.newpalm.com
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.
13
Linktone's current focus on Short Messaging Services (SMS) allows potential
access to virtually all of China's 185 million GSM subscribers, among users of
SMS, and familiarity with its functions, continues to increase rapidly month to
month. Linktone's consumer services focus on entertainment, messaging and
personalized information.
Linktone has also established itself as a provider of innovative enterprise
solutions. In May 2002, Linktone partnered with McDonald's Corporation (China)
to launch a first of its kind, nationwide SMS promotion for the 2002 World Cup
Tournament in Japan and Korea. Linktone has also worked to promote feature
films, television programs, major entertainment events, and consumer goods.
Although SMS remains Linktone's core focus, the Company has developed offerings
for the mobile operators that include WAP over GPRS, WAP over CDMA, EMS, MMS,
location-based and cell-broadcasting content and applications, as well as a
number of products, scheduled for release later this year, for China Mobile's
new 2.5G GPRS network. Linktone's headquarters are located in Shanghai, and the
company maintains regional offices in Beijing, Guangzhou, Fuzhou, Qingdao and
Xian.
5WAN.COM
5wan International concentrates on tens of millions cell phone users offering
the finest in humanization, high technology, and mobile entertainment. They are
working hard to provide top level and exciting entertainment services for
Chinese mobile users, and provide much better WAP games. In China, 5wan has
already launched several WAP games, and achieved great success. Their first
release was the first role play WAP game - "SYZF"; 5wan then introduced the
release of the first multi-person SMS game - "king of fighter".
(http://www.5wan.com)
5wan's products and services are based on WAP, SMS, GPRS, Java and MPEG4. Also,
5wan is the first software developer to pass the Ericsson GPRS test. Ericsson
(ERICY) has already used 5wan's game software into its application integration,
recommended formally by China Mobile (CHL).
3721 INTER CHINA NETWORK SOFTWARE CO. LTD
3721 Inter China Network Software Co. Ltd (www.3721.com), which was recently
acquired by Yahoo! Holdings (Hong Kong) Ltd., a wholly owned subsidiary of
Yahoo!, Inc.
Under the agreements, The partners started to market ICStar MMS's short messages
service (SMS), Multimedia Messages Services (MMS), ring tones, broadband to its
own multi millions users . ICStarMMS will provide entertainment information
celebrities as its core competency and other wireless contents such as wall
paper and gaming. Both companies will work together to provide better customer
preferred type of wireless/Internet products and services to lead a new trend of
entertainment era in China.
IC Star MMS Limited has been working with Aixi Software, Limited
(http://www.aixi.net) to develop a software program that is specifically
provided to service providers in the wireless messaging services in China. The
SMS/MMS Information Manager System software has generated sales via revenue
sharing model with service providers. This month the company will launch the
SMS/MMS Call Center CRM System (Enterprise version) for the service providers.
In the meantime, IC Star MMS, together with Aixi Software, will also launch
ICPhone Opt-in Classified List service. This service is specifically designed
for the service providers to offer information services software.
14
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
YEAR ENDED SEPTEMBER 30, 2003 COMPARED THE YEAR ENDED SEPTEMBER 30, 2002
Revenue for the year ended September 30, 2003 was $6,960,725 and was
generated entirely from our Panyu subsidiary from the date of acquisition
(January 1, 2003) to September 30. 2003. We did not have revenues for the year
ended September 30, 2002. This revenue was generated from constructions services
and is recognized on the percentage-of-completion method for certain of these
contracts, measured by the percentage of costs incurred to date to estimated
total costs for each contract. This method is used because management considers
costs incurred to be the best available measure of progress on these contracts.
Revenues are recognized on the completed-contract method for certain other
contracts. Contracts to manage, supervise, or coordinate the construction
activity of others are recognized only to the extent of the fee revenue.
For the year ended September 30, 2003, costs of sales amounted to
$6,350,010 or 91% of net revenues and consists of direct material and labor
costs and those indirect costs related to contract performance, such as indirect
labor, supplies, tools, repairs, and depreciation costs as well as local taxes
incurred. These costs are directly attributable to our construction projects.
15
For the year ended September 30, 2003, we incurred operating expenses
of $860,580 as compared to $0 the year ended September 30, 2002. For the year
ended September 30, 2003, operating expenses consisted of salaries of $145,083,
settlement expense related settlement of a lawsuit of $400,000, and other
selling, general and administrative expenses of $315,497. For the year ended
September 30, 2002, we did not incur any operation expenses since we had no
operations and acquired all of our subsidiaries on fiscal 2003.
For the year ended September 30, 2003, we incurred interest expense of
$60,661 and interest income of $7,229.
For the year ended September 30, 2003, we recorded minority interest
expense related the allocation of profits to our minority interest holder.
For the year ended September 30, 2003, we incurred foreign income tax
expense of $118,490 related to our foreign operations.
The following approximate unaudited pro forma consolidated results of
operations have been prepared as if the acquisitions of Panyu No. 6 Construction
Company Limited and StarEastNet Limited and subsidiaries had occurred as of the
following periods:
Year Ended Year Ended
September 30, September 30,
2003 2002
------------- -------------
Net Revenues ............... $ 9,300,000 $9,200,000
Net Income (Loss) .......... $ (300,000) $ 164,000
Net Loss per Share ......... $ (.01) $ 0.00
Pro forma data does not purport to be indicative of the results that
would have been obtained had these events actually occurred at the beginning of
the periods presented and is not intended to be a projection of future results.
OVERALL
We reported a net loss for the year ended September 30, 2003 of
$(448,500). This translates to an overall per-share loss of ($.01) for the year
ended September 30, 2003.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2003, we had a cash balance of $1,155,435 held in The
People's Republic of China. We currently have no cash positions in the United
States. We have been funding our operations from the receipt customer deposits
on our constructions projects and from working capital loans as described below:
- On July 9, 2002, our Panyu subsidiary, entered into a one-year
renewable working capital loan with a Chinese bank for $787,101. The
note was renewed in 2003 and is currently due on July 3, 2004 and bears
interest at 5.841% annually and is collateralized by certain assets of
the Company.
- On December 23, 2002, Panyu entered into a one-year renewable working
capital loan with a Chinese bank for $484,370. The note is due on
February 1, 2005, and currently bears interest at 5.31% per annum and
is collateralized by certain assets of the Company.
- We have three non-interest bearing loans from individuals totaling
$605,462. Such loans are payable on demand.
Management has invested substantial time evaluating and considering
numerous proposals for possible acquisition or combination developed by
management or presented by investment professionals, the Company's advisors and
others. We continue to consider acquisitions, business combinations, or start up
proposals, which could be advantageous to shareholders. No assurance can be
given that any such project; acquisition or combination will be concluded.
At September 30, 2003, our Company had stockholders' deficit of
$507,466. 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.
16
Net cash used in operations was $(100,046) for the year ended September
30, 2003 and was attributable to our net loss $448,500 offset by non-cash
activity such as depreciation of $136,863, impairment of goodwill of $32,181 and
minority interest of $37,471 as well as changes in the net assets of the Company
of $141,939. 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 provided by investing activities for the year ended September
30, 2003 was $159,718. For the year ended September 30, 2003, we received
$219,321 of cash from the acquisition of our Panyu subsidiary offset by cash
used for capital expenditures of $(59,603).
Net cash provided by financing activities were $1,154,728 for the year
ended September 30, 2003. Net cash provided by financing activities related
primarily to proceeds from related party loans of $ 64,046 and proceeds from
loans payable of $1,090,682.
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.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has recently issued several new
accounting pronouncements:
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS
No. 149 is effective for contracts entered into or modified after June 30, 2003,
except as specified and for hedging relationships designated after June 30,
2003. The adoption of this statement did not have any material impact on the
balance sheet or statement of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
150 requires that certain financial instruments, which under previous guidance
were accounted for as equity, must now be accounted for as liabilities. The
financial instruments affected include mandatorily redeemable stock, certain
financial instruments that require or may require the issuer to buy back some of
its shares in exchange for cash or other assets and certain obligations that can
be settled with shares of stock. SFAS 150 is effective for all financial
instruments entered into or modified after May 31, 2003. Otherwise it will
become effective at the beginning of the first interim period beginning after
June 15, 2003. The adoption of this statement did not have any material impact
on the balance sheet or statement of operations.
CRITICAL ACCOUNTING POLICIES
A summary of significant accounting policies is included in Note 1 to
the audited consolidated financial statements included herein. Management
believes that the application of these policies on a consistent basis enables
the Company to provide useful and reliable financial information about the
company's operating results and financial condition.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results may differ from those estimates.
17
We account for stock options issued to employees in accordance with the
provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations. As such,
compensation cost is measured on the date of grant as the excess of the current
market price of the underlying stock over the exercise price. Such compensation
amounts, if any, are amortized over the respective vesting periods of the option
grant. We adopted the disclosure provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation" and SFAS 148, "Accounting for Stock-Based Compensation
-Transition and Disclosure", which permits entities to provide pro forma net
income (loss) and pro forma earnings (loss) per share disclosures for employee
stock option grants as if the fair-valued based method defined in SFAS No. 123
had been applied. We account for stock options and stock issued to non-employees
for goods or services in accordance with the fair value method of SFAS 123.
Revenues are recognized on the percentage-of-completion method for
certain of these contracts, measured by the percentage of costs incurred to date
to estimated total costs for each contract. This method is used because
management considers costs incurred to be the best available measure of progress
on these contracts. Revenues are recognized on the completed-contract method for
certain other contracts. Contracts to manage, supervise, or coordinate the
construction activity of others are recognized only to the extent of the fee
revenue.
We act as a consultant to various contractors and performs
administrative services for a fixed percentage of the total contract price. Fees
are recognized as services are performed. Consulting revenue is included in net
revenues on the statements of operations for the years ended September 30, 2003
and 2002.
ITEM 7. FINANCIAL STATEMENTS
See "Index to Financial Statements" commencing on page F-1 for the
financial statements included in this Form 10-KSB.
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 3, 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.
We retained Sherb and Company, LLP, as independent certified accountants and
independent auditor in December 2003.
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 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.
18
PART III
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
------------- --- ----------------------------------------
Fred Deng 40 CEO, President and Chairman of the board
Ou Zhixiong 34 Director
Lijian Deng 30 Controller, Secretary, and Director
Shanhe Yang 29 Vice President in Product Development
Zhengbin Liu 40 Vice President in Business Development
Gary Lam 46 CFO
Angel Liu 23 General Manager in Information Services
Liu Yan 25 General Manager in Marketing and Sales
FRED DENG, CEO, PRESIDENT AND CHAIRMAN
Mr. Deng is the Founder of ICChina.com and vice secr-seneral of China City Image
Project Advancement Committee. Mr. Deng graduated from Guangzhou Broadcast TV
University in 1987. He has extensive investment and management experience in
China. He was primarily involved in corporate development and business
investment activities. Mr. Deng has responsible for established city local
information & services alliance network on more than 200 major Chinese cities
local government and collected all their enterprises to be the services alliance
members from time to time. The alliance network links investment and businesses
to local communities across China.
SHANHE YANG, VICE PRESIDENT IN PRODUCT DEVELOPMENT
Mr. Yang joined the company in 1999. 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
ZHENGBIN LIU, VICE PRESIDENT IN BUSINESS DEVELOPMENT
Mr. Liu joined the company in 2002. Prior to joining the group, Mr. Liu served
as Guang Jun company's vice president under command of advertising agency of
Guangdong Province. Mr. Liu was Ju Guang Tang advertising corporate client
inspector general and editor of Guangdong economic department of China Quality
Newspaper. Mr.Liu has more than 18 years media operations managing experience.
Mr. Liu graduated from Shandong Industrial University China.
LIJIAN DENG, CONTROLLER, SECRETARY AND DIRECTOR
Ms. Deng joined the company in 1994. Ms. Deng has been responsible for manage 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
Gary Lam has over 16 years 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.
FAMILY RELATIONSHIPS
Lijian Deng is the sister of Fred Deng
19
FAMILY RELATIONSHIPS
Lijian Deng is the sister of Fred Deng
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
financial expert to our Board of Directors. There are no other committees of the
Board of Directors.
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 $100,000 during the last three fiscal periods ended September 30,
2003, 2002 and 2001:
Annual Compensation Long-Term Compensation
-------------------------------------- --------------------------------------
Restricted Securities
Name and Other Annual Stock Underlying
Principal Fiscal Salary Bonus Compensation Awards Options All Other
Position Year ($) ($) ($) ($) SAR (#) Compensation
------------------ ------ ------ ----- ------------ ---------- ---------- ------------
Fred Deng 2003 $ - $ - $ - $ - - -0-
Chief Executive 2002 $ - $ - $ - $ - - -0-
Officer, President 2001 $ - $ - $ - $ - - -0-
and Chairman
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 part-time employees. The
compensation of the employment will be determined at the later date. The
part-time employees have been working for no pay since January 2001, and will be
paid in free-trading common stock of the Company for their services filed under
Form S-8.
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.
20
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 AND
RELATED STOCKHOLDER MATTERS
(a) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth, as of January 15, 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.
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 February 15, 2004, there were
40,079,325 shares of our common stock issued and outstanding. The issued and
outstanding shares do not include 10,910,000 shares of our common stock issuable
upon the exercise of warrants and options.
The following Table sets forth the shares held by those persons who own more
than ten percent of Telecom Communication's common stock as of January 15, 2004,
based upon 47,188,000 shares outstanding.
Name and address of
Title of Class beneficial owner Number of shares Percent of class
-------------- ----------------- ---------------- ----------------
Common Tak Hiromoto 8,000,000 16.9%
Common Fred Chiyuan Deng 33,689,000 71.4%
(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.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the year ended September 30, 2003, our Panyu subsidiary advanced $25,261
to a company owned by Panyu's general manager. The advances are non-interest
bearing and are payable on demand.
In connection with the acquisition of one of the Company's subsidiaries, the
Company owes its principal shareholder and officer $2,191,254, of which
$2,159,073 was reflected as long-term.
An officer of the Company or companies owned by this officer advances funds to
the Company for working capital purposes. At September 30, 2003, we owe this
officer or his companies $64,046. The advances are non-interest bearing and are
payable on demand.
21
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Our financial statements follow the signature page starting on page F-1
2.1 Plan and Agreement of Reorganization
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)
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)
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
None
22
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 2003 and 2002 and reviews of the consolidated
financial statements included in the Company's Forms 10-KSB for fiscal 2003 and
2002 were approximately $30,000 and $10,000, 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 2003
and 2002, 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 2003 and 2002 were $0 and $0,
respectively.
23
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 January 23, 2004.
Telecom Communications, Inc..
By: /s/ Fred Deng
-------------------------------
Fred Deng
Chief Executive Officer,
President and Chairman
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: January 23, 2004 By: /s/ Fred Deng
-------------
Fred Deng
CEO, President and Chairman
Date: January 23, 2004 By: /s/ Lijing Deng
---------------
Lijian Deng
Secretary, Treasurer and Director
Date: January 23, 2004 By: /s/ Gary Lam
------------
Gary Lam
Principal Financial and
Accounting Officer
Date: January 23, 2004 By: /s/Ou Zhixiong
--------------
Ou Zhixiong
Director
24
TELECOM COMMUNICATIONS, INC.AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
Report of Independent Certified Public Accountants...........................F-2
Consolidated Financial Statements:
Consolidated Balance Sheet...............................................F-3
Consolidated Statements of Operations....................................F-4
Consolidated Statement of Stockholders' Deficit..........................F-5
Consolidated Statements of Cash Flows....................................F-6
Notes to Consolidated Financial Statements...........................F-7 to F-18
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
Telecom Communications, Inc.
Guangzhou, China
We have audited the accompanying consolidated balance sheet of Telecom
Communications, Inc. and Subsidiaries as of September 30, 2003, and the related
consolidated statements of operations, stockholders' deficit and cash flows for
the fiscal years ended September 30, 2003 and 2002. 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 audits in accordance with auditing standards generally
accepted in the 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 amount 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 audits provide 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, 2003, and the results
of their operations and their cash flows for the years ended September 30, 2003
and 2002, in conformity with accounting principles generally accepted in the
United States of America.
/s/ Sherb & Co., LLP
Certified Public Accountants
New York, New York
January 19, 2004
F-2
TELECOM COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
September 30,
2003
------------
ASSETS
CURRENT ASSETS:
Cash ....................................................... $ 1,155,435
Accounts receivable ........................................ 604,952
Inventory of real estate held for sale ..................... 1,435,913
Costs and estimated earnings in excess of
billings on uncompleted contracts ........................ 4,994,379
Due from related party ..................................... 25,261
Prepaid expenses and other current assets .................. 1,430,518
------------
Total Current Assets ................................... 9,646,458
------------
PROPERTY AND EQUIPMENT - net ................................... 1,322,858
OTHER ASSETS ................................................... 26,099
------------
Total Assets ........................................... $ 10,995,415
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Loans payable .............................................. $ 1,876,932
Accounts payable and accrued expenses ...................... 904,164
Customer deposits .......................................... 4,864,383
Billings in excess of cost and estimated
earnings on uncompleted contracts ........................ 125,249
Due to related parties ..................................... 96,227
------------
Total Current Liabilities .............................. 7,866,955
LONG TERM LIABILITIES:
Due to related party ....................................... 2,159,073
------------
Total Liabilities ...................................... 10,026,028
------------
MINORITY INTEREST .............................................. 1,476,853
------------
STOCKHOLDERS' DEFICIT:
Preferred stock ($.001 Par Value;
20,000,000 Shares Authorized;
no shares issued and outstanding) ........................ --
Common stock ($.001 Par Value;
80,000,000 Shares Authorized;
37,299,000 shares issued and outstanding) ................ 37,299
Accumulated deficit ........................................ (537,599)
Accumulated other comprehensive loss ....................... (7,166)
------------
Total Stockholders' Deficit ............................ (507,466)
------------
Total Liabilities and Stockholders' Deficit ............ $ 10,995,415
============
See notes to consolidated financial statements
F-3
TELECOM COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended
September 30,
----------------------------
2003 2002
------------ -----------
NET REVENUES ................................... $ 6,960,725 $ --
COST OF SALES .................................. 6,350,010 --
------------ -----------
GROSS PROFIT ................................... 610,715 --
------------ -----------
OPERATING EXPENSES:
Salaries .................................. 145,083 --
Selling, general and administrative ....... 715,497 --
------------ -----------
Total Operating Expenses ............... 860,580 --
------------ -----------
LOSS FROM OPERATIONS ........................... (249,865) --
------------ -----------
OTHER INCOME (EXPENSE):
Interest income ........................... 7,229 --
Interest expense .......................... (60,661) --
------------ -----------
Total Other Income (Expense) ........... (53,432) --
------------ -----------
LOSS BEFORE PROVISION FOR INCOME TAXES ......... (303,297) --
PROVISION FOR INCOME TAXES ..................... (118,490) --
------------ -----------
LOSS BEFORE MINORITY INTEREST .................. (421,787) --
MINORITY INTEREST IN INCOME OF SUBSIDIARY ...... (26,713) --
------------ -----------
NET LOSS ....................................... $ (448,500) $ --
============ ===========
Loss per Common Share - Basic and Diluted ...... $ (0.01) $ 0.00
============ ===========
Weighted Average Common Shares Outstanding
- Basic and Diluted .......................... 37,299,000 37,299,000
============ ===========
See notes to consolidated financial statements
F-4
TELECOM COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
For the Years Ended September 30, 2002 and 2003
Common Stock,
$.001 Par Value
------------------- Additional Total
Number of Paid-in Accumulated Comprehensive Stockholders'
Shares Amount Capital Deficit (Loss) Deficit
---------- ------- ---------- --------- ------------- -------------
Balance, December 3, 2001 (Date of inception) 23,800,000 $23,800 $ -- $ (23,800) $ -- $ --
Net loss ..................................... -- -- -- -- -- --
---------- ------- ---------- --------- ------- -----------
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 for the year ended September 30, 2003 -- -- -- (448,500) -- (448,500)
Comprehensive income - unrealized loss on
foreign currency translationies .......... -- -- -- -- (7,166) (7,166)
-----------
Total comprehensive loss ................. -- -- -- -- -- (455,666)
---------- ------- ---------- --------- ------- -----------
Balance, September 30, 2003 .................. 37,299,000 $37,299 $ -- $(537,599) $(7,166) $ (507,466)
========== ======= ========== ========= ======= ===========
See notes to consolidated financial statements
F-5
TELECOM COMMUNICATIONS, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended
September 30,
-------------------------
2003 2002
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ..................................................................... $ (448,500) $ --
Adjustments to reconcile net loss to net cash used in operating activites:
Depreciation .............................................................. 136,863 --
Minority interest ......................................................... 37,471 --
Impairment of goodwill .................................................... 32,181 --
Changes in assets and liabilities:
Accounts receivable ....................................................... (604,390) --
Inventory of real estate held for sale .................................... (1,551) --
Costs and estimated earnings in excess of billings on uncompleted contracts 309,171 --
Due to related party ...................................................... (25,261)
Prepaid and other current assets .......................................... (44,658) --
Other assets .............................................................. (26,099) --
Accrued payable and accrued expenses ...................................... (218,482) --
Customer deposits ......................................................... 627,960 --
Billings in excess of costs and estimated earnings on uncompleted contracts 125,249 --
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES ............................................. (100,046) --
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash acquired in acquisition ................................................. 219,321 --
Capital expenditures ......................................................... (59,603) --
----------- -----------
NET CASH FLOWS PROVIDED BY INVESTING ACTIVITIES ................................... 159,718 --
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Due to related party ......................................................... 64,046 --
Proceeds from loan payable ................................................... 1,090,682 --
----------- -----------
NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES ................................... 1,154,728 --
----------- -----------
EFFECT OF EXCHANGE RATE CHANGES IN CASH ........................................... (58,965) --
----------- -----------
NET INCREASE IN CASH .............................................................. 1,155,435 --
CASH - beginning of year .......................................................... -- --
----------- -----------
CASH - end of year ................................................................ $ 1,155,435 $ --
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Noncash investing and financing activities:
Common stock issued for recapilization ................................ $ 217,597 $ --
=========== ===========
Acquisition details:
Fair value of assets acquired ......................................... $ 9,743,773 $ --
=========== ===========
Liabilities assumed ................................................... $ 9,743,773 $ --
=========== ===========
See notes to consolidated financial statements
F-6
TELECOM COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Telecom Communications, Inc. (the "Company" or "Telecom") was founded as a sole
proprietorship in 1995. The purpose of the Company was to provide low cost
access to long distance carriers for individuals needing to call Latin and South
America. The Company's long distance operated over the Internet. In addition,
the Company also provided various services such as check cashing, money wiring,
the sale of bus tokens and passes, and California lottery tickets.
Telecom has discontinued its current operations in the United States and will
focus on its newly acquired operations.
On September 30, 2003, Telecom Communications, Inc. consummated a Stock Purchase
Agreement with Arran Services Limited ("Arran") and its sole shareholder, Mr.
Fred Deng Chiyan, for the acquisition of all of the capital stock of Arran, a
British Virgin Island corporation. In exchange for the capital interest, Mr.
Deng received a total of 22.8 million shares and one designate of Mr. Deng
received 1 million shares of Telecom common stock, representing approximately
64% of the outstanding shares of Telecom. The Stock Purchase Agreement has been
accounted for as a reverse acquisition under the purchase method for business
combinations. Accordingly, the combination of the two companies is recorded as a
recapitalization of Telecom, pursuant to which Arran is treated as the
continuing entity. In connection the recapitalization, the Company reclassified
negative paid-in capital of $89,099 to the accumulated deficit.
Arran conducts business in China through its three subsidiaries, Panyu No. 6
Construction Company Limited, StarEast Net Limited and IC Star MMS, Limited as
follows:
Panyu No 6 Construction Company Limited, a 60 % owned Chinese company located in
Guangzhou, China ("Panyu"), is an integrated construction company. Panyu is
focused on both general construction as well as the construction of network
infrastructure for residential, industrial, cultural and commercial building
communities. The construction on network infrastructure is mainly for
communication through the setting up of broadband and telephone lines, intranet
network within the community, as well as television cable, electricity wire and
air conditioning. As of September 30, 2003, Panyu has generated all of the
revenues of the Company.
IC Star MMS Limited (formerly known as Sino Super Limited) is a 80% owned
China-based local information and services affiliate network. Established in
December 1991, ICStarMMS.com links entertainment and lifestyle information to
local communities across China.
F-7
TELECOM COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
THE COMPANY - CONTINUED
Superb Quality Limited ("Superb"), a British Virgin Island Company and 80%
owned subsidiary, owns 100% of StarEastNet Limited ("StarEastNet"), a Hong Kong
company. StarEastNet is a Chinese language Internet media company that provides
multimedia entertainment and lifestyle information to the global Chinese
community. StarEastNet's goal is to become a preeminent vertically integrated
Internet content provider, as well as a platform to provide exclusive,
innovative, and trend-setting entertainment content, products and services in
Asia. Its main portal was launched in September 1999. StarEastNet.com produces
and distributes original interactive programming through its network of
vertically integrated entertainment portals.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Telecom and its wholly-owned and partially-owned subsidiaries. All material
intercompany transactions and balances have been eliminated.
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.
INVENTORY OF REAL ESTATE HELD FOR SALE
Real estate held for sale is carried at the lower of cost or fair value less
estimated selling costs. Costs relating to improvement of real estate are
capitalized. Allowance for losses are available to absorb losses incurred on
real estate and represents additions charged to expense, less net gains or
losses. In determining the allowance for losses to be maintained, management
evaluates current economic conditions, fair value of the underlying collateral
and risk characteristics of real estate held for sale. As of September 30, 2003,
the Company was holding $1,435,913 in real estate held for resale.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheet for cash, accounts
receivable, accounts payable and accrued expenses, loans and amounts due to
related parties approximate their fair market value based on the short-term
maturity of these instruments.
ACCOUNTS RECEIVABLE
AT September 30, 2003 the Company deemed all accounts receivable as collectible;
therefore no allowance for doubtful accounts was established.
F-8
TELECOM COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
Income taxes are accounted for under Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes," which is an asset and liability approach
that requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the
Company's financial statements or tax returns.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided using the
straight-line method over the estimated economic lives of the assets, which are
from two to twenty years. Expenditures for major renewals and betterments that
extend the useful lives of property and equipment are capitalized. Expenditures
for maintenance and repairs are charged to expense as incurred.
INCOME (LOSS) PER SHARE
Net income (loss) per common share for the years ended September 30, 2003 and
2002 is based upon the weighted average common shares and dilutive common stock
equivalents outstanding during the year as defined by Statement of Financial
Accounting Standards, Number 128 "Earnings Per Share." As of September 30, 2003
and 2002, there were no outstanding common stock equivalents.
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
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 and
expenses are translated at weighted average exchange rates for the period to
approximate translation at the exchange rates 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.
F-9
TELECOM COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FOREIGN CURRENCY TRANSLATION - CONTINUED
The functional currency of Arran's Chinese subsidiaries, StarEast Net Limited,
IC Star MMS, Limited and Panyu No. 6 Construction Company Limited, 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 and were not material during the
periods presented. The cumulative translation adjustment and effect of exchange
rate changes at September 30, 2003 was $22,639.
COMPREHENSIVE INCOME (LOSS)
The Company uses Statement of Financial Accounting Standards No. 130 (SFAS 130)
"Reporting Comprehensive Income". Comprehensive income (loss) is comprised of
net income (loss) and all changes to the statements of stockholders' deficit,
except those due to investments by stockholders', changes in paid-in capital and
distributions to stockholders. Comprehensive loss for the year ended September
30, 2003 amounted to $(471,139). Amounts are reported net of tax and include
unrealized losses from foreign currency translations.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of cash and trade accounts receivable. The
Company places its cash with financial institutions located in the Peoples
Republic of China. Almost all of the Company's sales are credit sales which are
primarily to customers whose ability to pay is dependent upon the industry
economics prevailing in these areas; however, concentrations of credit risk with
respect to trade accounts receivables is limited due to generally short payment
terms. The Company also performs ongoing credit evaluations of its customers to
help further reduce credit risk.
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-10
TELECOM COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
Revenues are recognized on the percentage-of-completion method for certain of
these contracts, measured by the percentage of costs incurred to date to
estimated total costs for each contract. This method is used because management
considers costs incurred to be the best available measure of progress on these
contracts. Revenues are recognized on the completed-contract method for certain
other contracts. Contracts to manage, supervise, or coordinate the construction
activity of others are recognized only to the extent of the fee revenue.
The Company acts as a consultant to various contractors and performs
administrative services for a fixed percentage of the total contract price. Fees
are recognized as services are performed. Consulting revenue is included in net
revenues on the statements of operations for the years ended September 30, 2003
and 2002.
COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS ON UNCOMPLETED CONTRACTS
Costs and estimated earnings in excess of billings on uncompleted contracts
arise when revenues are recorded on a percentage-of-completion basis but cannot
be invoiced under the terms of the contract. Such amounts are invoiced upon
completion of contractual milestones. Costs and estimated earnings in excess of
billings also include certain costs associated with unapproved change orders.
These costs are included when change order approval is probable. Amounts are
carried at the lower of cost or net realizable value. No profit is recognized on
costs incurred until change order approval is obtained. The amounts recorded
involve the use of judgments and estimates; thus, actual recoverable amounts
could differ from original assumptions.
Assets and liabilities related to costs and estimated earnings in excess of
billings as well as billings in excess of costs and estimated earnings have been
classified as current and non-current under the operating cycle concept whereby
all contract-related items are regarded as current regardless of whether cash
will be received or paid within a 12-month period.
Contract costs include all direct material and labor costs and those indirect
costs related to contract performance, such as indirect labor, supplies, tools,
repairs, and depreciation costs. Selling, general, and administrative costs are
charged to expense as incurred. Provisions for estimated losses on uncompleted
contracts are made in the period in which such losses are determined. Changes in
job performance, job conditions, and estimated profitability, including those
arising from contract penalty provisions, and final contract settlements may
result in revisions to costs and income and are recognized in the period in
which the revisions are determined. Profit incentives are included in revenues
when their realization is reasonably assured. An amount equal to contract costs
attributable to claims is included in revenues when realization is probable and
the amount can be reliably estimated.
F-11
TELECOM COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS ON UNCOMPLETED CONTRACTS -
CONTINUED
The asset, "Costs and estimated earnings in excess of billings on uncompleted
contracts," represents revenues recognized in excess of amounts billed. The
liability, "Billings in excess of costs and estimated earnings on uncompleted
contracts," represents billings in excess of revenues recognized.
RECENT ACCOUNTING PRONOUNCEMENTS
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS
No. 149 is effective for contracts entered into or modified after June 30, 2003,
except as specified and for hedging relationships designated after June 30,
2003. The adoption of this statement did not have any material impact on the
balance sheet or statement of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS 150
requires that certain financial instruments, which under previous guidance were
accounted for as equity, must now be accounted for as liabilities. The financial
instruments affected include mandatory redeemable stock; certain financial
instruments that require or may require the issuer to buy back some of its
shares in exchange for cash or other assets and certain obligations that can be
settled with shares of stock. SFAS 150 is effective for all financial
instruments entered into or modified after May 31, 2003. Otherwise it will
become effective at the beginning of the first interim period beginning after
June 15, 2003. The adoption of this statement did not have any material impact
on the balance sheet or statement of operations.
NOTE 2 - PROPERTY AND EQUIPMENT
At September 30, 2003, property and equipment, which is located in China,
consisted of the following:
Estimated Life
Construction Machinery 2-5 Years $ 1,596,886
Office Equipment 2-5 Years $ 92,000
Transportation Equipment 2-10 Years $ 146,280
Furniture 5 Years $ 1,720
Building 20 Years $ 605,825
-----------
2,442,711
Less: Accumulated Depreciation (1,119,853)
-----------
$ 1,322,858
===========
For the year ended September 30, 2003, depreciation expense amounted to $136,863
of which $122,045 is included in cost of goods sold.
F-12
TELECOM COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
NOTE 3 - CONTRACT BILLING STATUS
At September 30, 2003, costs and estimated earnings on uncompleted contracts
included the following:
AS OF SEPTEMBER 30,
-------------------
2003
------------
Costs incurred on uncompleted contracts ............ $ 10,457,755
Estimated earnings ................................. 1,018,550
------------
11,476,305
Less: Billings to date ............................. (6,607,175)
------------
$ 4,869,130
============
Included in accompanying consolidated balance sheet
under the following captions:
Costs and estimated earnings in excess of billings $ 4,994,379
Billings in excess of costs and estimated earnings (125,249)
------------
$ 4,869,130
------------
NOTE 4 - ACQUISITIONS
On January 1, 2003, the Company acquired from its principal shareholder 60 %
ownership in Panyu No. 6 Construction Company Limited. The fair market value of
the net assets acquired from its principal shareholder was $2,159,072 and was
reflected as due to related party - long term on the consolidated balance sheet.
On January 7, 2003, the Company's Arran subsidiary completed the acquisition of
80% of Superb Quality Limited, a British Virgin Island company and its wholly
owned subsidiary, StarEastNet Limited, a Hong Kong Company. The purchase price
of this acquisition was $65,562 with $100 payable to the shareholders of the
acquired entity and $65,462 payable to a related entity for the assignment of a
non-interest bearing demand note, payable by one of the acquired Company's
subsidiaries. The purchase price approximated the fair market value of the
assets acquired.
The following approximate unaudited pro forma consolidated results of operations
have been prepared as if the acquisitions of Panyu No. 6 Construction Company
Limited and StarEastNet Limited and subsidiaries had occurred as of the
following periods:
Year Ended Year Ended
September 30, September 30,
2003 2002
------------ ------------
Net Revenues ........... $ 9,300,000 $ 9,200,000
Net Income (Loss) ...... $ (300,000) $ 164,000
Net Loss per Share ..... $ (.01) $ 0.00
Pro forma data does not purport to be indicative of the results that would have
been obtained had these events actually occurred at the beginning of the periods
presented and is not intended to be a projection of future results.
F-13
TELECOM COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
NOTE 5 - PREPAID EXPENSES AND OTHER CURRENT ASSETS
As of September 30, 2003, prepaid expenses and other current assets consisted of
the following:
Prepayment to subcontractors $ 832,847
Advances on purchases ...... 225,320
Prepaid local taxes ........ 263,074
Other current assets ....... 109,277
----------
$1,430,518
NOTE 6 - CUSTOMER DEPOSITS
On September 30, 2003, the Company was holding deposits from its customers of
$4,864,383.
NOTE 7 - LOANS PAYABLE
On July 9, 2002, the Company's Panyu subsidiary entered into a one-year
renewable working capital loan with a bank for $787,101. The note was renewed in
2003 and is currently due on July 3, 2004 and bears interest at 5.841% annually
and is collateralized by certain assets of the Company. For the nine month
period January 1, 2003 (from acquisition date) through September 30, 2003, Panyu
paid approximately $51,000 in monthly interest only payments.
On December 23, 2002, the Company's Panyu subsidiary entered into a one-year
renewable working capital loan with a bank for $484,370. The note is due on
February 1, 2005, and currently bears interest at 5.31% per annum and is
collateralized by certain assets of the Company. For the nine month period
January 1, 2003 (from acquisition date) through September 30, 2003, Panyu paid
approximately $20,000 in monthly interest only payments.
The Company's has three non-interest bearing loans from individuals totaling
$605,462. Such loans are payable on demand.
F-14
TELECOM COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
NOTE 8 - INCOME TAXES
The Company accounts for income taxes under Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" "SFAS 109". SFAS 109 requires
the recognition of deferred tax assets and liabilities for both the expected
impact of differences between the financial statements and the tax basis of
assets and liabilities, and for the expected future tax benefit to be derived
from tax losses and tax credit carryforwards. SFAS 109 additionally requires the
establishment of a valuation allowance to reflect the likelihood of realization
of deferred tax assets.
The Company has a net operating loss carryforward for tax purposes totaling
approximately $66,000 at September 30, 2003 expiring through the year 2023.
Internal Revenue Code Section 382 places a limitation on the amount of taxable
income that can be offset by carryforwards after a change in control (generally
greater than a 50% change in ownership). Temporary differences, which give rise
to a net deferred tax asset, are as follows:
2003 2002
-------- --------
Deferred tax assets:
Net operating loss carryforward 22,517 22,517
Less: Valuation allowance ...... (22,517) (22,517)
-------- --------
$ - $ -
======== ========
The table below summarizes the differences between the Company's effective tax
rate and the statutory federal rate as follows for fiscal 2003 and 2002:
2003 2002
Computed "expected" tax expense (benefit) .... (34.0)% 0.0%
Permanent difference ......................... 34.0% (0.0)%
----- ----
Effective tax rate ........................... 0.0% 0.0%
===== ====
The valuation allowance at September 30, 2003 was $22,517 and did not change
during fiscal 2003.
NOTE 9 - RELATED PARTY TRANSACTIONS
During the year ended September 30, 2003, the Company's Panyu subsidiary
advanced $25,261 to a company owned by Panyu's general manager. The advances are
non-interest bearing and are payable on demand.
In connection with the acquisition of one of the Company's subsidiaries, the
Company owes its principal shareholder and officer $2,191,254, of which
$2,159,073 was reflected as long-term.
An officer of the Company or companies owned by this officer advances funds to
the Company for working capital purposes. At September 30, 2003, the Company
owed this officer or his companies $64,046. The advances are non-interest
bearing and are payable on demand.
F-15
TELECOM COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
NOTE 10 - STOCKHOLDERS' DEFICIT
PREFERRED STOCK
The Company is authorized to issue 20,000,000 shares of Preferred Stock, par
value $.001, with such designations, rights and preferences as may be determined
from time to time by the Board of Directors.
COMMON STOCK
In connection with the reverse acquisition completed on September 30, 2003, the
Company issued 23,800,000 shares of its common stock for 100% of the outstanding
shares of Arran.
NOTE 11 - COMMITMENTS
OPERATING LEASES
The Company's StarEastNet subsidiary leases office space IN Hong Kong from an
affiliated entity. The lease was signed in May 2003 and will expire in April
2005. Monthly rental payments are $1,175. Rent expense for the year ended
September 30, 2003 was approximately $5,400. Future minimum rental payments
required under these operating leases are as follows:
Period Ended September 30, 2004 ................ $14,100
Period Ended September 30, 2005 ................ $ 8,225
NOTE 12 - LEGAL PROCEEDINGS
In November 2003, the Company and a third party entered into a settlement
agreement with Mas Capital, Inc. The settlement called for the third party to
repurchase 977,600 shares of the Company's common stock for $400,000. The
Company has accrued $400,000 in connection with this settlement. In December
2003, a third party paid the amount owed Mas Capital, Inc. on behalf of the
Company by purchasing the 977,600 shares for $400,000 as required by the
agreement. All parties have mutually released all claims and counterclaims
relating to this suit. The Company has subsequently recorded this settlement as
a contribution to capital.
NOTE 13 - OPERATING RISK
(a) Country risk
Currently, the Company's revenues are primarily derived from the construction of
network infrastructure for residential, industrial and cultural and commercial
building blocks to customers in the Peoples Republic of China (PRC). The Company
hopes to expand its operations to countries outside the PRC, however, such
expansion has not been commenced and there are no assurances that the Company
will be able to achieve such an expansion successfully. Therefore, a downturn or
stagnation in the economic environment of the PRC could have a material adverse
effect on the Company's financial condition.
F-16
TELECOM COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
NOTE 13 - OPERATING RISK (CONTINUED)
(b) Products risk
In addition to competing with other construction companies, the Company could
have to compete with larger US companies who have greater funds available for
expansion, marketing, research and development and the ability to attract more
qualified personnel if access is allowed into the PRC market. If US companies do
gain access to the PRC markets, they may be able to offer products at a lower
price. There can be no assurance that the Company will remain competitive should
this occur.
(c) Exchange risk
The Company can not guarantee that the current exchange rate will remain steady,
therefore there is a possibility that the Company could post the same amount of
profit for two comparable periods and because of a fluctuating exchange rate
actually post higher or lower profit depending on exchange rate of the Chinese
(RMB) or the Hong Kong Dollar (HK$) converted to US dollars on that date. The
exchange rate could fluctuate depending on changes in the political and economic
environments without notice.
(d) Political risk
Currently, PRC is in a period of growth and is openly promoting business
development in order to bring more business into PRC. Additionally PRC allows a
Chinese corporation to be owned by a United States corporation. If the laws or
regulations are changed by the PRC government, the Company's ability to operate
the PRC subsidiaries could be affected.
NOTE 14 - MAJOR CUSTOMERS
Substantially all of the sales during the year ended September 30, 2003, were
derived from five customers. These same five customers accounted for 91% of the
Company's revenue and 89% of the outstanding accounts receivable at September
30, 2003.
NOTE 15 - SUBSEQUENT EVENTS
ACQUISITION OF MINORITY INTEREST IN SUBSIDIARY
On December 31, 2003, the Company acquired the remaining 20% minority interest
in its IC Star MMS subsidiary for 9,889,000 shares of common stock and
10,000,000 warrants to purchase an additional 10,000,000 common shares at an
exercise price of $2.00; these warrants expire on December 31, 2005.
DISPOSITION OF SUBISIDIARY
On November 20, 2003, the Company sold a subsidiary of Arran, StarEastNet
Limited for $200,000.
F-17
TELECOM COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
NOTE 15 - SUBSEQUENT EVENTS (CONTINUED)
CONTINGENCY
On December 4, 2003, a writ of summons was issued by third parties (as a
contracted consultants group for Arran Services Limited) against Arran Services
Limited and the subsidiaries of the Company claiming for unspecified damages for
alleged breach of contract and an injunction to restrain the subsidiaries to use
some of its entertainment content. A defense letter was issued on December 24,
2003, by Arran's legal advisor claiming the Action by the Plaintiff is entirely
misconceived and without merit. Management believes it has solid grounds to
defend this Action. Accordingly, no provision has been made in the financial
statements for this uncertainty.
F-18