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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 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 November 17, 2003.
TELESOURCE INTERNATIONAL, INC.
TABLE OF CONTENTS
Page No.
-------------
PART I. Financial Information
Item 1. Financial Statements: 1
Condensed Consolidated Balance Sheets -
September 30, 2003 and December 31, 2002 2
Condensed Consolidated Statements of Operations -
nine months ended September 30, 2003 and 2002 3
Condensed Consolidated Statements of Operations -
three months ended September 30, 2003 and 2002 4
Condensed Consolidated Statements of Cash Flows -
nine months ended September 30, 2003 and 2002 5
Notes to Condensed Consolidated Financial Statements 6 - 17
Item 2. Management's Discussion and Analysis of 18 - 23
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 23
PART II. Other Information
Item 1. Legal Proceedings 24
Item 6. Exhibits and Reports on Form 8-K 24
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. Although
certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted pursuant to such
rules and regulations, the Company believes that the disclosures are adequate to
make the information presented not misleading. The statements reflect all
adjustments which are, in the opinion of management, necessary for a fair
presentation of the results for the periods presented. All such adjustments are
of a normal and recurring nature unless specified otherwise. These condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and the notes thereto included in the
Company's latest Annual Report on Form 10-K.
This Quarterly Report on Form 10-Q, and in particular the "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
section in Part I, contains forward-looking statements concerning future
operations and performance of the Company. Forward-looking statements are
subject to market, operating and economic risks and uncertainties that may cause
the Company's actual results in future periods to be materially different from
any future performance suggested herein. Factors that may cause such differences
include, among others: increased competition, increased costs, changes in
general market conditions, changes in the regulatory environment, changes in
anticipated levels of government spending on infrastructure, and changes in loan
relationships or sources of financing. Such forward-looking statements are made
pursuant to the Safe Harbor Provisions of the Private Securities Litigation
Reform Act of 1995.
1
TELESOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
September 30, 2003 and December 31, 2002
September 30, December 31,
Assets 2003 2002
------------- -----------
(unaudited)
Current assets:
Cash and cash equivalents $ 1,099,420 244,723
Accounts receivable 6,185,511 3,818,268
Current portion of net investment in sales-type lease 1,735,540 1,617,840
Costs and estimated earnings in excess of billings 6,721,421 5,448,663
Prepaid expenses and other current assets 317,660 261,379
------------ -----------
Total current assets 16,059,552 11,390,873
Net investment in sales-type lease - long term 9,944,802 11,261,571
Property, plant, and equipment, net 2,636,341 2,317,617
Other assets 145,905 190,274
------------ -----------
Total assets $ 28,786,600 25,160,335
============ ===========
Liabilities and Stockholders' Deficit
Current liabilities:
Current portion of long-term debt $ 24,084,991 20,700,000
Accounts payable 5,641,494 3,879,364
Accounts payable - related party 3,520,227 3,736,283
Accrued expenses 2,907,348 3,320,338
Billings in excess of costs and estimated earnings 348,149 --
------------ -----------
Total current liabilities 36,502,209 31,635,984
Long-term debt 9,430,000 14,000,000
Other long-term liabilities 133,505 125,000
Convertible preferred stock, authorized 10,000,000 shares:
issued and outstanding none and 2,000,000 shares
at September 30, 2003 and December 31, 2002, respectively -- 3,000,000
------------ -----------
Total liabilities 46,065,714 48,760,984
------------ -----------
Stockholders' deficit:
Convertible preferred stock, authorized 10,000,000 shares:
issued and outstanding 7,133,332 shares at September 30, 2003 10,700,000 --
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 (33,836,714) (29,431,981)
Accumulated comprehensive loss -
foreign currency translation (89,625) (115,893)
------------ -----------
Total stockholders' deficit (17,279,114) (23,600,649)
Commitments and contingencies (note 8) -- --
------------ -----------
Total liabilities and stockholders' deficit $ 28,786,600 25,160,335
============ ===========
See accompanying notes to condensed consolidated financial statements.
2
TELESOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (unaudited)
Nine months ended September 30, 2003 and 2002
2003 2002
------------ -----------
Revenues:
Construction revenues $ 13,228,985 13,388,595
Construction revenues - related party -- 754,982
Service fees - power generation plant 1,621,242 836,004
Sales, net 32,235 253,158
Sales, net - related party -- 7,688
Rental income 379,277 6,095
Finance lease revenue 870,931 978,110
------------ -----------
Gross revenues 16,132,670 16,224,632
Costs and expenses:
Construction costs 12,926,656 11,096,457
Operation and maintenance costs - power generation plant 1,556,932 904,975
------------ -----------
Gross profit 1,649,082 4,223,200
------------ -----------
Operating expenses:
Salaries and employee benefits 1,337,858 1,297,717
Occupancy and equipment 219,919 259,289
General and administrative 2,946,469 3,129,165
------------ -----------
Total operating expenses 4,504,246 4,686,171
------------ -----------
Operating loss (2,855,164) (462,971)
------------ -----------
Other income (expense):
Interest income -- 3,592
Interest expense (1,565,366) (1,373,331)
Other income, net 15,797 35,488
------------ -----------
Total other expense (1,549,569) (1,334,251)
------------ -----------
Loss before income taxes (4,404,733) (1,797,222)
Income tax expense -- --
------------ -----------
Net loss $ (4,404,733) (1,797,222)
============ ===========
Basic and diluted net loss per share $ (0.29) (0.12)
============ ===========
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 September 30, 2003 and 2002
2003 2002
------------ -----------
Revenues:
Construction revenues $ 5,181,270 5,023,975
Construction revenues - related party -- --
Service fees - power generation plant 927,394 305,796
Sales, net 32,235 3,576
Sales, net - related party -- 5,635
Rental income 80 4,193
Finance lease revenue 280,919 317,484
------------ -----------
Gross revenues 6,421,898 5,660,659
Costs and expenses:
Construction costs 5,430,630 3,820,105
Operation and maintenance costs - power generation plant 873,960 303,904
------------ -----------
Gross profit 117,308 1,536,650
------------ -----------
Operating expenses:
Salaries and employee benefits 313,187 373,833
Occupancy and equipment 74,586 89,088
General and administrative 948,327 918,719
------------ -----------
Total operating expenses 1,336,100 1,381,640
------------ -----------
Operating income (loss) (1,218,792) 155,010
------------ -----------
Other income (expense):
Interest income -- 3,592
Interest expense (745,147) (425,582)
Other income (expense), net (695) 15,159
------------ -----------
Total other expense (745,842) (406,831)
------------ -----------
Loss before income taxes (1,964,634) (251,821)
Income tax expense -- --
------------ -----------
Net loss $ (1,964,634) (251,821)
============ ===========
Basic and diluted net loss per share $ (0.13) (0.02)
============ ===========
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)
Nine months ended September 30, 2003 and 2002
2003 2002
------------ -----------
Cash flows from operating activities:
Net loss $ (4,404,733) (1,797,222)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 283,864 329,322
Changes in assets and liabilities:
Receivables (2,367,243) (2,444,938)
Prepaid expenses and other current assets (56,281) (178,390)
Costs and estimated earnings in excess of billings (924,609) (1,813,032)
Net investment in sales-type lease 1,199,069 1,091,890
Other assets 44,369 98,876
Accounts payable 1,546,075 1,634,947
Accrued expenses (412,990) 14,900
Income taxes payable -- (1,089)
Other liabilities 34,773 756,451
------------ -----------
Net cash used in operating activities (5,057,706) (2,308,285)
------------ -----------
Cash flows from investing activities:
Capital expenditures (602,588) (13,922)
------------ -----------
Net cash used in investing activities (602,588) (13,922)
------------ -----------
Cash flows from financing activities:
Proceeds from sale of preferred stock 7,700,000
Proceeds from borrowings 14,974,242 12,800,000
Principal payments on debt (16,159,251) (10,500,000)
------------ -----------
Net cash provided by financing activities 6,514,991 2,300,000
------------ -----------
Net increase in cash and cash equivalents 854,697 (22,207)
Cash and cash equivalents at beginning of period 244,723 204,752
------------ -----------
Cash and cash equivalents at end of period $ 1,099,420 182,545
============ ===========
Supplemental disclosure:
Cash paid for interest $ 1,466,386 1,610,948
See accompanying notes to condensed consolidated financial statements.
5
TELESOURCE INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the nine months ended September 30, 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. The Company has an office in the
Republic of Palau which handles construction activities in Palau.
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 September 30, 2003, and the results of operations
and cash flows for the nine month and three month periods ended September 30,
2003 and 2002. The unaudited condensed consolidated statements of operations for
such interim periods are not necessarily indicative of results for the full
year.
6
TELESOURCE INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the nine months ended September 30, 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 1998 through 2002, the Company experienced significant operating
losses with corresponding reductions in working capital and net worth. As of
September 30, 2003, the Company's current liabilities exceeded its current
assets by $20,442,657. 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
September 30, 2003 the Company had total outstanding debt of $33,514,991 of
which $24,084,991 is due in the next twelve months. As of September 30, 2003 the
Company had an accumulated deficit of $33,836,714 and total stockholders'
deficit of $17,279,114.
The Company incurred operating losses of $2,855,164 and $462,971 for the
nine months ended September 30, 2003 and 2002, respectively, 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 nine months ended September
30, 2003 and 2002 was $5.1 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 $602,588 for the nine months ended
September 30, 2003 as compared to 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 related to the bucket
trucks used on Guam for the super typhoon clean up efforts. The remaining
balance for capital purchases of $116,182 was used to purchase office and
construction equipment.
Cash provided by financing activities was $6.5 million for the nine months
ended September 30, 2003 as compared to cash provided by financing activities of
$2.3 million for the same period in 2002. The cash generated by financing came
from the proceeds from the sale of $7.7 million of preferred stock during 2003,
which partially offset by net repayments of debt.
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 2004 through
increasing revenues from existing long-term power plant operation and
maintenance agreements as a result of continued expansion on the island of
Tinian and a new operation and maintenance agreement for three power plants in
Fiji. 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 nine months ended September 30, 2003 and 2002
(unaudited)
2. Summary of Significant Accounting Policies, continued
Although management believes that the Company will be cash flow negative in 2003
including debt payments, management expects to generate additional cash flows
from the sale of preferred stock to cover the negative cash flows. 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
$31,304,616 of the Company's total debt of $33,514,991. SHBC has further agreed
that any additional funding provided to the Company by SHBC 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
$7.7 million worth of preferred stock during the nine months ended September 30,
2003, and has received firm commitments for the sale of an additional $4.0
million in preferred stock during the last three months 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 effective
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 nine months ended September 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 Accounting 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 nine months ended September 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 December 31, 2003. The
adoption of FIN 46 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 nine months ended September 30, 2003 and 2002
(unaudited)
3. Long-Term Debt and Credit Arrangements
Long-term debt consists of the following at September 30, 2003 and
December 31, 2002:
September 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 4.0%, 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. 562,509 600,000
Bank of Hawaii loan, advances on credit line, due on June 3, 2004,
including interest of 4.0%, 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. 1,781,250 1,900,000
Citytrust Bank loan, borrowings on $1,000,000 revolving line of
credit which expires on December 4, 2003. Due in 90 days from date of
drawdown including interest of 9.5% at September 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 530,375 600,000
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 nine months ended September 30, 2003 and 2002
(unaudited)
3. Long-Term Debt and Credit Arrangements, continued
September 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 3.95%. 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 February 15, 2005 1,330,000 --
Bent Marketing Limited loan, bearing interest of 7.0% per annum,
unsecured and maturing on September 25, 2005 350,000 --
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 the Central Bank of Kuwait's prime rate (4.75% at
September 30, 2003) and will mature on March 25, 2004. The loan is
guaranteed by Sayed Hamid Behbehani and Sons Co., WLL 4,710,857 --
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 14,750,000 20,000,000
----------- ----------
Notes payable to banks 33,514,991 34,700,000
Less current portion 24,084,991 20,700,000
----------- ----------
Total long-term debt $ 9,430,000 14,000,000
=========== ==========
12
TELESOURCE INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the nine months ended September 30, 2003 and 2002
(unaudited)
4. Shareholders' Equity
On September 30, 2003, 15,000,000 shares of the Company's common
stock were issued and outstanding. In July 2003, Telesource agreed to
issue 1,357,142 warrants to purchasers of 2,133,333 shares preferred
stock. The 1,357,142 warrants have an exercise price of $1.50 per share
and expire five years from date of issuance.
On March 6, 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 and paid for 2,000,000 shares of
preferred stock in December 2002 and has now purchased the total amount of
subscribed preferred stock.
On March 31, 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 provided for the elimination of the
collateral provided to Al Soor, elimination of the redemption feature,
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%. The
restructure resulted in the reclassification of the preferred stock to
equity.
On March 20, 2003, the Company completed a $1,000,000 offering of
666,666 shares of Series A, 6% convertible preferred stock. On July 18,
2003, the Company completed a $700,000 offering of 466,666 shares of
Series A, 6% convertible preferred stock. On August 15, 2003, the Company
completed a $2,500,000 offering of 1,666,667 shares of Series A, 6%
convertible preferred stock which matures in five years. On August 29,
2003, the Company completed a $500,000 offering of 333,333 shares of
Series A, 6% convertible preferred stock. The preferred stock sold has
been to three unrelated third parties. The Company has the option to force
a conversion of all issued preferred stock into common stock at maturity.
In January 2002, Telesource agreed to issue warrants to SHBC to
purchase 1,000,000 shares of Telesource's common stock at an exercise
price of $3.00 per share in connection with SHBC's agreement to provide a
standby letter of credit to Telesource to be used to secure financing with
The Hongkong Shanghai Banking Corporation Limited. These warrants will
expire on December 31, 2003.
In January 2001, 2,000,000 warrants were issued to SHBC in
connection with an agreement whereby SHBC granted a $10,000,000 letter of
credit for one year to be used by the Company. The warrants allow SHBC to
receive one share of the Company's common stock for each warrant upon
exercise. The exercise price for the warrants was $1 per share and the
warrants were exercised on June 29, 2001 resulting in an additional
2,000,000 shares of the Company's common stock being issued.
In January 2000, the Company's Board of Directors adopted the 2000
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 5 year period from the date of grant (vesting
occurs annually on the anniversary of the grant date at 20.0% of the
grant), and expire 10 years from the date of grant.
In January 2000, the Company's Board of Directors adopted the 2000
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 5
year period from the date of grant (vesting occurs annually on
13
the anniversary of the grant date at 20.0% of the grant), and expire 10
years from the date of grant.
In January 2000, the Company's Board of Directors adopted the 2000
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, and expire 10 years from the date of
grant.
14
TELESOURCE INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the nine months ended September 30, 2003 and 2002
(unaudited)
5. Comprehensive Loss
Comprehensive loss for the three and nine months ended September 30,
2003 and 2002 is as follows:
Nine Months Three Months
Ended September 30, Ended September 30,
------------------------------ ---------------------------
2003 2002 2003 2002
----------- ---------- ---------- --------
Net loss $(4,404,733) (1,797,222) (1,964,634) (251,821)
Other comprehensive loss:
Foreign currency translation 26,268 (90,803) 2,455 9,289
----------- ---------- ---------- --------
Comprehensive loss $(4,378,465) (1,888,025) (1,962,179) (242,532)
=========== ========== ========== ========
6. Earnings Per Share
In accordance with the disclosure requirements of SFAS 128 "Earnings
Per Share", a reconciliation of the numerator and denominator of basic and
diluted earnings per share is provided as follows:
Nine Months Ended September 30,
--------------------------------
2003 2002
----------- ------------
NUMERATOR - BASIC AND DILUTED LOSS PER SHARE
Net loss $(4,404,733) $ (1,797,222)
=========== ============
DENOMINATOR - BASIC LOSS PER SHARE
Weighted average common stock outstanding 15,000,000 15,000,000
=========== ============
Basic loss per share $ (0.29) $ (0.12)
=========== ============
DENOMINATOR - DILUTED LOSS PER SHARE
Weighted average common stock outstanding 15,000,000 15,000,000
=========== ============
Diluted loss per share $ (0.29) $ (0.12)
=========== ============
Three Months Ended September 30,
--------------------------------
2003 2002
----------- ------------
NUMERATOR - BASIC AND DILUTED LOSS PER SHARE
Net loss $(1,964,634) $ (251,821)
=========== ============
DENOMINATOR - BASIC LOSS PER SHARE
Weighted average common stock outstanding 15,000,000 15,000,000
=========== ============
Basic loss per share $ (0.13) $ (0.02)
=========== ============
DENOMINATOR - DILUTED LOSS PER SHARE
Weighted average common stock outstanding 15,000,000 15,000,000
=========== ============
Diluted loss per share $ (0.13) $ (0.02)
=========== ============
The computation of diluted loss per share for the nine and three
months ended September 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.
15
TELESOURCE INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the nine months ended September 30, 2003 and 2002
(unaudited)
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 losses, 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 losses if the
Company had applied the 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:
Nine Months Ended
-------------------------------------------
September 30, 2003 September 30, 2002
------------------ ------------------
Net loss as reported $(4,404,733) $(1,797,222)
Deduct: Total stock-based employee
compensation expense determined under
the fair value based method for all awards (30,887) (30,887)
Pro forma net loss $(4,435,620) $(1,828,109)
Loss per share:
Basic and diluted - as reported $ (0.29) $ (0.12)
Basic and diluted - pro forma $ (0.30) $ (0.12)
Three Months Ended
------------------------------------------
September 30, 2003 September 30, 2002
------------------ ------------------
Net loss as reported $(1,964,634) $ (251,821)
Deduct: Total stock-based employee
compensation expense determined under
the fair value based method for all awards (10,296) (10,296)
Pro forma net loss $(1,974,930) $ (262,117)
Loss per share:
Basic and diluted - as reported $ (0.13) $ (0.02)
Basic and diluted - pro forma $ (0.13) $ (0.02)
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.
16
TELESOURCE INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the nine months ended September 30, 2003 and 2002
(unaudited)
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:
For the Nine Months Ended
September 30, 2003
---------------------------------------------------------------------------
Power Generation and
Construction of Power
Plants Trading Construction Total
--------------------- --------- ------------ ----------
Revenue $ 2,492,173 32,235 13,608,262 16,132,670
Interest income -- -- -- --
Interest expense 1,230,329 -- 335,037 1,565,366
Depreciation and amortization 5,370 17,422 261,072 283,864
Net loss (321,322) (15,988) (4,067,423) (4,404,733)
Total capital expenditures -- -- 602,588 602,588
Total assets 13,731,686 3,679,299 11,375,615 28,786,600
For the Nine Months Ended
September 30, 2002
--------------------------------------------------------------------------
Power Generation and
Construction of Power
Plants Trading Construction Total
--------------------- --------- ------------ ----------
Revenue $ 1,814,114 266,941 14,143,577 16,224,632
Interest income -- 825 2,766 3,592
Interest expense 1,295,551 -- 77,780 1,373,331
Depreciation and amortization 3,416 9,151 316,765 329,322
Net income/(loss) 909,139 (737,541) (1,968,820) (1,797,222)
Total capital expenditures -- 3,386 10,536 13,922
Total assets 14,207,110 121,932 13,083,562 27,412,604
17
TELESOURCE INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the nine months ended September 30, 2003 and 2002
(unaudited)
9. Business Segment Information, continued
For the Three Months Ended
September 30, 2003
-------------------------------------------------------------------------
Power Generation and
Construction of Power
Plants Trading Construction Total
--------------------- --------- ------------ ----------
Revenue $ 1,208,313 32,235 5,181,350 6,421,898
Interest income -- -- -- --
Interest expense 410,459 -- 334,688 745,147
Depreciation and amortization 1,031 6,877 90,494 98,402
Net income (loss) 45,963 (5,366) (2,005,231) (1,964,634)
Total capital expenditures -- -- 90,155 90,155
Total assets 13,731,686 3,679,299 11,375,615 28,786,600
For the Three Months Ended
September 30, 2002
------------------------------------------------------------------------
Power Generation and
Construction of Power
Plants Trading Construction Total
--------------------- --------- ------------ ----------
Revenue $ 623,280 13,404 5,023,975 5,660,659
Interest income -- 825 2,767 3,592
Interest expense 399,655 -- 25,927 425,582
Depreciation and amortization 1,354 -- 51,877 53,231
Net income/(loss) 1,217,334 (494,957) (974,198) (251,821)
Total capital expenditures -- -- -- --
Total assets 14,207,110 121,932 13,083,562 27,412,604
18
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis of the Company's financial condition and
results of operations should be read in conjunction with the Company's unaudited
condensed consolidated financial statements and the notes thereto included
elsewhere herein.
Results of Operations for the nine months ended September 30, 2003 compared to
the nine months ended September 30, 2002
Revenues
The consolidated operating results for the nine months ended September 30, 2003
and 2002 and the consolidated balance sheet as of September 30, 2003 are derived
from, and qualified by reference to, the unaudited condensed consolidated
financial statements.
Construction Revenues. Construction revenues decreased 6.5% to $13.2 million
from $14.1 million for the nine months ended September 30, 2003. The slight
decrease is due to a slow down encountered on the Company's project to construct
a prison which was due to funding issues encountered by the customer. The
funding issues resulted in a work slow down on this project during the second
quarter of 2003 and during July of 2003. The funding issues have been resolved
by the customer and work has resumed on the project. The Company also
experienced a cost overrun on the airport expansion project. The airport
expansion cost overrun resulted in a reduction of forecasted profit for the
airport project during 2003 of $1.9 million and is attributed to cost 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 reflected in the accompanying
financial statements. Telesource expects that the change orders under
negotiation will be executed later this year at which time revenue will be
recognized. However there can be no assurance that such change orders will
ultimately be executed. 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 approved change orders prior to recognizing revenue resulting
from change orders.
Service Fees - Power Generation Plant. Service fees - power generation plant
increased 93.9% to $1.6 million from $836,004 for the nine months ended
September 30, 2003. The growth in power generation revenues is due 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
$32,235 during the nine months ended September 30, 2003 as compared to $260,846
for the nine months ended September 30, 2002. Sales revenues are not expected to
be a significant component of revenues for the foreseeable future.
Rental Income. Rental income increased to $379,277 from $6,095 for the nine
months ended September 30, 2003. 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 $870,931 from
$978,110 for the nine months ended September 30, 2003. 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 increased 16.5% to $12.9 million
from $11.1 million for the nine months ended September 30, 2003. The growth in
construction costs is a direct result of an increase in construction activities,
primarily due to the radio relay station expansion project on Tinian.
Construction costs as a percentage of construction revenues were 97.7% and 78.5%
for the nine months ended September 30, 2003 and 2002, respectively.
19
The lower gross margin on construction revenues during the first nine 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 corresponding construction revenue.
Telesource expects that the change orders under negotiation will be executed
later this year at which time revenue will be recognized. However there can be
no assurance that such change orders will ultimately be executed. 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 72.0% to $1.6 million from
$904,975 for the nine months ended September 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 3.1%
for the nine months ended September 30, 2003 compared to the same period in the
prior year. 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.
Management has made staffing cuts during the third quarter of 2003 and expects
to see payroll expenses decline in future periods.
Occupancy and Equipment. Occupancy and equipment expenses decreased 15.2% to
$219,919 from $259,289 for the nine months ended September 30, 2003 and 2002,
respectively. The increase in occupancy expense is due to increases in costs in
Fiji and Palau that are attributed to increased activities in these two markets;
however, the Company was able to offset these cost increases by cutting cost for
occupancy and equipment in other areas.
General and Administrative Expenses. General and administrative expenses
decreased 5.8% to $3.0 million from $3.1 million for the nine months ended
September 30, 2003 and 2002, respectively. The decrease is attributed to efforts
by management to reduce general and administrative expenses.
Other Expense, Net. Other expense increased 16.1% to $1.6 million from $1.3
million for the nine months ended September 30, 2003 and 2002, respectively. The
increase is primarily attributed to additional debt and interest on additional
preferred stock issued by the Company.
Results of Operations for the three months ended September 30, 2003 compared to
the three months ended September 30, 2002
Revenues
Construction Revenues. Construction revenues increased 3.1% to $5.2 million from
$5.0 million for the three months ended September 30, 2003 and 2002,
respectively. The increase is due to significant progress on the radio relay
station project located on Tinian. The radio relay station project was awarded
to Telesource in March of 2003 and has a scheduled completion date of March
2004.
Service Fees - Power Generation Plant. Service fees - power generation plant
increased 203.3% to $927,394 from $305,796 for the three months ended September
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. The service
fees for Fiji during the third quarter of 2003 were $639,778.
Sales Revenues. Sales revenues net of costs increased to $32,235 from $9,211 for
the three months ended September 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 decreased to $80 from $4,193 for the three months
ended September 30, 2003 and 2002, respectively. Rental income is not expected
to be a significant component of revenues for the foreseeable future.
20
Finance Lease Revenues. Finance lease revenues decreased 11.5% to $280,919 from
$317,484 for the three months ended September 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 increased 42.2% to $5.4 million
from $3.8 million for the three months ended September 30, 2003 and 2002,
respectively. Construction costs as a percentage of construction revenues were
104.8% and 76.0% for the three months ended September 30, 2003 and 2002,
respectively. The negative gross margin on construction revenues during the
third quarter of 2003 is attributed to a cost over run on the West Tinian
Airport expansion project. The change orders have not been completed and
approved and therefore, the costs incurred have been recognized without any
corresponding construction revenue. Telesource expects that the change orders
under negotiation will be executed later this year. 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 187.6% to $873,960 from
$303,904 for the three months ended September 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 decreased 16.2%
to $313,187 from $373,833 for the three months ended September 30, 2003 and
2002, respectively. The decrease in salaries and employee benefits was achieved
by making staffing reductions in the administrative areas of the Company in the
Chicago office, Palau office and Saipan.
Occupancy and Equipment. Occupancy and equipment expenses decreased 16.3% to
$74,586 from $89,088 for the three months ended September 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
increased 3.2% to $948,327 from $918,719 for the three months ended September
30, 2003 as compared to the same period in 2002. The increase is attributed
primarily to costs for professional services provided to the Company in the
Palau and Fiji offices.
Other Expense, Net. Other expense increased to $745,842 from $406,831 for the
three months ended September 30, 2003 and 2002, respectively. The increase is
primarily attributed to additional interest expense incurred on the preferred
stock issued by the Company during 2003.
Backlog
The following schedule shows a reconciliation of backlog representing the amount
of revenue Telesource International expects to realize from work to be performed
on uncompleted contracts accounted for using the percentage-of-completion method
of accounting in progress at September 30, 2003:
21
Uncompleted contracts as of December 31, 2002 $17,472,516
New contracts and approved change orders added during the first
nine months of 2003 11,870,668
-----------
29,343,184
Less: Construction revenue for the nine months ended
September 30, 2003 13,228,985
-----------
Balance at September 30, 2003 $16,114,199
===========
Contractual Obligations and Commercial Commitments
The Company finances its 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
billings in excess of costs and estimated earnings, income taxes payable and
other current liabilities and also includes $22,488,499 for guarantees provided
by the Company to bonding underwriters in exchange for bonds issued on the
projects underway at September 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 September 2004 $24,085 $54 $22,851
October 2004 to September 2007 9,430 -- 134
Thereafter -- -- --
------- --- -------
Total $33,515 $54 $22,985
======= === =======
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 September 30, 2003, 15,000,000 shares of Telesource
International's common stock were issued and outstanding.
Cash used in operating activities during the nine months ended September 30,
2003 and 2002 was $5.1 million and $2.3 million, respectively. The cash used in
operating activities was principally due to an increase in accounts receivable
and costs and estimated earnings in excess of billings on construction
activities during the first nine months of 2003, which is attributed to the
radio relay expansion project and prison project.
Cash used in investing activities was $602,588 and $13,922 for the nine months
ended September 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 $6.5 million and $2.3 million
for the nine months ended September 30, 2003 and 2002, respectively. The cash
generated by financing activities came from additional borrowings and the
proceeds from the sale of $7.7 million of preferred stock during 2003.
Telesource International had a working capital deficit of $20.4 million at
September 30, 2003. The deficit is a result of all loans being classified as
short term at September 30, 2003, with the exception of $7.75 million owed on
the Commercial Bank of Kuwait credit line and $1.68 million owed on a credit
line with Bent Marketing, Ltd. 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 September 30, 2003:
22
Payment Date Principal Payment
---------------------------- -------------------
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 $14,750,000
===========
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 September 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 7.1
million shares of preferred stock to investors for a total of $10.7 million, of
which Telesource received $3.0 million in December of 2002, $4.0 million was
received in March 2003, $700,000 was received in July 2003 and $3.0 million in
August 2003. The Company has also received a firm commitment for an additional
2,666,667 shares of preferred stock for $4.0 million in October 2003 from one
investor. The Company received $1.0 million of the $4.0 million subscribed in
October 2003 and expects to receive $2.0 million in November 2003 and the
remaining $1.0 million in December 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 2004 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
At a Telesource Board of Directors meeting held in November 2003, the employment
contract the Company has with its CEO and President, K.J. Semikian, and its
Executive Vice President, Nidal Zayed were both extended to July 1, 2004. The
Board of Directors also appointed Nidal Zayed to serve as the Company's Chief
Operating Officer. The employment contract the Company has with its CFO, Bud
Curley, automatically renewed in March 2003 to October 2005.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Registrant's primary interest rate risk relates to its long-term debt
obligations. As of September 30, 2003 and December 31, 2002, the Registrant had
total debt obligations, including current and long-term obligations, totaling
$33.5 million and $34.7 million, respectively. Of these amounts, fixed rate
obligations totaled $14.1 million and $7.2
23
million, and variable rate obligations totaled $19.4 million and $27.5 million,
as of September 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 $194,000 higher in
2003 and $300,000 higher in 2002 based on the respective outstanding balances at
September 30, 2003 and December 31, 2002. The Registrant has no interest rate
swap or exchange agreements.
There were $773,346 of the Registrant's gross revenues for the nine months ended
September 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 September 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.
24
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 nine months ended
September 30, 2003.
ITEM 5. OTHER INFORMATION.
The Company has not made an accrual or paid any fees to the Public Company
Oversight Board.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibits immediately following signature page.
(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: November 19, 2003 /s/ K.J. Semikian
---------------------------------------
K.J. Semikian
President and Chief Executive Officer
November 19, 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