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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934P
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002 COMMISSION FILE NUMBER 0-2564
TELESOURCE INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 6770 59-3671568
State or other jurisdiction of PRIMARY STANDARD I.R.S. Employer
Incorporation or organization INDUSTRIAL CLASSIFICATION Identification No.
CODE NUMBER
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
(630) 620-4787
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(Title of each class)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
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 |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to the
Form 10-K. |X|
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2 of the Act). Yes |_| No |X|
The aggregate market value of the Registrant's voting stock held by
non-affiliates of the Registrant on December 31, 2002 was approximately
$3,591,450.
Number of shares of $0.01 par value Common Stock outstanding as of the close of
business on April 14, 2003: 15,000,000 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement for its 2003 Annual
Meeting of Stockholders to be filed pursuant to Regulation 14A are incorporated
by reference into Part III of this Form 10-K.
TABLE OF CONTENTS
PAGE
PART I
Item 1. Business .......................................................... 3
Item 2. Properties ........................................................ 11
Item 3. Legal Proceedings ................................................. 11
Item 4. Submission of Matters to a Vote of Security Holders ............... 11
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters ............................................... 13
Item 6. Selected Financial Data ........................................... 14
Item 7. Management's Discussion and Analysis of Results of Operations
and Financial Condition ........................................... 15
Item 8. Financial Statements and Supplementary Data .......................F-1
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure .......................................... 43
PART III
Item 10. Directors and Executive Officers of the Registrant ................ 43
Item 11. Executive Compensation ............................................ 43
Item 12. Security Ownership of Certain Beneficial Owners and Management .... 43
Item 13. Certain Relationships and Related Transactions .................... 43
PART IV
Item 14. Controls and Procedures ........................................... 44
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K ... 44
2
PART I
ITEM 1. BUSINESS
GENERAL
Telesource International, Inc. 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 International is an
international engineering and construction company, constructing single family
homes, airports, radio towers and engaged in the construction and operation of
energy conversion power plants. In Tinian, an island in the Commonwealth of the
Northern Mariana Islands, a U.S. Territory, Telesource operates a diesel fired
electric power generation plant for the sale of electricity to the local power
grid. Telesource International's facility in Lombard, Illinois, handles the
procurement, export and shipping of U.S. fabricated products for use by its
subsidiaries or for resale to customers in the southwest Pacific.
Telesource International conducts its operations through three subsidiaries: (i)
Telesource CNMI, handles construction and management of the energy conversion
facilities in the Commonwealth of the Northern Mariana Islands and operates a
branch office in Guam; (ii) Commsource International, which is an international
export company that facilitates the purchase of equipment in the U.S. (during
2001, the business activities of Commsource were transferred to Telesource); and
(iii) Telesource Fiji, Limited, that handles the construction activities in
Fiji. Telesource's Palau operations are carried out by Telesource
International.
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.
Construction Services
Telesource International's Micronesian construction services are primarily
carried out through Telesource International's Mariana subsidiary, Telesource
CNMI. In late 1996, Telesource CNMI was subcontracted by Telesource
International's then-parent corporation to build a radio relay station in the
Commonwealth of the Northern Mariana Islands for the United States Information
Agency.
In 1999, through a competitive bidding process, Telesource International was
awarded a contract to build 45 housing units for the Northern Mariana Housing
Agency, a government agency. These are government-subsidized, low-income housing
units. This project was completed as of December 31, 2002. Management believes
that there may be additional contracts or phases to this project in the future,
though there can be no assurances that additional phases will be contracted or
whether Telesource International would be successful in being awarded the
contract.
In 2000, through a competitive bidding process, Telesource was awarded a
contract to expand two existing power generation stations in Fiji. The project
covered the expansion of the building housing the power plant and the addition
of two power generation engines at each of the
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two sites. The total power production capacity to be added for both sites is
approximately 16 Mwh. This project was completed as of December 31, 2002.
In 2000, through a competitive bidding process, Telesource International was
awarded a contract to construct a 7,800 linear foot airport runway on the Island
of Tinian. This contract is valued at $19.0 million and was 90.8% complete at
December 31, 2002. This contract has an expected completion date of June 2003;
however, management expects the contract will be expanded beyond its original
scope. Any expansion of the agreement is expected to have an impact on the final
completion date; however management expects to complete the original scope by
June 2003.
In August 2001, through a competitive bidding process, Telesource International
was awarded a contract to construct a radio broadcast station in Lebanon. This
contract is valued at $1.5 million and was completed as of December 31, 2002.
In December 2001, through a competitive bidding process, Telesource was awarded
a contract to install an overhead transmission line on the island of Tinian.
This contract is valued at $1.0 million and was 100.0% complete as of December
31, 2002.
In February 2002, through a competitive bidding process, Telesource was awarded
a contract to construct a 334-bed prison in accordance with the requirements
specified by the U.S. Department of Justice. The notice to proceed on the
construction of this project was issued in March 2002. This contract is valued
at $17.6 million and was 30.1% complete as of December 31, 2002. The prison
project is expected to be completed in spring of 2004.
In May 2002, Telesource received a contract to originally design and construct a
10-year landfill in the Republic of Palau. In December 2002, this contract scope
was modified to design and permit a 50-year landfill and construct a road to the
landfill. The contract is valued at $1.6 million and was in the early stages of
completion at December 31, 2002. The landfill project is expected to be
completed in early 2004.
In July 2002, Telesource received a Notice of Award for a contract to construct
the New Belau National Museum project in the Republic of Palau. Funding for the
project has come through a grant from the Government of Taiwan. The project
consists of the renovation of the small original Museum building and the design
and construction of a museum building totaling approximately 15,500 square feet.
The project also includes the development of an outdoor amphitheater and
terraced seating into the natural grade of the project site. The design phase of
the project began in late July with physical construction starting in March
2003. The contract is valued at $2.2 million and was 24.4% complete at December
31, 2002. The museum project is expected to be completed in early 2004.
In January 2003, Telesource received a Notice of Award for a $5.9 million
contract for construction services on the second phase of the Palau National
Capitol Relocation Project. Funding for the project has come through a grant
from the Government of Taiwan. The project is for the supply and installation of
claddings and ornamental trims to the President's Building, the Executive
Building, the Legislative Building, and the Judiciary Building. The project also
includes the construction of a mechanical and electrical yard, a drainage system
with wastewater handling and a pumping station. This project is expected to be
completed by March 2004.
4
In January 2003, Telesource agreed to deliver heavy equipment to Guam for use by
the Federal Emergency Management Agency and the Guam Power Authority to assist
in typhoon recovery efforts underway on Guam. The Guam Power Authority issued a
purchase order to lease equipment to be used in the cleanup efforts in
connection with super typhoon Pongsona, which severely damaged the electrical
distribution network on Guam. Telesource airlifted boom trucks owned by
Telesource from the U.S. mainland to Guam. The trucks are being used to replace
overhead electrical lines damaged during the super typhoon. The contract value
for this assistance is valued at approximately $900,000 and is expected to be
completed during the second quarter of 2003.
In March 2003, Telesource received a Notice of Award for a $5.7 million contract
to expand an existing radio relay broadcast station located in the Commonwealth
of Northern Mariana Islands for an agency of the U.S. Government Department of
State; the Broadcasting Board of Governors International Broadcasting Bureau.
The existing station was constructed by Telesource and began operations in 2000.
The expansion of this radio relay station is for the addition of two short wave
antennas within 360 days from receipt of the notice to proceed, March 19, 2003.
In March 2003, Telesource was awarded a 20-year, multi-million dollar, energy
conversion agreement with the Fiji Electric Authority for the operation and
maintenance of three diesel power plants with generation capacity of 78 MW. The
three power plants are located in Kinoya, Vuda and Labasa, Fiji. Telesource and
the Fiji Electric Authority have completed and executed the Energy Conversion
Agreement, which covers the take-over and operation of the three facilities.
Telesource is now working with the unions to complete employment terms for the
Fiji Electric Authority employees that are to be transferred by the Fiji
Electric Authority to Telesource. In furtherance of its policy of employing
local labor and bringing jobs to its local markets, Telesource has agreed to
offer employment contracts to existing Fiji Electric Authority employees on
terms and conditions equal to or greater than their current arrangement with the
Fiji Electric Authority. All costs to terminate agreements the Fiji Electric
Authority has with the employees to be transferred to Telesource will be borne
by the Fiji Electric Authority. All agreements are expected to be completed with
takeover of the three facilities occurring during the second quarter of 2003.
With Telesource's expansion into Guam to take advantage of the growing U.S.
military presence there, Telesource International is seeking opportunities for
construction services not only in Micronesia, but also throughout the Pacific
basin.
Specialized Construction Processes
Building an airport or a broadcasting facility is not like the construction of a
more conventional building. Because of the high levels of radio frequency
emissions or the generation of electrical currents, every part of the structure
is integrated into the overall design and plays a role in making the overall
facility safer and more efficient.
5
The building of these specialized structures requires additional engineering
skills, the knowledge of specialized construction techniques and relationships
with specialized subcontractors. The situation is made more difficult when
building offshore, where distance from raw materials and subcontractors becomes
a risk factor.
Past and Present Power Generation Construction Projects
Telesource International's power generation business involves:
* Building the power plants
* Operating the power plants for a contracted period of time
* Selling wholesale power to the client to be distributed on their
power grid
* The transfer of the ownership of the properties to the clients at
the end of the contract.
In 1997, a governmental agency located in the Commonwealth of the Northern
Mariana Islands, awarded Telesource CNMI a contract to design, build and operate
a 10-30 megawatt power plant.
The initial 10 megawatts are now on-line, completed within budget and on time
and the plant has been operational since March 1999. The second phase of the
project was completed in March 2000, also within budget and on time. The third
phase will be constructed at Telesource CNMI's discretion as the demand for
power increases. Accordingly, if power demand fails to meet Telesource
International's projections, this phase may never be constructed.
In 2000, Telesource International was contracted to expand two existing power
stations in Fiji and to add additional power generators with a combined
production capacity of 32 Mwh for a fixed price of approximately $12.1 million.
This project was completed in late 2001 at a cost of $11.1 million. Performance
for this contract was divided between Telesource International and Telesource
Fiji, Ltd., a subsidiary of Telesource International, based on the location and
type of service to be performed. The construction services were recognized under
Telesource Fiji, Ltd. while the purchasing of the power generation engines was
recognized on a net basis under Telesource International. The contract with the
customer reflects this arrangement. This contract was a performance pay contract
(i.e., as specified milestones are reached, Telesource bills the customer and
receives payments within 30 days).
Power Plant Operation and Maintenance
Our agreement with the governmental agency in the Commonwealth of the Northern
Mariana Islands is an example of a power plant operation and maintenance
project. Under the terms of this agreement, Telesource International designed,
financed and built the power plant. Telesource International obtained financing
for the project through a $25,000,000 line of credit from the Commercial Bank of
Kuwait, New York branch. For the construction of the first phase of this power
plant Telesource International is paid $180,000 per month for ten years by the
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governmental agency. Each monthly payment is secured by a promissory note in the
amount of $180,000 issued by the Commonwealth Utilities Corporation.
Telesource International has a 20-year lease on the land on which the power
plant is built, plus title to the entire plant and a two-month escrow account of
no less than $360,000 on which Telesource International has a first lien. In the
event the governmental agency is unable to meet its obligations either to make
payments of monthly maintenance fees or on the promissory notes, Telesource
International may sell, lease, assign or transfer the power plant or any of the
plant equipment.
In the first phase of the project, the governmental agency also pays Telesource
a production fee of $.02 per kilowatt-hour for each kilowatt-hour produced on
its behalf for the first 5,140,000-kilowatt hours per month. In the second
phase, which added 10-megawatts of capacity, the governmental agency has agreed
to pay Telesource International an additional production fee of $.065 per
kilowatt-hour produced over the initial 5,140,000-kilowatt hours per month.
In addition, the governmental agency pays Telesource a service fee of $50,000
per month for operating and maintaining the power plant.
In May 2001, the governmental agency and Telesource executed Change Order No. 3
to the Tinian Power Plant Contract. Change Order No. 3 provides a suspension in
the Escalator on the variable payments from January 1, 2001 to December 31,
2005. This Change Order extends the term of the contract from an expiration of
10 years following commissioning of the last constructed phase (currently Phase
II was commissioned in March 2000 and therefore the contract was to have expired
in March 2010) to an new expiration date of March 31, 2020. Change Order No. 3
does not include an expansion of the power generation capacity of the power
plant. The power plant will continue to operate at its current maximum
generation capacity of 20 Mwh. Effectively, the contract has been extended for
an additional 10 years. Power rates agreed to under the original contract and
Change Order No. 1 remain unchanged. Change Order No. 3 does provide the
customer with an early termination option of the extended agreement beginning on
March 31, 2010 and available annually thereafter; however, the customer is
required to give a six-month notice and pay an early termination fee of
$6,000,000. Change Order No. 3 prohibits the customer from purchasing power from
any source other than Telesource for the first 30 MW. The expanded agreement
executed under Change Order No. 3 only extends the power generation contract
term and does not require additional performance by Telesource, with respect to
construction activities.
Potential Future Power Plant Construction and Power Supply
7
Based on previous experience, management believes there will be a growing demand
for power around the world; however competition and deregulation could eliminate
the financial feasibility of these projects and thereby prevent Telesource
International from taking advantage of the expected growth in demand. In the
U.S., two-thirds of the country's installed plants are 25 or more years old and
need to be replaced and repowered, principally with new gas combustion turbines.
The world's use of electricity is projected to increase by two-thirds over the
forecast horizon, from 13 trillion kilowatt hours in 1999 to 22 trillion
kilowatt-hours in 2020. The strongest growth rates in electricity consumption
are projected for the developing world. The most rapid expansion in electricity
use in the reference case is expected for developing Asia and Central and South
America, with average annual growth rates exceeding 3.5 percent between 1999 and
2020. In the industrialized world, electricity consumption is expected to grow
at a more modest pace. Slower population and economic growth, along with the
market saturation of certain electronic appliances (such as washers and dryers)
and efficiency gains from electrical appliances help to explain the expected
slower growth of electricity use in the industrialized nations, although growing
computer usage and the introduction of new electronic devices could modulate
that trend in the future. Telesource International also believes that those
situations where the local governments lack the up-front funding to build the
additional power plants will represent an opportunity for Telesource
International to find alternative solutions up to and including having
Telesource International locate the needed project financing. Without the
additional energy, Telesource International believes that many of the
infrastructure upgrades envisioned by local governments will be unable to occur.
In Telesource International's experience, in return for securing project
financing in a manner similar to that obtained for the project in the
Commonwealth of the Northern Mariana Islands, local governments will be willing
to enter into contracts which guarantee Telesource International a minimum
amount of power consumption, coupled with long-term operations and maintenance
contracts.
Telesource International anticipates that these contracts will generally be
secured by governmental guarantees, promissory notes, liens and collateral on
the land and in the physical power plants.
Sales and Marketing Strategies
Most of Telesource International's construction projects are obtained through a
public bid process, and clients are either governments or governmental agencies.
In obtaining contracts:
* Telesource International performs significant market research.
Telesource International analyzes potential markets, looking for future building
plans or plans to expand the capital infrastructure. Telesource International's
research also includes analyzing numerous government documents and reviewing
previous and current requests for bids.
* Telesource International is actively involved in public relations with
the governments and agencies that might contract for Telesource International's
services. Much of this effort is
8
informational, learning the specific needs of each governmental agency while at
the same time explaining what services Telesource International has to offer.
* Telesource International has created and provides to potential clients a
survey to help governmental agencies evaluate whether Telesource International's
resources and services might be more efficient and cost-effective than their
current system.
Telesource International maintains three full-time salaried marketing executives
to help sales and marketing efforts; one in the Illinois headquarters and two
offshore.
Competition
The independent power industry has grown rapidly over the past twenty years.
There are a large number of suppliers in the wholesale market and a surplus of
capacity, which has led to intense competition in this market. The principal
sources of competition in this market include traditional regulated utilities
who have excess capacity, unregulated subsidiaries of regulated utilities,
energy brokers and traders, energy service companies in the development and
operation of energy-producing projects and the marketing of electric energy,
equipment suppliers and other non-utility generators like Telesource
International. Competition in this industry is substantially based on price with
competitors discovering lower cost alternatives for providing electricity. The
electric industry is also characterized by rapid changes in regulations, which
Telesource International expects could continue to increase competition.
Telesource International does not believe the Tinian power plant would be
significantly impacted by competition in the wholesale energy market since its
revenues are subject to contracted rates which are substantially fixed for
several years.
Telesource International also competes in the market to develop power generation
facilities. The primary bases of competition in this market are the quality of
development plans, the ability of the developer to finance and complete the
project and the price. In some cases, competitive bidding for a development
opportunity is required. Competition for attractive development opportunities is
expected to be intense as there are a number of competitors in the industry
interested in the limited number of opportunities. Many of the companies
competing in this market have substantially greater resources. Telesource
International believes its project development experience and its experience in
creating strategic alignments with other development firms with greater
financial and technical resources could enable Telesource to continue to compete
effectively in the development market if and when opportunities arise.
Presently, Telesource International believes there are a number of opportunities
for additional project development worldwide for projects similar to those
previously developed by Telesource. However, Telesource International is
currently evaluating whether it should seek development opportunities in other
areas outside of the south pacific to diversify its activities.
Presently, there is significant merger and consolidation activity occurring in
the electric industry. From time to time, Telesource International may consider
merger and acquisition proposals when they appear to present an opportunity to
enhance stockholder value. Telesource International is not involved in any of
these discussions or negotiations at this time.
9
Energy Regulation
Telesource International's projects are subject to regulation under federal and
local energy laws and regulations. Telesource International is subject to the
requirements established by its permitting authorities, i.e. the Department of
Environmental Quality ("DEQ") and the Environmental Protection Agency ("EPA").
Presently, neither the Customer Choice Act nor proposed legislation dealing with
U.S. energy policy directly impacts Telesource International because the
legislation and restructuring plan pertain to the retail market or new contracts
in the wholesale market. However, as discussed above, Telesource International
could be impacted in the future by, among other things, increases in competition
as a result of deregulation. Telesource International is actively monitoring
these developments in energy proceedings in order to evaluate the impact on
existing projects and also to evaluate new business opportunities created by the
restructuring of the electric industry.
Environmental Regulation
Telesource International's projects are subject to regulation under federal,
foreign and local environmental laws and regulations and must also comply with
the applicable laws pertaining to the protection of the environment, primarily
in the areas of water and air pollution. These laws and regulations in many
cases require a lengthy and complex process of obtaining and maintaining
licenses, permits and approvals from federal and local agencies. As regulations
are enacted or adopted in any of these jurisdictions, Telesource International
cannot predict the effect of compliance therewith on its business. Telesource
International's failure to comply with all applicable requirements could result
in delays in proceeding with any projects under development or require
modifications to operating facilities. During periods of non-compliance,
Telesource International's operating facilities may be forced to shutdown until
the instances of non-compliance are corrected. Telesource International is
responsible for ensuring compliance of its facilities with applicable
requirements and, accordingly, attempts to minimize these risks by dealing with
reputable contractors and using appropriate technology to measure compliance
with the applicable standards.
Insurance and Bonding
Telesource International maintains general and excess liability, construction
equipment, and workers' compensation insurance; all in amounts consistent with
industry practices. Telesource International believes its insurance programs are
adequate.
Telesource International was required to provide bonding for the airport runway
project on the island of Tinian. This project has partial funding from the U.S.
Government (the FAA) and consequently, U.S. Treasury Listed Bonding was
required. During 2002, Telesource was required to provide bonding for the prison
project on the island of Saipan. This project has partial funding from the U.S.
Government and therefore, U.S. Treasury Listed Bonding was required. In order to
secure the required bonding, Telesource's largest shareholder, SHBC provided a
letter of credit to the surety equal to 100% of the contract value of $17
million. Telesource International's ability to obtain additional surety bonding
depends upon its capitalization, working capital, past
10
performance, management expertise and other factors, which may change from time
to time. Currently Telesource is required to provide collateral equal to 100% of
the surety bond by Telesource International's surety company.
Employees
Telesource International presently employs 169 people, consisting of 17
employees in management, 25 engineers and technical staff members, 13 support
staff members and 114 hourly employees. All of Telesource International's
employees are nonunion workers, although Telesource International may employ
union subcontractors from time to time.
Ninety percent of Telesource International's project teams include engineers and
technical staff, due to the technical nature of its construction contracts.
Working on a power plant, broadcasting facility or other technical construction
site requires a higher level of expertise and a greater attention to safety
issues.
Telesource International's non-engineering level employees are hourly workers,
while its engineering and supervisory staffs are on monthly salaries.
ITEM 2. PROPERTIES
Properties
Telesource International maintains leased office space and leases land for
storage of construction equipment. Telesource International's Mariana
subsidiary's head office in the Commonwealth of the Northern Mariana Islands is
leased for an additional year. In Guam, Telesource has an office leased by the
year with 90 days notice for termination of the lease. In Fiji, Telesource has
an office leased on a month-to-month basis. Telesource has leased office space
in the Republic of Palau on a month-to-month basis. Telesource International's
corporate offices in Illinois are leased on a month-to-month basis.
Additionally, Telesource has approximately three leased vehicles in its fleet.
ITEM 3. LEGAL PROCEEDINGS
Telesource is involved in legal proceedings and claims asserted by and against
Telesource, which have arisen in the ordinary course of business. Telesource
believes it has a number of valid defenses to these actions, and Telesource
intends to vigorously defend or assert these claims and does not believe that a
material liability will result.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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ITEM 4(a). EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages and backgrounds of Telesource International's executive officers
are as follows:
Name and Age; Years
Served as Director Principal Occupation for Past Five Years; Other Directorships
- ------------------------------------ ------------------------------------------------------------------------------
Khajadour Semikian Khajadour Semikian, President, joined Telesource International in September
Age 49 1996. From January 1986 to December 1996, Mr. Semikian was Assistant General
Director Since 1995 Manager with Sayed Hamid Behbehani & Sons. Mr. Semikian has also served as a
director for Computhink Incorporated since 1994, Telebond Insurance Corporation
and Retsa Development Incorporated since 1998, and as President of Telebond
Insurance Corporation since 1998.
Nidal Zayed Nidal Zayed, Executive Vice President, joined Telesource International in
Age 42 January 1996. He is also engaged in the practice of law. He received a law
Director Since 1998 degree from Loyola University School of Law in 1985 and a B.A. in Accounting
from Loyola University of Chicago in 1982. He serves as Chairman for Computhink
Incorporated and has been a director for Computhink since 1994.
Bud Curley Mr. Curley joined Telesource International as its Chief Financial Officer in
Age 39 September 1999. Prior to September 1999, Mr. Curley served as the Chief
Financial Officer, Secretary and Executive Vice President for Surety Capital
Corporation and Surety Bank, N.A. from 1996 to 1999. From 1993 to 1996, Mr.
Curley served as Surety Capital Corporation and Surety Bank, N.A.'s Controller
and Senior Vice President. In 1989, Mr. Curley received a B.A. in Business
Administration from the University of Texas. He has also served as a director
for Surety Capital Corporation and Surety Bank, N.A. from 1998 to 1999.
Jeff Karandjeff Mr. Karandjeff joined Telesource International as Secretary in 1997. From
Age 35 October 1996 to February 1997, Mr. Karandjeff was an Associate with Schoenberg,
Fisher, Newman & Rosenberg, LTD. He received a law degree from Loyola University
School of Law in 1993 and a Bachelors Degree from Massachusetts Institute of
Technology in 1988.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
MARKET INFORMATION. On November 1, 2001, Telesource's common stock began trading
on the Over-the-Counter Bulletin Board under the symbol "TSCI". Prior to that
time, Telesource's common stock was not listed for trading.
The following table sets forth high and low sales prices for the common stock
for the periods indicated as reported by the Over-the-Counter Bulletin Board
since November 1, 2001:
HIGH LOW
------------ -------------
2001
Fourth Quarter................. $1.95 $0.51
2002
First Quarter.................. 2.45 1.50
Second Quarter................. 1.75 0.82
Third Quarter.................. 1.62 1.30
Fourth Quarter................. 1.40 1.35
As of April 4, 2003, the latest stock quote for Telesource was $1.45 per share.
HOLDERS. As of March 31, 2003, there were 192 shareholders of record.
DIVIDENDS. Telesource did not pay dividends on its common stock during 2002 or
2001, and it does not anticipate that it will pay dividends on its common stock
in the foreseeable future. Telesource's working capital credit facility limits
the payment of dividends on its common stock.
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ITEM 6. SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following selected financial data as of and for the years ended December 31,
2002, 2001, 2000, 1999 and 1998, has been derived from the audited consolidated
financial statements of Telesource International, Inc. and subsidiaries. The
consolidated financial statements as of December 31, 2002 and 2001, and for each
of the years in the three-year period ended December 31, 2002, are included
elsewhere in this Form 10-K. This selected financial data should be read in
conjunction with the consolidated financial statements and the notes thereto
included elsewhere in this Form 10-K.
Twelve Months Ended
December 31,
------------------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
Income Statement Data: ($ in 000's)
Construction revenues $ 16,566 $ 11,824 $ 7,810 $ 1,079 $ --
Construction revenues - related party 638 -- 852 2,181 3,786
Construction revenues on power plants -- 4,053 536 -- --
Service fees - power generation plant 1,130 858 692 305 --
Sales, net 307 131 872 161 --
Sales, net - related party 90 -- 198 181 145
Other revenues 1,390 1,420 1,545 1,366 --
Other revenues - related party -- -- 84 815 1,733
-------- -------- -------- -------- --------
Gross revenues 20,321 18,286 12,590 6,088 5,664
Construction costs 15,913 12,382 7,145 2,932 3,198
Construction costs on power plants -- 3,504 496 -- --
Operations & maintenance costs - power
generation plant 1,224 1,159 991 638 --
Loss on sale of power plant -- -- -- -- 12,521
-------- -------- -------- -------- --------
Gross profit (loss) 3,184 1,241 3,958 2,518 (10,055)
Salaries and employee benefits 1,702 1,849 1,580 693 387
Occupancy and equipment 342 561 535 246 293
General and administrative expenses 4,258 3,735 3,359 1,480 848
Impairment of long-lived asset -- -- -- -- 271
-------- -------- -------- -------- --------
Operating (loss) income (1,358) (4,904) (1,516) 99 (11,854)
Other income (expense):
Interest income 3 33 125 251 12
Interest expense (1,791) (2,399) (2,427) (1,132) (39)
Other income, net 20 44 80 14 4
-------- -------- -------- -------- --------
Total other expense (1,768) (2,322) (2,222) (867) (23)
Loss before taxes (3,118) (7,226) (3,738) (768) (11,877)
Income tax expense -- 19 4 -- --
-------- -------- -------- -------- --------
Net loss $ (4,886) $ (7,245) $ (3,742) $ (768) $(11,877)
======== ======== ======== ======== ========
Common Share Data:
Net loss per share (0.33) (0.52) (0.36) (0.08) (1.19)
Weighted average common shares outstanding
(in 000's) 15,000 13,849 10,356 10,000 10,000
Period end shares outstanding (in 000's) 15,000 15,000 13,000 10,000 10,000
Balance Sheet Data:
Total assets 25,160 24,022 30,496 22,886 19,893
Working deficit (20,370) (14,332) (3,400) (3,400) (12,037)
Short-term debt 20,700 15,500 7,127 500 --
Long-term obligations 17,000 20,000 27,021 28,000 17,500
Shareholders' deficit (23,601) (18,566) (13,534) (12,610) (11,842)
Performance Data:
Loss on total assets (19.4)% (30.2)% (12.3)% (3.4)% (59.7)%
Capital Ratio:
Quick ratio 35.9% 36.6% 80.0% 54.6% 15.4%
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
HIGHLIGHTS
Revenues for the year ended December 31, 2002 were $20.3 million, compared to
$18.3 million and $12.6 million for the years ended December 31, 2001 and 2000,
respectively. Net loss was $4.9 million for 2002, a decrease of $4.1 million,
or 32.6%, from the loss of $7.3 million for 2001. For 2000, net loss was $3.7
million. Basic and diluted net loss per share was $0.21 per share for 2002,
compared to $0.52 per share for 2001 and $0.36 per share for 2000.
Liquidity and Going Concern
As of December 31, 2002, the Company's current liabilities exceeded its current
assets by $18,270,111. The Company relies heavily on bank financing to support
is operations and its ability to refinance its existing bank debt is critical to
provide funding to satisfy the Company's obligations as they mature. As of
December 31, 2002 the Company had total outstanding debt of $34,700,000 of which
$18,600,000 is due in 2003. As of December 31, 2002 the Company had an
accumulated deficit of $29,431,981 and total stockholders' deficit of
$23,600,649.
The Company incurred operating losses of $3,118,300, $4,903,676 and $1,516,103
for the years ended December 31, 2002, 2001 and 2000, respectively. The Company
incurred net losses of $4,886,397, $7,245,774 and $3,742,302 for the years ended
December 31, 2002, 2001 and 2000, respectively.
Cash used in operating activities was $2,031,793, $4,382,413 and $4,631,964 for
the years ended December 31, 2002, 2001 and 2000, respectively. Funds provided
by net borrowings and stock sales amounted to $2,200,000, $3,351,882 and
$5,648,118 for the years ended December 31, 2002, 2001 and 2000, respectively.
The Company's net working capital deficiency, total stockholders' deficit,
recurring losses and negative cash flows from operations raise substantial doubt
about the Company's ability to continue as a going concern. Management intends
to work to address these uncertainties by continuing its efforts to increase
revenues and control costs with the goal of achieving profitability. Management
expects the increase in revenues to be achieved by securing additional
substantial projects during 2003 and through increasing revenues from existing
long term power plant operation and maintenance agreements as a result of
continued expansion on the island of Tinian. However, no assurance can be given
that such increased revenues will be achieved. Although management believes that
the Company will be cash flow positive in 2003 including debt payments, 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 pledged its
continued support of the Company. SHBC has agreed to guarantee or provide
letters of credit covering $33,000,000 of the Company's total debt of
$34,700,000. SHBC has further agreed that any additional funding from SHBC to
the Company will not be due until after December 31, 2003. SHBC is the Company's
majority shareholder.
OPERATING SEGMENTS
Telesource's business consists of the following operating segments: power
generation and construction of power plants, trading, and construction services.
Power generation activities did not commence until March 1999. Revenue of the
power generation and construction of power plants segment includes sales-type
lease revenues. The power generation activities occurred in the Commonwealth of
Northern Mariana Islands, a U.S. territory, ("CNMI") and construction of power
plants occurred in Fiji. Construction services occurred in the CNMI and the
Republic of Palau while trading activities occurred in the United States and the
CNMI.
CRITICAL ACCOUNTING POLICIES
Telesource believes its most critical accounting policy is revenue recognition
from long-term contracts for which Telesource uses the percentage-of-completion
method of accounting. Percentage of completion accounting is the preferred
method of accounting for long-term contracts under accounting principles
generally accepted in the United States of America, and accordingly, is the
method used for revenue recognition within Telesource's industry.
Percentage-of-completion is measured principally by the ratio of costs incurred
to date for each contract to the estimated total costs for each contract at
completion. Provisions for estimated losses on uncompleted contracts are made in
the period in which such losses are determined.
Application of percentage-of-completion accounting results in the recognition of
costs and estimated earnings in excess of billings on uncompleted contracts
within the consolidated balance sheets. Costs and estimated earnings in excess
of billings on uncompleted contracts reflected on the consolidated balance
sheets arise when revenues have been recognized but the amounts cannot be billed
under the terms of the contracts. Such amounts are recoverable from customers
upon achievement of various measures of performance, including achievement of
certain milestones, completion of specified units or completion of the contract.
Costs and estimated earnings in excess of billings on uncompleted contracts also
includes amounts Telesource seeks to collect from customers or others for errors
or changes in contract specifications or design, contract change orders once
approved as to both scope and price, or other customer-related causes of
unanticipated additional contract costs. Such amounts are recorded at estimated
net realizable value when the scope and price have been agreed to by the client
and Telesource.
Due to uncertainties inherent within estimates employed to apply
percentage-of-completion accounting, it is possible that estimates will be
revised as project work progresses. Application of percentage of completion
accounting requires that the impact of those revised estimates be reported in
the consolidated
15
financial statements prospectively.
Impairment of Long-Lived Assets
When we undergo changes in our business, including the closure or relocation of
facilities, we may have equipment and other assets that are no longer needed in
our business. When this occurs, we estimate how much we believe we are likely to
receive upon disposal of the assets and we record an impairment charge if this
amount is less than the net carrying value. If actual market conditions for
these assets are less favorable than those projected by management, additional
impairment charges may be required. Telesource did not incur any impairment of
long-lived assets for equipment or other assets during 2002, 2001 or 2000.
The investment in sales-type lease along with our property, plant and equipment
are considered to be a long-lived assets. Based on the anticipated cash flows
for the assets along with the current revenues and expenses and an evaluation of
future changes in the market and economic outlook as well as the length of the
contractual commitment, Telesource does not believe any impairment was indicated
at December 31, 2002.
RESULTS OF OPERATIONS
REVENUES
Overview
Telesource International is an international engineering and construction
company, which has among its operations power generation and specialty
construction services in the Commonwealth of the Northern Mariana Islands and
the Republic of Palau. Telesource International operates a diesel fired electric
power generation plant for the sale of electricity to the local power grid in
CNMI. Telesource has signed an agreement to take over the operation and
maintenance of three diesel fired electric power generation plants in Fiji
beginning in 2003 for 20 years. Telesource International's facility in Lombard,
Illinois handles the procurement, export and shipping of U.S. fabricated
products for use by Telesource International's subsidiaries or for resale to
customers outside of the mainland.
16
Telesource International was formed in 1994 to facilitate various
intra-corporate activities and, until July 1999, was a wholly owned subsidiary
of SHBC, a Kuwait-based civil, electrical and mechanical construction company.
Operations are conducted primarily through subsidiaries. Telesource
International currently has three subsidiaries. Telesource CNMI, Inc. handles
construction and management for the power facilities in the Commonwealth of the
Northern Mariana Islands. Telesource CNMI, Inc. has branch offices in Guam,
Telesource Pacifica and Pacifica Power Resources. Commsource International
located in Chicago, Illinois, is an international export company that
facilitates the purchase of equipment fabricated in the U.S. The business
activities of Commsource have been transferred to Telesource. Telesource Fiji,
Ltd. was established to oversee Telesource International, Inc.'s power plant
construction activities within Fiji, which currently involves the installation
of additional power generators for existing power plants in Fiji. Construction
activities in the Republic of Palau are carried out by Telesource International.
Telesource International has three main operating segments: construction
services, trading activities, and power generation and construction of power
plants.
Revenue from construction and construction of power plants is recognized using
the percentage-of-completion method of accounting based upon costs incurred and
projected costs. Construction revenue includes revenues recognized by Telesource
International, Inc.'s power plant construction segment and from other projects
ranging from housing development to the construction of airports and prisons.
The construction of power generation plants is considered by management to be a
part of Telesource International, Inc.'s power generation and construction of
power plants segment. 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.
Depreciation is provided using straight-line methods for construction equipment.
Contracts frequently extend over a period of more than one year and revisions in
cost and profit estimates during construction are reflected in the accounting
period in which the facts that require the revision become known. Losses on
contracts, if any, are provided 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 reliably estimated. The foregoing as well as the stage of
completion, and mix of contracts at different margins may cause fluctuations in
gross profit between periods.
Construction revenues on power plants are recognized using the
percentage-of-completion method of accounting, based upon costs incurred and
projected costs. This revenue is separated on the face of the consolidated
financial statements due to its origin within Telesource International's power
generation and construction of power plants segment. 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. Depreciation is provided using straight-line
methods for construction equipment. Contracts frequently extend over a period of
more than one year and revisions in cost and profit estimates during
construction are reflected 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
17
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 reliably estimated. The foregoing as well as the stage of
completion, and mix of contracts at different margins may cause fluctuations in
gross profit between periods.
Telesource 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
non-cancelable rents, was recognized in connection with recording the loss on
sale in 1997 and 1998. Telesource 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,
Telesource recognizes such contingent payments as additional finance lease
revenue as they are earned.
Sales revenues are derived from brokering of U.S. fabricated goods and
management of various projects outside of Telesource International's
construction and power generation segments. Sales of goods exported are
recognized at the time of shipment. When an order is received, the customer's
product specifications are sent to the manufacturer and upon completion the
goods are shipped from the manufacturer directly to the customer. In most cases,
the risk of loss during shipping is either borne by the manufacturer or the
customer. Telesource International is responsible for payment to the
manufacturer; however, Telesource normally collects payment from the customer
before the manufacturer is paid. The sales revenues are recognized net of cost
of goods sold. In 1999, Telesource entered into an agreement with its primary
customer, SHBC, to charge a flat fee of 7.5% of the invoice amount for all
orders executed by Telesource on behalf of SHBC.
Service revenues are recognized in the period in which the work is performed.
Service revenues consist of amounts billed to SHBC for project management of the
radio relay station and for other types of services provided to local customers
for small projects. The cost of services provided was not recorded separately,
and therefore was included in the general and administrative expenses.
Rental income consists of fees collected on rental of equipment to SHBC for use
in construction of the radio relay station as well as to local customers. The
rental fees are billed on a monthly basis for equipment used during the billing
period. Telesource recognizes rental revenue on the accrual basis pursuant to
contractual arrangements between Telesource and its customers.
Finance lease revenues are recognized on the amortization of the minimum lease
payments for the power plant located on the Island of Tinian that were
discounted upon execution of the contract in June of 1997 at an interest rate of
6.74%. The amortization of the minimum lease payments began in March 1999 at an
effective interest rate of 9.40% and will fully amortize in March 2010.
Construction costs are comprised of both variable and semi-variable expenses,
including labor and materials, amounts payable to subcontractors, direct
overhead costs, equipment expense
18
(primarily depreciation, maintenance and repairs), interest associated with
construction projects and insurance costs. Depreciation is provided using
straight-line methods for construction equipment.
Construction costs on power plants are comprised of both variable and
semi-variable expenses, 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. Depreciation is provided using straight-line
methods for construction equipment. These costs are disclosed separately from
construction costs due to their origin within the power generation segment.
Operations and maintenance costs - power generation plant consist of labor,
direct overhead costs, equipment expense (primarily maintenance and repairs),
and insurance costs. These costs are recognized as incurred. Salaries and
employee benefits consist of all wages and benefits for management and staff
wages and benefits that are not directly associated with a particular project,
that is, idle costs for employees are charged to general and administrative
expense. Telesource's principal market, the Commonwealth of the Northern Mariana
Islands, allows employers to import guest employees. The local labor laws
require employers importing guest employees, principally from the Philippines,
to execute a one-year employment contract with the guest employee. Since
Telesource has a few large contracts, this can lead to short periods of
inactivity for some employees. As Telesource continues to grow, this issue is
expected to be minimized; however, it can have a significant impact on
Telesource's operating results.
Occupancy and equipment expense consist of rent, utilities and office equipment
for Telesource International's offices in Illinois, CNMI, Guam and Fiji.
General and administrative expenses consist primarily of depreciation, telephone
expense, insurance, travel, financial and legal expenses and a gross revenue tax
incurred on Telesource International's operations in the Commonwealth of the
Northern Mariana Islands.
Telesource International, Inc., Commsource International, Inc., Telesource CNMI,
Inc. and Telesource Fiji, Ltd. file separate corporate income tax returns.
Telesource International, Inc. and Commsource International, Inc. are U.S.
corporations that file separate U.S. corporate tax returns. Telesource CNMI,
Inc. is a Commonwealth of the Northern Mariana Island corporation and files a
corporation tax return for this commonwealth. Telesource Fiji, Ltd. is a Fijian
corporation and files a Fijian corporation tax return.
Deferred income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective income
tax bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
19
Tinian Power Plant
Phase I
In June 1997, Telesource International entered into a contract to construct and
operate a power plant on the island of Tinian. The June 1997 agreement
(hereafter referred to as Phase I) called for Telesource International to
construct a 10Mwh power generation plant with the capacity to add an additional
20Mwh of power at later dates, and to operate the power plant for a period of 10
years from the date of commissioning. Phase I was commissioned in March 1999.
The terms for Phase I call for fixed payments of $180,000 per month plus a
production fee of $0.02 per Kwh produced for the first 5,140,000 Kwh produced
each month (hereafter referred to as the Base Load). The agreement also provides
that Telesource International will receive a monthly service fee of $50,000 for
a period of 10 years from the date of commissioning. Following the conclusion of
that 10-year period, the only payments Telesource International will receive for
the Base Load is a production fee of $0.03 per Kwh produced, as adjusted for
inflation per the agreement.
Phase II
In November 1998, Telesource International received a change order instructing
Telesource to add an additional 10Mwh of power generation capacity (hereafter
referred to as Phase II). This change order provided for Telesource
International to receive only variable payments in the form of a production fee
of $0.065 per Kwh produced in excess of the Base Load (hereafter referred to as
the Expansion Rate) and for these payments to occur over a ten-year period
commencing upon the commissioning of Phase II. After the completion of the
ten-year period, the production fee changes from $0.065 per Kwh to $0.03 per Kwh
for all power produced. Phase II was commissioned in March 2000 and increased
the power plant's total generation capacity to its maximum current level of
20Mwh.
Expanded Agreement
In May 2001, Telesource International received a third change order extending
the term of the agreement for an additional ten years or to March 31, 2020
(hereafter referred to as the Expanded Agreement). The Expanded Agreement leaves
the option to expand the power plant by adding an additional 10Mwh of generation
capacity unchanged. The power generation plant currently has 20Mwh of production
capacity, which can be increased to 30Mwh by installing the appropriate power
generators. The production rates for the Base Load and the Expansion Rate do not
change from the amounts originally agreed upon. In summary, Telesource will
receive $0.03 (adjusted for inflation) per Kwh produced after March 31, 2010 for
all power produced.
Accounting for the Construction of the Power Plant
Telesource 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
non-cancelable rents, was recognized in connection with recording the loss on
sale in
20
1997 and 1998. Telesource 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, Telesource recognizes
such contingent payments as additional finance lease revenue as they are earned.
The original net investment in sales-type lease was recognized in June 1997, the
date the contract was executed. The components of the net investment in
sales-type lease are as follows:
December 31,
------------------------ June 10, 1997
2002 2001 Inception
----------- ---------- ----------
Total minimum lease payments to be received $13,320,000 15,480,000 21,600,000
Add: Operation and maintenance fee 3,700,000 4,300,000 6,000,000
----------- ---------- ----------
Minimum lease payments receivable 17,020,000 19,780,000 27,600,000
Less: unearned income 4,140,589 5,427,360 9,750,000
----------- ---------- ----------
Net investment in sales-type lease $12,879,411 14,352,640 17,850,000
=========== ========== ==========
When Telesource recognized the net investment in sales-type lease at the
inception of the agreement in June 1997, Telesource also recognized a loss on
the sale of Phase I in the amount of $1,748,713. In 1998, Telesource recognized
a loss on the sale of Phase II in the amount of $12,521,457 (equal to the entire
amount of the construction costs for Phase I, as there were no additional
minimum lease payments related to this phase). The loss recognized on the sale
of Phase II was recognized when the contract for Phase II was executed in
November 1998.
Phase I of the power plant was commissioned in March of 1999. Phase II was
commissioned in March of 2000. Telesource recognized power generation revenues
from billings at the rate of $0.02 per Kwh produced of $1,130,172, $858,336,
$692,160 and $304,920 for the years ended December 31, 2002, 2001, 2000 and
1999, respectively. No power generation income was recognized during 1998.
Revenues for this contract consist of the present value of the total contractual
minimum lease payments, which were recognized at lease inception. The minimum
lease payments were discounted using an interest rate of 6.74% and the minimum
lease payments are comprised of a guaranteed monthly payment along with an
operation and maintenance fee. Interest earned on the minimum lease payments,
which is recognized over the lease term so as to yield a constant percentage
return on the net investment in the lease beginning in March 1999, is included
in finance lease revenues in the consolidated statements of operations.
Telesource 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.
The total construction costs for the power plant were $32,120,170. A substantial
portion (approximately $14,270,000) of the repayment to Telesource International
for these construction costs is expected to come from the variable production
fees that will be recognized as revenue
21
when power is produced and billed to the customer. Due to the fact that the
agreement does not provide for any minimum production fees, there is no
guarantee that Telesource International will recover all of the construction
costs incurred to construct the power plant; however, the agreement does require
the customer to purchase 100% of its power from Telesource International until
the maximum power generation capacity has been reached each month. The future
minimum lease payments to be collected by Telesource are $2,760,000 each year
through March 2009.
Future revenue related to the construction and operation of the power plant will
be recorded as service fees until the amount exceeds the estimated fair value of
the services performed. Amounts in excess of the fair value of the services
performed will be accounted for as additional finance lease revenue.
Results of Operations
The following table sets forth results of operations expressed as a percentage
of total revenues:
----------------------------
Twelve Months Ended
December 31,
----------------------------
2002 2001 2000
------ ------ ------
Revenues:
Construction revenues 81.5% 64.7% 62.0%
Construction revenues - related party 4.1 -- 6.8
Construction revenues on power plants -- 22.1 4.3
Service fees - power generation plant 5.6 4.7 5.5
Sales, net 1.5 0.7 6.9
Sales, net - related party 0.4 -- 1.6
Rental income 0.3 -- 0.1
Rental income - related party -- -- 0.4
Management fees - related party 0.3 -- 0.3
Finance lease revenues 6.3 7.8 12.2
------ ------ ------
Gross revenues 100.0 100.0 100.0
Costs and expenses:
Construction costs 78.2 67.8 56.8
Construction costs on power plants -- 19.2 3.9
Operations & maintenance costs -
power generation plant 6.0 6.3 7.9
------ ------ ------
Gross profit 18.4 6.8 31.4
Operating expenses:
Salaries and employee benefits 8.4 10.1 12.5
Occupancy and equipment 1.7 3.1 4.2
General and administrative 20.9 20.4 26.7
------ ------ ------
Total operating expenses 31.0 33.6 43.5
Operating loss (15.3) (26.8) (12.0)
Other income (expense):
Interest income -- 0.2 1.0
Interest expense (8.8) (13.1) (19.3)
Other income, net 0.1 0.2 0.6
------ ------ ------
Total other expense (8.7) (12.7) (17.6)
Loss before income taxes (24.0) (39.5) (29.7)
Income tax expense -- 0.1 --
------ ------ ------
Net loss (24.0) (39.6) (29.7)
====== ====== ======
22
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 December 31, 2002:
Contracts as of December 31, 2001 $ 9,615,813
New contracts, change orders and claims added during 2002 25,260,730
-----------
34,876,543
Less: Contract revenue for 2002 17,404,027
-----------
Balance at December 31, 2002 $17,472,516
===========
Subsequent to the year-end, Telesource was awarded a $5.9 million project for
various construction services to be performed on the Palau Capitol Relocation
project. Telesource received the notice to proceed on the Palau Capitol
Relocation project on April 2, 2003. In addition to the Palau Capitol Relocation
project, Telesource also received a $5.7 million award to expand an existing
radio relay broadcast station on the island of Tinian. Telesource received the
notice to proceed on March 19, 2003 for the expansion of the radio relay station
project. The awards for the Palau Capitol Relocation project and the expansion
of the radio relay station on Tinian are not included in the backlog balance at
December 31, 2002.
Comparison of the twelve months ended December 31, 2002 and 2001
Revenues
Construction Revenues. Construction revenues, including related party, increased
47.2% to $17.4 million in 2002 from $11.8 million in 2001. The growth in
construction revenues is attributed to the $19.0 million airport expansion
project during 2002 along with the progress on the $17.6 million prison project.
The airport expansion project is expected to be completed during the second
quarter of 2003 and the prison project is expected to be completed in early
2004. The growth in construction revenues is expected to continue in future
periods but not at the pace experienced in 2002. The backlog was $17.5 million
at December 31, 2002 and was $9.7 million at December 31, 2001. The backlog at
December 31, 2002 does not include two contracts awarded to Telesource during
the first quarter of 2003 with a total contract value for both contracts of
$11.6 million.
Construction Revenues on Power Plants. There was no construction revenues on
power plants for 2002 as compared to $4.1 million in 2001. These revenues in
2001 were recognized on a contract Telesource International had to expand two
existing power stations in Fiji by expanding the facilities and installing
additional power generators with a combined output of 32 Mwh. This contract was
accounted for under the percentage-of-completion method of accounting and
23
was completed during 2001. Construction revenues on power plants are not
expected in the immediate future until Telesource is successful in being awarded
additional contracts.
Service Fees - Power Generation Plant. Service fees - power generation plant
increased 31.7% to $1.1 million in 2002 from $858,336 in 2001. The growth in
service fees - power generation plant is attributed to an increase in power
demand by the radio relay broadcast station in Tinian during 2002 as well as
completion of an expansion to the local power distribution network which
connected additional customers during 2002.
Sales Revenues, Net. Sales revenues increased 203.5% to $397,376 in 2002 from
$130,930 in 2001. The growth in sales during 2002 is attributed to an increase
in sales to third party customers in Guam. Sales to SHBC increased to $89,998 in
2002 from $256 in 2001. Sales to SHBC are not expected to increase in future
periods.
Rental Income. Rental income increased to $68,209 in 2002 from none in 2001. The
increase in rental income is a result of leasing equipment not in use by
Telesource to third party customers in the CNMI. Telesource expects a
significant growth in rental income to third parties during 2003 due to a short
term lease agreement signed in 2003 with the Guam Power Authority to assist the
local utility in clean up efforts from a super typhoon, Pongsona, which struck
Guam in December 2002.
sService Fees. Service fees increased to $34,640 from none. The increase is a
result of Telesource providing project management services to third parties.
Service fees are not expected to generate a significant source of revenues in
future periods.
Finance Lease Revenues. Finance lease revenues decreased 9.3% to $1.3 million in
2002 from $1.4 million in 2001. Finance lease revenue for the Tinian power plant
will decrease each year until the investment in sales type lease is fully
amortized in March 2010.
Expenses
Construction Costs. Total construction costs (includes related party and third
party) increased 28.5% to $15.9 million from $12.4 million for 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, the
prison project and the museum project. Construction costs as a percentage of
construction revenues were 91.4% and 104.7% for 2002 and 2001, respectively. The
effective gross margin of 8.6% on construction activities during 2002 is
attributed primarily to the airport project. Telesource recognized a gross
margin for construction activities on the airport project of 1.5% on revenues of
$9.0 million, which was 51.4% of Telesource's construction revenues for 2002.
The airport's gross margin was affected by costs incurred on certain tasks at
the airport project which are outside of the scope of the contract for an
estimated cost of approximately $700,000. Management expects a change order to
be executed in early 2003 which will cover these costs. In addition to these
costs, Telesource incurred significant weather delays during the fourth quarter
of 2002. Out of a total of 92 work days for the fourth quarter there were 84
days of work stoppage. The negative gross margin in 2001 on construction
revenues is primarily attributed to a cost over run on the Kobblerville housing
project due to delays encountered as a result of inclement weather.
Additionally, there were delays in the processing of Telesource International's
invoices by the Federal Housing Authority, which
24
resulted in a delay in the collection of payments for the Kobblerville project.
This ultimately led to an increase in interest expense incurred directly on this
project, as well as increased costs for supplies. The weather delays and the
delay in the processing of Telesource's invoices occurred during the first
quarter of 2001 and were identified in connection with management's quarterly
project review process. The costs estimates for the Kobblerville project were
revised to $6,153,417 during 2001 from an estimated total costs of $4,830,000.
The estimated profit for the Kobblerville project was reduced from $1,480,000 to
$136,583. The change in estimate decreased profit on third party construction
revenues by $1,343,417 and was reflected in 2001 operating results. This
increase in estimated costs was recognized during 2001 and is attributed to the
delays encountered in completing the project. The Kobblerville project was
completed in December 2001.
Construction Costs on Power Plants. Construction costs on power plants were $0
in 2002 and $3.5 million in 2001. The decrease in construction costs on power
generation plants is a result of Telesource completing a power plant
construction contract for Fiji. The net margin realized in 2001 on the
construction of power generation plants was 13.5%.
Operation and Maintenance Costs - Power Generation Plant. Operation and
maintenance costs - power generation plant increased 5.6% to $1,224,202 in 2002
from $1,159,132 in 2001. The increase in operation and maintenance costs for the
Tinian power plant is attributed to growth in power production during 2002.
During 2002, Telesource's realized increased revenue on power produced of 32.7%,
which resulted in additional operation and maintenance cost of 5.6% for
servicing costs. Telesource recognized a loss on power generation activities of
$94,030 and $300,796 for the twelve months ended December 31, 2002 and 2001,
respectively, and is attributed to management and staffing costs associated with
the power plant exceeding the power production revenues. Telesource expects the
Tinian power plant to become profitable in 2003.
Salaries and Employee Benefits. Salaries and employee benefits decreased 7.9% to
$1.7 million in 2002 from $1.9 million in 2001. The decrease in salaries and
employee benefits is attributed to management's efforts to reduce costs during
2002 by reducing staffing levels.
Occupancy and Equipment. Occupancy and equipment expenses decreased 39.0% to
$342,189 in 2002 from $560,476 in 2001. The decrease in occupancy and equipment
expense is attributed to cost cutting efforts of management which were achieved
by closing the office on Tinian and reducing the amount of cost incurred to
store equipment.
General and Administrative Expenses. General and administrative expenses
increased 14.0% to $4.3 million in 2002 from $3.7 million in 2001. The increase
is attributed to increased professional fees, telephone expense, bank service
charges, insurance, travel and entertainment and gross revenue taxes associated
with the growth and development of the business.
Other Expense, Net. Other expense decreased 23.9% to $1.8 million in 2002 from
$2.3 million in 2001. The decrease is a result of reduced borrowing costs due to
declining interest rates obtained for debt by Telesource.
25
Income Tax Expense. There was no income tax expense for 2002 as compared to
income tax expense in 2001 of $19,440. Telesource had net operating loss
carryforward at December 31, 2002 of approximately $27,024,000, however,
Telesource International's subsidiary in Fiji had taxable income during 2001 and
incurred an estimated tax liability of $19,440.
Comparison of the twelve months ended December 31, 2001 and 2000
Revenues
Construction Revenues. Construction revenues, including related party, increased
36.5% to $11.8 million in 2001 from $8.7 million in 2000. The growth in
construction revenues is attributed to the commencement of the $22.4 million
airport expansion project during 2001. The airport expansion project is expected
to be completed by July 2002. The growth in construction revenues is expected to
continue in future periods but not at the pace experienced in 2001. The backlog
was $9.7 million at December 31, 2001 and was $18.9 million at December 31,
2000. Construction revenues from SHBC were none and 9.8% of total construction
revenues for the years ended December 31, 2001 and 2000, respectively.
Construction Revenues on Power Plants. Construction revenues on power plants
increased to $4.1 million in 2001 as compared to $536,210 for 2000. These
revenues were recognized on a contract Telesource International has to expand
two existing power stations in Fiji by expanding the facilities and installing
additional power generators with a combined output of 32 Mwh. This contract was
accounted for under the percentage-of-completion method of accounting and was
completed during 2001.
Service Fees - Power Generation Plant. Service fees - power generation plant
increased 24.0% to $858,336 in 2000 from $692,160 in 1999. The growth in service
fees - power generation plant is attributed to two factors. The local casino on
Tinian was not connected to the local power grid until November 2001 and,
secondly, there was an increase in power demand by the radio relay broadcast
station in Tinian during 2001.
Sales Revenues, Net. Sales revenues decreased 85.0% to $130,674 in 2001 from
$872,680 in 2000. The decrease is attributed to the completion of the project in
Fiji during 2001. The equipment sales for this project were executed in late
2000 and were accordingly recognized during 2000 in the amount of approximately
$700,000. Sales to SHBC decreased to $256 in 2001 from $197,845 in 2000. The
substantial decrease in sales to SHBC is a result of an order from SHBC for U.S.
fabricated goods for a project SHBC had in the Middle East that was completed
during 2000.
Rental Income. Rental income decreased to none in 2001 from $59,658 in 2000. The
decrease in rental income is a result of the completion of the radio relay
station on the island of Tinian. Telesource provided equipment for use in the
construction of the radio relay station and charged a rental fee for use of this
equipment to SHBC.
Service Fees. Service fees decreased to none from $31,625. The decrease is a
result of the completion of the radio relay station for SHBC. The completion of
this project represents the
26
completion of the only project Telesource International has had for SHBC whereby
service fees were earned for the management of the project.
Finance Lease Revenues. Finance lease revenues decreased 7.8% to $1.4 million in
2001 from $1.5 million in 2000. Finance lease revenue for the Tinian power plant
will decrease each year until the investment in sales type lease is fully
amortized in March 2010.
Expenses
Construction Costs. Total construction costs (includes related party and third
party) increased 73.3% to $12.4 million from $7.1 million for 2001 and 2000,
respectively. The growth in construction costs is a direct result of an increase
in construction activities, primarily due to the airport expansion project which
began in November 2000 and has revenues of approximately $17 million; however,
the notice to proceed on this project was delayed until late February 2001 due
to permitting delays and additional costs incurred on the Koblerville housing
project. Construction costs as a percentage of construction revenues were 104.7%
and 82.5% for 2001 and 2000, respectively. The negative gross margin on
construction revenues is primarily attributed to a cost over run on the
Koblerville housing project due to delays encountered as a result of inclement
weather. Additionally, there were delays 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 Koblerville project. This ultimately
led to an increase in interest expense incurred directly on this project, as
well as increased costs for supplies. The weather delays and the delay in the
processing of Telesource's invoices occurred during the first quarter of 2001
and were identified in connection with management's quarterly project review
process. These delays have resulted in a decline in the margin for third party
construction revenues since 2000. The costs estimates for the Koblerville
project were revised to $6,153,417 during 2001 from an estimated total costs of
$4,830,000. The estimated profit for the Koblerville project was reduced from
$1,480,000 to $136,583. The change in estimate decreased profit on third party
construction revenues by $1,343,417 and was reflected in 2001 operating results.
This increase in estimated costs was recognized during 2001 and is attributed to
the delays encountered in completing the project. The Koblerville project was
completed in December 2001.
Construction Costs on Power Plants. Construction costs on power plants were $3.5
million in 2001 as compared to $496,655 in 2000. The growth in construction
costs on power generation plants is a result of the contract Telesource
International has in Fiji. The net margin realized in 2001 on the construction
of power generation plants was 13.5%.
Operation and Maintenance Costs - Power Generation Plant. Operation and
maintenance costs - power generation plant increased 17.0% to $1.2 million in
2001 from $990,541 in 2000. The increase in operation and maintenance costs for
the Tinian power plant is attributed to additional staffing for the power plant
to meet the expected future demand increases for power from the radio relay
broadcast station along with the local casino. Telesource recognized a loss on
power generation activities of $300,796 and $298,381 for the twelve months ended
December 31, 2001 and 2000, respectively. The net loss on operations and
maintenance at the power plant on Tinian was 35.0% in 2001 and 43.1% in 2000,
and is attributed to management and staffing costs associated with the power
plant exceeding the power production revenues.
27
Salaries and Employee Benefits. Salaries and employee benefits increased 17.1%
to $1.9 million in 2001 from $1.6 million in 2000. The increase in salaries and
employee benefits is attributed to growth within Telesource's management team
and the transition between projects. Telesource currently hires guest workers
from the Philippines for staffing its projects within the Commonwealth of the
Northern Mariana Islands. These guest workers are under contract for one year
and the existence of these contractual obligations results in an increase in
salaries and employee benefits when transitioning between large projects.
Occupancy and Equipment. Occupancy and equipment expenses rose 4.8% to $560,476
in 2001 from $534,876 in 2000. The increase in occupancy and equipment expense
is attributed to the additional office space added in Fiji during late 2000.
General and Administrative Expenses. General and administrative expenses
increased 11.2% to $3.7 million in 2001 from $3.4 million in 2000. The increase
is attributed to increased professional fees, telephone expense, bank service
charges, insurance, travel and entertainment and gross revenue taxes associated
with the growth and development of the business.
Other Expense, Net. Other expense increased 4.6% to $2.3 million in 2001 from
$2.2 million in 2000. The increase is a result of additional interest expense on
a larger balance of borrowings for Telesource International.
Income Tax Expense. Income tax expense in 2001 was $19,440. Telesource had a net
operating loss carry forwards at December 31, 2001 of approximately $22,000,000,
however, Telesource International's subsidiary in Fiji had taxable income during
2001 and incurred an estimated tax liability of $19,440.
28
Liquidity and Capital
Since 1994, Telesource International's primary sources of operating funds have
been bank borrowings, contributions of equity capital and profits realized on
projects completed. On December 31, 2002, 15,000,000 shares of Telesource
International's common stock were issued and outstanding. Telesource had
13,000,000 shares issued and outstanding until on June 29, 2001, then SHBC
exercised the 2,000,000 warrants it held for the purchase of Telesource
International common stock at $1.00 per share.
Cash used in operating activities during the twelve months ended December 31,
2002 and 2001 was $2.0 million and $4.4 million, respectively. The cash used in
operating activities was principally due to the increase in costs and estimated
earnings in excess of billings during 2002 of $2.7 million, which is further
attributed to the airport and prison projects. Significant collections on
accounts receivables and payments on accounts payable were made in 2001. During
2001, there was $5.4 million in collections on receivables, which mainly
consisted of amounts collected for the Fiji project, which was offset by a $2.9
million reduction in accounts payable.
Cash used in investing activities was $128,236 for the twelve months ended
December 31, 2002 as compared to net cash provided by investing activities of
$196,308 for the twelve months ended December 31, 2001. The cash used in
investing activities during 2002 is attributed to capital purchases during 2002
of $142,158. During 2001, a certificate of deposit held at a financial
institution in the amount of $1.0 million matured, thereby generating most of
the cash provided by investing activities for 2001.
Cash provided by financing activities generated $2.2 million for the twelve
months ended December 31, 2002 as compared to $3.4 million for the same period
in 2001. The cash generated by financing came from additional borrowings and the
proceeds from the sale of $3.0 million worth of preferred stock during 2002.
29
Cash used in operating activities during the twelve months ended December 31,
2001 and 2000 were $4.4 million and $4.6 million, respectively. Significant
collections on accounts receivables and payments on accounts payable were made
in 2001. During 2001, there was $5.4 million in collections on receivables,
which mainly consisted of amounts collected for the Fiji project, which was
offset by a $2.9 million reduction in accounts payable. The increase in costs
and estimated earnings in excess of billings was principally due to the West
Tinian Airport project getting under way.
Cash provided by investing activities was $196,308 for the twelve months ended
December 31, 2001 as compared to net cash used in investing activities of
$843,567 for 2000. During 2001, a certificate of deposit held at a financial
institution in the amount of $1.0 million matured, thereby generating most of
the cash provided by investing activities for the year. The cash used in
investing activities was used in the purchase of equipment to be used on
projects.
Cash provided by financing activities generated $3.4 million for the twelve
months ended December 31, 2001 as compared to $5.7 million for the same period
in 2000. The cash generated by financing came from additional borrowings and the
proceeds from the exercise of stock purchase warrants by SHBC.
Telesource International had a working capital deficit of $20.4 million at
December 31, 2002 and $14.3 million at December 31, 2001. The increase in the
deficit is a result of all loans, with the exception of $15.0 million owed on
the Commercial Bank of Kuwait credit line, becoming short term as of December
31, 2002. During 2001, the Company refinanced the $25,000,000 loan from the
Commercial Bank of Kuwait which has principal payments due as follows as of
December 31, 2002:
Principal Payment
Payment Date Amount Due
---------------------------- -------------------------
March 19, 2003 1,750,000
May 19, 2003 1,750,000
August 19, 2003 1,750,000
November 19, 2003 1,750,000
February 19, 2004 1,750,000
May 19, 2004 1,750,000
August 19, 2004 1,750,000
November 19, 2004 1,750,000
February 21, 2005 1,500,000
May 21, 2005 1,500,000
August 21, 2005 1,500,000
November 23, 2005 1,500,000
-------------------------
Total $ 20,000,000
=========================
30
Since January 1, 2003, Telesource International has made some reductions to
loans outstanding at December 31, 2002. Telesource has made a $1.75 million
reduction on the Commercial Bank of Kuwait credit line as required during the
first quarter of 2003. Telesource has also refinanced a $7.5 million credit line
secured by a letter of credit from SHBC payable to the Hongkong and Shanghai
Banking Corporation by transferring this credit facility to the Commercial Bank
of Kuwait during the first quarter of 2003. This $7.5 credit facility with the
Commercial Bank of Kuwait is secured by a letter of credit from SHBC and matures
in March 2004.
The following debt repayments have occurred since January 1, 2003:
The Hongkong and Shanghai Banking Corporation
debt due March 31, 2003 $ 7,500,000
Commercial Bank of Kuwait loan with
$1.75 million due on March 19, 2003 1,750,000
---------------
Total debt reductions since
December 31, 2002 $ 9,250,000
===============
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 March 31, 2003. 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 April 1, 2004.
To address the 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 sold a total of 4.0
million shares of preferred stock to an investor, Al-Soor Consulting, for a
total of $6.0 million, of which Telesource received $3.0 million in December of
2002 and the last $3.0 million was received in March 2003. In addition to the
sale of preferred stock to Al-Soor Consulting, Telesource also sold 666,666
shares of preferred stock to two investors for a total of $1,000,000 during
March 2003.
Telesource International currently expects that its existing cash balances along
with credit lines established in 2003 together with funds available through SHBC
will be sufficient to meet anticipated cash requirements for at least the next
12 months. Telesource International obtained a $5 million credit line committed
from Al-Ahli Bank for the radio relay station expansion project and the Palau
Capitol Relocation projects at March 31, 2003.
Telesource has forecasted cash inflows for the next twelve months from projects
of $42.9 million, $4.0 million from the sale of preferred stock in the first
quarter of 2003, and $5.5 million
31
in additional borrowings. Telesource's forecasted cash outflows consist of $15.2
million in principal and interest payments on credit lines and $30.3 million for
project costs and general and administrative expenses. Telesource had a cash on
hand balance at December 31, 2002 of $244,723 and a forecasted cash on had after
these collections and payments of $2.0 million in December of 2003.
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. Telesource International may seek to raise additional
capital in 2003 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.
NEW ACCOUNTING PRONOUNCEMENTS
In August 2001, FASB issued Statement of Financial Accounting Standards No. 143
("SFAS 143"), "Accounting for Asset Retirement Obligations," which is effective
for our fiscal year beginning January 1, 2003. SFAS 143 addresses financial
accounting and reporting obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. SFAS 143 requires,
among other things, that the retirement obligations be recognized when they are
incurred and displayed as liabilities on the balance sheet. In addition, the
asset's retirement costs are to be capitalized as part of the asset's carrying
amount and subsequently allocated to expense over the asset's useful life. We do
not believe the adoption of SFAS 143 will have a material effect on our
financial position, results of operations, or cash flows.
32
In August 2001, the FASB issued Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
144"). SFAS 144 establishes a single accounting model, based on the framework
established in Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of" ("SFAS 121"), for long-lived assets to be disposed of by sale, and resolves
significant implementation issues related to SFAS 121. This statement also
supercedes 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," ("APB 30") for the disposal of
a segment of a business. The provisions of SFAS No. 144 are effective for the
fiscal years beginning after December 15, 2001. The adoption of SFAS 144 did not
have a material impact on its results of operations, financial position or cash
flows.
In June 2002, the FASB issued Statement of Financial Accounting Standards No.
146 ("SFAS 146"), "Accounting for Costs Associated with Exit or Disposal
Activities." SFAS 146 requires recording costs associated with exit or disposal
activities at their fair values when a liability has been incurred and is
effective January 1, 2003. Under previous guidance, certain exit costs were
accrued upon management's commitment to an exit by the company. We do not
believe the adoption of SFAS 146 will have a material effect on our financial
position, results of operations, or cash flows.
In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"), "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." FIN 45 requires certain disclosures to be
made by a guarantor in its interim and annual financial statements about its
obligations under certain guarantees that it has issued. It also requires that a
guarantor recognize, at the inception of a guarantee, a liability for the fair
value of the obligation undertaken in issuing the guarantee. FIN 45 supercedes
FASB Interpretation No. 34, "Disclosure of Indirect Guarantees of Indebtedness
of Others". The disclosure provisions of FIN 45 are effective for financial
statements of both interim and annual periods that end after December 15, 2002
and the initial recognition and measurement provisions are effective on a
prospective basis to guarantees issued or modified after December 31, 2002. We
do not believe the adoption of FIN 45 will have a material effect on our
financial position, results of operations, or cash flows.
In December 2002, the FASB issued Statement of Financial Accounting Standards
No. 148 ("SFAS 148"), "Accounting for Stock-Based Compensation -- Transition and
Disclosure -- an amendment of FASB Statement No. 123." SFAS 148 amends SFAS 123,
"Accounting for Stock-Based Compensation", to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS 148 amends the
disclosure requirements of SFAS 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results.
33
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities -- an Interpretation of ARB No.
51." FIN 46 addresses consolidation accounting for certain entities in which
equity investors do not have the characteristics of a controlling financial
interest or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other parties.
FIN 46 is effective immediately for all variable interest entities created or
acquired after January 31, 2003. For variable interest entities created or
acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for
the first interim or annual period beginning after June 15, 2003. We do not
believe the adoption of FIN 46 will have a material effect on our financial
position, results of operations, or cash flows.
SUBSEQUENT EVENTS
During January 2003, Telesource received a Notice of Award for a $5.9 million
contract for construction services on the second phase of the Palau National
Capitol Relocation Project. Funding for the project has come through a grant
from the Government of Taiwan. The project is for the supply and installation of
claddings and ornamental trims to the President's Building, the Executive
Building, the Legislative Building, and the Judiciary Building. The project also
includes the construction of a mechanical and electrical yard, a drainage system
with wastewater handling and a pumping station. The project commenced in
February 2003 and is to be completed by March 2004.
During February 2003, Telesource was awarded a 20-year, multi-million dollar,
energy conversion agreement ("ECA") with the Fiji Electric Authority ("FEA") for
the operation and maintenance of three diesel power plants with generation
capacity of 78 MW. The three power plants are located in Kinoya, Vuda and
Labasa, Fiji. Telesource and the FEA have completed and executed the ECA, which
covers the take-over and operation of the three facilities. Telesource is now
working with the unions to complete employment terms for the FEA employees that
are to be transferred by the FEA to Telesource. In furtherance of its policy of
employing local labor and bringing jobs to its local markets, Telesource has
agreed to offer employment contracts to existing FEA employees on terms and
conditions equal to or greater than their current arrangement with the FEA. All
agreements are expected to be completed with takeover of the three facilities
occurring on or before March 15, 2003. The specific terms of the contract were
not disclosed.
During February 2003, Telesource was awarded a $5.7 million contract to expand
an existing radio relay broadcast station located in the Commonwealth of
Northern Mariana Islands for an agency of the U.S. Government Department of
State; the Broadcasting Board of Governors International Broadcasting Bureau.
The existing station was constructed by Telesource and began operations in 2000.
The expansion of this radio relay station is for the addition of two short wave
antennas within 360 days from receipt of the notice to proceed. The expansion of
the radio relay station located in the CNMI is being made to reach more
countries in Asia and the Pacific. Telesource International's wholly owned
subsidiary located in the CNMI owns and operates the power plant on the island
of Tinian.
34
During March 2003, Telesource received the second tranche of funds due from Al
Soor for the purchase of the preferred stock sold under a subscription agreement
executed by Telesource and Al-Soor on December 9, 2002, whereby Al Soor agreed
to purchase 4,000,000 shares of newly designated series A convertible preferred
stock, at a purchase price of $1.50 per share of series A convertible preferred
stock or a total amount of $6,000,000. Al-Soor purchased the first 2,000,000
shares of preferred stock in December 2002 and has now purchased the total
subscribed preferred stock.
During March 2003, Telesource and Al Soor agreed to restructure the Certificate
of Designation underlying the preferred stock sold to Al Soor in December of
2002. The restructure involves the elimination of the collateral provided to Al
Soor, elimination of the redemption feature (the preferred stock was to have
been redeemed by payment of $6.0 million to Al Soor by the Company at maturity
in March 2008 provided that Al Soor had not converted the preferred stock prior
to maturity), added a provision to allow the Company to force a conversion of
the preferred stock to common stock from January 1, 2008 to March 31, 2008 and
increased the coupon rate for dividends from 6.0% to 6.5%.
During March 2003, Telesource sold a total of an additional 666,666 shares of
preferred stock to two investors, Listex and Wellspoint Financial for a total
sum of $1,000,000, which was received during March 2003. The terms of the
preferred stock sold to Listex and to Wellspoint Financial matches the terms and
conditions of the revised agreement with Al-Soor.
During March 2003, Telesource's credit facility with the Hongkong Shanghai
Banking Corporation matured and was repaid by transferring this credit facility
to the Commercial Bank of Kuwait. The new credit facility with the Commercial
Bank of Kuwait requires quarterly interest payments with principal due at
maturity on March 25, 2004. This credit facility is guaranteed by SHBC.
During March 2003, the Company established a new line of credit with Al-Ahli
Bank of Kuwait in the amount of $5.0 million. This line of credit is secured by
a guarantee from Sayed Hamid Behbehani & Sons Co., WLL along with project
receivables. This credit facility matures on March 25, 2004.
QUARTERLY RESULTS
The following table sets forth selected unaudited financial information for the
eight quarters in the period ended December 31, 2002. This information has been
prepared on the same basis as the audited financial statements and, in the
opinion of management, contains all adjustments necessary for a fair
presentation thereof.
35
QUARTERLY FINANCIAL DATA
(UNAUDITED -- IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
2002 QUARTERS ENDED
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
------------- --------- --------- ---------
Revenue $ 5,700,781 4,911,686 5,660,659 4,048,069
Gross profit $ 1,446,661 1,239,889 1,536,650 (1,038,840)
As a percent of revenue 25.4% 25.2% 27.1% 25.7%
Net loss $ (713,598) (831,803) (251,821) (3,089,175)
As a percent of revenue 12.5% 16.9% 4.5% 76.3%
Basic and diluted net loss per share $ (0.05) (0.06) (0.02) (0.20)
Market price:
High $ 2.45 1.75 1.62 1.40
Low $ 1.50 0.82 1.30 1.35
2001 QUARTERS ENDED
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
------------- --------- --------- ---------
Revenue $ 4,080,579 4,096,670 3,559,519 6,549,001
Gross profit $ 644,652 (265,786) (623,692) 1,485,710
As a percent of revenue 15.8% 6.5% 17.5% 22.7%
Net loss $ (1,547,375) (2,475,676) (2,742,494) (480,229)
As a percent of revenue 37.9% 60.4% 77.1% 7.3%
Basic and diluted net loss per share $ (0.12) (0.19) (0.18) (0.03)
Market price:
High $ -- -- -- 1.95
Low $ -- -- -- 0.51
Net income per share calculations are based on the weighted average common
shares outstanding for each period presented. Accordingly, the sum of the
quarterly net income per share amounts may not equal the per share amount
reported for the year.
Telesource's stock began trading on November 2, 2001.
ITEM 7.A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Telesource is exposed to market risk for changes in interest rates for
borrowings under some of its credit facilities. These credit facilities that
bear interest at variable rates, and the fair value of the borrowings are not
significantly affected by changes in market interest rates.
Amounts invested in Telesource's foreign operations (Telesource Fiji, Ltd.) are
translated into U. S. dollars at the exchange rates in effect at year-end. The
resulting translation adjustments are recorded as accumulated other
comprehensive loss, a component of stockholders' equity, in the consolidated
balance sheets.
An increase in interest rates of 1.0% at December 31, 2002 would increase
Telesource's interest expense on adjustable loans by approximately $305,000 per
year. A decrease in interest rates of approximately the same amount, $305,000.
36
THIS ANNUAL REPORT ON FORM 10-K CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS
WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995,
PARTICULARLY STATEMENTS REGARDING MARKET OPPORTUNITIES, MARKET SHARE GROWTH,
COMPETITIVE GROWTH, GROSS PROFIT, AND SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES AND THE INVESTMENT CONSIDERATIONS LISTED BELOW. THESE FORWARD-LOOKING
STATEMENTS INVOLVE RISKS AND UNCERTAINTIES, THAT COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THOSE IN ANY SUCH FORWARD-LOOKING STATEMENTS. SUCH RISKS
AND UNCERTAINTIES INCLUDE, BUT ARE NOT LIMITED TO ADVERSE CHANGES IN GENERAL
ECONOMIC CONDITIONS, INCLUDING CHANGES IN THE SPECIFIC MARKETS FOR TELESOURCE'S
SERVICES, ADVERSE BUSINESS CONDITIONS, DECREASED OR LACK OF GROWTH IN THE
MECHANICAL AND ELECTRICAL CONSTRUCTION AND FACILITIES SERVICES INDUSTRIES,
INCREASED COMPETITION, PRICING PRESSURES AND RISK ASSOCIATED WITH FOREIGN
OPERATIONS AND OTHER FACTORS.
Investment Considerations
Telesource International - Risks related to construction activities
Telesource International will likely experience significant fluctuation in
quarterly results, which makes it difficult for investors to make reliable
period-to-period comparisons of its business.
Telesource International's quarterly operating results will depend on revenues
from contracts for major projects. Telesource International can only undertake a
specific number of projects at any one time. If Telesource International
finishes one large project and does not have another large project to start on,
revenues and results of operations within the quarter and possibly subsequent
periods could suffer. Customers may also cancel or defer existing contracts
resulting in reduced revenues for the quarter. Though management intends to take
steps to adjust spending in a timely manner to compensate for any unexpected
revenue shortfalls, it may not be successful. For example staffing reductions
cannot be implemented quickly due to local labor and employment laws in the
Commonwealth of Northern Mariana Islands, which limit our ability to release
employees at will, and losses could result. Accordingly, any such revenue
shortfalls could result in continued operating losses.
Telesource International's revenues are derived mainly from fixed-price
contracts that may lead to variations in profits due to a failure to control
costs.
All of Telesource International's construction revenues are derived from
fixed-price contracts. Because Telesource International assumes the risk of
performing such contracts at the stipulated price, any change in the estimate of
ultimate costs to be incurred under the contract or to control costs during
contract performance could result in losses or reduced profits for particular
fixed-price contracts, which, in turn, could result in periods of operating
losses.
37
Telesource International's principal market is highly competitive, and if
Telesource International is unable to compete successfully in this market, it
may be unable to increase its operations or become profitable.
The market for construction services is highly competitive and rapidly changing.
Telesource International competes directly with other firms that focus on
providing general construction services as well as services for more
sophisticated structures, including power plants and broadcasting facilities.
Many of Telesource International's competitors have well-established reputations
for building residential and technical structures and have longer operating
histories and significantly greater financial, technical, marketing, personnel
and other resources than Telesource International has. Telesource International
is subject to competition that is expected to increase in the future. If
Telesource International does not successfully compete in its market, its growth
opportunities will be limited and its business will not grow and its revenues
may be reduced.
Telesource International relies on third parties for important raw materials and
technical expertise. Telesource International's ability to enter into new
engagements or to engage the business in a profitable manner will be harmed if
its access to these important resources is limited or becomes too costly.
Telesource International relies on third-party suppliers for raw materials like
wood, steel and concrete; for fabrication of technical equipment subsystems
including diesel generations, antennas, towers and transmitters, and for
providing technical expertise.
Telesource International's ability to obtain raw materials, fabrication services
and technical assistance is subject to a number of external factors which are
outside of its control, including:
o Third parties may increase the price of the raw materials,
fabrication services or technical assistance they provide.
o Third-party raw material suppliers, fabricators or technical
expertise providers may decide not to provide Telesource
International with materials or services.
o Telesource International has no long-term contracts with third-party
suppliers of raw materials, fabrication services or technical
expertise providers.
o Telesource International's third-party contracts are usually short
term in duration and are cancelable by such third party.
If Telesource International fails to obtain what it needs from these providers,
it may not be able to successfully compete for new business or to complete
existing engagements profitably.
Telesource International is subject to substantial claims for warranty coverage
which, if such claims arise, could harm its financial condition.
Telesource International offers warranties on its construction services and
power generating plants. Telesource International does not maintain any material
warranty reserves because these
38
warranties are usually backed by warranties from its vendors. Should Telesource
International be required to cover the cost of repairs not covered by the
warranties of Telesource International's vendors or should one of Telesource
International's major vendors be unable to cover future warranty claims,
Telesource International could be required to outlay substantial funds, which
could harm its financial condition.
Telesource International - Risks related to power generation activities
Telesource International's power-generating facility could be shut down
unexpectedly, making it difficult to sustain revenues and cash flow.
Telesource International owns a diesel fired electric generating facility with a
maximum power generation capacity of 20 mega-watts (Mw) located on the island of
Tinian, in the Commonwealth of the Northern Mariana Islands, a U.S. possession.
This facility from time to time may experience both scheduled and unscheduled
shutdowns. Periodically, the facility will incur scheduled shutdowns in order to
perform maintenance procedures to equipment that cannot be performed while the
equipment is operating. The facility may also incur unscheduled shutdowns or may
be required to operate at reduced capacity levels following the detection of
equipment malfunctions, or following minimum generation orders received by the
utility. During periods when the facility is shutdown or operating at reduced
capacity levels, Telesource International may incur losses due to the loss of
its operating revenues and/or due to additional costs which may be required to
complete any maintenance procedures. It is not possible for it to predict the
frequency of future unscheduled shutdowns or to predict the extent of
maintenance that may be required during shutdowns related to equipment
maintenance.
Telesource International depends on a single customer at its power-generation
facility. The loss of this single customer could cause Telesource
International's revenues to decline.
Since March 1999, Telesource International began deriving a portion of its
revenues from the sale of electric power. Under Telesource International's
agreement with a governmental agency, the electrical power generated at
Telesource International's power generation facility is owned by the
governmental agency. Telesource International is paid a fee to produce the
electric power. The governmental agency in turn sells the electric power to the
various users throughout the Island of Tinian. If the end-user customer defaults
or increases in power use do not materialize as anticipated, Telesource
International's revenues base may not grow to support other operations.
Telesource International's insurance or reserves may be insufficient to cover
future claims on Telesource International's power generation activities.
Telesource International's power generation activities involve significant risks
of environmental damage, equipment damage and failures, personal injury and
fines and costs imposed by regulatory agencies. Though management believes its
insurance programs are adequate, if a
39
liability claim is made against it, or if there is an extended outage or
equipment failure or damage at Telesource International's power plant for which
it is inadequately insured or subject to a coverage exclusion, and Telesource
International is unable to defend against these claims successfully or obtain
indemnification or warranty recoveries, Telesource International may be required
to pay substantial amounts, which could have a materially adverse effect on its
financial condition.
Telesource International - Other risks
Telesource International is subject to several inherent risks of conducting
business internationally.
Telesource International's international operations are subject to the inherent
risks of doing business abroad. The loss of any or all of Telesource
International's international suppliers and customers could harm Telesource
International's ability to deliver Telesource International's construction
services and power services on time and cause Telesource International's sales
to decline. Telesource International's financial performance could be harmed by
many events and circumstances relating to international operations, including:
* Shipping delays and cancellations;
* Increases in import duties and tariffs;
* Foreign exchange rate fluctuations;
* Changes in foreign laws and regulations; and
* Political and economic instability.
Telesource International is subject to government regulation. Both the costs of
compliance and the penalties imposed for a failure to comply could be
substantial.
Although management does not believe that compliance with applicable regulatory
requirements has harmed Telesource International's operations in the past
relative to its competitors, government regulations can change, which could
increase Telesource International's costs of compliance with these requirements.
In addition, Telesource International's aggregate materials operations require
operating permits granted by governmental agencies. Telesource International
believes that tighter regulations for the protection of the environment and
other factors will make it increasingly difficult to obtain new permits and
renewal of existing permits may be subject to more restrictive conditions than
currently exist. Failure to comply with these laws and regulations could result
in fines, additional licensing requirements or the revocation of Telesource
International's licenses in the particular jurisdiction. The costs of compliance
could affect adversely operating results. If a substantial fine or other penalty
is imposed, Telesource International's business and financial condition could be
harmed.
If Telesource International does not manage its growth effectively, its future
business prospects could be harmed.
40
Telesource International will need to expand in anticipation of a growing user
base and larger demand for Telesource International's services. The focus on
development of new business could cause disruptions of existing operations
adversely affecting Telesource International's business. Expansion will require
Telesource International to make significant up front expenditures for
increasing Telesource International's sales and marketing efforts and to hire
and train additional project managers, engineers and facilities operators as
well as incur costs in connection with constructing power plants to be owned by
Telesource. Telesource may not be successful in expanding its operations or
maintaining adequate management, financial and operating systems and controls of
its larger business base.
Telesource International's largest stockholder and its affiliates will own
approximately 75.6% of the common stock, and their interest may not be the same
as the minority stockholders who will have little or no influence over
Telesource International's activities.
The largest stockholder, SHBC, is able to control the outcome of all matters
submitted to a vote of the holders of common stock, including the election of
directors, amendments to Telesource's certificate of incorporation and approval
of significant corporate transactions. SHBC owns beneficially approximately of
75.6% of the common stock.
41
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
TELESOURCE INTERNATIONAL, INC.
AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 2002 and 2001
(With Independent Auditors' Report Thereon)
42
TELESOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
Table of Contents
Page
Independent Auditors' Report F-1
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-3
Consolidated Statements of Stockholders' Deficit and
Comprehensive Income (Loss) F-4
Consolidated Statements of Cash Flows F-5
Notes to Consolidated Financial Statements F-6
Independent Auditors' Report
The Board of Directors
Telesource International, Inc.:
We have audited the accompanying consolidated balance sheets of Telesource
International, Inc. and subsidiaries (the Company) as of December 31, 2002 and
2001, and the related consolidated statements of operations, changes in
stockholders' deficit and comprehensive income (loss), and cash flows for each
of the years in the three-year period ended December 31, 2002. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Telesource
International, Inc. and subsidiaries as of December 31, 2002 and 2001, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2002 in conformity with accounting
principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company's recurring losses and negative cash flows
from operations, dependency on its major shareholder for financial support and
its net working capital deficiency raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
/s/ KPMG LLP
Chicago, Illinois
April 14, 2003
TELESOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2002 and 2001
Assets 2002 2001
------------ -----------
Current assets:
Cash and cash equivalents $ 244,723 204,752
Accounts receivable 3,818,268 3,150,617
Current portion of net investment in sales-type lease 1,617,840 1,473,229
Costs and estimated earnings in excess of billings 5,448,663 3,039,607
Prepaid expenses and other current assets 261,379 388,129
------------ -----------
Total current assets 11,390,873 8,256,334
Net investment in sales-type lease - long term 11,261,571 12,879,411
Property, plant, and equipment, net 2,317,617 2,690,935
Other assets 190,274 194,847
------------ -----------
Total assets $ 25,160,335 24,021,527
============ ===========
Liabilities and Stockholders' Deficit
Current liabilities:
Current portion of long-term debt $ 20,700,000 15,500,000
Accounts payable 3,879,364 3,036,912
Accounts payable - related party 3,736,283 406,215
Accrued expenses 3,320,338 3,123,074
Billings in excess of costs and estimated earnings -- 333,651
Income taxes payable -- 19,440
Other current liabilities 125,000 168,504
------------ -----------
Total current liabilities 31,760,984 22,587,796
Long-term debt 14,000,000 20,000,000
Convertible preferred stock: authorized 10,000,000 shares,
issued and outstanding 2,000,000 shares and none
at December 31, 2002 and 2001, respectively 3,000,000 --
------------ -----------
Total liabilities 48,760,984 42,587,796
------------ -----------
Stockholders' deficit:
Common stock, $0.01 par value. Authorized 50,000,000 shares,
issued and outstanding 15,000,000 shares 150,000 150,000
Additional paid-in capital 5,797,225 5,797,225
Accumulated deficit (29,431,981) (24,545,584)
Accumulated comprehensive income (loss) -
foreign currency translation (115,893) 32,090
------------ -----------
Total stockholders' deficit (23,600,649) (18,566,269)
Commitments and contingencies (note 16)
------------ -----------
Total liabilities and stockholders' deficit $ 25,160,335 24,021,527
============ ===========
See accompanying notes to consolidated financial statements.
F-2
TELESOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 2002, 2001, and 2000
2002 2001 2000
------------ ----------- -----------
Revenues:
Construction revenues $ 16,565,696 11,823,772 7,809,909
Construction revenues - related party 838,331 -- 851,912
Construction revenues on power plants -- 4,052,600 536,210
Service fees - power generation plant 1,130,172 858,336 692,160
Sales, net 307,378 130,674 872,680
Sales, net - related party 89,998 256 197,845
Rental income 68,209 1,675 6,555
Rental income - related party -- -- 53,103
Service fees 34,640 -- --
Service fees - related party -- -- 31,625
Finance lease revenue 1,286,771 1,418,456 1,538,370
------------ ----------- -----------
Gross revenues 20,321,195 18,285,769 12,590,369
Costs and expenses:
Construction costs 15,912,633 12,381,495 7,145,352
Construction costs on power plants -- 3,504,258 496,655
Operation and maintenance costs -
power generation plant 1,224,202 1,159,132 990,541
------------ ----------- -----------
Gross profit 3,184,360 1,240,884 3,957,821
------------ ----------- -----------
Operating expenses:
Salaries and employee benefits 1,702,139 1,848,905 1,579,640
Occupancy and equipment 342,189 560,476 534,876
General and administrative 4,258,332 3,735,179 3,359,408
------------ ----------- -----------
Total operating expenses 6,302,660 6,144,560 5,473,924
------------ ----------- -----------
Operating loss (3,118,300) (4,903,676) (1,516,103)
------------ ----------- -----------
Other income (expense):
Interest income 2,768 32,829 125,739
Interest expense (1,791,328) (2,399,145) (2,426,964)
Other income, net 20,463 43,658 79,772
------------ ----------- -----------
Total other expense (1,768,097) (2,322,658) (2,221,453)
------------ ----------- -----------
Loss before income taxes (4,886,397) (7,226,334) (3,737,556)
Income tax expense -- 19,440 4,746
------------ ----------- -----------
Net loss $ (4,886,397) (7,245,774) (3,742,302)
============ =========== ===========
Basic and diluted net loss per share $ (0.33) (0.52) (0.36)
Weighted average shares outstanding 15,000,000 13,849,315 10,356,164
See accompanying notes to consolidated financial statements.
F-3
TELESOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Deficit and Comprehensive Income (Loss)
Years ended December 31, 2002, 2001, and 2000
Common stock
---------------------- Additional Accumulated Total
Par paid-in Accumulated Comprehensive comprehensive stockholders'
Shares value capital deficit loss income (loss) deficit
---------- -------- ---------- ----------- ------------ ------------- -------------
Balance at December 31, 1999 10,000,000 $100,000 847,225 (13,557,508) -- (12,610,283)
Issuance of 3,000,000 shares of
common stock at $1 per share
in satisfaction of trade payables 3,000,000 30,000 2,970,000 -- -- -- 3,000,000
Net loss -- -- -- (3,742,302) (3,742,302) -- (3,742,302)
Foreign currency translation
adjustment -- -- -- -- (181,057) (181,057) (181,057)
----------
Comprehensive income (loss) (3,923,359)
---------- -------- --------- ----------- ========== -------- -----------
Balance at December 31, 2000 13,000,000 130,000 3,817,225 (17,299,810) (181,057) (13,533,642)
Exercise of 2,000,000 warrants
for common stock at
$1 per share 2,000,000 20,000 1,980,000 -- -- -- 2,000,000
Net loss -- -- -- (7,245,774) (7,245,774) -- (7,245,774)
Foreign currency translation
adjustment -- -- -- -- 213,147 213,147 213,147
----------
Comprehensive income (loss) (7,032,627)
---------- -------- --------- ----------- ========== -------- -----------
Balance at December 31, 2001 15,000,000 150,000 5,797,225 (24,545,584) 32,090 (18,566,269)
Net loss -- -- -- (4,886,397) (4,886,397) -- (4,886,397)
Foreign currency translation
adjustment -- -- -- -- (147,983) (147,983) (147,983)
----------
Comprehensive income (loss) (5,034,380)
---------- -------- --------- ----------- ========== -------- -----------
Balance at December 31, 2002 15,000,000 $150,000 5,797,225 (29,431,981) (115,893) (23,600,649)
========== ======== ========= =========== ======== ===========
See accompanying notes to consolidated financial statements.
F-4
TELESOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2002, 2001, and 2000
2002 2001 2000
------------ ---------- ----------
Cash flows from operating activities:
Net loss $ (4,886,397) (7,245,774) (3,742,302)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 501,554 411,425 436,178
Changes in assets and liabilities:
Receivables (667,651) 5,357,495 (7,797,272)
Prepaid expenses and other current assets 126,750 140,328 138,964
Costs and estimated earnings in excess of billings (2,742,707) (3,114,724) 1,251,639
Net investment in sales-type lease 1,473,229 1,341,544 1,221,630
Other assets 4,573 40,621 (22,423)
Accounts payable 4,172,519 (2,884,056) 5,228,596
Accrued expenses 197,264 1,521,035 162,352
Income taxes payable (19,440) 14,694 4,746
Other liabilities (191,487) 34,999 (193,043)
Estimated costs to complete power plant -- -- (1,321,029)
------------ ---------- ----------
Net cash used in operating activities (2,031,793) (4,382,413) (4,631,964)
------------ ---------- ----------
Cash flows from investing activities:
Proceeds from maturity of certificate of deposit -- 1,000,000 --
Proceeds from sale of equipment 13,922 30,267 --
Capital expenditures (142,158) (833,959) (843,567)
------------ ---------- ----------
Net cash provided by (used in) investing
activities (128,236) 196,308 (843,567)
------------ ---------- ----------
Cash flows from financing activities:
Proceeds from long-term debt 11,400,000 6,500,000 6,050,000
Payments of long-term debt (12,200,000) (5,148,118) (401,882)
Proceeds from sale of preferred stock 3,000,000 -- --
Proceeds from exercise of stock warrants -- 2,000,000 --
------------ ---------- ----------
Net cash provided by financing activities 2,200,000 3,351,882 5,648,118
------------ ---------- ----------
Net increase (decrease) in cash and cash
equivalents 39,971 (834,223) 172,587
Cash and cash equivalents at beginning of year 204,752 1,038,975 866,388
------------ ---------- ----------
Cash and cash equivalents at end of year $ 244,723 204,752 1,038,975
============ ========== ==========
Supplemental disclosure:
Cash paid during the year for interest $ 2,112,655 2,879,739 2,880,248
Cash paid during the year for income taxes 19,440 -- --
Amount of interest capitalized during the year -- -- 353,215
------------ ---------- ----------
Noncash transactions:
Issuance of common stock in satisfaction of
trade payables $ -- -- 3,000,000
------------ ---------- ----------
See accompanying notes to consolidated financial statements.
F-5
(1) Background
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 engineering and
construction company. Telesource is an international engineering and
construction company, engaged in constructing single family homes,
airports, and radio towers, and in the construction and operation of
energy conversion power plants. In Tinian, an island in the Commonwealth
of the Northern 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,
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 the Northern Mariana Islands and operates a branch office
in Guam. The Company's second subsidiary, Commsource International, Inc.,
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. The Company's
Palau operations are handled directly by the Company.
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 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, Inc. Upon completion of the merger,
Telesource made application for listing its common stock with the NASD and
Telesource was approved for listing on the NASD Over The Counter Bulletin
Board in October 2001.
(2) Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries: Telesource CNMI Inc.,
Commsource International, Inc., and Telesource Fiji, Ltd. All
significant intercompany transactions and accounts have been
eliminated.
F-6
(2) Summary of Significant Accounting Policies, continued
Liquidity and Going Concern
As of December 31, 2002, the Company's current liabilities exceeded
its current assets by $18,270,111. The Company relies heavily on
bank financing to support is operations and its ability to refinance
its existing bank debt is critical to provide funding to satisfy the
Company's obligations as they mature. As of December 31, 2002 the
Company had total outstanding debt of $34,700,000 of which
$18,600,000 is due in 2003. As of December 31, 2002 the Company had
an accumulated deficit of $29,431,981 and total stockholders'
deficit of $23,600,649.
The Company incurred operating losses of $3,118,300, $4,903,676 and
$1,516,103 for the years ended December 31, 2002, 2001 and 2000,
respectively. The Company incurred net losses of $4,886,397,
$7,245,774 and $3,742,302 for the years ended December 31, 2002,
2001 and 2000, respectively.
Cash used in operating activities was $2,031,793, $4,382,413 and
$4,631,964 for the years ended December 31, 2002, 2001 and 2000,
respectively. Funds provided by net borrowings and stock sales
amounted to $2,200,000, $3,351,882 and $5,648,118 for the years
ended December 31, 2002, 2001 and 2000, respectively.
The Company's net working capital deficiency, total stockholders'
deficit, recurring losses and negative cash flows from operations
raise substantial doubt about the Company's ability to continue as a
going concern. Management intends to work to address these
uncertainties by continuing its efforts to increase revenues and
control costs with the goal of achieving profitability. Management
expects the increase in revenues to be achieved by securing
additional substantial projects during 2003 and through increasing
revenues from existing long term power plant operation and
maintenance agreements as a result of continued expansion on the
island of Tinian. However, no assurance can be given that such
increased revenues will be achieved. Although management believes
that the Company will be cash flow positive in 2003 including debt
payments, 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 pledged its continued support of the Company.
SHBC has agreed to guarantee or provide letters of credit covering
$33,000,000 of the Company's total debt of $34,700,000. SHBC has
further agreed that any additional funding from SHBC to the Company
will not be due until after December 31, 2003. SHBC is the Company's
majority shareholder.
Cash Equivalents
Telesource records as cash equivalents all highly liquid short-term
investments with original maturities of three months or less.
Foreign Currency
All assets and liabilities denominated in foreign currencies are
translated at the exchange rate on the balance sheet date. Revenues,
costs, and expenses are translated at average rates of exchange
prevailing during the period. Translation adjustments are deferred
as a separate component of stockholders' equity. Gains and losses
resulting from foreign currency transactions are included in the
consolidated statements of earnings.
Deposits in Excess of Federal Deposit Insurance Corporation
Insurance
The Company maintains cash in accounts in excess of the Federal
Deposit Insurance Corporation's insured limit of $100,000.
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.
F-7
(2) Summary of Significant Accounting Policies, continued
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.
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, with the risk of loss borne by the customer at the time of
transfer. 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.
Property, Plant, and Equipment
Property, plant, and equipment are stated at cost less accumulated
depreciation. Depreciation is computed using the straight-line
method at rates sufficient to depreciate the cost over the estimated
economic lives of the assets. Depreciable lives used for financial
reporting purposes are as follows:
Estimated
Asset description useful life
----------------------------------------- ------------------
Leasehold improvements Lesser of lease
term or 7 years
Automobiles 5 years
Construction machinery and equipment 10 years
Office furniture and fixtures 5 years
Computer and communication equipment 5 years
Cost and accumulated depreciation are eliminated from the accounts
when assets are sold or retired and any resulting gain or loss is
reflected in operations in the year of disposition.
F-8
(2) Summary of Significant Accounting Policies, continued
Impairment of Long-lived Assets
The Company accounts for long-lived assets in accordance with the
provisions of Statement of Financial Accounting Standards No. 144,
Accounting for the Impairment of Long-Lived Assets. This statement
requires that long-lived assets and certain identifiable intangibles
be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to
future net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of
the assets exceed the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair
value less costs to sell.
Income Taxes
Telesource International, Inc., Commsource International, Inc.,
Telesource CNMI, Inc., and Telesource Fiji, Ltd. file separate
corporation income tax returns. Telesource International, Inc. and
Commsource International, Inc. are U.S. corporations that file
separate U.S. corporate income tax returns. Telesource CNMI, Inc. is
a Commonwealth of Northern Mariana Islands corporation and files a
corporation tax return for this commonwealth. Telesource Fiji, Ltd.
is a Fijian corporation and files a Fijian corporation tax return.
There is no corporate income tax in Palau.
Deferred income taxes are accounted for under the asset and
liability method. Deferred tax assets and liabilities are recognized
for the estimated future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective income tax
bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years
in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that
includes the enactment date.
The Company's subsidiary, Telesource CNMI, Inc., in the Commonwealth
of the Northern Mariana Islands (CNMI) prepares its corporate income
tax returns based on the local tax code. The tax code used is
outlined in the "Covenant to Establish a Commonwealth of the
Northern Mariana Islands in Political Union with the United States,"
which adopted the Internal Revenue Code as the local territorial
income tax. Beginning January 1, 1985, 95% of any income tax due on
the CNMI source income is rebated to the extent that it exceeds
local business gross receipts taxes (GRT). In 1995, the rebate
percent was decreased and currently ranges from 90% decreasing to
50% depending upon the amount of taxable income. The amounts paid
for the gross receipts tax amounted to $1,037,861, $567,301, and
$438,859 in 2002, 2001, and 2000, respectively, and are included in
general and administrative expenses on the accompanying consolidated
statements of operations.
Use of Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
F-9
(2) Summary of Significant Accounting Policies, continued
Fair Value of Financial Instruments
The Company's financial instruments include cash and cash
equivalents, certificate of deposit, receivables, short-term debt,
accounts payable, and long-term debt. The gross carrying amount of
the notes receivable related to the sales-type lease approximates
fair value as the notes have been discounted at a rate approximating
the Company's borrowing rate. The carrying amount of the long-term
debt approximates fair value due to the variable interest rates. The
carrying amounts of other assets and liabilities approximate fair
value because of the short maturities of those instruments.
Stock Based Compensation
The Company uses the intrinsic value method of accounting for its
stock based compensation programs.
Statement of Financial Accounting Standards 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), encourages, but does not
require, companies to record compensation cost for employee
stock-based compensation plans at fair value as determined by
generally recognized option pricing models such as the Black-Scholes
or the Binomial model. The Company has adopted the disclosure-only
provisions of SFAS 123, and applies Accounting Principles Board
(APB) Opinion 25, "Accounting for Stock Issued to Employees", which
does not require compensation costs to be recorded on options which
have exercise prices at least equal to the market value of the stock
on the date of grant. Accordingly, the Company has not recognized
compensation cost for its stock-based plans. If the Company had
accounted for its stock-based compensation plans using the fair
value recognition provision of SFAS 123, net loss and diluted
earnings per share would have been increased to the pro forma
amounts as follows:
Years ended December 31
---------------------------------------
2002 2001 2000
----------- ---------- ----------
Net loss as reported $(4,886,397) (7,245,774) (3,742,302)
Less: stock-based compensation
expense determined under fair
value method for all awards
net of related tax effects 42,810 89,958 --
----------- ---------- ----------
Pro forma, net loss $(4,929,207) (7,335,632) (3,742,302)
=========== ========== ==========
Basic and diluted loss per share:
As reported $ (0.33) (0.52) (0.36)
Pro forma (0.33) (0.53) (0.36)
F-10
(3) Customer and Credit Concentrations
The Company has a concentration with three major customers. The Company
was contracted by the Commonwealth Utilities Corporation (CUC) to
construct and operate a power generation facility. In March 1999, the
power generation plant became operational. Power revenues from this plant
began in March 1999 and are earned under the terms of a long-term power
energy conversion agreement with this customer. Revenues from the CUC were
$2.4 million, $2.3 million, and $2.2 million for 2002, 2001, and 2000,
respectively. Another major customer, SHBC, is the Company's parent
corporation and principal stockholder. SHBC is a major customer of the
Company's subsidiary, Commsource International, which is involved in the
trading of U.S. fabricated products. Revenues from SHBC were 4.6%, 0%, and
10.0% of the Company's total revenues for 2002, 2001, and 2000,
respectively. Receivables from SHBC were $0 and $0 at December 31, 2002
and 2001, respectively. The third major customer is the Commonwealth Ports
Authority (CPA). In 2001, the Company was contracted to construct an
airport expansion project on the island of Tinian by the CPA. The Company
recognized revenues of $10.8 million, $7.9 million, and $0 from the CPA
for 2002, 2001, and 2000, respectively.
Upon commissioning of the Company's power plant on the island of Tinian
for Phase I in March 1999, the Company received 120 promissory notes each
in the amount of $180,000 representing the guaranteed payment due from the
customer over the term of the agreement. The par value balance of
promissory notes outstanding was $13.3 million and $15.5 million as of
December 31, 2002 and 2001, respectively. The discounted value of the
promissory notes was $10.1 million and $11.2 million at December 31, 2002
and 2001, respectively. The discounted value of the operation and
maintenance fee was $2.8 million and $3.1 million at December 31, 2002 and
2001, respectively. The promissory notes have been included in the
original net investment in sales-type lease as discussed in note 7.
Revenues from the Tinian power plant were 10.9% and 12.5% of the Company's
revenues for 2002 and 2001, respectively. Gross receivables for the
investment in sales-type lease were $17,020,000 and $19,780,000 at
December 31, 2002 and 2001, respectively.
F-11
(4) Accounts Receivable
Accounts receivable consist of the following at December 31, 2002 and
2001:
December 31
----------------------
2002 2001
---------- ---------
Construction contracts completed and in progress $1,714,204 1,903,966
Construction material sales -- 172,347
Retainages 1,842,015 1,042,691
Other 262,049 31,613
---------- ---------
3,818,268 3,150,617
========== =========
Retainages are all due within the next 12 months. Provisions taken as an
allowance for doubtful accounts during 2002 and 2001 were $0 and $1,365,
respectively.
(5) Costs and Estimated Earnings In Excess of Billings on Uncompleted
Contracts
Long-term construction contracts in progress accounted for using the
percentage-of-completion method consisted of:
December 31
-------------------------
2002 2001
----------- -----------
Costs incurred on uncompleted contracts $15,912,633 15,885,753
Estimated earnings (loss) 1,491,394 (9,380)
----------- -----------
17,404,027 15,876,373
Less billings to date 11,955,364 13,170,417
----------- -----------
$ 5,448,663 2,705,956
=========== ===========
Included in the accompanying consolidated balance sheet
under the following captions:
Costs and estimated earnings in excess of billings $ 5,448,663 3,039,607
Billings in excess of costs and estimated earnings -- 333,651
See note 3 for a description of customer concentrations.
F-12
(6) Property, Plant, and Equipment
2002 2001
---------- ---------
Leasehold improvements $ 189,128 158,214
Automobiles 276,482 260,382
Construction machinery and equipment 3,670,277 3,589,889
Office furniture and equipment 668,510 673,992
Computer and communication equipment 158,687 121,604
Construction in progress -- 30,767
---------- ---------
4,963,084 4,834,848
Less accumulated depreciation and amortization 2,645,467 2,143,913
---------- ---------
Net property, plant, and equipment $2,317,617 2,690,935
========== =========
Total depreciation expense was $501,554, $411,425, and $436,178 in 2002,
2001, and 2000, respectively. Depreciation for construction machinery and
equipment is recognized as a project expense when appropriate.
(7) Investment in Sales-Type Lease
The Company's contract with one customer (Commonwealth Utilities
Corporation (CUC)) for the construction and operation of a power plant on
the island of Tinian is accounted for as a sales-type lease. The minimum
lease payments due under the agreement began upon commissioning of the
first phase of the power plant and are comprised of a guaranteed monthly
payment of $180,000 for one hundred and twenty (120) months, and an
operation and maintenance fee of $50,000 due monthly for one hundred and
twenty (120) months. These minimum lease payments were discounted at an
interest rate of 6.74%, which was the ten-year U.S. Treasury note rate in
June 1997, the time of contract execution. Amortization of the minimum
lease payments began in March 1999 when the plant was commissioned and the
Company began collecting payments on the promissory notes and service fees
for operating the plant. The Company also receives variable monthly
payments as a part of its production fee of $0.02 per Kwh produced for the
first 5,140,000 Kwh produced each month (Base Load) plus $0.065 per Kwh
for any amount produced beyond the Base Load of 5,140,000 each month. The
variable payments are recognized based upon power produced and delivered
to the customer as earned during each accounting period. Service fees
earned in 2002 and 2001 were not in excess of the estimated fair value of
the services performed.
F-13
(7) Investment in Sales-Type Lease, continued
The original net investment in sales-type lease was recognized in June
1997, the date the contract was executed. The components of the net
investment in sales-type lease are as follows:
December 31
------------------------ June 20, 1997
2002 2001 inception
----------- ---------- ----------
Guaranteed monthly payments $13,320,000 15,480,000 21,600,000
Minimum operation and maintenance fees 3,700,000 4,300,000 6,000,000
----------- ---------- ----------
Total minimum lease
payments receivable 17,020,000 19,780,000 27,600,000
Less unearned income 4,140,589 5,427,360 9,750,000
----------- ---------- ----------
Net investment in sales-type
lease $12,879,411 14,352,640 17,850,000
=========== ========== ==========
The future minimum lease payments to be collected by the Company are
$2,760,000 each year through 2009.
When the Company recognized the net investment in sales-type lease at the
inception of the agreement in June 1997, the Company also recognized a
loss on the sale of Phase I in the amount of $1,748,713. The Company
recognized a loss on the sale of Phase II for the entire amount of the
construction costs for Phase II, as there were no additional minimum lease
payments related to this phase. The loss recognized on the sale of Phase
II occurred when the contract for Phase II was executed in November 1998,
and amounted to $12,521,457.
Phase I of the power plant was commissioned in March of 1999. Phase II was
commissioned in March of 2000. The Company recognized power generation
revenues from billings at the rate of $0.02 per Kwh produced of
$1,130,172, $858,336, and $692,160 for the years ended December 31, 2002,
2001, and 2000, respectively.
F-14
(8) Long-Term Debt and Credit Arrangements
Long-term debt consists of the following at December 31, 2002 and 2001:
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% at December 31, 2001) -- 2,000,000
The Hongkong and Shanghai Banking Corporation, Limited,
advances on $7,500,000 credit line, due in full on March
31, 2003, including interest of 0.5% above the bank's
base lending rate (4.75% at December 31, 2002) secured by
an irrevocable standby letter of credit for $7,500,000
issued by Alahli Bank of Kuwait and guaranteed by SHBC,
along with three (3) Commonwealth Utilities Corporation
negotiable promissory notes valued at $540,000 and a and
a corporate guarantee of Telesource International, Inc. 7,500,000 --
Bent Marketing Limited loan, bearing interest of 7.0% per
annum, unsecured and maturing on December 31, 2003. 1,100,000 1,100,000
Bank of Hawaii loan, due in lump sum on June 3, 2003, at
interest payable monthly at 0.5% above the bank's bank base
rate (4.25% at December 31, 2002), secured by an
irrevocable standby letter of credit for $2,000,000
issued by Alahli Bank of Kuwait, guaranteed by SHBC. 1,900,000 1,900,000
Bank of Hawaii loan, advances on credit line, due in full on
June 3, 2003, including interest of 1.5% above the bank's
bank base rate (4.25% at December 31, 2002), secured by
twenty-one (21) Commonwealth Utilities Corporation
negotiable promissory notes valued at $3,780,000 and a
corporate guarantee of Telesource International, Inc. 600,000 1,500,000
F-15
(8) Long-Term Debt and Credit Arrangements
December 31
-----------------------------------------
2002 2001
------------------- -------------------
Citytrust Bank loan, borrowings on $1,000,000 revolving line
of credit which expires on May 17, 2003. Due in 90 days
from date of drawdown including interest of 9.5% at
December 31, 2002 and 11.5% at December 31, 2001 secured
by assignment of specific invoice from billing on the
West Tinian Airport Airside improvement project,
guaranteed by Telesource International Inc. and one of
its officers 600,000 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 March 31, 2002, including
interest of LIBOR plus 3%. 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 installments of $1,000,000 on June 11,
2003, $1,000,000 on December 11, 2003 and $1,000,000 on
April 11, 2004, including interest of 4.56%. The loan is
guaranteed by Sayed Hamid Behbehani and Sons Co., WLL 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%. The loan
is guaranteed by Sayed Hamid Behbehani and Sons Co., WLL.
The schedule of maturities is detailed below. Should the
Company default on an installment payment, the entire
loan and accrued interest become due and payable 20,000,000 25,000,000
----------- -----------
Notes payable to banks 34,700,000 35,500,000
Less current portion 20,700,000 15,500,000
----------- -----------
Total long-term debt $14,000,000 20,000,000
=========== ===========
There were no unused credit line balances available at December 31, 2002.
At December 31, 2002, there was $33,000,000 in total debt which was either
guaranteed directly by SHBC or secured by an irrevocable letter of credit
obtained by SHBC, $600,000 fully collateralized by lease and project
receivables, and $1,100,000 unsecured (Bent Marketing Limited loan
maturing on December 31, 2003).
F-16
(8) Long-Term Debt and Credit Arrangements
The largest loan held by Telesource International, a $20,000,000 loan from
the Commercial Bank of Kuwait, is due in installments of principal as
follows:
Principal
Payment date payment
------------------------------- -----------
February 19, 2003 $ 1,750,000
May 19, 2003 1,750,000
August 19, 2003 1,750,000
November 19, 2003 1,750,000
February 19, 2004 1,750,000
May 19, 2004 1,750,000
August 19, 2004 1,750,000
November 19, 2004 1,750,000
February 19, 2005 1,500,000
May 19, 2005 1,500,000
August 19, 2005 1,500,000
November 19, 2005 1,500,000
-----------
Total $20,000,000
===========
The Company's debt agreements contain various covenants. The Company was
in compliance with these covenants or obtained waivers for the year ended
December 31, 2002.
Scheduled maturities of debt outstanding as of December 31, 2002 are as
follows:
Year ending December 31:
2003 $20,700,000
2004 8,000,000
2005 6,000,000
-----------
$34,700,000
===========
The Company has made the following debt repayments and refinancings since
January 1, 2003:
On March 24, 2004, the Company established a new line of credit with the
Commercial Bank of Kuwait in the amount of $7.5 million. This line of
credit is secured by a $7.9 million standby letter of credit through SHBC
and is payable on demand but in no event later than March 24, 2004. On
April 3, 2003, the Company established a new line of credit with Al-Ahli
Bank of Kuwait in the amount of $5.0 million. This line of credit is
secured by a guarantee from Sayed Hamid Behbehani & Sons Co., WLL along
with project receivables.
F-17
(9) Preferred Stock
On December 9, 2002, the Company entered into a Preferred Stock
Subscription Agreement with Al Soor Consulting for Financial Management
Co., W.L.L. ("Al Soor"), whereby Al Soor agreed to purchase 4,000,000
shares of newly designated series A convertible preferred stock, at a
purchase price of $1.50 per share of series A convertible preferred stock
or a total amount of $6,000,000. The sale of the 4,000,000 shares of
series A preferred stock occurred in two tranches of 2,000,000 shares each
on December 16, 2002 and on March 3, 2003. The Company received the
proceeds of $3,000,000 from the first tranche on December 16, 2002 and
issued 2,000,000 shares of Series A Preferred Stock to Al Soor. The
Company has agreed to provide two promissory notes for a total value of
$360,000 to the holder as collateral for dividends.
On March 31, 2003, the Company and Al Soor agreed to restructure the
Certificate of Designation underlying the preferred stock sold to Al Soor
in December of 2002. The restructuring involves the elimination of the
collateral provided to Al Soor, elimination of the redemption feature (the
preferred stock was to have been redeemed by payment of $6.0 million to Al
Soor by the Company at maturity in March 2008 provided that Al Soor had
not converted the preferred stock prior to maturity), added a provision to
allow the Company to force a conversion of the preferred stock to common
stock from January 1, 2008 to March 31, 2008, and increased the coupon
rate for dividends from 6.0% to 6.5%.
(10) Stockholder's Equity
On December 31, 2002, 15,000,000 shares of the Company's common stock were
issued and outstanding.
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 to the
Company. Each warrant allowed SHBC to receive one share of the Company's
common stock at an exercise price of $1 per share. The warrants were
exercised on June 29, 2001 resulting in an additional 2,000,000 shares of
the Company's common stock being issued.
F-18
(10) Stockholder's Equity, continued
On December 31, 2000, 13,000,000 shares of the Company's common stock were
issued and outstanding. The Company had 10,000,000 shares issued and
outstanding for most of 2000 until the Company issued an additional
3,000,000 shares to its principal stockholder, SHBC, to settle $3.0
million in trade payables due to the same stockholder. The Company had no
remaining debt owed to SHBC at December 31, 2000. During the year ended
December 31, 1999, the Company had 10,000,000 shares of common stock
issued and outstanding.
(11) Earnings Per Share
In accordance with the disclosure requirements of Statement of Financial
Accounting Standards No. 128, Earnings Per Share (SFAS 128), a
reconciliation of the numerator and denominator of basic and diluted
earnings per share is provided as follows:
Years ended December 31
------------------------------------------
2002 2001 2000
------------ ----------- -----------
Numerator - basic and diluted loss
per share - net loss $ (4,886,397) (7,245,774) (3,742,302)
Denominator - basic and diluted loss
per share - common stock outstanding 15,000,000 13,849,315 10,356,164
Basic and diluted earnings per share (0.33) (0.52) (0.36)
For 2002, options to purchase 225,000 shares of common stock at a price
$1.25 and 3,000,000 shares of preferred stock were outstanding but not
included in the computation of diluted earnings per share as the effect of
the options would be anti-dilutive. For 2001, options to purchase 225,000
shares of commons stock at a price of $1.25 were outstanding but not
included in the computation of diluted earnings per share as the effect of
the options would be anti-dilutive. There were no options outstanding
during 2000.
(12) Stock Option Plans
The Company has adopted the disclosure-only provisions of SFAS 123,
"Accounting for Stock-Based Compensation." Had compensation cost for the
Company's stock option plans been determined using the fair value method
of accounting described in SFAS 123, the Company's net income would have
been changed to the pro forma amounts indicated in note 2 of the notes to
consolidated financial statements.
For purposes of calculating the compensation cost consistent with SFAS
123, the fair value of each option grant is estimated on the date of grant
using the binomial option-pricing model with the following weighted
average assumptions used for grants in 2002, 2001 and 2000:
F-19
(12) Stock Option Plans, continued
2002 2001 2000
---- ---- ----
Risk free interest rate 4% 5% 5%
Expected volatility 30% 30% 30%
Expected lives (in years) 8 9 10
Expected dividend yield 0% 0% 0%
2001 Non-Employee Director's Stock Option Plan
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 nonqualified stock options to outside directors. Under the terms of
this plan, under which 285,000 shares of common stock were reserved for
issuance, options to purchase common stock 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.
Changes in options outstanding are summarized as follows:
December 31, 2002 December 31, 2001 December 31, 2000
-------------------- --------------------- ---------------------
Weighted Weighted Weighted
Average Exercise Average Exercise Average Exercise
Shares Price Shares Price Shares Price
-------- -------- -------- -------- -------- --------
Options outstanding at January 1 225,000 1.25 -- -- -- --
Granted -- -- 225,000 1.25 -- --
Exercised -- -- -- -- -- --
Cancelled -- -- -- -- -- --
Options outstanding at December 31 225,000 1.25 225,000 1.25 -- --
Options exercisable at December 31 150,000 1.25 75,000 1.25 -- --
Shares available for future grant at December 31 60,000 60,000 --
2001 Incentive Stock Option Plan
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, under which
888,000 shares of common stock were reserved for issuance, options to
purchase common stock 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.
F-20
(12) Stock Option Plans, continued
2001 Non-Qualified Stock Option Plan
In January 2001, the Company's board of directors adopted the 2001
Non-Qualified Stock Option Plan that provides for the issuance of
nonqualified stock options to employees. Under the terms of this plan,
under which 27,000 shares of common stock were reserved for issuance,
options to purchase common stock are granted at less than fair market
value, become exercisable immediately on the date of grant, and expire 10
years from the date of grant.
F-21
(12) Stock Option Plans, continued
All Stock Option Plans
As of December 31, 2002, the Company has issued only 225,000 options with
an exercise price of for all 225,000 options of $1.25 per share. These
225,000 options were issued on January 1, 2001, vest 33.3% on each
anniversary date and are exercisable for 10 years from date of grant. The
remaining contractual life for these options is six and one half years.
(13) Financial Instruments With Off-balance Sheet Risk and Concentrations of
Credit Risk
In the ordinary course of business with customers, vendors, and others,
the Company is contingently liable for performance under letters of credit
and other financial guarantees totaling approximately $33 million at
December 31, 2002. Telesource is obligated to repay any balances paid by
SHBC under the standby letters of credit provided by SHBC. The Company's
management does not believe it is practicable to estimate the fair values
of these financial instruments and does not expect any losses from their
resolution.
F-22
(14) Related-Party Transactions
Certain of the Company's executive officers, directors, and major
stockholders are also owners, officers, and/or directors of SHBC located
in Kuwait. SHBC is a civil, electrical, and mechanical engineering firm
and construction contractor with 750 employees and over 30 years of
experience. SHBC and its affiliates were the sole stockholder of
Telesource International prior to July 1999 and now own approximately
75.6% of the common stock outstanding. SHBC and Telesource International
bid and compete within the same industries; however, SHBC has agreed in
writing to not bid projects within the United States and its possessions.
Additionally, SHBC and SHBC's majority stockholders, Fouad Behbehani and
Nasrallah Behbehani, have signed as guarantors on Telesource CNMI's
promissory note with the Commercial Bank of Kuwait, New York Branch, and
as guarantors on a $3,000,000 credit facility for Telesource CNMI with
Kuwait Real Estate Bank. SHBC and SHBC's majority stockholders have also
signed as guarantors on a $2,000,000 letter of credit issued to the Bank
of Hawaii to secure a $1,900,000 credit facility. These credit facilities
were used to finance the construction activities on the power plant, the
West Timor Airport Expansion Project, and to provide financing for other
projects. Also see note 8.
Additionally, from time to time the Company may hire, on a part time or
temporary basis, individuals employed by SHBC to provide assistance to
Telesource on certain projects in the Northern Mariana Islands. The rates
paid do not exceed the fair market value of similar services provided by
unrelated third parties.
In 1996, the Company was subcontracted by SHBC to build a radio relay
station in the Commonwealth of Northern Mariana Islands for the United
States Information Agency. The agreement between SHBC and the Company
included payment to the Company on a monthly basis for all time and
material plus a fee of 7.5% on local purchases and procurements. The radio
relay station project was completed in early 1999, however, an addition to
the radio relay station was approved and the Company was hired by SHBC to
perform additional construction services on the radio relay station under
the same terms as the original agreement. This project concluded in 2000.
The following table provides a summary of financial information related to
all services provided to SHBC by the Company:
Years ended December 31
---------------------------------
2002 2001 2000
-------- ------- ---------
Construction revenues $838,331 -- 851,912
Sales 89,998 256 197,845
Rental income -- -- 53,103
Service fees -- -- 31,625
-------- ------- ---------
Total related party revenues $928,329 256 1,134,485
======== ======= =========
The following table summarizes all balances related to transactions with
SHBC as of the end of each period:
2002 2001
--------- -------
Accounts payable to SHBC 3,736,283 406,215
Other current liabilities 125,000 125,000
F-23
(14) Related-Party Transactions, continued
The increase during 2002 in accounts payable to SHBC is due to costs of
materials purchased by SHBC for Telesource for use on the airport and
prison projects.
The Company held an investment in Telebond Insurance Corporation at
December 31, 2002, in the amount of $71,284. The Company purchased
insurance from Telebond and paid premiums of $59,760, $23,566, and
$158,278 during the years ended December 31, 2002, 2001, and 2000,
respectively. Telebond provides employment bonds along with bid,
performance, and payment bonds for the Company's projects. Telebond is not
a U.S. Treasury listed bonding company. Most bid, performance, and payment
bonds for the Company are secured from third party vendors. The Company's
President and CEO, K.J. Semikian, serves on Telebond Insurance
Corporation's board of directors and as President of Telebond, and owns
10% of the stock of Telebond.
(15) Income Taxes
Income tax expense consists of:
Current Deferred Total
------------------- ------------------- -------------------
Year ended December 31, 2002:
U.S. Federal $ -- -- --
State and local -- -- --
U.S. possession -- -- --
Foreign -- -- --
------------------- ------------------- -------------------
$ -- -- --
=================== =================== ===================
Year ended December 31, 2001:
U.S. Federal $ -- -- --
State and local -- -- --
U.S. possession -- -- --
Foreign 19,440 -- 19,440
------------------- ------------------- -------------------
$ 19,440 -- 19,440
=================== =================== ===================
Year ended December 31, 2000:
U.S. Federal $ -- -- --
State and local -- -- --
U.S. possession -- -- --
Foreign 4,746 -- 4,746
------------------- ------------------- -------------------
$ 4,746 -- 4,746
=================== =================== ===================
The foreign tax was incurred in connection with the Company's operations
in Fiji and is based upon earnings within Fiji. The average tax rate on
these earnings was 35%. In 2002, 2001, and 2000, the Company recorded a
loss for financial reporting purposes as well as a loss for income tax
reporting purposes and therefore, no current U.S. income tax expense has
been reflected in the accompanying consolidated statements of operations.
F-24
(15) Income Taxes, continued
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 2002 and 2001 are presented below:
2002 2001
------------ -----------
Deferred tax assets:
Contribution carryover $ 10,000 10,000
Net operating loss carryforwards 9,603,605 7,780,078
Accrued expenses 312,866 --
------------ -----------
Total gross deferred tax assets 9,926,471 7,790,078
Less valuation allowance (9,814,562) (7,709,943)
------------ -----------
Net deferred tax asset 111,909 80,135
------------ -----------
Deferred tax liability - excess tax over
book depreciation $ (111,909) (80,135)
============ ===========
The valuation allowance for deferred tax assets as of December 31, 2002
and 2001 was $16,857,591 and $12,416,059, respectively. The net change in
the total valuation allowance for the years ended December 31, 2002 and
2001 was an increase of $2,104,619 and an increase of $2,544,773,
respectively. The net deferred tax asset at December 31, 2002 and 2001 was
also 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.
At December 31, 2002, the Company has net operating loss carryforwards of
approximately $27,024,000. The net operating loss carryforwards expire in
the years 2017 through 2022. The 2001 deferred tax assets for the net
operating loss carryforwards have been adjusted to actual amounts.
(16) Commitments and Contingencies
Minimum rental commitments under all noncancelable-operating leases,
primarily related to property, vehicles, and construction equipment, in
effect at December 31, 2002 are:
Year ending December 31:
2003 $ 81,377
2004 40,800
2005 10,000
---------------
$ 132,177
===============
Lease expense was $181,043, $452,045, and $410,848 for the years ended
December 31, 2002, 2001, and 2000, respectively.
F-25
(16) Commitments and Contingencies, continued
Telesource entered into an employment agreement with Khajadour Semikian in
June 1999, Nidal Zayed in August 1999, and Bud Curley in April 2001. The
term of the agreement with Mr. Semikian is from July 1, 1999 to July 1,
2002 which has been extended to July 3, 2003. Under the terms of the
agreement, Mr. Semikian is required to devote his full time to the
Company's business. The Company has agreed to pay him an annualized base
salary of $220,000 during 1999, increased to $270,000 during 2000 and
remaining at $270,000 per year until July 3, 2003. The payment of cash
bonuses to Mr. Semikian will be at the Board's discretion. The Company has
agreed to provide Mr. Semikian with health insurance for him and his
family.
The term of the agreement with Mr. Zayed is from September 1, 1999 to
September 1, 2002 which has been extended to July 3, 2003. Under the terms
of the agreement, Mr. Zayed's responsibilities comprise serving as the
number two operating officer accountable for the full range of operations.
The Company has agreed to pay him an annualized base salary of $125,000
per year for the term of the agreement. The payment of cash bonuses to Mr.
Zayed will be at the Board's discretion. The Company has also agreed to
provide Mr. Zayed with health insurance for him and his family along with
a company car. The term of the original agreement with Mr. Curley is from
April 1, 2001 to October 1, 2003 which has been renewed to October 1,
2004. Under the terms of the agreement, Mr. Curley is required to devote
his full time to the Company's business. The Company has agreed to pay him
an annualized base salary of $165,000 during the period from April 1, 2001
to October 31, 2001, and $175,000 from November 1, 2001 to October 1,
2004. The payment of cash bonuses to Mr. Curley will be at the Board's
discretion. The Company has agreed to provide Mr. Curley with health
insurance for him and his family. The Company has agreed to provide Mr.
Curley with a $10,000 per year car allowance for the term of this
agreement.
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.
(17) Business Segment Information
The Company adopted SFAS No. 131, Disclosure About Segments of an
Enterprise and Related Information, in 1998. Segments were determined
based on products and services provided by each segment. Telesource has
three operating segments: power generation and construction of power
plants, trading, and construction services. Power generation activities
did not commence until March 1999. 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 inter
segment revenues have been eliminated. The following table sets forth
certain segment information for the periods indicated:
F-26
(17) Business Segment Information, continued
December 31, 2002
----------------------------------------------------------------------------
Power
generation
and
construction
of power
plants Trading Construction Total
----------------- ----------------- ----------------- -----------------
Revenue $ 2,416,943 397,376 17,506,876 20,321,195
Interest income -- -- 2,768 2,768
Interest expense 1,791,328 -- -- 1,791,328
Depreciation and amortization 4,125 22,502 474,927 501,554
Income tax expense -- -- -- --
Net loss (602,712) (233,465) (4,050,220) (4,886,397)
Total capital expenditures -- 37,083 105,075 142,158
Total assets 14,053,008 3,592,187 7,515,140 25,160,335
December 31, 2001
----------------------------------------------------------------------------
Power
generation
and
construction
of power
plants Trading Construction Total
----------------- ----------------- ----------------- -----------------
Revenue $ 6,329,392 130,930 11,825,447 18,285,769
Interest income -- -- 32,829 32,829
Interest expense 2,250,000 -- 149,145 2,399,145
Depreciation and amortization 4,125 35,785 371,515 411,425
Income tax expense 19,440 -- -- 19,440
Net loss (618,294) (91,802) (6,535,678) (7,245,774)
Total capital expenditures 7,748 3,209 823,002 833,959
Total assets 14,655,720 3,788,569 5,577,238 24,021,527
F-27
(17) Business Segment Information, continued
December 31, 2000
----------------------------------------------------------------------------
Power
generation
and
construction
of power
plants Trading Construction Total
----------------- ----------------- ----------------- -----------------
Revenue $ 2,766,740 1,070,526 8,753,103 12,590,369
Interest income 5,279 -- 120,460 125,739
Interest expense 2,360,162 -- 66,802 2,426,964
Depreciation and amortization 1,309 31,537 403,332 436,178
Income tax expense 4,746 -- -- 4,746
Net loss (1,977,858) (536,655) (1,227,789) (3,742,302)
Total capital expenditures 10,798 15,960 816,809 843,567
Total assets 14,486,727 5,693,348 10,316,113 30,496,188
The basis used to attribute revenues to individual countries is based upon
where the services are provided.
The power generation segment includes revenues from the Company's power
station on Tinian, Commonwealth of the Northern Mariana Islands in the
amount of $2,416,943, $2,276,792, and $2,230,530 for 2002, 2001, and 2000,
respectively. The construction revenues recognized for the expansion of
two power plants in Fiji are included under the power generation segment
and were $0, $4,052,600, and $536,210 for 2002, 2001, and 2000,
respectively.
Revenues from the Company's related party, SHBC, were $89,998, $256, and
$1,134,485 for 2002, 2001, and 2000, respectively. The revenues recognized
from SHBC under the construction segment were $0, $0, and $851,912 for
2002, 2001, and 2000, respectively. The revenues recognized from SHBC
under the trading segment were $89,998, $256, and $197,845 for 2002, 2001,
and 2000, respectively. The Company recognized $1,191,585 in construction
revenues for a project to construct a radio broadcast station in Lebanon.
All other revenues recognized within the construction segment for all
periods presented were earned in the Commonwealth of Mariana Islands.
Rental income and service fees earned from SHBC were $0, $0, and $84,728
for 2002, 2001, and 2000, respectively.
Trading revenues generated by the Company's Guam office were $307,378,
$130,205, and $267,742 for 2002, 2001, and 2000, respectively. All other
revenues recognized within the trading segment for all periods presented
were earned in the United States.
Long-lived assets located in the Commonwealth of the Northern Mariana
Islands were $13.7 million, $15.7 million, and $19.7 million as of
December 31, 2002, 2001, and 2000, respectively. Long-lived assets located
in Fiji were $12,206, $0 and $0 as of December 31, 2002, 2001 and 2000,
respectively. The Company had no long-lived assets located in Palau as of
December 31, 2002.
F-28
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The sections entitled "Election of Directors" and "Section 16(a) Beneficial
Ownership Reporting Compliance" are incorporated by reference from the
definitive proxy statement to be filed with the Securities and Exchange
Commission in connection with the Company's 2003 annual meeting of stockholders.
Information about the Company's executive officers is set forth in Item 4(a) in
Part I of this Report.
ITEM 11. EXECUTIVE COMPENSATION
The section entitled "Executive Compensation" excluding the Board Compensation
Committee Report and the stock price performance graph is incorporated by
reference from the definitive proxy statement to be filed with the Securities
and Exchange Commission in connection with the Company's 2003 annual meeting of
stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The section entitled "Ownership of Securities" is incorporated by reference from
the definitive proxy statement to be filed with the Securities and Exchange
Commission in connection with the Company's 2003 annual meeting of stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The section entitled "Certain Transactions" is incorporated by reference from
the definitive proxy statement to be filed with the Securities and Exchange
Commission in connection with the Company's 2003 annual meeting of stockholders.
43
PART IV
ITEM 14. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management, including
our chief executive officer and chief financial officer, we conducted an
evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures, as defined in Rules 13a-14(c) and 15d-14(c) under the
Securities Exchange Act of 1934, within 90 days of the filing date of this
report (the "Evaluation Date"). To maintain a cost-effective controls structure,
management necessarily applied its judgment in assessing the costs and benefits
of such controls and procedures, which, by their nature, can only provide
reasonable assurance that our management's control objectives are met. In
addition, the design of any system of control is based upon certain assumptions
about the likelihood of future events, and there can no assurance that any
design will succeed in achieving its stated goals under all future events, no
matter how remote.
Based on this evaluation, our chief executive officer and chief financial
officer concluded as of the Evaluation Date that our disclosure controls and
procedures were effective in timely alerting them to material information
relating to the company required to be included in our periodic SEC reports. In
addition, there were no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the
Evaluation Date. We have not identified any significant deficiencies or material
weaknesses in our internal controls, and therefore there were no corrective
actions taken.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) The following consolidated financial statements of Telesource
International, Inc. and Subsidiaries are included in Part II, Item 8:
Financial Statements:
Consolidated Balance Sheets--December 31, 2002 and 2001
Consolidated Statements of Operations--Years Ended December 31, 2002, 2001 and
2000
Consolidated Statements of Cash Flows--Years Ended December 31, 2002, 2001 and
2000
Consolidated Statements of Stockholders' Equity and Comprehensive Income--Years
Ended December 31, 2002, 2001 and 2000
Notes to Consolidated Financial Statements
Report of Independent Public Accountants
(a)(2) The following financial statement schedules are included in this Form
10-K report:
44
None.
(b) Reports on Form 8-K:
Telesource filed a Form 8-K on December 9, 2002, to report that Telesource had
entered into a Preferred Stock Subscription Agreement with Al Soor Consulting
for Financial Management Co., W.L.L. ("Al Soor"), whereby Al Soor has agreed to
purchase 4,000,000 shares of newly designated Series A Convertible Preferred
Stock, at a purchase price of $1.50 per share of Series A Convertible Preferred
Stock or a total amount of $6,000,000.
ITEM 15(a)(3). EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
The following executive compensation plans and arrangements are listed
incorporated by reference in this Form 10-K:
Employment Contract between K.J. Semikian and Telesource International,
Inc.
Employment Contract between Nidal Z. Zayed and Telesource International,
Inc.
Employment Contract between Bud Curley and Telesource International, Inc.
Telesource International, Inc. 2000 Incentive Stock Option Plan
Telesource International, Inc. 2000 Non-Qualified Stock Option Plan
Telesource International, Inc. 2000 Non-Employee Director Stock Option
Plan
45
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) 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 April 14, 2003 /s/ K.J. Semikian
---------------------------------
K.J. Semikian
President and Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT
HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND
IN THE CAPACITIES INDICATED ON APRIL 11, 2002.
/s/ Ralph Beck Chairman of the Board of Directors
-----------------------------
Ralph Beck
/s/ K.J. Semikian Director, President and Chief Executive Officer
-----------------------------
K.J. Semikian
/s/ Nidal Z. Zayed Director and Executive Vice President
-----------------------------
Nidal Z. Zayed
/s/ Max Engler Director
-----------------------------
Max Engler
/s/Jeffery Adams Director
-----------------------------
Jeffery Adams
/s/ Weston Marsh Director
-----------------------------
Weston Marsh
/s/ Ibrahim Ibrahim Director
-----------------------------
Ibrahim Ibrahim
/s/ Bud Curley Chief Financial Officer
-----------------------------
Bud Curley
46
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, KJ Semikian, certify that:
I have reviewed this annual report on Form 10-K of Telesource International,
Incorporated;
1. Based on my knowledge, this annual 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 annual
report;
2. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;
3. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and 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 annual
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 annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
4. 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
functions):
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
5. The registrant's other certifying officer and I have indicated in this annual
report whether 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.
Dated: April 14, 2003 By: /s/ KJ Semikian
-----------------------
KJ Semikian
President and Chief Executive Officer
47
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Bud Curley, certify that:
I have reviewed this annual report on Form 10-K of Telesource International,
Incorporated;
1. Based on my knowledge, this annual 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 annual
report;
2. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;
3. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and 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 annual
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 annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
4. 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
functions):
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
5. The registrant's other certifying officer and I have indicated in this annual
report whether 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.
Dated: April 14, 2003 By: /s/ Bud Curley
------------------------
Bud Curley
Chief Financial Officer
48
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------ -------------------
2.01 Amended and Restated Agreement and Plan of Merger and Plan
of Reorganization among Sixth Business Service Group and
Telesource International, Inc. Appendix A**
3.01 Certificate of Incorporation of Telesource International **
3.02 By-laws of Telesource International **
10.01 Agreement for Design, Supply of Plant and Equipment, Private
Construction, Maintenance and Operation, and Transfer of
Ownership dated June 10, 1997**
10.02 Agreement for Design, Supply of Plant and Equipment, Private
Construction, Maintenance and Operation, and Transfer of
Ownership, Change Order Number 1, dated November 30, 1998**
10.03 Agreement for Design, Supply of Plant and Equipment, Private
Construction, Maintenance and Operation, and Transfer of
Ownership, Change Order Number 2, dated November 30, 1998**
10.04 Agreement and Contract for Construction of Koblerville
Expansion Project between the Northern Mariana Islands and
Telesource International dated July 28, 1998**
10.06 Memorandum of Understanding between Sayed Hamid Behbehani &
Sons, Co. W.L.L. and Telesource International, Inc.
regarding right of first refusal for certain areas**
10.07 Memorandum of Understanding between Sayed Hamid Behbehani &
Sons, Co. W.L.L. and Telesource International, Inc.
regarding commission fees **
10.10 Note Agreement between the Commercial Bank of Kuwait, New
York Branch, and Telesource International CNMI, Inc. dated
August 20, 1998**
10.10A Note Agreement between the Commercial Bank of Kuwait, New
York Branch, and Telesource CNMI, Inc. dated December 11,
2001 **
10.11 Term Loan Agreement between the Kuwait Real Estate Bank and
Telesource International CNMI, Inc. dated May 2, 1999**
10.12 Line of Credit Agreement between the Bank of Hawaii and
Telesource International CNMI, Inc. )**
10.13 Credit Agreement between Hongkong and Shanghai Bank
Corporation, Limited and Telesource CNMI, Inc. dated January
21, 2000**
10.13A Credit Agreement between Hongkong and Shanghai Bank
Corporation, Limited and Telesource CNMI, Inc. dated March
26, 2002 **
10.14 Lease of Tinian Land between the Commonwealth Utilities
Corporation and Telesource International CNMI, Inc.**
10.15 Employment Contract between K.J. Semikian and Telesource
International, Inc.**
10.16 Employment Contract between Nidal Z. Zayed and Telesource
International, Inc.**
10.17 Employment Contract between Bud Curley and Telesource
International, Inc. **
10.18 Adoption Agreement for Aetna Life Insurance and Annuity
Company Standardized 401(k) Profit Sharing Plan and Trust
between Aetna Life Insurance and Annuity Company and
Commsource International, Inc. dated November 13, 1998**
10.19 Agreement for Design, Supply of Plant and Equipment, Private
Construction, Maintenance and Operation, and Transfer of
Ownership, Change Order Number 3 dated May 11, 2001**
10.20 Telesource International, Inc. 2000 Incentive Stock Option
Plan **
10.21 Telesource International, Inc. 2000 Non-Qualified Stock
Option Plan **
10.22 Telesource International, Inc. 2000 Non-Employee Director
Stock Option Plan **
10.23 Warrant to Purchase 1,000,000 Shares of Common Stock between
SHBC and Telesource International, Inc. **
99.1 Certification Pursuant to Section 1350 of Chapter 63 of
Title 18 of the United States Code -- Chief Executive
Officer -- Corporation *
99.2 Certification Pursuant to Section 1350 of Chapter 63 of
Title 18 of the United States Code -- Chief Financial
Officer -- Corporation *
* Filed herewith
** Previously filed