U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 for the quarterly period ended March 31, 2002
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 for the transition period from _______ to _______
COMMISSION FILE NUMBER 333-62236
TELECOM COMMUNICATIONS, INC.
----------------------------
(Exact name of small business issuer as specified in its charter)
Indiana 35-2089848
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(State or other jurisdiction of (IRS Employer identification
incorporation or organization) No.)
827 S. Broadway, Los Angeles, CA 90014
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(Address of principal executive offices)
(213) 489-3486
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(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section13
or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [x] No [ ]
Number of shares of common stock outstanding as of
May 18, 2002: 10,000,000
ITEM 1. FINANCIAL STATEMENTS
TELECOM COMMUNICATIONS, INC.
BALANCE SHEETS
AT MARCH 31, 2002(UNAUDITED) AND SEPTEMBER 30, 2001
(Unaudited)
March 31, 2002 September 30, 2001
ASSETS
------------------------------------------------------------------
CURRENT ASSETS
------------------------------------------------------------------
Cash in banks (Note 4) . . . . . . . . . . . . . . . . . . . . . $ 18,918 $ 25,920
Inventory (Note 5) . . . . . . . . . . . . . . . . . . . . . . . 4,000 4,000
TOTAL CURRENT ASSETS . . . . . . . . . . . . . . . . . . . . . . 22,918 29,920
--------------- --------------------
PROPERTY AND EQUIPMENT, NET. . . . . . . . . . . . . . . . . . . . -0- -0-
------------------------------------------------------------------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . $ 22,918 $ 29,920
=============== ====================
LIABILITIES AND STOCKHOLDERS'EQUITY
------------------------------------------------------------------
CURRENT LIABILITIES
------------------------------------------------------------------
Income taxes payable (Note 14) . . . . . . . . . . . . . . . . . $ 8,517 $ 21,026
--------------- --------------------
TOTAL CURRENT LIABILITIES. . . . . . . . . . . . . . . . . . . . 8,517 21,026
--------------- --------------------
STOCKHOLDERS' EQUITY (NOTE 15)
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Common stock ($.001 par value, 80,000,000 shares authorized:
10,000,000 issued and outstanding). . . . . . . . . . . . . . . 10,000 10,000
Preferred stock ($.001 par value, 20,000,000 shares authorized:
none issued and outstanding). . . . . . . . . . . . . . . . . . -0- -0-
Additional paid-in-capital . . . . . . . . . . . . . . . . . . . -0- -0-
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . 4,401 (1,106)
TOTAL STOCKHOLDERS' EQUITY . . . . . . . . . . . . . . . . . . . 14,401 8,894
--------------- --------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY . . . . . . . . . . . . . . . . . . . . . . $ 22,918 $ 29,920
=============== ====================
The accompanying notes are an integral part of these financial statements
TELECOM COMMUNICATIONS, INC.
STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2002 AND 2000
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
March 31, 2002 March 31, 2001 March 31, 2002 March 31, 2001
INCOME (NOTE 2):
------------------------------
Phone calls. . . . . . . . . $ 38,801 $ 65,332 $ 69,924 $ 87,954
Lotto tickets (net). . . . . 1,624 4,645 3,430 4,115
Bus tokens . . . . . . . . . 97,258 128,191 195,451 240,934
Bus passes . . . . . . . . . 1,573 22,372 3,657 37,579
Checks cashed. . . . . . . . 2,569 2,863 4,064 5,113
Money grams. . . . . . . . . 1,135 1,158 3,386 2,243
---------------- ---------------- ---------------- ----------------
TOTAL. . . . . . . . . . . . $ 142,960 $ 224,561 $ 279,912 $ 377,938
---------------- ---------------- ---------------- ----------------
COST OF GOODS SOLD
------------------------------
Phone call costs . . . . . . 18,247 34,995 33,428 45,363
Bus token costs. . . . . . . 88,540 127,437 177,985 225,404
Bus pass costs . . . . . . . 1,501 21,674 3,499 36,045
TOTAL COST OF SALES. . . . . 108,288 184,106 214,912 306,812
---------------- ---------------- ---------------- ----------------
GROSS PROFIT . . . . . . . . $ 34,672 $ 40,455 $ 65,000 $ 71,126
---------------- ---------------- ---------------- ----------------
OPERATING EXPENSES:
------------------------------
General and administrative . $ 36,162 $ 40,360 50,976 52,513
TOTAL EXPENSES . . . . . . . 36,162 40,360 50,976 52,513
---------------- ---------------- ---------------- ----------------
OPERATING INCOME . . . . . . (1,490) 95 14,024 18,613
---------------- ---------------- ---------------- ----------------
INCOME TAX (PROVISION)
BENEFIT. . . . . . . . . . . (4,747) (818) (8,517) (2,661)
---------------- ---------------- ---------------- ----------------
NET INCOME . . . . . . . . . $ (6,237) $ (723) $ 5,507 $ 15,952
---------------- ---------------- ---------------- ----------------
Net income per common share
basic & fully diluted. . . . $ ** $ ** $ ** $ **
---------------- ---------------- ---------------- ----------------
Weighted average common
shares outstanding . . . . . 10,000,000 10,000,000 10,000,000 10,000,000
---------------- ---------------- ---------------- ----------------
**Less than $.01
The accompanying notes are an integral part of these financial statements
TELECOM COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED MARCH 31, 2002 AND 2001
2002 2001
CASH FLOWS FROM OPERATING ACTIVITIES:
--------------------------------------------------
Net income . . . . . . . . . . . . . . . . . . . $ 5,507 $ 15,952
Adjustments to reconcile net income to net
cash used in operating activities:
Common stock issued for services . . . . . . . -0- -0-
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses. . . . (12,509) 2,661
--------- ---------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES . . . . . . . . . . . . (7,002) 18,613
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
--------------------------------------------------
Shareholder distributions. . . . . . . . . . . . -0- (20,203)
--------- ---------
NET CASH USED IN FINANCING
ACTIVITIES . . . . . . . . . . . . . . . . . -0- (20,203)
--------- ---------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS. . . . . . . . . . (7,002) (1,590)
--------- ---------
CASH AND CASH EQUIVALENTS:
--------------------------------------------------
Beginning of period. . . . . . . . . . . . . 25,920 2,443
--------- ---------
End of period. . . . . . . . . . . . . . . . $ 18,918 $ 853
--------- ---------
The accompanying notes are an integral part of these financial statements
TELECOM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2002 (UNAUDITED)
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
In the opinion of management, the unaudited condensed consolidated financial
statements contain all adjustments consisting only of normal recurring accruals
considered necessary to present fairly the Company's financial position at March
31, 2002, the results of operations for the three and six month periods ended
March 31, 2002 and 2001, and cash flows for the six months ended March 31, 2002
and 2001. The results for the period ended March 31, 2002, are not necessarily
indicative of the results to be expected for the entire fiscal year ending
September 30, 2002.
NOTE 1. ABOUT THE COMPANY
Telecom Communications of America was founded as a sole proprietorship in 1995
by Michelle Hiromoto with the assistants and management of her father Tak
Hiromoto. 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 operates on the Internet as opposed to using conventional long distance
carriers to facilitate lower costs that are passed on to the customers. Many of
the extra fees that are found in conventional long distance systems are avoided
this way. In addition the company also provides various services such as check
cashing, money wiring, the sale of bus tokens and passes, and tickets from
California Lottery known as Lotto.
NOTE 2. REVENUE RECOGNITION
SAB 101 identifies basic criteria that must be met for revenue recognition.
There must be the following items:
A. Persuasive evidence of an arrangement exists;
B. Delivery has occurred or service has been rendered.
C. The seller's price to the buyer is fixed or determinable;
D. Collectability is reasonably assured.
Except for check cashing, all transactions are done on a cash basis with fixed
prices made clear to the buyer prior to the transaction. All products are paid
for immediately upon receipt or completion of phone calls. All monies received
are not refundable. EITF 99-19 requires that sales recognized on a gross basis
be for an item or service where the merchant takes total risk for the product or
service as opposed to an agent relationship wherein earnings are simply a
commission received as a representative who bears no risk. Phone calls, Bus
Passes, and Tokens, are reported at gross while Lotto Tickets, Money Grams and
Check Cashing are reported at net. Checks cashed are limited to local
individuals known by the owners as local employees with two types of I.D.
required. On one occasion $5,000 worth of checks did bounce which were later
determined to be counterfeit.
This incident was isolated and has not been repeated because of the controls
being used. For this reason bad checks are minimal. All cashed checks are
deposited the same evening and clear the next day so there are no material
receivables. There is a fee of 1.7% of the amount cashed.
NOTE 3. ACCOUNTING METHOD
The company uses the accrual method of accounting.
NOTE 4. BANKING POLICY
Funds are kept in two banks so no more than $100,000 is in any one account.
NOTE 5. INVENTORY VALUATION
The average inventories on any given day are as follows:
Bus Passes $ 500
Bus Tokens 2,000
Lotto Scratcher 1,500
_________
Total $ 4,000
========
NOTE 6. RECEIVABLES
There are no receivables as all business is done for cash. See Note 2.
NOTE 7. ASSETS
All capitalized assets are fully depreciated while new ones are currently being
leased.
NOTE 8. LIABILITIES
There are no loans outstanding and no material payables other than income taxes
accrued.
See Note 14.
NOTE 9. LOANS AND LEASES
Although no loans are outstanding, the Company does have a computer lease
requiring a monthly payment of $911.00. This lease is good thru July 1, 2003.
Although there is a purchase option at the end of the lease for $3,600 this is
not small enough to be considered a bargain purchase option which would require
lease capitalization Statement No. 13 which requires capitalization and
depreciation of certain leases. No capitalization of the lease will be done.
The Company is also leasing its occupancy thru December 31, 2003. Both
obligations are broken down as follows:
Computer Lease
Balance on 07/01/2001 thru 09/30/2001 $ 2,733
Balance on 10/01/2001 thru 09/30/2002 10,932
Balance on 10/01/2002 thru 07/01/2003 8,199
___________
Total $ 21,864
==========
Occupancy Lease
Balance on 07/01/2001 thru 09/30/2001 $ 5,400
Balance on 10/01/2001 thru 09/30/2002 22,300
Balance on 10/01/2002 thru 09/30/2003 23,500
Balance on 10/01/2003 thru 12/31/2003 6,000
___________
Total $ 57,200
==========
NOTE 10. RELATED PARTY TRANSACTIONS
There have been no related party transactions.
NOTE 11. LITIGATION
There is no litigation at this time either threatened or pending.
NOTE 12. PRE-PAID ITEMS AND DEPOSITS
There are no large deposits on any assets or prepaid insurance.
NOTE 13. PAYROLL
Prior to incorporation there were no payrolls as ownership took draws as any
sole proprietorship does. After incorporation the officers will be paid as
professional, independent contractors. Therefore, there are no payroll tax
issues to be concerned about at this time.
NOTE 14. INCOME TAX PROVISION
Provision for income taxes is based on corporate rates for both state and
federal taxes. Corporate rates are used for the statements prior to
incorporation for consistency. The rates are calculated as follows:
Federal rates:
The first $50,000 @ 15% percent.
The next $25,000 @ 25% percent.
The balance @ 35% percent.
State rates:
California rate of 9.3%.
NOTE 15. INCORPORATION
On December 21, 2000, the Company was acquired by MAS Acquisition XXI Corp.
Following APB No. 16, this type of acquisition is commonly called a "reverse
merger" wherein the smaller private operating company, Telecom Communications of
America, merges into a non-operating shell corporation, MAS Acquisition XXI
Corp., which had no assets, resulting in the owner's/manager's, Tak Hiromoto
continuing to have effective operating control of the new combined company,
Telecom Communications, Inc. The shareholders of the former shell only continue
as passive investors. The accounting was accomplished by adjusting the balance
sheet into a corporate style as opposed to a sole proprietorship with simple
recognition of the assets and liabilities as they were in the former financial
statements of the sole proprietorship. The equity section is adjusted by taking
all owner's capital and reclassifying it as Additional Paid in Capital. The
Common Stock issued is recognized at its par value of .001 as per the offering.
Ten million shares were issued totaling $10,000 but no cash was received. The
offsetting entry is to reduce Additional Paid in Capital by the $10,000. The
financial statements presented here represent the activities of the smaller
operating company.
As mentioned, ten million shares have been issued at a par value of .001. A
total of 100 million shares are authorized with 80 million as common shares and
20 million as preferred. The preferred stock will not be convertible so once
issued no dilution of Earnings per Share will be needed. The company intends to
raise additional capital through the issuance of stock to enable it to expand.
Management estimates that $50,000 is needed to move forward the first year. Of
the ten million shares issued, nine million were issued to Tak Hiromoto. He
then transferred one million shares to Herman Alexis & Co., Inc. for assisting
the company. The remaining one million shares are broken down with 977,500
owned by MAS Capital, Inc. and the remaining 22,400 owned by a large number of
small investors.
NOTE 16. FACILITATION OF MERGER
The joining of the companies was accomplished by an introduction to MAS
Acquisition XXI Corp. by Herman Alexis & Co., Inc. to the Hiromotos. Neither
party knew each other before this introduction.
NOTE 17. GOING CONCERN
As mentioned in Note 15, management estimates that $50,000 is needed to
effectively expand and operate the company for the first year. Although the
company has operated successfully for seven years, ownership draws have produced
a capital deficiency that raises substantial doubt about the company's ability
to continue as a going concern. The future is unpredictable. The financial
statements are presented on the going concern basis, which contemplates the
realization of assets and satisfaction of liabilities in the normal course of
business. The company's ability to continue as a going concern must be
considered in light of the problems, expenses, and complications frequently
encountered by entrance into established markets and the competitive environment
in which the company operates. The financial statements prepared here have not
been adjusted to reflect possible future events and their effect on the
recoverability and classification of assets or the amounts and classification of
assets or the amounts and classification of liabilities that may result from the
possible inability of the company to continue as a going concern.
NOTE 18. EARNINGS PER SHARE
The company calculates net income or Earnings per Share as required by SFAS No.
128. Earnings per share are calculated by dividing net income by the average
number of outstanding shares. No shares are convertible so dilution is not an
issue.
The following represents the calculation of earnings per share:
For the three months ended For the six months ended
March 31, March 31,
BASIC & DILUTED* 2002 2001 2002 2001
------------------ ------ ---- ---- ----
Net income $ (6,237) $ (723) $ 5,507 $ 15,952
Less- preferred stock dividends
-- -- -- --
------------- ------------ ------------ ----------
Net income $ (6,237) $ (723) $ 5,507 $ 15,952
Weighted average number
of common shares 10,000,000 10,000,000 10,000,000 10,000,000
------------- ------------ ------------ ----------
Basic & diluted earnings per share
$ ** $ ** $ ** $ **
======== ======== ======== ========
*There were no common stock equivalents for either period presented.
** Less than $.01
NOTE 19. DEFERRED TAXES
According to SFAS 109, the objectives of accounting for income taxes are to
recognize (a) the amount of taxes payable or refundable for a current year and
(b) deferred tax liabilities and assets for the future tax consequences of
events that have been recognized in an enterprise's financial statements or tax
returns. A deferred tax liability or asset is recognized for the estimated
future tax effects attributable to temporary differences and carry forwards.
Measurements of current and deferred tax liabilities and assets are based on
provisions of the enacted tax law. The effects of future changes in tax laws or
rates are not anticipated. If a tax deferral occurs, the measurement of
deferred tax assets is reduced, if necessary, by the amount of any tax benefits
that, based on available evidence, are not expected to be realized. At this
time, there are no such deferrals. See Note 14 for calculations of current tax
year liabilities based on existing rates.
NOTE 20. SEGMENT REPORTING
Currently the company reports only one segment on the financial statements, as
there is only one central location of business and not multiple locations or
departments. SFAS 131 defines an operating segment, in part, as a component of
an enterprise whose operating results are regularly reviewed by the chief
operating decision maker to make decisions about resources to be allocated to
the segment and assess its performance. The chief operating decision maker is
not necessarily a single person, but is a function that may be performed by
several persons.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
--------
With the exception of historical facts stated herein, the matters discussed in
this report are "forward looking" statements that involve risks and
uncertainties that could cause actual results to differ materially from
projected results. Such "forward looking" statements include, but are not
necessarily limited to, statements regarding anticipated levels of future
revenues and earnings from operations of the Company. Readers of this report are
cautioned not to put undue reliance on "forward looking" statements, which are
by their nature, uncertain as reliable indicators of future performance. The
Company disclaims any intent or obligation to publicly update these "forward
looking" statements, whether as a result of new information, future events, or
otherwise.
DESCRIPTION OF BUSINESS
-----------------------
Business Development
--------------------
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
unidentified business. On December 21, 2000, we acquired Telecom Communications
of America which 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.
Our principal executive offices are located at 827 S. Broadway, Los Angeles, CA
90014. Our telephone number is (213) 489-3486.
Overview
--------
Our main business is to provide low cost telephone calls over the Internet to
individuals and businesses. Our services enable our customers to make low cost
telephone calls over the Internet using the traditional telephone. In September
1999, we introduced a service that enables international and domestic calls to
be made over the Internet using traditional telephones. Long distance calls
made using our services are often substantially less expensive than long
distance calls routed over traditional voice network. Following illustrate a
typical cost for our customers. In summary, our cost of 9.5 cents per minute
compared with 17 cents per minute using traditional phones taking in
considerations for the monthly basic service charges for the traditional phone
services.
Illustration: (based on telephone services in our area)
Our cost per minute = 9.5
Traditional phone services cost per minute = 7 cents (without basic fees)
Assumptions: Residential long distance charge for the month is $10.78
for 154 minutes (domestic call). Customer is using plans
such as MCI 7 Cents anytime residential plan.
Additional costs for Traditional long distance charges:
MCI 7 Cents anytime residential plan $ 6.95
12% Federal Excise Tax 1.32
40% State & Local Taxes 4.36
.004% Federal, State & Local Surcharges 0.04
25% Federal Universal Service Fee 2.61
.23% CA High cost Fund-B Surcharges 0.25
.005% CA Universal Life Tel Service Surcharges 0.05
.003% CA Relay Service and Communication Device Fund 0.03
.006% CA 911 Local 0.07
-------------------- --------
TOTAL $15.68
To calculate traditional phone cost, we took the traditional long distance
charges for the month of $10.78 plus the monthly fees of $15.68 and divide the
result by 154 minutes which gives 17 cents per minute.
$10.78 + $15.68 = $26.46 divided by 154 minutes = 17 cents.
In this illustration, our customers would save 7.5 cents per minute using our
services. The basic fees may very for different areas and we do not have that
information at this time. For International calls, you have a higher savings
due to higher tariff on traditional phone calls.
We intend to expand our business through acquisitions. Currently, we have one
telephone calling center with one server located in Los Angeles, California.
We have only a limited operating history upon which you can evaluate our
business and prospects. We have achieved limited profitability, and expect to
continue to achieve limited profitability in the year 2001 and subsequent fiscal
periods. We will need to significantly increase our revenues in order to achieve
greater profitability, which may not occur. Even if we do achieve greater
profitability, we may be unable to sustain or increase profitability on a
quarterly or annual basis in the future.
Industry Background
-------------------
The Internet is experiencing unprecedented growth as a global medium for
communications and commerce. Internet telephony has emerged as a low cost
alternative to traditional long distance calls. Internet telephone calls are
less expensive than traditional domestic and international long distance calls
primarily because these calls are carried over the Internet and therefore bypass
a significant portion of local and international long distance tariffs. The
fees and tariffs that are eliminated for our services can be itemized as
follows:
* Calling Plans Charge
* Carrier Access Charge
* Federal Excise Tax
* State and local Tax
* Federal, State and local surcharge
* Federal Universal Service fee
* California High Cost Fund-B surcharge
* California Universal Lifeline Telephone Service surcharge
* California Relay Service and Common Device fund
* California 911 Local charge
The technology by which Internet phone calls are made is also more
cost-effective than the technology by which traditional long distance calls are
made. The growth of Internet telephony has been limited to date due to poor
sound quality attributable to technological issues such as delays in packet
transmission and network capacity limitations. However, recent improvements in
packet-switching technology, new software algorithms and improved hardware have
substantially reduced delays in packet transmissions.
Products and Services
---------------------
Presently, we have one telephone calling center located in Los Angeles,
California. This center has 6 phone booths each with its own traditional
telephone set, table and chair. Phone calls made from these booths are routed
through our computer server and Internet connection to a third party servers
which provide the interconnection to their established network which enables
telecommunications over Internet Protocol (IP) data networks using their
software, hardware and related components. The third party providing this
service is Inter-Tel.net, Inc. with whom Telecom has a contractual agreement.
We do not rely solely on customers visiting our telephone calling center. We
also have 24 phone lines attached to our server which enables customers
accessing our services using telephones away from our location by calling in to
our telephone calling center to be re-routed to our Internet connections. In
addition, the following products and services are also offered at our telephone
calling center:
* Money wiring service
* Check cashing
* Sales of Lotto tickets
* Automatic Telling Machine (ATM)
* Faxing services
* Sales of telephone cards
Business Strategies
-------------------
We hope to grow rapidly through franchising our existing operations and through
acquisitions. We have not made any specific business plan for franchising our
existing operations and we have no prior experience in franchising. Currently,
we do not have prospective franchisees or acquisition targets that are targeted
for acquisitions.
Key elements of the company's business strategy are:
* Acquiring and consolidating geographically disparate and usually smaller
independent Internet Telephone Service Providers.
* Developing and offering additional value-added products and services to
customers. For example, offering long distance international calls over the
Internet using cellular phones.
* Selling franchises of our telephone calling center concept throughout the West
Coast and in other areas of high concentration of immigrants.
* Building customer loyalty and gaining market share through brand recognition.
* Expansion of our sales and marketing operation.
Marketing Strategy
------------------
We currently market our products in several areas. Our marketing efforts include
newspaper advertisements and advertisements in publications that potential
customers from Latin American countries are likely to see. Other advertising
such as flyers targeting a particular market segment are developed to compliment
and expand the impact of our marketing program.
Our marketing strategy for the future will consist of using medias designed to
reach mass audiences such as audio spot advertisements, video clips and banner
advertising on the Internet as well as advertising targeted toward specific
markets using radio, television and other publications.
Competition
-----------
We have nearly two years of experience building and fine tuning Internet based
telephone call services using traditional telephones at a calling center
environment. We believe we have the ability to deploy information technology at
a faster rate and with fewer errors than new entrants into this field. We have
basic billing capabilities to accommodate the more complex commercial
transactions in which we intend to engage in the future. We already have in
place network management tools and a secure web site capable of taking new
account orders in real-time. With our billing package, we can bill customers for
their telephone calls at any interval that they desire. We can send out bills on
a weekly, bi-weekly or monthly basis. Many Commercial transactions need to be
billed differently. We use an internal billing system that was designed for our
telephony system. The transactions that we intend to bill for are charges that
would normally appear on the telephone bill. We will be offering long distance
telephone service to our commercial as well as our retail customers. We can bill
for transactions by time of day, date, even charge a surcharge on holidays.
We believe our competitive strength is the ability to build a bridge for a
segment of the urban population to access Internet based telephone communication
services. We also believe we can move faster than larger telephone companies in
identifying and taking advantage of market opportunities as Internet based
telephone communication services continues to evolve at a rapid pace.
Long Distance Market
--------------------
The long distance telephony market and, in particular, the Internet telephony
market, is highly competitive. There are several large and numerous small
competitors and we expect to face continuing competition based on price and
service offerings from existing competitors and new market entrants in the
future. The principal competitive factors in the market include price, quality
of service, breadth of geographic presence, customer service, reliability,
network capacity and the availability of enhanced communications services. Our
competitors include AT&T, MCI WorldCom, Sprint, Net2Phone and other
telecommunications carriers.
Many of our competitors have substantially greater financial, technical and
marketing resources, larger customer bases, longer operating histories, greater
name recognition and more established relationships in the industry than we
have. As a result, certain of these competitors may be able to adopt more
aggressive pricing policies, which could hinder our ability to market our
Internet telephony services.
Web-Based Internet Telephony Services
-------------------------------------
As consumers and telecommunications companies have grown to understand the
benefits that may be obtained from transmitting voice over the Internet, a
substantial number of companies have emerged to provide voice over the Internet.
In addition, companies currently in related markets have begun to provide voice
over the Internet services or adapt their products to enable voice over the
Internet services. These related companies may potentially migrate into the
Internet telephony market as direct competitors or could become competitors if
we move towards their current markets through our stated intention to grow by
acquisition.
Internet Telephony Service Providers
------------------------------------
During the past several years, a number of companies have introduced services
that make Internet telephony services available to businesses and consumers.
AT&T Jens (a Japanese affiliate of AT&T), deltathree.com (a subsidiary of RSL
Communications), I-Link, iBasis (formerly known as VIP Calling), ICG
Communications, IPVoice.com, ITXC and OzEmail (which was acquired by MCI
WorldCom) provide a range of voice over the Internet services. These companies
offer PC-to-phone or phone-to-phone services which could be adapted to provide a
similar service to the services we offer. Some, such as AT&T Jens and OzEmail,
offer these services within limited geographic areas.
Intellectual Property
---------------------
We do not currently own or hold any patents, trademarks, licenses, franchises
concessions, royalty agreements or labor contracts.
Government Regulation
---------------------
- Regulation of Internet Access Service
We provide Internet access, in part, by using telecommunications services
provided by carriers. Terms, conditions and prices for telecommunications
service are subject to economic regulation by State and Federal agencies. We,
as an Internet Access Provider, are not currently subject to direct economic
regulation by the Federal Communications Commission (FCC) or any State
regulatory body other than the type and scope of regulation that is applicable
to businesses generally.
In April 1998 the FCC reaffirmed that Internet Access Providers should be
classified as unregulated "Information Service Providers" rather than regulated
"Telecommunication Providers" under the terms of the Federal Telecommunication
Act of 1996. As a result, we are not subject to Federal regulations that apply
to telephone companies and similar carriers simply because we provide our
services using telecommunications service provided by a third party carrier. To
date, no State has attempted to exercise economic regulations over Internet
Access Providers.
Governmental regulatory approaches and policies to Internet Access Providers and
others that use the Internet to facilitate Data and Communication Transmissions
are continuing to develop and in the future we could be exposed to regulation by
the FCC or other Federal agencies or by State regulatory agencies or bodies.
For example, the FCC has expressed an intention to consider whether to regulate
providers of voice and fax service that employ the Internet or Internet Packet
Switching as "Telecommunications Providers" even though Internet access itself
would not be regulated. The FCC is also considering whether providers of
Internet based telephone services should be required to contribute towards the
Universal Service Fund, which subsidizes telephone service for rural and low
income consumers, or should pay carrier access charges on the same basis as
applicable to regulated telecommunications providers. To the extent that we
engage in the provision of Internet or Internet Protocol base telephone or fax
service, we may become subject to regulations promulgated by the FCC or State
with respect to such activities. We cannot assure potential investors that such
regulations would not adversely affect our ability to offer certain enhanced
business services in the future.
- Regulation of Internet Content
Due to the increase in popularity and use of the Internet by broad segments of
the population it is possible that laws and regulations may be adopted with
respect to web site content, privacy pricing, encryption standards, consumer
protection, electronic commerce, taxation, copyright infringement and other
intellectual property issues. We cannot predict the effect, if any, that any
future regulatory changes or developments may have on the demand for our access
or enhanced business service.
Employees
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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 registration statement, we have two full- time and
three-part time employees. Two full-time employees are responsible for
management and marketing, one part-time employee is responsible for book keeping
and sales, two other part-time employees are responsible for sales and other day
to day operations. The three part-time employees are sons and daughter of Mr.
Tak Hiromoto and Mrs. Elizabeth Hiromoto. We consider our employee relations to
be good and we have never experienced any work stoppages. We can not 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.
RESULTS OF OPERATIONS
-----------------------
Net Income
The Company had a net loss of $6,237 for the three months ended March 31, 2001,
versus a net loss of $723 for the same period ended March 31, 2001, an increase
of $5,514. The change in net income for the period was primarily attributable to
a decrease in gross profit $5,783 due to less revenues during the quarter.
The Company had net income of $5,507 for the six months ended March 31, 2002,
versus net income of $15,952 for the same period ended March 31, 2001, a
decrease of $10,445. The change in net income for the period was primarily
attributable to a decrease in gross profit $6,126 due to less revenues during
the quarter and an increase in income taxes of $5,586 due to the Company's new
tax structure after its revocation of its S-corporation status with the Internal
Revenue Service.
Sales
Revenues were $142,960 for the three months ended March 31, 2001, versus
$224,561 for the three months ended March 31, 2001, a decrease of $81,601 or
36%. Revenues were $279,912 for the six months ended March 31, 2002, versus
$377,938 for the six months ended March 31, 2001, a decrease of $98,026 or 26%.
The decrease in sales for both periods was primarily due to competitive prices
within the telecommunications industry. Gross margins remained relatively
constant for both periods.
Expenses
Total expenses were $36,162 for the three months ended March 31, 2002, versus
$40,360 for the three months ending March 31, 2001, a decrease of $4,198 or 10%.
Total expenses for the six months ended March 31, 2002 were $50,976, versus
$52,513 for the six months ended March 31, 2001, a decrease of $1,537 or 3%. The
Company realized a slight increase in its total expenses during fiscal year 2001
due to its effort to gain active trading status on the Over-the-Counter Bulletin
Board (OTC BB).
Liquidity and Capital Resources
On March 31, 2002, the Company had cash of $18,918 and working capital of
$14,401. This compares with cash of $853 and a working capital deficit of $1,820
at March 31, 2001. The increase in working capital was due to an increase in
cash partially offset by an increase in income taxes payable.
Net cash used in operating activities was $7,002 for the six months ended March
31, 2002 as compared with net cash provided by operating activities of $18,613
for the six months ended March 31, 2001. The difference in 2002 was primarily
attributable to a decrease in net income of $10,445 and an increase of $15,170
in income taxes payable during 2002.
Cash provided by financing activities totaled $-0- for the six months ended
December 31, 2001 as compared with net cash used in financing activities of
$20,203 for the six months ended December 31, 2000. Cash used in financing
activities during 2001 consisted solely of shareholder distributions.
PART II. OTHER INFORMATION
--------------------------
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
During February 2002, the Company located a market maker to submit a filing with
the National Association of Security Dealers to quote the Company's common stock
on the Over-the-Counter Bulletin Board. However, there can be no assurance that
a market will be established or maintained.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
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None.
b) Reports on Form 8-K
----------------------
None.
SIGNATURES
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In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TELECOM COMMUNICATIONS, INC.
/s/ Tak Hiromoto
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Date: May 18, 2002 Tak Hiromoto
President and Director