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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 2002
OR
|_| Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission file number - 0-2564
TELESOURCE INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 59-3738614
(State or other jurisdiction of (IRS employer identification no.)
incorporation or organization)
860 Parkview Boulevard 60148
(Address of principal executive offices) (Zip code)
(630) 620-4787
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
There were 15,000,000 shares of common stock, par value $0.01 per share,
of Telesource International, Incorporated outstanding as of November 19, 2002.
TELESOURCE INTERNATIONAL, INC.
TABLE OF CONTENTS
Page No.
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PART I. Financial Information
Item 1. Financial Statements: 1
Condensed Consolidated Balance Sheets -
September 30, 2002 and December 31, 2001 2
Condensed Consolidated Statements of Operations -
nine months ended September 30, 2002 and 2001 3
Condensed Consolidated Statements of Operations -
three months ended September 30, 2002 and 2001 4
Condensed Consolidated Statements of Cash Flows -
nine months ended September 30, 2002 and 2001 5
Notes to Condensed Consolidated Financial Statements 6 - 15
Item 2. Management's Discussion and Analysis of 16 - 21
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 21
PART II. Other Information
Item 1. Legal Proceedings 22
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
ITEM 1. FINANCIAL STATEMENTS
The condensed consolidated financial statements which follow have been prepared
by Telesource International, Incorporated ("the Company"), without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission.
The Company's independent audit firm, KPMG, L.L.P., has not completed its
quarterly review of these financial statements. The independent audit firm's
quarterly review is expected to be completed by December 4, 2002. Although
certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted pursuant to such
rules and regulations, the Company believes that the disclosures are adequate to
make the information presented not misleading. The statements reflect all
adjustments which are, in the opinion of management, necessary for a fair
presentation of the results for the periods presented. All such adjustments are
of a normal and recurring nature unless specified otherwise. These condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and the notes thereto included in the
Company's latest Annual Report on Form 10-K.
This Quarterly Report on Form 10-Q, and in particular the "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
section in Part I, contains forward-looking statements concerning future
operations and performance of the Company. Forward-looking statements are
subject to market, operating and economic risks and uncertainties that may cause
the Company's actual results in future periods to be materially different from
any future performance suggested herein. Factors that may cause such differences
include, among others: increased competition, increased costs, changes in
general market conditions, changes in the regulatory environment, changes in
anticipated levels of government spending on infrastructure, and changes in loan
relationships or sources of financing. Such forward-looking statements are made
pursuant to the Safe Harbor Provisions of the Private Securities Litigation
Reform Act of 1995.
1
TELESOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
September 30, 2002 and December 31, 2001
September 30, December 31,
Assets 2002 2001
------------- -------------
(unaudited)
Current assets:
Cash and cash equivalents $ 182,545 204,752
Accounts receivable 5,595,555 3,150,617
Current portion of net investment in sales-type lease 1,580,408 1,473,229
Costs and estimated earnings in excess of billings 5,335,729 3,039,607
Prepaid expenses and other current assets 566,519 388,129
------------- -------------
Total current assets 13,260,756 8,256,334
Net investment in sales-type lease-long term 11,680,342 12,879,411
Property, plant and equipment, net 2,375,535 2,690,935
Other assets 95,971 194,847
------------- -------------
Total assets $ 27,412,604 24,021,527
============= =============
Liabilities and Stockholders' Deficit
Current liabilities:
Current portion of long-term debt $ 19,950,000 15,500,000
Accounts payable 5,078,074 3,443,127
Accrued expenses 3,137,974 3,123,074
Billings in excess of costs and estimated earnings 816,741 333,651
Income taxes payable 18,351 19,440
Other current liabilities 1,015,758 168,504
------------- -------------
Total current liabilities 30,016,898 22,587,796
Long-term debt 17,850,000 20,000,000
------------- -------------
Total liabilities 47,866,898 42,587,796
------------- -------------
Stockholders' deficit:
Common stock, $0.01 par value, 50,000,000 shares
authorized; 15,000,000 shares issued and outstanding at
September 30, 2002 and December 31, 2001, respectively 150,000 150,000
Additional paid-in capital 5,797,225 5,797,225
Accumulated deficit (26,342,806) (24,545,584)
Accumulated comprehensive income (loss) -
foreign currency translation (58,713) 32,090
------------- -------------
Total stockholders' deficit (20,454,294) (18,566,269)
Commitments and contingencies (note 6)
------------- -------------
Total liabilities and stockholders' deficit $ 27,412,604 24,021,527
============= =============
See accompanying notes to condensed consolidated financial statements
2
TELESOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (unaudited)
Nine months ended September 30, 2002 and 2001
2002 2001
------------ ------------
Revenues:
Construction revenues $ 13,388,595 8,282,332
Construction revenues - related party 754,982 1,095,690
Construction revenues on power plants -- 2,060,030
Service fees - power generation plant 836,004 549,360
Sales, net 253,158 110,317
Sales, net - related party 7,688 --
Rental income 6,095 1,675
Finance lease revenue 978,110 1,075,709
------------ ------------
Gross revenues 16,224,632 13,175,113
Costs and expenses:
Construction costs 10,961,457 10,649,965
Construction costs on power plants -- 1,941,054
Operation and maintenance costs - power generation plant 904,975 828,920
------------ ------------
Gross profit 4,358,200 (244,826)
------------ ------------
Operating expenses:
Salaries and employee benefits 1,297,717 1,390,703
Occupancy and equipment 259,289 430,918
General and administrative 3,264,165 2,958,444
------------ ------------
Total operating expenses 4,821,171 4,780,065
------------ ------------
Operating loss (462,971) (5,024,891)
------------ ------------
Other income (expense):
Interest income 3,592 32,798
Interest expense (1,373,331) (1,874,761)
Other income, net 35,488 114,364
------------ ------------
Total other expense (1,334,251) (1,727,599)
------------ ------------
Loss before income taxes (1,797,222) (6,752,490)
Income tax expense -- 13,055
------------ ------------
Net loss $ (1,797,222) (6,765,545)
============ ============
Basic and diluted net loss per share $ (0.12) (0.49)
============ ============
Basic weighted average shares outstanding 15,000,000 13,686,131
============ ============
See accompanying notes to condensed consolidated financial statements.
3
TELESOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (unaudited)
Three months ended September 30, 2002 and 2001
2002 2001
------------ ------------
Revenues:
Construction revenues $ 5,023,975 2,089,503
Construction revenues - related party -- 803,708
Construction revenues on power plants -- 141,478
Service fees - power generation plant 305,796 174,048
Sales, net 3,576 --
Sales, net - related party 5,635 --
Rental income 4,193 --
Finance lease revenue 317,484 350,782
------------ ------------
Gross revenues 5,660,659 3,559,519
Costs and expenses:
Construction costs 3,685,105 3,819,879
Construction costs on power plants -- 131,037
Operation and maintenance costs - power generation plant 303,904 232,295
------------ ------------
Gross profit 1,671,650 (623,692)
------------ ------------
Operating expenses:
Salaries and employee benefits 373,833 437,891
Occupancy and equipment 89,088 131,749
General and administrative 1,053,719 1,061,605
------------ ------------
Total operating expenses 1,516,640 1,631,245
------------ ------------
Operating loss 155,010 (2,254,937)
------------ ------------
Other income (expense):
Interest income 3,592 470
Interest expense (425,582) (559,629)
Other income, net 15,159 72,445
------------ ------------
Total other expense (406,831) (486,714)
------------ ------------
Loss before income taxes (251,821) (2,741,651)
Income tax expense -- 843
------------ ------------
Net loss $ (251,821) (2,742,494)
============ ============
Basic and diluted net loss per share $ (0.02) (0.18)
============ ============
Basic weighted average shares outstanding 15,000,000 15,000,000
============ ============
See accompanying notes to condensed consolidated financial statements.
4
TELESOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (unaudited)
Nine months ended September 30, 2002 and 2001
2002 2001
------------ ------------
Cash flows from operating activities:
Net loss $ (1,797,222) (6,765,545)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 329,322 343,117
Changes in assets and liabilities:
Receivables (2,444,938) 5,706,448
Prepaid expenses and other current assets (178,390) 31,656
Costs and estimated earnings in excess of billings (1,813,032) (1,754,338)
Net investment in sales-type lease 1,091,890 770,050
Other assets 98,876 1,550,654
Accounts payable 1,634,947 (4,320,657)
Accrued expenses 14,900 424,201
Income taxes payable (1,089) 8,309
Other liabilities 756,451 342,330
------------ ------------
Net cash used in operating activities (2,308,285) (3,663,775)
------------ ------------
Cash flows from investing activities:
Proceeds from maturity of certificate of deposit -- 1,000,000
Capital expenditures (13,922) (855,181)
------------ ------------
Net cash provided by (used in) investing activities (13,922) 144,819
------------ ------------
Cash flows from financing activities:
Proceeds from borrowings 12,800,000 2,510,000
Proceeds from sale of stock -- 2,000,000
Principal payments on debt (10,500,000) (1,258,118)
------------ ------------
Net cash provided by financing activities 2,300,000 3,251,882
------------ ------------
Net decrease in cash and cash equivalents (22,207) (267,074)
Cash and cash equivalents at beginning of period 204,752 1,038,975
------------ ------------
Cash and cash equivalents at end of period $ 182,545 771,901
============ ============
Supplemental disclosure:
Cash paid during the period for interest $ 1,610,948 2,710,766
See accompanying notes to condensed consolidated financial statements.
5
TELESOURCE INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the nine months ended September 30, 2002 and 2001
(unaudited)
1. Description of Business
Telesource International, Inc. ("Telesource" or the "Company") was
incorporated in Delaware in 1994. Telesource was formed in 1994 to facilitate
various intra-corporate activities and, until July 1999, was a wholly owned
subsidiary of Sayed Hamid Behbehani & Sons Co. W.L.L. ("SHBC"), a Kuwait-based
civil, electrical and mechanical construction company. Telesource is an
international engineering and construction company, engaged in constructing
single family homes, airports, radio towers and in the construction and
operation of energy conversion power plants. In Tinian, an island in the
Commonwealth of Mariana Islands (U.S. Territory), the Company operates a diesel
fired electric power generation plant for the sale of electricity to the local
power grid. The Company's facility in Lombard, Illinois, annually handles the
procurement, export and shipping of U.S. fabricated products for use by the
Company's subsidiaries or for resale to customers outside of the mainland.
The Company conducts its operations through three subsidiaries. The
Company's Mariana subsidiary, Telesource CNMI, Inc., handles construction and
management of the Company's energy conversion facilities in the Commonwealth of
Mariana Islands and operates a branch office in Guam to take advantage of future
opportunities. The Company's second subsidiary, Commsource International, is an
international export company that facilitates the purchase of equipment in the
U.S. The Company's third subsidiary, Telesource Fiji, Ltd., handles the
Company's construction activities in Fiji.
Telesource has three main operating segments: construction services,
brokerage of goods and services, and power generation and construction of power
plants. The power generation activities commenced in March 1999.
During 1999, Telesource entered into an agreement for a merger with Sixth
Business Service Group, a registered company with the Securities and Exchange
Commission (SEC) located in Tampa, Florida. Telesource completed the merger with
and into Sixth Business Service Group on September 7, 2001, pursuant to which
merger the stockholders of Telesource received shares of Sixth Business Service
Group in exchange for their shares of Telesource stock. Sixth Business Service
Group is the surviving corporation and after the merger was completed, Sixth
Business Service Group changed its name to Telesource International,
Incorporated. Upon completion of the merger, Telesource made application for
listing its common stock with the NASD and Telesource was approved for listing
on the National Association of Securities Dealers ("NASD") Over The Counter
Bulletin Board in October 2001, under the ticker symbol "TSCI".
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared in conformity with accounting principles generally accepted
in the United States of America. Such principles were applied on a basis
consistent with those reflected in the 2001 Annual Report on Form 10-K and
documents incorporated therein as filed with the Securities and Exchange
Commission. The accompanying financial data should be read in conjunction with
the consolidated financial statements and the notes thereto contained in the
2001 Annual Report on Form 10-K and documents incorporated therein. In the
opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments necessary to present fairly the
financial position of the Company as of September 30, 2002, and the results of
operations and cash flows for the three and nine month periods ended September
30, 2002 and 2001. The unaudited condensed consolidated statements of operations
for such interim periods are not necessarily indicative of results for the full
year.
6
TELESOURCE INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the nine months ended September 30, 2002 and 2001
(unaudited)
2. Summary of Significant Accounting Policies, continued
Liquidity
As of September 30, 2002, the Company's current liabilities exceeded its
current assets by $16,756,142, and the Company had a total stockholders' deficit
of $20,454,294. The Company has and expects to continue to seek support from its
principal stockholder, SHBC, for its operations, for working capital needs, debt
repayment and business expansion as may be required. SHBC has agreed to
guarantee certain of the Company's obligations, and if necessary, to repay these
borrowings, and has also arranged for letters of credit to secure the repayment
of certain loans. At September 30, 2002, the Company had $37,800,000 in debt
outstanding, $19,950,000 of which is due and payable within the next twelve
months.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements. Additionally, such estimates and
assumptions affect the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
Revenue from construction contracts and construction revenues on power
plants, with the exception of the power plant constructed on Tinian which is
accounted for using the sales-type lease method of accounting as discussed
below, is recognized using the percentage-of-completion method of accounting,
based upon costs incurred and projected costs. Cost of revenue consists of
direct costs on contracts, including labor and materials, amounts payable to
subcontractors, direct overhead costs, equipment expense (primarily
depreciation, maintenance and repairs), interest associated with construction
projects and insurance costs. Contracts frequently extend over a period of more
than one year and revisions in cost and profit estimates during construction are
recognized in the accounting period in which the facts that require the revision
become known. Losses on contracts, if any, are provided in total when
determined, regardless of the degree of project completion. Claims for
additional contract revenue are recognized in the period when it is probable
that the claim will result in additional revenue and the amount can be
reasonably estimated.
The Company accounts for its leasing activities in accordance with the
requirements of Statement of Financial Accounting Standards No. 13, Accounting
for Leases. Revenue associated with the sale of the Tinian power plant
constructed and sold under a sales-type lease, measured as the present value of
noncancelable rents, was recognized in connection with recording the loss on
sale in 1997 and 1998. The Company recognizes finance lease revenue on the
resulting sales-type lease receivable at a constant rate using the interest
method. Service revenues received from operating and maintaining the Tinian
power plant for the duration of the lease are recognized as earned based on
actual kilowatt hours of electricity produced and delivered to the lessee's
customers. To the extent that variable payments based on kilowatt hours of
production exceed the fair value of operation and maintenance services provided,
the Company recognizes such contingent payments as additional finance lease
revenue as they are earned.
The Company also receives variable monthly payments as compensation for
its production of power. The variable payments are recognized based upon power
produced and billed to the customer as earned during each accounting period.
7
TELESOURCE INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the nine months ended September 30, 2002 and 2001
(unaudited)
2. Summary of Significant Accounting Policies, continued
Revenue from the Company's brokering of U.S. fabricated goods is
recognized at the time of shipment. The sales revenues for U.S. fabricated goods
are recognized net of costs of goods sold due to title transferring from the
manufacturer directly to the Company's customer and the risk of loss being borne
by the customer. The Company recognizes management fees and energy sales revenue
in the period in which the commodity is delivered or at the time the work is
performed. Telesource recognizes rental revenue on the accrual basis pursuant to
contractual arrangements between the Company and its customers.
Income Taxes
The net deferred tax asset is fully reserved. In assessing the
realizability of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those temporary
differences become deductible. Management believes that the valuation allowance
reduces the recognition of deferred tax assets to a level that reflects the
amount that is more likely than not to be realized, considering the tax planning
strategies available to the Company.
New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 141, "Business Combinations". SFAS
No. 141 supercedes prior guidance and requires that all business combinations in
the scope of this statement be accounted for using the purchase method. The
provisions of this statement apply to all business combinations initiated after
June 30, 2001, as well as all business combinations accounted for using the
purchase method for which the date of acquisition is July 1, 2001 or later. The
Company adopted this statement as required on July 1, 2001 and it did not affect
the financial statements.
In July 2001, the Financial Accounting Standards Board issued SFAS No.
142, "Goodwill and Other Intangible Assets". SFAS No. 142 supercedes prior
guidance and requires that goodwill no longer be amortized to earnings, but
instead be annually reviewed for impairment. In addition, goodwill or other
intangible assets should be tested for impairment upon adoption. The Company
adopted SFAS No. 142 as required on January 1, 2002 and it did not affect the
financial statements.
In August 2001 and October 2001, the FASB issued SFAS No. 143, "Accounting
for Asset Retirement Obligations" ("SFAS 143") and SFAS No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), respectively.
SFAS 143 requires obligations associated with the retirement of a tangible
long-lived asset to be recorded as a liability when those obligations are
incurred. The Company will be required to adopt this standard effective January
1, 2003. The Company does not believe that adoption of this statement will have
a material impact on its financial statements. SFAS 144 requires that long-lived
assets that are to be disposed of by sale must be measured at the lower of fair
value or book value less cost to sell. The Company adopted SFAS 144 as required
on January 1, 2002 and it did not affect the financial statements.
8
TELESOURCE INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the nine months ended September 30, 2002 and 2001
(unaudited)
2. Summary of Significant Accounting Policies, continued
On January 1, 2002, the Company also adopted the provisions of SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No.
144 supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of," and the accounting and reporting
provisions of Accounting Principles Board Opinion No. 30, "Reporting the Results
of Operations--Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for
the disposal of a segment of a business (as previously defined in that Opinion).
SFAS No. 144 requires that long-lived assets to be disposed of by sale,
including those of discontinued operations, be measured at the lower of their
carrying amount or fair value less cost to sell, whether reported in continuing
operations or in discontinued operations. Reserves for discontinued operations
will no longer include amounts for operating losses that have not yet been
incurred. SFAS No. 144 also broadens the reporting of discontinued operations to
include all components of an entity with operations that can be distinguished
from the rest of the entity, and that will be eliminated from the ongoing
operations of the entity in a disposal transaction. The adoption of SFAS No. 144
had no impact on the Company's financial condition, results of operations, or
cash flows.
In June 2002, the Financial Accounting Standards Board issued SFAS No.
146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS
No. 146 requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. Prior guidance required
that a liability for an exit cost be recognized at the date of an entity's
commitment to an exit plan. This Statement also establishes that liabilities
related to exit or disposal activities should be measured at fair value. SFAS
No. 146 is effective for exit or disposal activities that are initiated after
December 31, 2002.
9
TELESOURCE INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the nine months ended September 30, 2002 and 2001
(unaudited)
3. Long-Term Debt and Credit Arrangements
Long-term debt consists of the following at September 30, 2002 and
December 31, 2001:
September 30, December 31,
2002 2001
------------ ------------
The Hongkong and Shanghai Banking Corporation, Limited, advances on
$2,000,000 credit line, due in full on January 31, 2002 including
interest of 1.5% above the bank's base lending rate (6.3% and 9.5% at
December 31, 2001 and 2000, respectively), secured by nineteen (19)
Commonwealth Utilities Corporation negotiable promissory notes valued
at $3,420,000 and a corporate guarantee of Telesource International,
Inc. -- 2,000,000
Bent Marketing Limited loan, bearing interest of 7.0% per annum,
unsecured and maturing on December 31, 2003. 1,100,000 1,100,000
Bankof Hawaii loan, due in lump sum on December 3, 2002, interest payable
monthly including interest of 0.5% above the Bank Base Rate (4.75% at
September 30, 2002 and December 31, 2001), secured by a irrevocable
standby letter of credit for $2,000,000 issued by Alahli Bank of
Kuwait, guaranteed by SHBC. 1,900,000 1,900,000
Bankof Hawaii loan, advances on credit line, due in full on December 3,
2002, including interest of 1.5 percent above Bank Base Rate (4.75% at
September 30, 2002 and December 31, 2001), secured by twenty-one (21)
Commonwealth Utilities Corporation negotiable promissory notes valued
at $3,780,000 and a corporate guarantee of Telesource International,
Inc. 1,000,000 1,500,000
The Hongkong and Shanghai Banking Corporation, Limited, advances on
$7,500,000 credit line, due in full on November 2, 2002 or upon demand
including interest of 0.5% above the bank's base lending rate (6.3% at
September 30, 2002 and December 31, 2001), secured by irrevocable
standby letter of credit and a corporate guarantee of Telesource
International, Inc. This loan was extended to December
6, 2002. 7,500,000 --
10
TELESOURCE INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the nine months ended September 30, 2002 and 2001
(unaudited)
3. Long-Term Debt and Credit Arrangements, continued
Citytrust Bank loan, borrowings on $1,000,000 revolving line of credit
which expires on December 6, 2002. Due in 90 days from date of
drawdown including interest of 9.5 percent per annum, secured by
assignment of specific invoices from billings on the West Tinian
Airport Airside improvement project, guaranteed by Telesource
International Inc. and one of its officers. 800,000 1,000,000
Kuwait Real Estate Bank loan advances on $3,000,000 credit line, due in
installments of $1,000,000 on January 31, 2002 and $2,000,000 on
September 30, 2002, including interest of LIBOR plus 3 percent. The
loan is guaranteed by Sayed Hamid Behbehani and Sons Co., WLL (a
related party). -- 3,000,000
Kuwait Real Estate Bank loan advances on $3,000,000 credit line, due in
three installments of $1,000,000 each on May 28, 2003, November 28,
2003 and March 15, 2004, respectively, including interest of LIBOR
plus 3 percent. The loan is guaranteed by Sayed Hamid Behbehani and
Sons Co., WLL (a related party). 3,000,000 --
Commercial Bank of Kuwait loan, due in installments, including interest,
from February 18, 2002 through November 23, 2005. The note bears
interest at LIBOR plus 3 percent. The loan is guaranteed by Sayed
Hamid Behbehani and Sons Co., WLL (a related party). Should the
Company default on an installment payment, the entire loan and accrued
interest become due and payable. 22,500,000 25,000,000
------------ ------------
Notes payable to banks 37,800,000 35,500,000
Less current portion 19,950,000 15,500,000
------------ ------------
Total long-term debt $ 17,850,000 20,000,000
============ ============
11
TELESOURCE INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the nine months ended September 30, 2002 and 2001
(unaudited)
4. Shareholders' Equity:
On September 30, 2002, 15,000,000 shares of the Company's common stock
were issued and outstanding. In January 2002, Telesource agreed to issue
warrants to SHBC for the option to purchase of 1,000,000 shares of
Telesource's common stock at an exercise price of $3.00 per share in
connection with SHBC's agreement to provide a standby letter of credit to
Telesource to be used to secure financing with The Hongkong Shanghai
Banking Corporation Limited. These warrants will expire on December 31,
2003.
In January 2001, 2,000,000 warrants were issued to SHBC in connection with
an agreement whereby SHBC granted a $10,000,000 letter of credit for one
year to be used by the Company as it sees fit. The warrants allow SHBC to
receive one share of the Company's common stock for each warrant upon
exercise. The exercise price for the warrants was $1 per share and the
warrants were exercised on June 29, 2001 resulting in an additional
2,000,000 shares of the Company's common stock being issued.
In January 2001, the Company's Board of Directors adopted the 2001
Non-Employee Director's Stock Option Plan that provides for the issuance
of non-qualified stock options to outside directors. Under the terms of
this plan, options to purchase 285,000 shares of common stock were
reserved for issuance, are granted at not less than fair market value,
become exercisable over a 3 year period from the date of grant (vesting
occurs annually on the grant date at 33.3% of the grant), and expire 10
years from the date of grant.
In January 2001, the Company's Board of Directors adopted the 2001
Incentive Stock Option Plan that provides for the issuance of qualified
stock options to employees. Under the terms of this plan, options to
purchase 888,000 shares of common stock were reserved for issuance, are
granted at not less than fair market value, become exercisable over a 3
year period from the date of grant (vesting occurs annually on the grant
date at 33.3% of the grant), and expire 10 years from the date of grant.
In January 2001, the Company's Board of Directors adopted the 2001
Non-Qualified Stock Option Plan that provides for the issuance of
non-qualified stock options to employees. Under the terms of this plan,
options to purchase 27,000 shares of common stock were reserved for
issuance, are granted at less than fair market value, become exercisable
immediately on the date of grant (vesting occurs annually on the grant
date at 33.3% of the grant), and expire 10 years from the date of grant.
12
TELESOURCE INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the nine months ended September 30, 2002 and 2001
(unaudited)
5. Comprehensive Income (Loss)
Comprehensive income (loss) for the three and nine months ended September
30, 2002 and 2001 is as follows:
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------ ------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Net loss $ (251,821) (2,742,494) (1,797,222) (6,765,545)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment 9,289 -- (90,803) 333,827
---------- ---------- ---------- ----------
Comprehensive loss $ (242,532) (2,742,494) (1,888,025) (7,099,372)
========== ========== ========== ==========
6. Earnings Per Share:
In accordance with the disclosure requirements of "SFAS 128", a
reconciliation of the numerator and denominator of basic and diluted
earnings per share is provided as follows:
Nine Months Ended September 30 2002 2001
------------ ------------
NUMERATOR - BASIC AND DILUTED (LOSS) EARNINGS PER SHARE
Net loss $ (1,797,222) $ (6,765,545)
============ ============
DENOMINATOR - BASIC EARNINGS PER SHARE
Weighted average common stock outstanding 15,000,000 13,686,131
============ ============
Basic loss per share $ (0.12) $ (0.49)
============ ============
DENOMINATOR - DILUTED EARNINGS PER SHARE
Weighted average common stock outstanding 15,098,182 13,709,313
============ ============
Diluted loss per share $ (0.12) $ (0.49)
============ ============
Three Months Ended September 30 2002 2001
------------ ------------
NUMERATOR - BASIC AND DILUTED (LOSS) EARNINGS PER SHARE
Net loss $ (251,821) $ (2,742,494)
============ ============
DENOMINATOR - BASIC EARNINGS PER SHARE
Weighted average common stock outstanding 15,000,000 15,000,000
============ ============
Basic loss per share $ (0.02) $ (0.18)
============ ============
DENOMINATOR - DILUTED EARNINGS PER SHARE
Weighted average common stock outstanding 15,144,293 15,069,293
============ ============
Diluted loss per share $ (0.02) $ (0.18)
============ ============
The computation of diluted loss per share for the three and nine months
ended September 30, 2002 and 2001 does not include shares from potentially
dilutive securities as the assumption of conversion or exercise of these
would have an antidilutive effect on loss per share.
7. Commitments and Contingent Liabilities:
The Company is involved in various litigation proceedings arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on
the Company's financial position, results of operations or liquidity.
13
TELESOURCE INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the nine months ended September 30, 2002 and 2001
(unaudited)
8. Business Segment Information:
Telesource has three operating segments: power generation and construction
of power plants, trading and construction services. The power generation
and construction of power plants segment includes sales-type lease
revenues recognized. There were no material amounts of transfers between
segments. Any intersegment revenues have been eliminated. The following
table sets forth certain segment information for the periods indicated:
For the Nine Months Ended
September 30, 2002
-------------------------------------------------------------------------
Power Generation and
Construction of
Power Plants Trading Construction Total
-------------------- ------------ -------------- --------------
Revenue $ 1,814,114 266,941 14,143,577 16,224,632
Interest income -- 825 2,766 3,592
Interest expense 1,295,551 -- 77,780 1,373,331
Depreciation and amortization 3,416 9,151 270,531 283,098
Income tax expense -- -- -- --
Net income/(loss) 909,139 (737,541) (1,968,820) (1,797,222)
Total capital expenditures -- 3,386 10,536 13,922
Total assets 14,207,110 121,932 13,083,562 27,412,604
For the Nine Months Ended
September 30, 2001
-------------------------------------------------------------------------
Power Generation and
Construction of
Power Plants Trading Construction Total
-------------------- ------------ -------------- --------------
Revenue $ 3,685,099 111,992 9,378,022 13,175,113
Interest income 47 13,250 19,501 32,798
Interest expense 1,352,340 -- 522,421 1,874,761
Depreciation and amortization 5,970 26,038 311,109 343,117
Income tax expense 13,055 -- -- 13,055
Net income/(loss) 820,395 (793,317) (6,792,623) (6,765,545)
Total capital expenditures -- -- 855,181 855,181
Total assets 13,683,983 242,784 10,014,462 23,941,229
14
TELESOURCE INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the nine months ended September 30, 2002 and 2001
8. Business Segment Information, continued:
For the Three Months Ended
September 30, 2002
-------------------------------------------------------------------------
Power Generation and
Construction of
Power Plants Trading Construction Total
-------------------- ------------ -------------- --------------
Revenue $ 623,280 13,404 5,023,975 5,660,659
Interest income -- 825 2,767 3,592
Interest expense 399,655 -- 25,927 425,582
Depreciation and amortization 1,354 -- 51,877 53,231
Income tax expense -- -- -- --
Net income/(loss) 1,217,334 (494,957) (974,198) (251,821)
Total capital expenditures -- -- -- --
Total assets 14,207,110 121,932 13,083,562 27,412,604
For the Three Months Ended
September 30, 2001
-------------------------------------------------------------------------
Power Generation and
Construction of
Power Plants Trading Construction Total
-------------------- ------------ -------------- --------------
Revenue $ 666,308 -- 2,893,211 3,559,519
Interest income -- 470 -- 470
Interest expense 116,497 -- 443,133 559,629
Depreciation and amortization 1,354 8,695 105,401 115,450
Income tax expense 843 -- -- 843
Net income/(loss) 1,531,487 (722,967) (3,551,013) (2,742,494)
Total capital expenditures -- -- 21,222 21,222
Total assets 13,683,983 242,784 10,014,462 23,941,229
15
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis of the Company's financial condition and
results of operations should be read in conjunction with the Company's unaudited
condensed consolidated financial statements and the notes thereto included
elsewhere herein.
Results of Operations for the nine months ended September 30, 2002 compared to
the nine months ended September 30, 2001
Revenues
The consolidated operating results for the nine months ended September 30, 2002
and 2001 and the consolidated balance sheet as of September 30, 2002 are derived
from, and qualified by reference to, the unaudited consolidated financial
statements.
Construction Revenues. Construction revenues, including construction revenues
from the related party Retsa (a local development company owned by Nasrallah
Behbehani, a Telesource International significant shareholder), increased 50.8%
to $14.1 million from $9.4 million for the nine months ended September 30, 2002.
The growth is due in part to the efforts of Telesource to broaden its customer
base along with expanding the type of projects sought after for the construction
segment. Related party construction revenues from Retsa were 5.3% and 11.7% of
total construction revenues for the nine months ended September 30, 2002 and
2001, respectively.
Construction Revenues on Power Plants. Construction revenues on power plants
decreased to none for the nine months ended September 30, 2002 as compared to
$2.1 million for the same period during 2001. These revenues during 2001 were
recognized on a contract Telesource International had to expand two existing
power stations in Fiji. The project in Fiji was completed during 2001.
Service Fees - Power Generation Plant. Service fees - power generation plant
increased 52.2% to $836,004 from $549,360 for the nine months ended September
30, 2002 and 2001, respectively. The growth in service fees - power generation
plant is due to growth in demand for power on the island of Tinian. The growth
is principally a result of a local hotel and casino connecting to the local
power grid in late 2001. The average monthly amount billed for the first nine
months of 2002 was $92,889 as compared to the average monthly amount billed for
same period in 2001 in the amount of $61,040. Service fees are expected to grow
in future periods due to an expected increase in tourist arrivals on Tinian
after the completion of the Tinian airport runway during 2002.
Sales Revenues. Sales revenues net of costs, including related party sales,
increased to $260,846 from $110,317 for the nine months ended September 30, 2002
and 2001, respectively. Sales to third party customers increased from $110,317
for the nine months ended September 30, 2001 to $253,158 for the same period in
2002. Related party sales were $7,688 and none for the nine months ended
September 30, 2002 and 2001, respectively. Sales revenues are not expected to be
a significant component of revenues for the foreseeable future.
Rental Income. Rental income increased to $6,095 from $1,675 for the nine months
ended September 30, 2002 and 2001, respectively. Rental income is also not
expected to be a significant component of revenues for the foreseeable future.
Finance Lease Revenues. Finance lease revenues decreased 9.1% to $978,110 from
$1,075,709 for the nine months ended September 30, 2002 and 2001, respectively.
The decrease is due to the declining balance of minimum lease payments, which
are amortized to give a constant rate of return.
Expenses
Construction Costs. Total construction costs (includes related party and third
party) increased 2.9% to $11.0 million from $10.7 million for the nine months
ended September 30, 2002 and 2001, respectively. The growth in construction
costs is a direct result of an increase in construction activities, primarily
due to the airport expansion project on Tinian. Construction costs as a
percentage of construction revenues were 77.5% and 113.6% for the nine months
ended September 30, 2002 and 2001, respectively. The lower gross margin on
construction revenues during the first nine months of 2001 is attributed to a
cost over run on the Kobblerville housing project due to delays encountered as a
result of weather delays along with a delay in the processing of Telesource
International's invoices by the Federal Housing Authority which resulted in a
delay in the collection of payments for the Kobblerville
16
project and ultimately led to an increase in interest expense incurred directly
on this project as well as increased costs for supplies on the project.
Construction Costs on Power Plants. Construction costs on power plants decreased
to none for the first nine months of 2002 as compared to $2,060,030 for the same
period during 2001. The construction costs on power plants recognized during
2001 were incurred on the expansion of two power plants in Fiji. This project
was completed in late 2001.
Operations and Maintenance Costs - Power Generation Plant. Operations and
maintenance costs - power generation plant increased 9.2% to $904,975 from
$828,920 for the nine months ended September 30, 2002. The growth in operations
and maintenance costs - power generation plant is due to increased costs
incurred in operating the power plant. These costs increases are related to
additional staffing required to operate the plant and increased operational and
maintenance fees associated with the increase in the actual amounts of power
produced. Operational and maintenance fees are tied directly to the amount of
usage the power generation engines experience. Power produced during the nine
months ended September 30, 2002 and 2001 was 41.3 million kilo-watt hours and
27.5 million kilo-watt hours, respectively. Operations and maintenance costs -
power generation plant as a percent of service fees - power generation plant
were 108.3% and 150.9% for the nine months ended September 30, 2002 and 2001,
respectively. Operations and maintenance costs - power generation plant exceeded
service fees for the nine months ended September 30, 2002 and for the same
period in 2001 due to low demand for power at the present time. Current demand
levels have increased 52.2% during the first nine months of 2002 as compared to
the same period in 2001 as a result of a hotel and casino connecting to the
local power grid. The ratio of operations and maintenance costs - power
generation plant as a percent of service fees - power generation plant is
expected to improve in future periods due to expected increases in the amount of
power required by the island of Tinian. The expected increase is due to an
expected increase in demand upon completion of the airport runway expansion. The
airport expansion is expected to lead to an increase in tourism on the island of
Tinian.
Salaries and Employee Benefits. Salaries and employee benefits decreased 6.7% to
$1.3 million from $1.4 million for the nine months ended September 30, 2002. The
decrease in salaries and employee benefits is attributed to efforts to reduce
staffing. Management decided to begin making staffing reductions in the fourth
quarter of 2001 through the end of the second quarter of 2002. The reductions in
staff are primarily guest workers hired by our subsidiary in the CNMI and
included labor staff and administrative support staff. The savings generated by
the reduction in labor staff will be realized primarily in costs of sales
whereas the reduction in the administrative support staff will be realized in
salaries and employee benefits.
Occupancy and Equipment. Occupancy and equipment expenses decreased 39.8% to
$259,289 from $430,918 for the nine months ended September 30, 2002. Management
initiated steps during the third quarter of 2001 to further reduce occupancy and
equipment expense by reducing the amount of office space required by the
Company.
General and Administrative Expenses. General and administrative expenses
increased 10.3% to $3.3 million from $3.0 million for the nine months ended
September 30, 2002. The increase is attributed primarily to additional gross
revenue taxes incurred on the increased revenues along with banking fees
incurred in establishing letters of credit to secure bonding for the prison
project on Saipan and letters of credit used to renew or replace maturing debt.
Other Expense, Net. Other expense decreased 22.8% to $1.3 from $1.7 million for
the nine months ended September 30, 2002. The decrease is primarily attributed
to declining interest rates, which resulted in lower interest expense for the
Company.
Income Tax Expense. Income tax expense was none and $13,055 for the nine months
ended September 30, 2002 and 2001, respectively. The tax expense incurred in
2001 was for our Fiji power plant expansion project that was completed in late
2001. Telesource had a net operating loss carryforward at September 30, 2002 of
approximately $23,900,000.
17
Results of Operations for the three months ended September 30, 2002 compared to
the three months ended September 30, 2001
Revenues
The consolidated operating results for the three months ended September 30, 2002
and 2001 and the consolidated balance sheet as of September 30, 2002 are derived
from, and qualified by reference to, the unaudited consolidated financial
statements.
Construction Revenues. Construction revenues, including construction revenues
from the related party Retsa (a local development company owned by Nasrallah
Behbehani, a Telesource International significant shareholder), increased 73.6%
to $5.0 million from $2.9 million for the three months ended September 30, 2002.
The growth is due in part to the efforts of Telesource to broaden its customer
base along with expanding the type of projects sought after for the construction
segment. Related party construction revenues from Retsa were none and 27.8% of
total construction revenues for the three months ended September 30, 2002 and
2001, respectively.
Construction Revenues on Power Plants. Construction revenues on power plants
decreased to none for the three months ended September 30, 2002 as compared to
$141,478 for the same period during 2001. These revenues during 2001 were
recognized on a contract Telesource International had to expand two existing
power stations in Fiji. The project in Fiji was completed during 2001.
Service Fees - Power Generation Plant. Service fees - power generation plant
increased 75.7% to $305,796 from $174,048 for the three months ended September
30, 2002. The growth in service fees - power generation plant is due to growth
in demand for power on the island of Tinian. The growth is principally a result
of a local hotel and casino connecting to the local power grid in late 2001.
Sales Revenues. Sales revenues net of costs, including related party sales,
increased to $9,211 from none for the three months ended September 30, 2002.
Sales revenues are not expected to be a significant component of revenues for
the foreseeable future.
Rental Income. Rental income decreased to $4,193 from none for the three months
ended September 30, 2002. Rental income is also not expected to be a significant
component of revenues for the foreseeable future.
Finance Lease Revenues. Finance lease revenues decreased 9.5% to $317,484 from
$350,782 for the three months ended September 30, 2002. The decrease is due to
the declining balance of minimum lease payments, which are amortized to give a
constant rate of return.
Expenses
Construction Costs. Total construction costs (includes related party and third
party) decreased 3.5% to $3.7 million from $3.8 million for the three months
ended September 30, 2002. Construction costs as a percentage of construction
revenues were 73.4% and 132.0% for the three months ended September 30, 2002 and
2001, respectively. The lower gross margin on construction revenues during the
first quarter of 2001 is attributed to a cost over run on the Kobblerville
housing project due to delays encountered as a result of weather delays along
with a delay in the processing of Telesource International's invoices by the
Federal Housing Authority which resulted in a delay in the collection of
payments for the Kobblerville project and ultimately led to an increase in
interest expense incurred directly on this project as well as increased costs
for supplies on the project.
Construction Costs on Power Plants. Construction costs on power plants decreased
to none for the third quarter of 2002 as compared to $131,037 for the same
period during 2001. The construction costs on power plants recognized during
2001 were incurred on the expansion of two power plants in Fiji. This project
was completed in late 2001.
Operations and Maintenance Costs - Power Generation Plant. Operations and
maintenance costs - power generation plant decreased 30.8% to $303,904 from
$232,295 for the three months ended September 30, 2002. The lower costs during
2002 were a direct result of management's cost cutting efforts and were achieved
primarily by reducing payroll expenses to operate the power plant.
Salaries and Employee Benefits. Salaries and employee benefits decreased 14.6%
to $373,833 from $437,891 for the three months ended September 30, 2002. The
decrease in salaries and employee benefits is attributed to efforts to reduce
staffing. Management decided to begin making staffing reductions in the fourth
18
quarter of 2001 through the end of the second quarter of 2002. The reductions in
staff are primarily guest workers hired by our subsidiary in the CNMI and
include labor staff and administrative support staff. The savings generated by
the reduction in labor staff will be realized primarily in costs of sales
whereas the reduction in the administrative support staff will be realized in
salaries and employee benefits.
Occupancy and Equipment. Occupancy and equipment expenses decreased 32.4% to
$89,088 from $131,749 for the three months ended September 30, 2002 and 2001,
respectively. Management initiated steps during the third quarter of 2001 to
further reduce occupancy and equipment expense by reducing the amount of office
space required by the Company.
General and Administrative Expenses. General and administrative expenses
decreased 0.7% to $1.05 million from $1.06 million for the three months ended
September 30, 2002 as compared to the same period in 2001. The slight decrease
is attributed to cost cutting measures.
Other Expense, Net. Other expense decreased 16.4% to $406,831 from $486,714 for
the three months ended September 30, 2002. The decrease is primarily attributed
to declining interest rates which resulted in lower interest expense for the
Company.
Income Tax Expense. Income tax expense was none and $843 for the three months
ended September 30, 2002 and 2001, respectively. The tax expense incurred in
2001 was for our Fiji power plant expansion project that was completed in late
2001. Telesource had a net operating loss carryforwards at September 30, 2002 of
approximately $23,600,000.
Backlog
The following schedule shows a reconciliation of backlog representing the amount
of revenue Telesource International expects to realize from work to be performed
on uncompleted contracts accounted for using the percentage-of-completion method
of accounting in progress at September 30, 2002:
Contracts as of December 31, 2001 $ 9,615,813
New contracts and change orders added during the first
nine months of 2002 31,098,004
-----------
40,713,817
Less: Contract revenue for the nine months ended
September 30, 2002 14,143,577
-----------
Balance at September 30, 2002 $26,570,240
===========
19
Contractual Obligations and Commercial Commitments
The Company leases certain facilities and equipment under non-cancelable
operating leases, which expire at various dates through 2005. The Company
conducts most of its operations through construction projects and most of the
Company's obligations are encountered through construction contracts. Commercial
commitments include accounts payable, accrued expenses, billings in excess of
costs and estimated earnings, income taxes payable and other current
liabilities. Contractual cash obligations and commitments relating to debt and
lease payments are as follows:
Operating Commercial
Debt Leases Commitments
--------------- --------------- ---------------
(in thousands) (in thousands) (in thousands)
Through September 2003 $ 19,950 $ 115 $ 10,067
October 2003 to September 2006 17,850 84 --
Thereafter -- -- --
--------------- --------------- ---------------
Total $ 37,800 $ 199 $ 10,067
=============== =============== ===============
Liquidity and Capital Resources
Since 1994, the Company's primary sources of operating funds have been bank
borrowings, contributions of equity capital and profits realized on projects
completed. On December 31, 2000, 13,000,000 shares of Telesource International's
common stock were issued and outstanding. On June 29, 2001, SHBC exercised the
2,000,000 warrants it held for the purchase of Telesource International common
stock at $1.00 per share. As of May 15, 2002, Telesource International has
15,000,000 shares of common stock issued and outstanding.
Cash used in operating activities during the nine months ended September 30,
2002 and 2001 were $2.3 million and $3.7 million, respectively.
Net cash used by investing activities was $1,089 for the nine months ended
September 30, 2002 as compared to net cash provided by investing activities of
$144,819 for the same period in 2001. Cash used in investing activities was used
for the purchase of equipment to be used on projects.
Cash from financing activities generated $2.3 million for the nine months ended
September 30, 2001 as compared to cash generated of $3.3 million for the same
period in 2002. The cash generated by financing during 2001 and 2002 came from
additional borrowings.
Telesource International had a working capital deficit of $16.8 million at
September 30, 2002 and $14.3 million at December 31, 2001.
The Company borrowed $5.3 million from SHBC during the first nine months of 2002
in order to make required debt payments (principal and interest) on debt due to
the Kuwait Real Estate Bank and the Commercial Bank of Kuwait which came due
during the first quarter of 2002. The Company repaid this short-term facility to
SHBC in April 2002 when it established a new line of credit with the Hongkong
and Shanghai Banking Corporation in the amount of $7.5 million. This line of
credit is secured by a $7.5 million standby letter of credit from SHBC along
with three promissory notes on the Tinian power plant with a par value of
$540,000, and is payable on demand but in no event later than November 2002.
After first securing an extension to April 15, 2002, the Company repaid the $2.0
million credit facility with the Hongkong and Shanghai Banking Corporation that
was originally due on January 31, 2002, with the proceeds from the $7.5 million
credit line.
In August 2002, the Company renewed both loans with the Bank of Hawaii in the
amount of $1.9 million and $1.5 million as a single loan by making a paydown of
principal in the amount of $500,000. These loans were scheduled to mature on
July 1, 2002 and August 15, 2002. This credit line was renewed by the Bank of
Hawaii and will mature on December 3, 2002. The Company intends to make a
reduction of $400,000 and renew the Bank of Hawaii total credit facility of $2.5
million after the $400,000 paydown for an additional six months at maturity on
December 3, 2002.
20
The Hongkong and Shanghai Banking Corporation is in the process of closing down
operations within the Mariana Islands and Guam. Telesource currently has a $7.5
million credit facility with the Hongkong and Shanghai Banking Corporation which
had a maturity of November 2, 2002. The bank has agreed to extend this credit
facility to December 6, 2002. Telesource is in negotiations with another bank in
the region to take over this credit facility. Telesource intends to renew this
loan for an additional six months at maturity on December 6, 2002.
Telesource is substantially dependent upon SHBC to provide resources for
operating, working capital, and business expansion. SHBC has either given a
guarantee or provided a letter of credit for a majority of the credit facilities
now in place for Telesource as of September 30, 2002. If Telesource is unable to
make a scheduled payment on one of the credit facilities guaranteed by SHBC or
secured by a standby letter of credit from SHBC, SHBC has committed to provide
the funds necessary to make the payment and will not require repayment from
Telesource until after January 31, 2003.
To address its working capital deficit and reduce its dependence on debt
financing obtained with the support of SHBC, Telesource plans on making some
reductions on existing lines and renewing the credit lines. The amount of the
reductions is dependent upon the amounts of capital raised by Telesource
International within the next twelve months.
Telesource International had a $17 million credit line committed from the Gulf
Bank for the prison project at December 31, 2001. The prison project was awarded
in March 2002 and the project-related credit line from the Gulf Bank was
finalized in March 2002. This credit line was used for securing US Treasury
listed bonds for the project.
While Telesource International believes it has sufficient financing for its
current working capital needs, Telesource is considering bidding on additional
projects in addition to the current backlog. There can be no assurance that
Telesource International's present capital and financing will be sufficient to
finance future operations thereafter. Telesource International may seek to raise
additional capital in 2002 through the sale of equity to reduce the existing
credit line borrowings as well as to provide capital needed for growth. There
can no assurance that Telesource will be successful in such efforts. If
Telesource International sells additional shares of common stock to raise funds,
the terms and conditions of the issuances and any dilutive effect may have an
adverse impact on the existing stockholders. If additional financing beyond
current levels becomes necessary, there can be no assurance that the financing
can be obtained on satisfactory terms, if at all. In this event, Telesource
International could be required to restrict its operations.
Subsequent Events
The employment contract the Company has with its CEO and President, K.J.
Semikian, matured on July 1, 2002. At the Board meeting in November 2002, the
Company and Mr. Semikian agreed to extend the current contract until the next
scheduled Board meeting, expected in early March 2003. The employment contract
the Company has with its Executive Vice President, Nidal Zayed matured on
September 1, 2002. At the Board meeting in November 2002, the Company and Mr.
Zayed agreed to extend the current contract until the next scheduled Board
meeting, expected in early March 2003.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Registrant's primary interest rate risk relates to its long-term debt
obligations. As of September 30, 2002 and December 31, 2001, the Registrant had
total debt obligations, including current and long-term obligations, totaling
$37.8 million and $35.5 million, respectively. Of these amounts, fixed rate
obligations totaled $3.7 million and $2.1 million, and variable rate obligations
totaled $34.1 million and $33.4 million, as of September 30, 2002 and December
31, 2001, respectively. Assuming a 1.0% increase in interest rates on the
Registrant's variable rate obligations, annualized interest expense would have
been approximately $341,000 higher in 2002 and $334,000 higher 2001 based on the
respective outstanding balances of variable rate obligations at September 30,
2002 and December 31, 2001. The Registrant has no interest rate swap or exchange
agreements.
0% and 15.6% of the Registrant's gross revenues for the three months ended
September 30, 2002 and September 30, 2001, respectively, were denominated in
currencies other than the U.S. dollar. All contracts currently underway for the
Registrant are denominated in the U.S. dollar; accordingly, the Registrant has
no material exposure to foreign currency exchange risk. The Registrant has no
foreign currency exchange contracts.
21
Based on the nature of the Registrant's business, it has no direct exposure to
commodity price risk.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains "disclosure control procedures", as such term is
defined under Exchange Act Rul3 13a-14(c), that are designed to ensure
that information required to be disclosed in the Company's Exchange Act
reports is recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms, and that such information
is accumulated and communicated to the Company's management, including its
Chief Executive Officer and Chief Financial Officer, as appropriate, to
allow timely decisions regarding required disclosures. In designing and
evaluating the disclosure controls and procedures, the Company's
management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving
the desired control objectives and the Company's management necessarily
was required to apply its judgement in evaluating the cost-benefit
relationship of possible controls and procedures. The Company has carried
out an evaluation, within the 90 days prior to the date of filing of this
report, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures. Based upon there evaluation
and subject to the foregoing, the Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures were effective in ensuring that material information relating
to the Company, is made known to the Chief Executive Officer and Chief
Financial Officer by others within the Company during the period in which
this report was being prepared.
There have been no significant changes in the Company's internal controls
or in other factors that could significantly affect these controls
subsequent to the date the Company completed its evaluation.
PART II. Other Information
ITEM 1. LEGAL PROCEEDINGS.
There are no material developments in legal proceedings previously
reported in our Form 10-K for the year 2001 and no new material legal
proceedings have become reportable events during the three months ended
September 30, 2002.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibit 99.1 Certification of Chief Executive Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 99.2 Certification of Chief Financial Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 99.3 Certification of Chief Executive Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 99.4 Certification of Chief Financial Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K.
None.
22
SIGNATURES
Pursuant to 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.
Telesource International, Inc.
-----------------------------------------
(Registrant)
Date November 19, 2002 /s/ K.J. Semikian
-----------------------------------------
K.J. Semikian
President and Chief Executive Officer
November 19, 2002 /s/ Bud Curley
-----------------------------------------
Bud Curley
Chief Financial Officer
23
TELESOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION
I, K.J. Semikian, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Telesource
International, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarter report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchanges Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared.
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date") and;
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls, and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ K.J. Semikian
K.J. Semikian
President and Chief Executive Officer
November 19, 2002
24
TELESOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION
I, Bud Curley, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Telesource
International, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarter report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchanges Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared.
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date") and;
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls, and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ Bud Curley
Bud Curley
Vice President and Chief Financial Officer
November 19, 2002
25
Index to Exhibits
Exhibits
- --------
99.1 Certification Pursuant to Section 1350 of Chapter 63 of Title 18 of
the United States Code-- Chief Executive Officer -- Corporation (1)
99.2 Certification Pursuant to Section 1350 of Chapter 63 of Title 18 of
the United States Code-- Chief Financial Officer -- Corporation (1)
(1) Filed herewith.
26