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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 2003
OR
|_| Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission file number - 0-2564
TELESOURCE INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 59-3738614
(State or other jurisdiction of (IRS employer identification no.)
incorporation or organization)
860 Parkview Boulevard 60148
(Address of principal executive offices) (Zip code)
(630) 620-4787
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rules 12b-2 of the Securities Exchange Act of 1934).
Yes |_| No |X|
There were 15,000,000 shares of common stock, par value $0.01 per share,
of Telesource International, Inc. outstanding as of August 15, 2003.
TELESOURCE INTERNATIONAL, INC.
TABLE OF CONTENTS
Page No.
------------
PART I. Financial Information
Item 1. Financial Statements: 1
Condensed Consolidated Balance Sheets -
June 30, 2003 and December 31, 2002 2
Condensed Consolidated Statements of Operations -
six months ended June 30, 2003 and 2002 3
Condensed Consolidated Statements of Operations -
three months ended June 30, 2003 and 2002 4
Condensed Consolidated Statements of Cash Flows -
six months ended June 30, 2003 and 2002 5
Notes to Condensed Consolidated Financial Statements 6 - 15
Item 2. Management's Discussion and Analysis of 16 - 21
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 21
PART II. Other Information
Item 1. Legal Proceedings 22
Item 6. Exhibits and Reports on Form 8-K 23
Signatures 24
2
ITEM 1. FINANCIAL STATEMENTS
The condensed consolidated financial statements which follow have been prepared
by Telesource International, Inc. ("the Company"), without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission. . The
Company's independent audit firm, KPMG, L.L.P., has not completed its quarterly
review of these financial statements. The independent audit firm's quarterly
review is expected to be completed by August 29, 2003. Although certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America have been condensed or omitted pursuant to such rules
and regulations, the Company believes that the disclosures are adequate to make
the information presented not misleading. The statements reflect all adjustments
which are, in the opinion of management, necessary for a fair presentation of
the results for the periods presented. All such adjustments are of a normal and
recurring nature unless specified otherwise. These condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements and the notes thereto included in the Company's latest
Annual Report on Form 10-K.
This Quarterly Report on Form 10-Q, and in particular the "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
section in Part I, contains forward-looking statements concerning future
operations and performance of the Company. Forward-looking statements are
subject to market, operating and economic risks and uncertainties that may cause
the Company's actual results in future periods to be materially different from
any future performance suggested herein. Factors that may cause such differences
include, among others: increased competition, increased costs, changes in
general market conditions, changes in the regulatory environment, changes in
anticipated levels of government spending on infrastructure, and changes in loan
relationships or sources of financing. Such forward-looking statements are made
pursuant to the Safe Harbor Provisions of the Private Securities Litigation
Reform Act of 1995.
1
TELESOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
June 30, 2003 and December 31, 2002
June 30, December 31,
Assets 2003 2002
------------ ------------
(unaudited)
Current assets:
Cash and cash equivalents $ 447,198 244,723
Accounts receivable 5,720,733 3,818,268
Current portion of net investment in sales-type lease 1,695,384 1,617,840
Costs and estimated earnings in excess of billings 4,618,786 5,448,663
Prepaid expenses and other current assets 288,337 261,379
------------ -----------
Total current assets 12,770,438 11,390,873
Net investment in sales-type lease - long term 10,394,039 11,261,571
Property, plant, and equipment, net 2,646,932 2,317,617
Other assets 166,257 190,274
------------ -----------
Total assets $ 25,977,666 25,160,335
============ ===========
Liabilities and Stockholders' Deficit
Current liabilities:
Current portion of long-term debt $ 25,829,400 20,700,000
Accounts payable 3,409,749 3,879,364
Accounts payable - related party 3,288,185 3,736,283
Accrued expenses 2,608,279 3,320,338
Billings in excess of costs and estimated earnings 278,019 --
Other current liabilities 133,505 125,000
------------ -----------
Total current liabilities 35,547,137 31,760,984
Long-term debt 9,500,000 14,000,000
Convertible preferred stock, authorized 10,000,000 shares:
issued and outstanding none and 2,000,000 shares
at June 30, 2003 and December 31, 2002, respectively -- 3,000,000
------------ -----------
Total liabilities 45,047,137 48,760,984
------------ -----------
Stockholders' deficit:
Convertible preferred stock, authorized 10,000,000 shares:
issued and outstanding 4,666,666 shares at June 30, 2003 7,000,000 --
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 (31,872,080) (29,431,981)
Accumulated comprehensive loss -
foreign currency translation (144,616) (115,893)
------------ -----------
Total stockholders' deficit (19,069,471) (23,600,649)
Commitments and contingencies (note 8) -- --
------------ -----------
Total liabilities and stockholders' deficit $ 25,977,666 25,160,335
============ ===========
See accompanying notes to condensed consolidated financial statements.
2
TELESOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (unaudited)
Six months ended June 30, 2003 and 2002
2003 2002
------------ -----------
Revenues:
Construction revenues $ 8,047,715 8,378,783
Construction revenues - related party -- 740,819
Service fees - power generation plant 693,848 530,208
Sales, net -- 296,678
Sales, net - related party -- 2,053
Rental income 379,197 3,300
Finance lease revenue 590,012 660,626
------------ -----------
Gross revenues 9,710,772 10,612,467
Costs and expenses:
Construction costs 7,496,026 7,324,846
Operation and maintenance costs - power generation plant 682,972 601,071
------------ -----------
Gross profit 1,531,774 2,686,550
------------ -----------
Operating expenses:
Salaries and employee benefits 1,024,671 891,644
Occupancy and equipment 145,333 170,201
General and administrative 1,998,142 2,242,686
------------ -----------
Total operating expenses 3,168,146 3,304,531
------------ -----------
Operating loss (1,636,372) (617,981)
------------ -----------
Other income (expense):
Interest income -- 2,766
Interest expense (820,219) (947,749)
Other income, net 16,492 17,563
------------ -----------
Total other expense (803,727) (927,420)
------------ -----------
Loss before income taxes (2,440,099) (1,545,401)
Income tax expense -- --
------------ -----------
Net loss $ (2,440,099) (1,545,401)
============ ===========
Basic and diluted net loss per share $ (0.16) (0.10)
============ ===========
Weighted average common shares outstanding 15,000,000 15,000,000
============ ===========
See accompanying notes to condensed consolidated financial statements.
3
TELESOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (unaudited)
Three months ended June 30, 2003 and 2002
2003 2002
------------ -----------
Revenues:
Construction revenues $ 2,602,721 3,931,032
Construction revenues - related party -- 318,850
Service fees - power generation plant 416,312 286,776
Sales, net -- 47,096
Sales, net - related party -- 464
Rental income 133,080 1,365
Finance lease revenue 290,383 326,103
------------ -----------
Gross revenues 3,442,496 4,911,686
Costs and expenses:
Construction costs 3,205,644 3,407,000
Operation and maintenance costs - power generation plant 465,180 264,797
------------ -----------
Gross profit (loss) (228,328) 1,239,889
------------ -----------
Operating expenses:
Salaries and employee benefits 536,572 450,984
Occupancy and equipment 84,764 83,093
General and administrative 989,700 1,063,260
------------ -----------
Total operating expenses 1,611,036 1,597,337
------------ -----------
Operating loss (1,839,364) (357,448)
------------ -----------
Other income (expense):
Interest income -- 2,764
Interest expense (391,042) (489,572)
Other income (expense), net (17,272) 12,453
------------ -----------
Total other expense (408,314) (474,355)
------------ -----------
Loss before income taxes (2,247,678) (831,803)
Income tax expense -- --
------------ -----------
Net loss $ (2,247,678) (831,803)
============ ===========
Basic and diluted net loss per share $ (0.15) (0.06)
============ ===========
Weighted average common shares outstanding 15,000,000 15,000,000
============ ===========
See accompanying notes to condensed consolidated financial statements.
4
TELESOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (unaudited)
Six months ended June 30, 2003 and 2002
2003 2002
------------ -----------
Cash flows from operating activities:
Net loss $ (2,440,099) (1,545,401)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 185,462 229,867
Changes in assets and liabilities:
Receivables (1,661,361) (771,468)
Prepaid expenses and other current assets (26,958) (219,742)
Costs and estimated earnings in excess of billings 1,107,896 (1,110,669)
Net investment in sales-type lease 789,988 719,374
Other assets 24,017 90,400
Accounts payable (1,158,816) 868,597
Accrued expenses (712,059) (545,399)
Income taxes payable -- (1,089)
Other liabilities (20,218) (18,786)
------------ -----------
Net cash used in operating activities (3,912,148) (2,304,316)
------------ -----------
Cash flows from investing activities:
Capital expenditures (514,777) (13,922)
------------ -----------
Net cash used in investing activities (514,777) (13,922)
------------ -----------
Cash flows from financing activities:
Proceeds from sale of preferred stock 4,000,000 --
Proceeds from borrowings 10,979,400 12,800,000
Principal payments on debt (10,350,000) (10,100,000)
------------ -----------
Net cash provided by financing activities 4,629,400 2,700,000
------------ -----------
Net increase in cash and cash equivalents 202,475 381,762
Cash and cash equivalents at beginning of period 244,723 204,752
------------ -----------
Cash and cash equivalents at end of period $ 447,198 586,514
============ ===========
Supplemental disclosure:
Cash paid for interest $ 1,288,535 1,062,165
See accompanying notes to condensed consolidated financial statements.
5
TELESOURCE INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the six months ended June 30, 2003 and 2002
(unaudited)
1. Description of Business
Telesource International, Inc. ("Telesource" or the "Company") was
incorporated in Delaware in 1994. Telesource was formed in 1994 to facilitate
various intra-corporate activities and, until July 1999, was a wholly owned
subsidiary of Sayed Hamid Behbehani & Sons Co. W.L.L. ("SHBC"), a Kuwait-based
civil, electrical and mechanical construction company. Telesource is an
international engineering and construction company, engaged in constructing
single family homes, airports, radio towers and in the construction and
operation of energy conversion power plants. In Tinian, an island in the
Commonwealth of Mariana Islands (U.S. Territory), the Company operates a diesel
fired electric power generation plant for the sale of electricity to the local
power grid. The Company's facility in Lombard, Illinois, annually handles the
procurement, export and shipping of U.S. fabricated products for use by the
Company's subsidiaries or for resale to customers outside of the mainland.
The Company conducts its operations through three subsidiaries. The
Company's Mariana subsidiary, Telesource CNMI, Inc., handles construction and
management of the Company's energy conversion facilities in the Commonwealth of
Mariana Islands and operates a branch office in Guam to take advantage of future
opportunities. The Company's second subsidiary, Commsource International, is an
international export company that facilitates the purchase of equipment in the
U.S. The Company's third subsidiary, Telesource Fiji, Ltd., handles the
Company's construction activities in Fiji.
Telesource has three main operating segments: construction services,
brokerage of goods and services, and power generation and construction of power
plants. The power generation activities commenced in March 1999.
During 1999, Telesource entered into an agreement for a merger with Sixth
Business Service Group, a registered company with the Securities and Exchange
Commission (SEC) located in Tampa, Florida. Telesource completed the merger with
and into Sixth Business Service Group on September 7, 2001, pursuant to which
merger the stockholders of Telesource received shares of Sixth Business Service
Group in exchange for their shares of Telesource stock. Sixth Business Service
Group is the surviving corporation and after the merger was completed, Sixth
Business Service Group changed its name to Telesource International, 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 National
Association of Securities Dealers ("NASD") Over The Counter Bulletin Board in
October 2001, under the ticker symbol "TSCI".
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared in conformity with accounting principles generally accepted
in the United States of America. Such principles were applied on a basis
consistent with those reflected in the financial statements included in the
Company's 2002 Annual Report on Form 10-K as filed with the Securities and
Exchange Commission. The accompanying condensed consolidated financial data
should be read in conjunction with the consolidated financial statements and the
notes thereto contained in the 2002 Annual Report on Form 10-K. In the opinion
of management, the accompanying unaudited condensed consolidated financial
statements contain all adjustments necessary to present fairly the financial
position of the Company as of June 30, 2003, and the results of operations and
cash flows for the six month period and three month periods then ended. The
unaudited condensed consolidated statements of operations for such interim
periods are not necessarily indicative of results for the full year.
6
TELESOURCE INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the six months ended June 30, 2003 and 2002
(unaudited)
2. Summary of Significant Accounting Policies, continued
Liquidity and Going Concern
The accompanying condensed consolidated financial statements have been
prepared on a going concern basis, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business. During the
fiscal years of 2000 through 2002, the Company experienced significant operating
losses with corresponding reductions in working capital and net worth. As of
June 30, 2003, the Company's current liabilities exceeded its current assets by
$22,776,699. The Company relies heavily on bank financing to support its
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 June
30, 2003 the Company had total outstanding debt of $35,329,400 of which
$25,829,400 is due in the next twelve months. As of June 30, 2003 the Company
had an accumulated deficit of $31,872,080 and total stockholders' deficit of
$19,069,471.
The Company incurred operating losses of $1,636,372 and $617,981 for the
six months ended June 30, 2003 and 2002 and operating losses of $3,118,300,
$4,903,676 and $1,516,103 for the years ended December 31, 2002, 2001 and 2000,
respectively.
Cash used in operating activities during the six months ended June 30,
2003 and 2002 was $3.9 million and $2.3 million, respectively. The cash used in
operating activities was principally due to the operating loss coupled with an
increase in accounts receivable during 2003.
Cash used in investing activities was $514,777 for the six months ended
June 30, 2003 as compared to net cash used in investing activities of $13,922
for the same period in 2002. The cash used in investing activities during 2003
is attributed to capital purchases during 2003 of $488,406 to purchase the
bucket trucks leased on Guam and used in the super typhoon clean up efforts and
the remaining balance for capital purchases of $26,371 was used to purchase
office and construction equipment.
Cash provided by financing activities was $4.6 million for the six months
ended June 30, 2003 as compared to cash provided by financing activities of $2.7
million for the same period in 2002. The cash generated by financing came from
additional borrowings and the proceeds from the sale of $4.0 million worth of
preferred stock during 2003.
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. To address the going
concern issue, management has implemented financial and operational
restructuring plans designed to improve operating efficiencies, reduce and
eliminate cash losses and position Telesource for profitable operations by also
increasing revenues. 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. The
financial statements do not include any adjustments relating to the
recoverability of assets and the classification of liabilities that might be
necessary should the Company be unable to continue as a going concern.
7
TELESOURCE INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the six months ended June 30, 2003 and 2002
(unaudited)
2. Summary of Significant Accounting Policies, continued
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 $33,398,200 of the Company's total debt of
$35,329,400. SHBC has further agreed that any additional funding provided to the
Company by SHBC to the Company will not be due until after March 31, 2004. SHBC
is the Company's majority shareholder. In addition to the fundings from SHBC,
the Company has also completed the sale of $3.2 million worth of preferred stock
since June 30, 2003 and expects to receive firm commitments for the sale of an
additional $4.5 million in preferred stock during the third quarter of 2003. The
proceeds from the sale of this preferred stock will be used to satisfy maturing
debt obligations and for working capital needs.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements. Additionally, such estimates and
assumptions affect the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
Revenue from construction contracts and construction revenues on power
plants, with the exception of the power plant constructed on Tinian which is
accounted for using the sales-type lease method of accounting as discussed
below, is recognized using the percentage-of-completion method of accounting,
based upon costs incurred and projected costs. Cost of revenue consists of
direct costs on contracts, including labor and materials, amounts payable to
subcontractors, direct overhead costs, equipment expense (primarily
depreciation, maintenance and repairs), interest associated with construction
projects and insurance costs. Contracts frequently extend over a period of more
than one year and revisions in cost and profit estimates during construction are
recognized in the accounting period in which the facts that require the revision
become known. Losses on contracts, if any, are provided in total when
determined, regardless of the degree of project completion. Claims for
additional contract revenue are recognized in the period when it is probable
that the claim will result in additional revenue and the amount can be
reasonably estimated.
The Company accounts for its leasing activities in accordance with the
requirements of Statement of Financial Accounting Standards No. 13, Accounting
for Leases. Revenue associated with the sale of the Tinian power plant
constructed and sold under a sales-type lease, measured as the present value of
noncancelable rents, was recognized in connection with recording the loss on
sale in 1997 and 1998. The Company recognizes finance lease revenue on the
resulting sales-type lease receivable at a constant rate using the interest
method. Service revenues received from operating and maintaining the Tinian
power plant for the duration of the lease are recognized as earned based on
actual kilowatt hours of electricity produced and delivered to the lessee's
customers. To the extent that variable payments based on kilowatt hours of
production exceed the fair value of operation and maintenance services provided,
the Company recognizes such contingent payments as additional finance lease
revenue as they are earned.
The Company also receives variable monthly payments as compensation for
its production of power. The variable payments are recognized based upon power
produced and billed to the customer as earned during each accounting period.
8
TELESOURCE INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the six months ended June 30, 2003 and 2002
(unaudited)
2. Summary of Significant Accounting Policies, continued
Revenue from the Company's brokering of U.S. fabricated goods is
recognized at the time of shipment. The sales revenues for U.S. fabricated goods
are recognized net of costs of goods sold due to title transferring from the
manufacturer directly to the Company's customer and the risk of loss being borne
by the customer. The Company recognizes management fees and energy sales revenue
in the period in which the commodity is delivered or at the time the work is
performed. Telesource recognizes rental revenue on the accrual basis pursuant to
contractual arrangements between the Company and its customers.
New Accounting Pronouncements
Statement of Financial Accounting Standards No. 150, "Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity," was issued in May 2003. Statement 150 requires instruments within its
scope to be classified as a liability (or, in some cases, as an asset).
Statement 150 is generally effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003 (i.e. July 1, 2003 for
calendar year entities). For financial instruments created before June 1, 2003
and still existing at the beginning of the interim period of adoption,
transition generally should be applied by reporting the cumulative effect of a
change in an accounting principle by initially measuring the financial
instruments at fair value or other measurement attributes of the Statement. The
adoption of Statement 150 did not have a significant effect on the Company's
consolidated financial statements.
In August 2001, the Financial Accounts Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 143 ("SFAS 143"), "Accounting
for Asset Retirement Obligations," which is effective for the Company's 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. The adoption
of SFAS 143 did not have an effect on the Company's financial statements.
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. The adoption of FIN 45 did not have an effect on the
Company's 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." 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. Telesource
has adopted the disclosure provisions of SFAS 148 and has included the
disclosures herein.
9
TELESOURCE INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the six months ended June 30, 2003 and 2002
(unaudited)
2. Summary of Significant Accounting Policies, continued
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. The adoption
of FIN 46 did not have an effect on the Company's financial position, results of
operations, or cash flows.
In June 2002, the Financial Accounting Standards Board issued SFAS No.
146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS
No. 146"). SFAS No. 146 requires that a liability for a cost associated with an
exit or disposal activity be recognized when the liability is incurred. Prior
guidance required that a liability for an exit cost be recognized at the date of
an entity's commitment to an exit plan. This Statement also establishes that
liabilities related to exit or disposal activities should be measured at fair
value. SFAS No. 146 is effective for exit or disposal activities that are
initiated after December 31, 2002. The adoption of SFAS 146 did not have an
effect on the Company's financial position, results of operations or cash flows.
10
TELESOURCE INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the six months ended June 30, 2003 and 2002
(unaudited)
3. Long-Term Debt and Credit Arrangements
Long-term debt consists of the following at June 30, 2003 and December 31,
2002:
June 30, December 31,
2003 2002
----------- ------------
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 Al Ahli
Bank of Kuwait along with three (3) promissory notes valued at $540,000
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
Bank of Hawaii loan, advances on credit line, due on June 3, 2004,
including interest of 1.5% above bank's base rate (4.25% at June 30, 2003),
secured by standby letter of credit for $600,000 issued by Al Ahli Bank of
Kuwait, and guaranteed by SHBC and a corporate guarantee of Telesource
International, Inc. 600,000 600,000
Bank of Hawaii loan, advances on credit line, due on June 3, 2004,
including interest of 1.5% above bank's base rate (4.25% at June 30, 2003),
secured by standby letter of credit for $2,000,000 issued by Al Ahli Bank
of Kuwait, and guaranteed by SHBC and a corporate guarantee of Telesource
International, Inc. 1,900,000 1,900,000
Citytrust Bank loan, borrowings on $1,000,000 revolving line of
credit which expires on September 5, 2003. Due in 90 days from date of
drawdown including interest of 9.5% at June 30, 2003 and December 31, 2002,
secured by assignment of specific invoice from billing on West Tinian
Airport Airside improvement project, guaranteed by Telesource
International, Inc. and one of its officers. 600,000 600,000
Commercial Bank of Kuwait loan, due in full on March 31, 2004,
including interest of 3.35% per annum, secured by an irrevocable standby
letter of credit for $7,500,000 issued by Al Ahli Bank of
Kuwait and guaranteed by SHBC. 7,500,000 --
11
TELESOURCE INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the six months ended June 30, 2003 and 2002
(unaudited)
3. Long-Term Debt and Credit Arrangements, continued
June 30, December 31,
2003 2002
------------- ------------
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. 2,000,000 3,000,000
Bent Marketing Limited loan, bearing interest of 7.0% per annum,
unsecured and maturing on November 19, 2003. 770,000 --
Bent Marketing Limited loan, bearing interest of 7.0% per annum,
unsecured and maturing on December 11, 2003. 560,000 --
Citytrust Bank loan, borrowings on $180,000 revolving line of
credit which expires on June 30, 2004 with interest of 10.0% and secured by
one Commonweath Utilities Corporation ("CUC") promissory note. 1,200 --
Al Ahli Bank of Kuwait loan, due in installments equal to 50% of
project collections for the Palau Capitol project and the Tinian radio
relay expansion project. The note bears variable interest at 3.0% over and
the Central Bank of Kuwait's prime rate 4.75% at June 30, 2003 and will
mature on March 25, 2004. The loan is guaranteed by Sayed Hamid
Behbehani and Sons Co., WLL. 4,898,200 --
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. Should the Company
default on an installment payment, the entire loan
and accrued interest become due and payable. 16,500,000 20,000,000
----------- -----------
Notes payable to banks 35,329,400 34,700,000
Less current portion 25,829,400 20,700,000
----------- -----------
Total long-term debt $ 9,500,000 14,000,000
=========== ===========
12
TELESOURCE INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the six months ended June 30, 2003 and 2002
(unaudited)
4. Shareholders' Equity:
On June 30, 2003, 15,000,000 shares of the Company's common stock
were issued and outstanding. In January 2003, Telesource agreed to issue
warrants to SHBC for the option to purchase of 1,000,000 shares of
Telesource's common stock at an exercise price of $3.00 per share in
connection with SHBC's agreement to provide a standby letter of credit to
Telesource to be used to secure financing with The Hongkong Shanghai
Banking Corporation Limited. These warrants will expire on December 31,
2003.
In January 2002, 2,000,000 warrants were issued to SHBC in
connection with an agreement whereby SHBC granted a $10,000,000 letter of
credit for one year to be used by the Company as it sees fit. The warrants
allow SHBC to receive one share of the Company's common stock for each
warrant upon exercise. The exercise price for the warrants was $1 per
share and the warrants were exercised on June 29, 2002 resulting in an
additional 2,000,000 shares of the Company's common stock being issued.
In January 2002, the Company's Board of Directors adopted the 2002
Non-Employee Director's Stock Option Plan that provides for the issuance
of non-qualified stock options to outside directors. Under the terms of
this plan, options to purchase 285,000 shares of common stock were
reserved for issuance, are granted at not less than fair market value,
become exercisable over a 3 year period from the date of grant (vesting
occurs annually on the grant date at 33.3% of the grant), and expire 10
years from the date of grant.
In January 2002, the Company's Board of Directors adopted the 2002
Incentive Stock Option Plan that provides for the issuance of qualified
stock options to employees. Under the terms of this plan, options to
purchase 888,000 shares of common stock were reserved for issuance, are
granted at not less than fair market value, become exercisable over a 3
year period from the date of grant (vesting occurs annually on the grant
date at 33.3% of the grant), and expire 10 years from the date of grant.
In January 2002, the Company's Board of Directors adopted the 2002
Non-Qualified Stock Option Plan that provides for the issuance of
non-qualified stock options to employees. Under the terms of this plan,
options to purchase 27,000 shares of common stock were reserved for
issuance, are granted at less than fair market value, become exercisable
immediately on the date of grant (vesting occurs annually on the grant
date at 33.3% of the grant), and expire 10 years from the date of grant.
5. Comprehensive Income (Loss)
Comprehensive income (loss) for the three and six months ended June 30,
2003 and 2002 is as follows:
Three Months Six Months
Ended June 30, Ended June 30,
--------------------------- ---------------------------
2003 2002 2003 2002
------------ ----------- ----------- -----------
Net loss $(2,247,678) (831,803) (2,440,099) (1,545,401)
Other comprehensive loss,
net of tax:
Foreign currency (1,710) (100,092) (28,723) (100,092)
----------- -------- ---------- ----------
Comprehensive loss $(2,249,388) (931,895) (2,468,822) (1,645,493)
=========== ======== ========== ==========
13
TELESOURCE INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the six months ended June 30, 2003 and 2002
(unaudited)
6. Earnings Per Share:
In accordance with the disclosure requirements of "SFAS 128", a
reconciliation of the numerator and denominator of basic and diluted
earnings per share is provided as follows:
Six Months Ended June 30 2003 2002
----------- ------------
NUMERATOR - BASIC AND DILUTED LOSS PER SHARE
Net loss $(2,440,099) $ (1,545,401)
=========== ============
DENOMINATOR - BASIC LOSS PER SHARE
Weighted average common stock outstanding 15,000,000 15,000,000
=========== ============
Basic loss per share $ (0.16) $ (0.10)
=========== ============
DENOMINATOR - DILUTED LOSS PER SHARE
Weighted average common stock outstanding 15,000,000 15,000,000
=========== ============
Diluted loss per share $ (0.16) $ (0.10)
=========== ============
Three months ended June 30 2003 2002
----------- ------------
NUMERATOR - BASIC AND DILUTED LOSS PER SHARE
Net loss $(2,247,678) $ (831,803)
=========== ============
DENOMINATOR - BASIC LOSS PER SHARE
Weighted average common stock outstanding 15,000,000 15,000,000
=========== ============
Basic loss per share $ (0.15) $ (0.06)
=========== ============
DENOMINATOR - DILUTED LOSS PER SHARE
Weighted average common stock outstanding 15,000,000 15,000,000
=========== ============
Diluted loss per share $ (0.15) $ (0.06)
=========== ============
The computation of diluted loss per share for the six and three
months ended June 30, 2003 and 2002 does not include shares from
potentially dilutive securities as the assumption of conversion or
exercise of these securities would have an antidilutive effect on loss per
share.
7. Stock Options
The Company accounts for its fixed plan stock options under the
intrinsic value-based method of accounting prescribed by Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees" and related interpretations. As such, compensation expense
would be recorded on the date of grant and amortized over the period of
service only if the current market value of the underlying stock exceeded
the exercise price. No stock-based employee compensation cost is reflected
in net earnings, as each option granted under these plans had an exercise
price equal to the market value of the underlying common stock on the date
of grant.
The following table illustrates the effect on net earnings if the
Company had applied fair value recognition provisions of Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation," to stock-based employee compensation, including
straight-line recognition of compensation costs over the related vesting
periods for fixed awards:
14
TELESOURCE INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the six months ended June 30, 2003 and 2002
(unaudited)
7. Stock Options, continued
Six Months Ended
------------------------------
June 30, 2003 June 30, 2002
------------- -------------
Net loss as reported $(2,440,099) $(1,545,401)
Deduct: Total stock-based employee
compensation expense determined under
the fair value based method for all awards (10,703) (22,465)
Pro forma net loss $(2,450,802) $(1,567,866)
Loss per share:
Basic and diluted - as reported $ (0.16) $ (0.10)
Basic and diluted - pro forma $ (0.16) $ (0.10)
Three Months Ended
------------------------------
June 30, 2003 June 30, 2002
------------- -------------
Net loss as reported $(2,247,678) $(831,803)
Deduct: Total stock-based employee
compensation expense determined under
the fair value based method for all awards (5,352) (11,233)
Pro forma net loss $(2,253,030) $(843,036)
Loss per share:
Basic and diluted - as reported $ (0.15) $ (0.06)
Basic and diluted - pro forma $ (0.15) $ (0.06)
8. Commitments and Contingent Liabilities:
The Company is involved in various litigation proceedings arising in
the ordinary course of business. In the opinion of management, the
ultimate disposition of these matters will not have a material adverse
effect on the Company's financial position, results of operations or
liquidity.
9. Business Segment Information:
Telesource has three operating segments: power generation and
construction of power plants, trading and construction services. The power
generation and construction of power plants segment includes sales-type
lease revenues recognized. There were no material amounts of transfers
between segments. Any intersegment revenues have been eliminated. The
following table sets forth certain segment information for the periods
indicated:
15
TELESOURCE INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the six months ended June 30, 2003 and 2002
(unaudited)
8. Business Segment Information, continued:
For the Six Months Ended
June 30, 2003
---------------------------------------------------------------------
Power Generation and
Construction of
Power Plants Trading Construction Total
-------------------- --------- ------------ ----------
Revenue $ 1,283,860 -- 8,426,912 9,710,772
Interest income -- -- -- --
Interest expense 820,219 -- -- 820,219
Depreciation and amortization 4,339 11,555 169,568 185,462
Income tax expense -- -- -- --
Net loss (367,285) (10,622) (2,062,192) (2,440,099)
Total capital expenditures -- -- 514, 777 514,777
Total assets 13,832,680 3,575,979 8,569,007 25,977,666
For the Six Months Ended
June 30, 2002
----------------------------------------------------------------------
Power Generation and
Construction of
Power Plants Trading Construction Total
-------------------- --------- ------------ ----------
Revenue $ 1,190,834 298,731 9,122,902 10,612,467
Interest income -- -- 2,766 2,766
Interest expense 895,896 -- 51,853 947,749
Depreciation and amortization 2,062 9,151 218,654 229,867
Income tax expense -- -- -- --
Net loss (308,195) (242,584) (994,622) (1,545,401)
Total capital expenditures -- 9,902 4,020 13,922
Total assets 14,001,792 292,575 11,756,691 26,051,058
For the Three Months Ended
June 30, 2003
-----------------------------------------------------------------------
Power Generation and
Construction of
Power Plants Trading Construction Total
-------------------- --------- ------------ ----------
Revenue $ 706,695 -- 2,735,801 3,442,496
Interest income -- -- -- --
Interest expense 391,042 -- -- 391,042
Depreciation and amortization 3,308 5,503 74,209 83,020
Income tax expense -- -- -- --
Net loss (514,242) (5,036) (1,728,400) (2,247,678)
Total capital expenditures -- -- 26,371 26,371
Total assets 13,832,680 3,575,979 8,569,007 25,977,666
16
TELESOURCE INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the six months ended June 30, 2002 and 2001
(unaudited)
8. Business Segment Information, continued:
For the Three Months Ended
June 30, 2002
--------------------------------------------------------------------
Power Generation and
Construction of
Power Plants Trading Construction Total
-------------------- --------- -------------- ----------
Revenue $ 612,879 48,370 4,250,437 4,911,686
Interest income -- -- 2,764 2,764
Interest expense 447,948 -- 41,624 489,572
Depreciation and amortization 1,031 4,575 138,620 144,226
Income tax expense -- -- -- --
Net income/(loss) (533,836) 41,290 (339,257) (831,803)
Total capital expenditures -- 3,386 -- 3,386
Total assets 14,001,792 292,575 11,756,691 26,051,058
17
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis of the Company's financial condition and
results of operations should be read in conjunction with the Company's unaudited
condensed consolidated financial statements and the notes thereto included
elsewhere herein.
Results of Operations for the six months ended June 30, 2003 compared to the six
months ended June 30, 2002
Revenues
The consolidated operating results for the six months ended June 30, 2003 and
2002 and the consolidated balance sheet as of June 30, 2003 are derived from,
and qualified by reference to, the unaudited condensed consolidated financial
statements.
Construction Revenues. Construction revenues, including construction revenues
from the related party Retsa (a local development company owned by Nasrallah
Behbehani, a Telesource International significant shareholder), decreased 11.8%
to $8.1 million from $9.1 million for the six months ended June 30, 2003 and
2002, respectively. The decrease is due to funding issues related to the
Company's project to construct a prison. The funding issues resulted in a work
slow down on this project during the second quarter of 2003 and is expected to
be resolved later during 2003. In addition to the funding issues on the prison
project, the Company also experienced a cost overrun on the airport expansion
project. The airport expansion costs overrun resulted in a reduction of
forecasted profit for the airport project of $1.1 million and is attributed to
costs incurred to execute tasks for which change orders are under negotiation.
The change orders have not been completed and approved and therefore, the
expected revenue from the change orders not executed is not included. Telesource
expects that the change orders under negotiation will be executed later this
year; however, if the change orders are not agreed upon, Telesource will file a
claim on the project seeking collection of costs incurred to execute tasks for
which change orders were under negotiation. Telesource's accounting policy
requires executed change orders prior to recognition additional revenue
resulting from change orders. Related party construction revenues from Retsa
were none and 8.1% of total construction revenues for the six months ended June
30, 2003 and 2002, respectively.
Service Fees - Power Generation Plant. Service fees - power generation plant
increased 30.9% to $693,848 from $530,208 for the six months ended June 30, 2003
and 2002, principally to the addition of the operation and maintenance contract
for two power stations in Fiji beginning in late May 2003. Service fees are
expected to grow in future periods due to an expected increase in tourist
arrivals on Tinian after the completion of the Tinian airport runway during
2003, along with increases due to the Fiji operation and maintenance contract.
Sales Revenues. Sales revenues net of costs, including related party sales, were
none during the six months ended June 30, 2003 as compared to $298,731 for the
six months ended June 30, 2002. Sales revenues are not expected to be a
significant component of revenues for the foreseeable future.
Rental Income. Rental income increased to $379,197 from $3,300 for the six
months ended June 30, 2003 and 2002, respectively. The growth in rental income
is the result of a short term lease of seven bucket trucks to a public utility
on Guam in connection with clean up efforts on a super typhoon which struck Guam
in December 2002. The short term lease of the bucket trucks was completed in
April 2003. Rental income is not expected to be a significant component of
revenues for the foreseeable future.
Finance Lease Revenues. Finance lease revenues decreased 10.7% to $590,012 from
$660,626 for the six months ended June 30, 2003 and 2002, respectively. The
decrease is due to the declining balance of minimum lease payments, which are
amortized to give a constant rate of return.
Expenses
Construction Costs. Total construction costs (includes related party and third
party) increased 2.3% to $7.5 million from $7.4 million for the six months ended
June 30, 2003 and 2002, respectively. The growth in construction costs is a
direct result of an increase in construction activities, primarily due to the
airport expansion project on Tinian. Construction costs as a percentage of
construction revenues were 93.1% and 80.3% for the six months ended June
18
30, 2003 and 2002, respectively. The lower gross margin on construction revenues
during the first six months of 2003 is attributed to a cost over run on the West
Tinian Airport expansion project due to delays encountered as a result of
weather along with a delay in the processing and approval of expected change
orders for the project. The change orders have not been completed and approved
and therefore, the costs incurred have been recognized without any construction
revenue. Telesource expects that the change orders under negotiation will be
executed later this year; however, if the change orders are not agreed upon,
Telesource will file a claim on the project seeking collection of costs incurred
to execute tasks for which change orders were under negotiation. Telesource's
accounting policy requires executed change orders prior to recognition
additional revenue resulting from change orders.
Operations and Maintenance Costs - Power Generation Plant. Operations and
maintenance costs - power generation plant increased 13.6% to $682,972 from
$601,071 for the six months ended June 30, 2003 and 2002, respectively. The
growth in operations and maintenance costs - power generation plant is due to
the additional costs added in connection with the two additional power stations
the Company began operating in Fiji in late May 2003 under a 20 year operation
and maintenance contract.
Salaries and Employee Benefits. Salaries and employee benefits increased 14.9%
to $1,024,671 from $891,644 for the six months ended June 30, 2003 and 2002,
respectively. The increase in salaries and employee benefits is attributed to
additional management and administrative staffing added under the new operation
and maintenance contract the Company has in Fiji and for the office in Palau.
Occupancy and Equipment. Occupancy and equipment expenses decreased 14.6% to
$145,333 from $170,201 for the six months ended June 30, 2003 and 2002,
respectively. Management initiated steps during the third quarter of 2002 to
further reduce occupancy and equipment expense by reducing the amount of office
space required by the Company.
General and Administrative Expenses. General and administrative expenses
decreased 10.9% to $2.0 million from $2.2 million for the six months ended June
30, 2003 and 2002, respectively. The decrease is attributed primarily to
management's efforts to reduce operating costs . The lower costs are attributed
to a reduction in professional fees of 41.6% to $288,801 from $494,367 for the
six months ended June 30, 2003 and 2002, respectively.
Other Expense, Net. Other expense decreased 13.3% to $803,727 from $927,420 for
the six months ended June 30, 2003 and 2002, respectively. The decrease is
primarily attributed to declining interest rates which resulted in lower
interest expense for the Company.
Results of Operations for the three months ended June 30, 2003 compared to the
three months ended June 30, 2002
Revenues
Construction Revenues. Construction revenues, including construction revenues
from the related party Retsa (a local development company owned by Nasrallah
Behbehani, a Telesource International significant shareholder), decreased 38.8%
to $2.6 million from $4.3 million for the three months ended June 30, 2003 and
2002, respectively. The decrease is due to funding issues related to the
Company's project to construct a prison. The funding issues resulted in a work
slow down on this project during the second quarter of 2003 and is expected to
be resolved later during 2003. In addition to the funding issues on the prison
project, the Company also experienced a cost overrun on the airport expansion
project. The airport expansion costs overrun resulted in a reduction of
forecasted profit for the airport project of $1.1 million and is attributed to
costs incurred to execute tasks for which change orders are under negotiation.
The change orders have not been completed and approved and therefore, the
expected revenue from the change orders not executed is not included. Telesource
expects that the change orders under negotiation will be executed later this
year; however, if the change orders are not agreed upon, Telesource will file a
claim on the project seeking collection of costs incurred to execute tasks for
which change orders were under negotiation. Related party construction revenues
from Retsa were none and 7.5% of total construction revenues for the three
months ended June 30, 2003 and 2002, respectively.
Service Fees - Power Generation Plant. Service fees - power generation plant
increased 45.2% to $416,312 from $286,776 for the three months ended June 30,
2003 and 2002, respectively. The growth in service fees - power generation plant
is due to principally to the addition of the operation and maintenance contract
for two power stations in Fiji beginning in late May 2003.
19
Sales Revenues. Sales revenues net of costs, including related party sales,
decreased to none from $47,560 for the three months ended June 30, 2003 and
2002, respectively. Sales revenues are not expected to be a significant
component of revenues for the foreseeable future.
Rental Income. Rental income increased to $133,080 from $1,365 for the three
months ended June 30, 2003 and 2002, respectively. The growth in rental income
is the result of a short term lease of seven bucket trucks to a public utility
on Guam in connection with clean up efforts on a super typhoon which struck Guam
in December 2002. The short term lease of the bucket trucks was completed in
April 2003. Rental income is not expected to be a significant component of
revenues for the foreseeable future.
Finance Lease Revenues. Finance lease revenues decreased 11.0% to $290,383 from
$326,103 for the three months ended June 30, 2003 and 2002, respectively. The
decrease is due to the declining balance of minimum lease payments, which are
amortized to give a constant rate of return.
Expenses
Construction Costs. Total construction costs (includes related party and third
party) decreased 5.9% to $3.2 million from $3.4 million for the three months
ended June 30, 2003 and 2002, respectively. Construction costs as a percentage
of construction revenues were 123.2% and 80.2% for the three months ended June
30, 2003 and 2002, respectively. The lower gross margin on construction revenues
during the second quarter of 2003 is attributed to a cost over run on the West
Tinian Airport expansion project due to delays encountered as a result of
weather,along with a delay in the processing and approval of expected change
orders for the project. The change orders have not been completed and approved
and therefore, the costs incurred have been recognized without any construction
revenue. Telesource expects that the change orders under negotiation will be
executed later this year; however, if the change orders are not agreed upon,
Telesource will file a claim on the project seeking collection of costs incurred
to execute tasks for which change orders were under negotiation. Telesource's
accounting policy requires executed change orders prior to recognition
additional revenue resulting from change orders.
Operations and Maintenance Costs - Power Generation Plant. Operations and
maintenance costs - power generation plant increased 75.7% to $465,180 from
$264,797 for the three months ended June 30, 2003 and 2002, respectively due to
the addition of the operation and maintenance of two power stations in Fiji in
late May 2003.
Salaries and Employee Benefits. Salaries and employee benefits increased 19.0%
to $536,572 from $450,984 for the three months ended June 30, 2003 and 2002,
respectively. The increase in salaries and employee benefits is attributed to
additional management and administrative staffing added under the new operation
and maintenance contract the Company has in Fiji and for the office opened in
Palau in April of 2002.
Occupancy and Equipment. Occupancy and equipment expenses increased 2.0% to
$84,764 from $83,093 for the three months ended June 30, 2003 and 2002,
respectively. Management initiated steps during the third quarter of 2002 to
further reduce occupancy and equipment expense by reducing the amount of office
space required by the Company. The costs reduction efforts were offset by
additional costs added during the second quarter under the new operation and
maintenance contract added for Fiji.
General and Administrative Expenses. General and administrative expenses
decreased 6.9% to $989,700 from $1.06 million for the three months ended June
30, 2003 as compared to the same period in 2002. The decrease is attributed
primarily to management's efforts to reduce operating costs. The lower costs are
attributed to a reduction in professional fees of 50.6% to $161,889 from
$327,867 for the three months ended June 30, 2003 and 2002, respectively.
Other Expense, Net. Other expense decreased 13.9% to $408,314 from $474,355 for
the three months ended June 30, 2003 and 2002, respectively. The decrease is
primarily attributed to declining interest rates which resulted in lower
interest expense for the Company.
20
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 June 30, 2003:
Contracts as of December 31, 2002 $17,472,516
New contracts and approved change orders added during the first
six months of 2003 11,666,891
-----------
29,139,407
Less: Construction revenue for the six months ended
June 30, 2003 8,047,715
-----------
Balance at June 30, 2003 $21,091,692
===========
Contractual Obligations and Commercial Commitments
The Company finances it operations through bank borrowings and also leases
certain facilities and equipment under non-cancelable operating leases, which
expire at various dates through 2005. The Company conducts most of its
operations through construction projects and most of the Company's obligations
are related to these construction contracts. Commercial commitments include
accounts payable, accrued expenses, billings in excess of costs and estimated
earnings, income taxes payable and other current liabilities and also includes
$25,394,000 in bonding requirements for construction projects currently in
progress at June 30, 2003. Contractual cash obligations and commitments relating
to debt and lease payments are as follows:
Operating Commercial
Debt Leases Commitments
--------------- --------------- --------------
(in thousands) (in thousands) (in thousands)
Through June 2004 $25,829 $54 $35,137
July 2004 to June 2007 9,500 -- --
Thereafter -- -- --
------- --- -------
Total $35,329 $54 $35,137
======= === =======
Liquidity and Capital Resources
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 June 30, 2003, 15,000,000 shares of Telesource
International's common stock were issued and outstanding.
Cash used in operating activities during the six months ended June 30, 2003 and
2002 was $3.9 million and $2.3 million, respectively. The cash used in operating
activities was principally due to an increase in accounts receivable during the
first six months of 2003, which is further attributed to the airport and prison
projects.
Cash used in investing activities was $514,777 and $13,922 for the six months
ended June 30, 2003 and 2002, respectively. The cash used in investing
activities during 2003 is attributed to capital purchases of bucket trucks
leased on Guam and used in the super typhoon clean up efforts.
Cash provided by financing activities generated $4.6 million and $2.7 million
for the six months ended June 30, 2003 and 2002, respectively. The cash
generated by financing activities came from additional borrowings and the
proceeds from the sale of $4.0 million worth of preferred stock during 2003.
21
Telesource International had a working capital deficit of $22.8 million at June
30, 2003. The deficit is a result of all loans, with the exception of $9.5
million owed on the Commercial Bank of Kuwait credit line, being classified as
short term atf June 30, 2003. 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 June 30, 2003:
Payment Date Principal Payment
----------------- -------------------
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 $16,500,000
===========
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 June 30, 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 and an additional 466,666 shares of preferred stock for $700,000 in
July 2003. The Company has also sold an additional 1,666,667 shares of preferred
stock for $2.5 million in August 2003 and expects to sell an additional
3,000,000 shares for $4.5 million in the third quarter 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.
Subsequent Events
The employment contract the Company has with its CEO and President, K.J.
Semikian, matured on July 1, 2003. During July 2003, the Company and Mr.
Semikian agreed to extend the current contract until the next Board meeting
scheduled for early November 2003. The employment contract the Company has with
its Executive Vice President, Nidal Zayed will mature on September 1, 2003.
During July 2003, the Company and Mr. Zayed agreed to extend the current
contract until the next Board meeting scheduled for early November 2003.
22
On July 18, 2003, the Company completed a $700,000 offering 466,666 shares of
Series A 6% convertible preferred stock which matures in five years. The Company
has the option to force a conversion of this preferred stock into common stock
at maturity. On August 15, 2003, the Company completed a $2,500,000 offering of
1,666,666 shares of Series A 6% convertible preferred stock which matures in
five years. The Company has the option to force a conversion of this preferred
stock into common stock at maturity.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Registrant's primary interest rate risk relates to its long-term debt
obligations. As of June 30, 2003 and December 31, 2002, the Registrant had total
debt obligations, including current and long-term obligations, totaling $35.3
million and $34.7 million, respectively. Of these amounts, fixed rate
obligations totaled $11.4 million and $4.7 million, and variable rate
obligations totaled $23.9 million and $30.0 million, as of June 30, 2003 and
December 31, 2002, respectively. Assuming a 1.0% increase in interest rates on
the Registrant's variable rate obligations, annualized interest expense would
have been approximately $239,000 higher in 2003 and $300,000 higher in 2002
based on the respective outstanding balances at June 30, 2003 and December 31,
2002. The Registrant has no interest rate swap or exchange agreements.
There were $133,568 of the Registrant's gross revenues for the six months ended
June 30, 2003 which were denominated in currencies other than the U.S. dollar.
These revenues were earned under the operation and maintenance contract for
Fiji. All other contracts currently underway for the Registrant are denominated
in the U.S. dollar; accordingly, the Registrant has no material exposure to
foreign currency exchange risk at June 30, 2003. The Registrant has no foreign
currency exchange contracts.
Based on the nature of the Registrant's business, it has no direct exposure to
commodity price risk.
Item 4. Controls and Procedures
As of the end of the period covered by this report, an evaluation was performed
under the supervision and with the participation of the Company's management,
including the Chief Executive Officer and the Chief Financial Officer, of the
effectiveness of the Company's disclosure controls and procedures. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that the Company's disclosure controls and procedures are effective to
ensure that information required to be disclosed by the Company in reports that
it files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules.
There have been no significant changes in the Company's internal controls over
financial reporting or in other factors that could significantly affect those
controls subsequent to the date the evaluation was carried out.-
23
PART II. Other Information
ITEM 1. LEGAL PROCEEDINGS.
There are no material developments in legal proceedings previously
reported in our Form 10-K for the year 2002 and no new material
legal proceedings have become reportable events during the six
months ended June 30, 2003.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On June 16, 2003, Telesource International, Inc. held its 2003
annual meeting of stockholders. At the annual meeting, the
stockholders (i) elected to the Board of Directors Ralph Beck, Jeff
Adams, Max Engler, Ibrahim Ibrahim, Weston Marsh, K.J. Semikian and
Nidal Zayed; and (ii) ratified the appointment of KPMG LLP as
Telesource International's independent auditors.
The following table sets forth, with respect to each matter voted
upon at the annual meeting, the number of votes cast for, the number
of votes cast against, and the number of votes abstaining with
respect to such matter:
Votes For Votes Against
---------- -------------
Election of Directors:
Ralph Beck 11,345,200 --
Jeff Adams 11,345,200 --
Max Engler 11,345,200 --
Ibrahim Ibrahim 11,345,200 --
Weston Marsh 11,345,200 --
K.J. Semikian 11,345,200 --
Nidal Z. Zayed 11,345,200 --
Broker
Votes For Votes Against Abstentions Non-Votes
----------- --------------- ------------- ----------
Ratification of Auditors 11,345,200 -- 150 --
24
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibit 31.1 TELESOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
CERTIFICATION PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002 - Chief Executive Officer
Exhibit 31.2 TELESOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
CERTIFICATION PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002 - Chief Financial Officer
Exhibit 32.1 Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2003.
Exhibit 32.2 Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2003.
(b) Reports on Form 8-K.
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Telesource International, Inc.
----------------------------------------
(Registrant)
Date August 20, 2003 /s/ K.J. Semikian
----------------------------------------
K.J. Semikian
President and Chief Executive Officer
August 20, 2003 /s/ Bud Curley
----------------------------------------
Bud Curley
Chief Financial Officer
26
Index to Exhibits
Exhibits
----------
31.1 TELESOURCE INTERNATIONAL, INC. AND SUBSIDIARIES CERTIFICATION
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 - Chief
Executive Officer (1)
31.2 TELESOURCE INTERNATIONAL, INC. AND SUBSIDIARIES CERTIFICATION
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 - Chief
Financial Officer (1)
32.1 Certification Pursuant to Section 1350 of Chapter 63 of Title 18 of
the United States Code -- Chief Executive Officer -- Corporation (1)
32.2 Certification Pursuant to Section 1350 of Chapter 63 of Title 18 of
the United States Code -- Chief Financial Officer -- Corporation (1)
(1) Filed herewith.
27