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 March 31, 2004
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 [_] No [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rules 12b-2 of the Act). Yes [_] No [X]
There were 49,709,497 shares of common stock, par value $0.01 per share, of
Telesource International, Incorporated outstanding as of January 31, 2005.
TELESOURCE INTERNATIONAL, INC.
TABLE OF CONTENTS
Page No.
--------
PART I. Financial Information
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets -
March 31, 2004 and December 31, 2003 1
Condensed Consolidated Statements of Operations -
three months ended March 31, 2004 and 2003 2
Condensed Statements of Comprehensive Loss
for the three months ended March 31, 2004 and 2003 3
Condensed Consolidated Statements of Cash Flows -
three months ended March 31, 2004 and 2003 4
Notes to Condensed Consolidated Financial Statements 5 - 17
Item 2. Management's Discussion and Analysis of 18 - 21
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market
Risk 21
Item 4. Controls and Procedures 21
PART II. Other Information
Item 1. Legal Proceedings 24
Item 2. Sale of Unregistered Securities 24
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 6. Exhibits and Reports on Form 8-K 26
Signatures 27
PART 1 - FINANCIAL STATEMENTS
- -----------------------------
ITEM 1. FINANCIAL STATEMENTS
TELESOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
March 31, 2004 and December 31, 2003
March 31, December 31,
Assets 2004 2003
------------- -------------
(unaudited)
Current assets:
Cash and cash equivalents $ 1,668,014 1,487,280
Accounts receivable 6,728,424 5,685,485
Current portion of net investment in sales-type lease 1,818,726 1,776,646
Costs and estimated earnings in excess of billings 783,890 3,560,452
Prepaid expenses and other current assets 525,770 372,029
------------- -------------
Total current assets 11,524,824 12,881,892
Net investment in sales-type lease - long term 9,014,156 9,484,925
Property, plant, and equipment, net 2,445,834 2,288,562
Other assets 103,628 128,063
------------- -------------
Total assets $ 23,088,442 24,783,442
============= =============
Liabilities and Stockholders' Deficit
Current liabilities:
Current portion of long-term debt $ 15,260,982 9,242,195
Accounts payable 2,883,735 3,426,122
Accounts payable - related party 4,328,282 3,467,719
Accrued expenses 2,539,904 1,895,889
Billings in excess of costs and estimated earnings 275,691 246,559
Accrued losses on contracts in progress 958,246 --
Other current liabilities -- 161,251
------------- -------------
Total current liabilities 26,246,840 18,439,735
Long-term debt 15,939,862 20,310,222
------------- -------------
Total liabilities 42,186,702 38,749,957
------------- -------------
Commitments and contingencies (note 7)
Stockholders' deficit:
Convertible preferred stock: authorized 50,000,000 shares:
issued and outstanding 9,799,999 shares with a liquidation
value of $1.50 per share plus accrued dividends at
March 31, 2004 and December 31, 2004 14,700,000 14,700,000
Common stock, $0.01 par value. Authorized 100,000,000 shares,
issued and outstanding 18,000,000 shares at March 31, 2004
and 17,000,000 shares at December 31, 2003 180,000 170,000
Additional paid-in capital 8,767,225 7,777,225
Accumulated deficit (42,655,565) (36,630,897)
Accumulated comprehensive loss -
foreign currency translation (89,920) 17,157
------------- -------------
Total stockholders' deficit (19,098,260) (13,966,515)
------------- -------------
Total liabilities and stockholders' deficit $ 23,088,442 24,783,442
============= =============
See accompanying notes to condensed consolidated financial statements.
1
TELESOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (unaudited)
Three months ended March 31, 2004 and 2003
2004 2003
------------- -------------
Revenues:
Construction revenues $ 1,479,720 5,444,994
Service fees - power generation plant 956,332 277,536
Service fees, net 107,164 --
Rental income 88,916 246,117
Finance lease revenue 261,311 299,629
------------- -------------
Gross revenues 2,893,443 6,268,276
Costs and expenses:
Construction costs 3,127,534 4,290,382
Construction costs - related party 383,622 --
Operation and maintenance costs -
power generation plant 719,113 217,792
Cost of service and sales 298,237 --
Provision for losses on contracts in progress 958,246 --
Provision for unbilled and uncollected accounts 1,308,380 --
------------- -------------
Gross (loss) profit (3,901,689) 1,760,102
------------- -------------
Operating expenses:
Salaries and employee benefits 412,812 488,099
Occupancy and equipment 69,603 60,569
General and administrative 976,621 1,008,442
------------- -------------
Total operating expenses 1,459,036 1,557,110
------------- -------------
Operating income (loss) (5,360,725) 202,992
------------- -------------
Other income (expense):
Interest expense (342,272) (358,038)
Other income, net 5,185 33,764
------------- -------------
Total other expense (337,087) (324,274)
------------- -------------
Loss before income taxes (5,697,812) (121,282)
Income tax expense 87,981 --
------------- -------------
Net loss $ (5,785,793) (121,282)
------------- -------------
Dividend on preferred stock 238,875 71,139
------------- -------------
Net loss to common stockholders $ (6,024,668) (192,421)
============= =============
Basic and diluted net loss to common stockholders per share $ (0.33) (0.01)
Weighted average common shares outstanding 17,703,297 15,000,000
See accompanying notes to condensed consolidated financial statements.
2
TELESOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Loss (unaudited)
Three months ended March 31, 2004 and 2003
Three Months
Ended March 31,
------------------------------
2004 2003
------------- -------------
Net loss $ (5,785,793) (121,282)
Preferred stock dividend (238,875) (71,139)
Other comprehensive loss:
Foreign currency translation adjustment (107,077) (27,013)
------------- -------------
Comprehensive loss $ (6,131,745) (219,434)
============= =============
See accompanying notes to condensed consolidated financial statements.
3
TELESOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (unaudited)
Three months ended March 31, 2004 and 2003
2004 2003
------------- -------------
Cash flows from operating activities:
Net loss $ (5,785,793) (121,282)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 133,082 102,442
Provision for lossses on contracts in progress 958,246 --
Provision for unbilled and uncollected accounts 1,308,380 --
Changes in assets and liabilities:
Receivables (2,351,319) (2,836,809)
Costs and estimated earnings in excess of billings 2,776,562 829,693
Prepaid expenses and other current assets (153,741) (89,577)
Net investment in sales-type lease 428,689 390,371
Other assets 24,435 4,888
Accounts payable 318,176 2,061,997
Accrued expenses 405,140 (847,188)
Billings in excess of cost 29,132 129,955
Other liabilities (161,251) (152,013)
------------- -------------
Net cash used in operating activities (2,070,262) (527,523)
------------- -------------
Cash flows from investing activities:
Capital expenditures (290,354) (488,406)
------------- -------------
Net cash used in investing activities (290,354) (488,406)
------------- -------------
Cash flows from financing activities:
Proceeds from sale of preferred stock -- 4,000,000
Proceeds from sale of common stock 1,000,000 --
Proceeds from borrowings 2,500,000 7,500,000
Principal payments on borrowings (851,573) (10,350,000)
------------- -------------
Net cash provided by financing activities 2,648,427 1,150,000
------------- -------------
Effect of exchange rate changes on cash (107,077) (27,013)
------------- -------------
Net increase in cash and cash equivalents 180,734 107,058
Cash and cash equivalents at beginning of period 1,487,280 244,723
------------- -------------
Cash and cash equivalents at end of period $ 1,668,014 351,781
============= =============
Supplemental disclosure:
Cash paid during the period for interest $ 265,946 736,794
============= =============
See accompanying notes to condensed consolidated financial statements.
4
TELESOURCE INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
The interim condensed consolidated financial statements and notes thereto
of Telesource International, Inc. and its subsidiaries ("the Company"), have
been prepared by management 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
except for the revised contract estimate adjustments and related loss provisions
as described in Note 10. These condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and the
notes thereto included in the Company's 2003 Annual Report on Form 10-K. The
results of operations for the interim periods are not necessarily indicative of
the results for any subsequent quarter or the entire fiscal year ending December
31, 2004.
Reclassifications
Certain balances have been reclassified in the condensed consolidated
financial statements to conform to current year presentation. These
reclassifications had no effect on reported net loss.
2. Description of Business
Telesource International, Inc. ("Telesource" or the "Company") 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. 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 power generation
activities in Fiji. The Company has an office in the Republic of Palau which
handles construction activities in Palau.
The Company was incorporated in Delaware in 1994 and was formed 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.
During 1999, Telesource entered into an agreement for a merger with Sixth
Business Service Group, a public company located in Tampa, Florida. Telesource
completed the merger with and into Sixth Business Service Group on September 7,
2001, pursuant to which merger the stockholders of Telesource received shares of
Sixth Business Service Group in exchange for their shares of Telesource stock.
Sixth Business Service Group is the surviving corporation and after the merger
was completed, Sixth Business Service Group changed its name to Telesource
International, Incorporated. Upon completion of the merger, Telesource made
application for listing its common stock with the NASD and Telesource was
approved for listing on the National Association of Securities Dealers ("NASD")
Over The Counter Bulletin Board in October 2001, under the ticker symbol "TSCI".
5
TELESOURCE INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
3. Summary of Significant Accounting Policies, continued
Liquidity and Going Concern
The accompanying unaudited 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 2004, we experienced significant operating losses
with corresponding reductions in working capital and net worth. As of March 31,
2004, the Company's current liabilities exceeded its current assets by $14.7
million. The Company relies heavily on bank financing to support is operations
and its ability to refinance its existing bank debt is critical to provide
funding to satisfy the Company's obligations as they mature. As of March 31,
2004 the Company had total outstanding debt of $31.2 million of which $15.3
million is due in the next twelve months. As of March 31, 2004 the Company had
an accumulated deficit of $42.7 million and total stockholders' deficit of $19.1
million.
The Company incurred a net loss of $6.0 million for the three months ended March
31, 2004 and operating losses of $5.4 million, $3.1 million, and $4.9 million
for the years ended December 31, 2003, 2002 and 2001, respectively.
Cash used in operating activities during the three months ended March 31, 2004
and 2003 was $2.1 million and $527,523, respectively. The cash used in operating
activities was principally due to the net loss incurred during 2004.
Cash used in investing activities was $290,354 for the three months ended March
31, 2004 as compared to net cash used in investing activities of $488,406 for
the same period in 2003. The cash used in investing activities during 2004 is
attributed to purchases of equipment used in construction activities and office
equipment while 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.
Cash provided by financing activities generated $2.7 million for the three
months ended March 31, 2004 as compared to cash provided by financing activities
of $1.2 million for the same period in 2003. The cash generated by financing
came from additional debt borrowings and the proceeds from the sale of $1.0
million worth of common stock during 2004.
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 has arranged to have debt owed to Bent Marketing
Ltd. and Solas Investment converted to common stock during the fourth quarter of
2004 along with a conversion of all preferred stock into common stock during the
fourth quarter of 2004 as well. Management plans to increase its working capital
in 2005 through additional debt and equity financing; however, there can be no
assurance that increased credit lines or equity financings will be successful
during 2005. Management expects the increase in revenues to be achieved by
increasing revenues from existing long term power plant operation and
maintenance agreements as a result of continued expansion in Fiji and on the
island of Tinian and management is pursing a power operation and maintenance
contract in 2005 which if successful will have a positive impact. However, no
assurance can be given that such increased revenues will be achieved. The
condensed consolidated financial statements do not include any adjustments
relating to the recoverability of assets and the classifications of liabilities
that might be necessary should we be unable to continue as a going concern.
Although management believes that the Company will be cash flow positive in 2005
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
agreed to guarantee or provide letters of credit covering $26.5 million of the
Company's total debt of $31.2 million.
6
TELESOURCE INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
3. Summary of Significant Accounting Policies, continued
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.
While Telesource International believes it has sufficient financing for its
current working capital needs, 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 2005 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.
Use of Estimates
The preparation of condensed consolidated 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 condensed consolidated 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.
Significant estimates used in preparing these financial statements include
those assumed in computing profit percentages under the percentage-of-completion
revenue recognition method. It is at least reasonably probable that the
estimates used will change within the next year as the construction projects are
completed.
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.
7
TELESOURCE INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
3. Summary of Significant Accounting Policies, continued
The Company accounts for its leasing activities in accordance with the
requirements of Statement of Financial Accounting Standards No. 13, Accounting
for Leases. Revenue associated with the sale of the Tinian power plant
constructed and sold under a sales-type lease, measured as the present value of
noncancelable rents, was recognized in connection with recording the loss on
sale in 1997 and 1998. The Company recognizes finance lease revenue on the
resulting sales-type lease receivable at a constant rate using the 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.
Revenue from the Company's brokering of U.S. fabricated goods is recognized
at the time of shipment. The sales revenues for U.S. fabricated goods are
recognized net of costs of goods sold due to title transferring from the
manufacturer directly to the Company's customer and the risk of loss being borne
by the customer. The Company recognizes management fees and energy sales revenue
in the period in which the commodity is delivered or at the time the work is
performed. Telesource recognizes rental revenue on the accrual basis pursuant to
contractual arrangements between the Company and its customers.
Income Taxes
The net deferred tax asset is fully reserved. In assessing the
realizability of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those temporary
differences become deductible. Management believes that the valuation allowance
reduces the recognition of deferred tax assets to a level that reflects the
amount that is more likely than not to be realized, considering the tax planning
strategies available to the Company.
New Accounting Pronouncements
In December 2003, the FASB issued FASB Interpretation No. 46 (revised December
2003), Consolidation of Variable Interest Entities, which addresses how a
business enterprise should evaluate whether it has a controlling financial
interest in an entity through means other than voting rights and accordingly
should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46,
Consolidation of Variable Interest Entities, which was issued in January 2003.
The Company will be required to apply FIN 46R to variable interests in VIEs
created after December 31, 2003. For variable interests in VIEs created before
January 1, 2004, the Interpretation will be applied beginning on January 1,
2005. For any VIEs that must be consolidated under FIN 46R that were created
before January 1, 2004, the assets, liabilities and noncontrolling interests of
the VIE initially would be measured at their carrying amounts with any
difference between the net amount added to the balance sheet and any previously
recognized interest being recognized as the cumulative effect of an accounting
change. If determining the carrying amounts is not practicable, fair value at
the date FIN 46R first applies may be used to measure the assets, liabilities
and noncontrolling interest of the VIE. We do not believe the adoption of FIN
46R will have a material effect on our financial position, results of
operations, or cash flows.
8
TELESOURCE INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
3. Summary of Significant Accounting Policies, continued
In May 2003, the Financial Accounting Standards Board ("FASB") issued SFAS No.
150, "Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity." SFAS No. 150 requires that instruments that are
redeemable upon liquidation or termination of an issuing subsidiary that has a
limited life be considered mandatorily redeemable shares in the financial
statements of the parent company. Accordingly, those non-controlling interests
are required to be classified as liabilities in the parent company's
consolidated financial statements and reported at settlement value. At its
October 29, 2003 meeting, the FASB decided to defer the application of this
aspect of this standard for an indefinite period of time. We anticipate further
guidance or modifications from the FASB and have not determined the financial
statement impact of FASB 150 as currently stated.
On December 16, 2004, the FASB issued FASB Statement No. 123 (revised 2004),
Share-Based Payment, which is a revision of FASB Statement No. 123, Accounting
for Stock-Based Compensation . Statement 123(R) supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees , and amends FASB Statement No. 95,
Statement of Cash Flows . Generally, the approach in Statement 123(R) is similar
to the approach described in Statement 123. However, Statement 123(R) requires
all share-based payments to employees, including grants of employee stock
options, to be recognized in the income statement based on their fair values.
Pro forma disclosure is no longer an alternative. Statement 123(R) must be
adopted no later than July 1, 2005. Early adoption will be permitted in periods
in which financial statements have not yet been issued. We expect to adopt
Statement 123(R) on July 1, 2005. Statement 123(R) permits public companies to
adopt its requirements using one of two methods: (1) A "modified prospective"
method in which compensation cost is recognized beginning with the effective
date (a) based on the requirements of Statement 123(R) for all share-based
payments granted after the effective date and (b) based on the requirements of
Statement 123 for all awards granted to employees prior to the effective date of
Statement 123(R) that remain unvested on the effective date. (2) A "modified
retrospective" method which includes the requirements of the modified
prospective method described above, but also permits entities to restate based
on the amounts previously recognized under Statement 123 for purposes of pro
forma disclosures either (a) all prior periods presented or (b) prior interim
periods of the year of adoption.
The Company is currently evaluating the adoption alternatives and expects to
complete its evaluation by June 30, 2005. As permitted by Statement 123, the
company currently accounts for share-based payments to employees using Opinion
25's intrinsic value method and, as such, generally recognizes no compensation
cost for employee stock options. Accordingly, the adoption of Statement 123(R)'s
fair value method may have a significant impact on our result of operations,
although it will have no impact on our overall financial position. The impact of
adoption of Statement 123(R) cannot be predicted at this time because it will
depend on levels of share-based payments granted in the future. However, had we
adopted Statement 123(R) in prior periods, the impact of that standard would
have approximated the impact of Statement 123 as described in the disclosure of
pro forma net income and earnings per share in Note 3 to our consolidated
financial statements. Statement 123(R) also requires the benefits of tax
deductions in excess of recognized compensation cost to be reported as a
financing cash flow, rather than as an operating cash flow as required under
current literature. This requirement will reduce net operating cash flows and
increase net financing cash flows in periods after adoption. While the company
cannot estimate what those amounts will be in the future (because they depend
on, among other things, when employees exercise stock options), there were no
operating cash flows recognized in prior periods for such excess tax deductions.
9
TELESOURCE INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
3. Summary of Significant Accounting Policies, continued
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 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 a straight-line recognition of
compensation costs over the related vesting periods for fixed awards:
Three Months Ended
--------------------------------
March 31, 2004 March 31, 2003
-------------- --------------
Net loss as reported $ (5,785,793) $ (121,282)
Preferred stock dividend (238,875) (71,139)
Add: Stock based employee compensation expense included in
reported net loss determined under APB No. 25,
net of related tax effects -- --
Deduct: Total stock-based employee compensation expense
determined under the fair value based method for all awards (10,295) (10,703)
-------------- --------------
Pro forma net loss before dividend $ (6,034,963) $ (203,124)
============== ==============
Loss per share:
Basic and diluted - as reported $ (0.34) $ (0.01)
Basic and diluted - pro forma $ (0.34) $ (0.01)
10
TELESOURCE INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
4. Long-Term Debt and Credit Arrangements
Long-term debt consists of the following at March 31, 2004 and December 31,
2003:
March 31, December 31,
--------------- ---------------
2004 2003
--------------- ---------------
Bent Marketing Limited loan, bearing interest of 7.0% per
annum, unsecured and maturing on December 31, 2005. 2,680,000 1,680,000
Bent Marketing Limited loan, bearing interest of 7.0% per
annum, unsecured and maturing on July 31, 2005. 1,000,000 --
Bank of Hawaii loan, due in quarterly installments of $118,750 and
interest payable monthly at prime with the loan maturating on
June 3, 2005, secured by an irrevocable standby letter of credit
for $2,000,000 issued by Al Ahli Bank of Kuwait, guaranteed by SHBC. 1,543,750 1,662,500
Bank of Hawaii loan, due in quarterly installments of $37,941 and
interest payable monthly at prime with the loan maturing on June 3,
2005, secured by an irrevocable standby letter of credit for
$2,000,000 issued by Al Ahli Bank of Kuwait, guaranteed by SHBC. 487,386 525,017
Citytrust Bank loan, borrowings on $1,000,000 revolving line of credit
which expires on December 11, 2004. Due in 90 days from date of
drawdown including interest of 9.50% at December 11, 2004 secured
by assignment of specific invoice from billing on the West Tinian
Airport Airside improvement project, guaranteed by Telesource
International Inc. and one of its officers 327,472 430,375
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
LIBOR + 2.5%. The loan is guaranteed by SHBC 1,000,000 1,000,000
11
TELESOURCE INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
4. Long-Term Debt and Credit Arrangements, continued
Commercial Bank of Kuwait loan, restructured during 2003, due in monthly
installments of $180,000 plus interest, from February 4, 2004
through January 4, 2009, with a final payment of $2.2 million on
February 4, 2009. The note bears interest at LIBOR plus 3%. The loan
is guaranteed by SHBC. In the event the Company defaults on one
installment payment, the entire loan and accrued interest become due
and payable 12,640,000 13,000,000
Commercial Bank of Kuwait loan, due on March 31, 2005
with quarterly payment of interest of LIBOR + 2.5%.
Principal payment on maturity. Secured by a standby letter of
credit issued by Al Ahli Bank of Kuwait for $7,875,000. 7,500,000 7,500,000
Solas Investments loan, bearing interest of 7.0% per annum, unsecured
and maturing on December 31, 2005. 500,000 --
Al Ahli Bank loan due on September 4, 2004 with variable
payment of interest of 6.25%. Secured by a guarantee from
Sayed Hamid Behbehani & Sons Co. WLL 3,343,541 3,526,812
ANZ loan due on October 1, 2004 with interest of 7.75% payable on
monthly installment 78,009 117,491
ANZ loan due on July 17, 2007 with interest of 8% payable on monthly
installment 100,686 110,222
--------------- ---------------
Notes payable to creditors 31,200,844 29,552,417
Less current portion 15,260,982 9,242,195
--------------- ---------------
Total long-term debt $ 15,939,862 20,310,222
=============== ===============
Subsequent to March 31, 2004, the Company had a debt covenant violation on
its loan with the Al Ahli Bank of Kuwait. The debt covenant requires a
payment to the bank of 50% of all collections on the radio relay station
project in Tinian and the capitol relocation project in Palau. The Company
failed to make the required payments to ABK when the collections occurred
during the last half of 2004. The Company is working to bring the payments
due to the bank current or payoff the facility during the first quarter of
2005. This credit facility has been renewed and currently has a maturity
date of September 30, 2005.
Subsequent to March 31, 2004, the Company renewed its debt obligation with
the Bank of Hawaii which now had a maturity date of June 3, 2004 and which
has been extended to June 3, 2005. Due to the extension, the Bank of Hawaii
loans are treated as long-term debt at March 31, 2004. Subsequent to March
31, 2004, the Company has repaid its loan with ANZ bank which matured on
October 1, 2004.
12
TELESOURCE INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
5. Stockholders' Equity
Preferred Stock
The Company has 9.8 million shares of Series A Cumulative Convertible
Preferred Stock (The Preferred Shares) outstanding. Holders of the
Preferred Shares are entitled to receive cumulative cash dividends at the
annual rate of 6.5% per share payable semi-annually, when and if declared
by the Board of Directors.
The Preferred Shares are convertible, in whole or in part, at the option of
the holders thereof, into shares of common stock on a one-for-one basis for
a period of five years from the closing date of the Preferred Shares
agreement. The Company may force conversion to common stock for a period of
time as defined by each agreement. All accumulated dividends plus any
dividends earned up through the forced conversion date are payable to the
holder at the time of forced conversion. At March 31, 2004, and December
31, 2003, the Company owed accrued dividends of $238,875 and $204,358,
respectively which was recorded in the line item accrued expense.
Holders of the Preferred Shares have no voting rights and the Preferred
Shares rank senior as to dividends and upon liquidation to the common
stock.
Common Stock
On December 31, 2003, 17,000,000 shares of the Company's common stock were
issued and outstanding.
On March 31, 2004, 18,000,000 shares of the Company's common stock were
issued and outstanding. The Company sold 1,000,000 shares of common stock
to an investor, Al Amal Investments, on January 27, 2004 at $1 per share.
Proceeds from the sale were received by the Company on January 27, 2004.
Subsequent to March 31, 2004, the Company issued common stock to two
investors during the second quarter of 2004 in the amount of 4,200,000
shares at a price of $1.00 per share for a total consideration of
$4,200,000. During the fourth quarter of 2004, the Company sold common
stock to two investors in the amount of 2,348,236 shares at a price of
$0.50 per share for a total consideration of $1,174,118. During the fourth
quarter of 2004, the Company agreed to convert all of the preferred stock
plus the accumulated dividend due on the preferred stock into common stock
at a conversion price of $1.00 per share.
During the fourth quarter of 2004, the Company also agreed to convert debt
payable for both principal and interest to Bent Marketing in the amount of
$5,552,024 at a conversion price of $0.50 per share into common stock for a
total of common stock issued to Bent Marketing under this debt conversion
of 11,104,047. The Company also agreed to convert debt payable for both
principal and interest to Solas Investments in the amount of $517,500 at a
conversion price of $0.50 per share into common stock for a total of common
stock issued to Solas Investments under this debt conversion of 1,035,000.
13
TELESOURCE INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
6. Computation of Net Loss 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:
Three Months Ended Three Months Ended
March 31, March 31,
2004 2003
------------------ ------------------
NUMERATOR - BASIC AND DILUTED LOSS PER SHARE
Net loss $ (5,785,793) $ (121,282)
-------------- --------------
Preferred Stock Dividend 238,875 71,139
-------------- --------------
Total Numerator (6,024,668) (192,421)
============== ==============
DENOMINATOR - BASIC EARNINGS PER SHARE
Weighted average common stock outstanding 17,703,297 15,000,000
============== ==============
Basic loss per share $ (0.33) $ (0.01)
============== ==============
DENOMINATOR - DILUTED EARNINGS PER SHARE
Weighted average common stock outstanding 17,703,297 15,000,000
============== ==============
Diluted loss per share $ (0.33) $ (0.01)
============== ==============
The computation of diluted loss per share for the three months ended March
31, 2004 and 2003 does not include 3,224,999 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. 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.
The Company has commitments to provide services under its construction
contracts, some of which cover a multi year period and the Company has
commitments for the operation of power stations for up to another 18 years.
8. Related Party Transactions
Certain of the Company's executive officers, directors, and major
stockholders are also owners, officers, and/or directors of SHBC located in
Kuwait. SHBC is a civil, electrical, and mechanical engineering firm and
construction contractor with 750 employees and over 30 years of experience.
SHBC and its affiliates were the sole stockholder of Telesource
International prior to July 1999 and as of December 31, 2003 owned
approximately 66.7% of the common stock outstanding. SHBC and Telesource
International bid and compete within the same industries; however, SHBC has
agreed, in writing, not to bid projects within the United States and its
possessions. Additionally, SHBC and its majority stockholders, Fouad
Behbehani and Nasrallah Behbehani, have signed as guarantors on Telesource
CNMI's promissory note with the Commercial Bank of Kuwait, New York Branch,
and as guarantors on a $1,000,000 credit facility for Telesource CNMI with
Kuwait Real Estate Bank. SHBC and its majority stockholders have also
signed as guarantors on a $2,000,000 letter of credit issued to the Bank of
Hawaii to secure a $1,900,000 credit facility. These credit facilities were
used to finance the construction activities on the power plant, the West
Tinian Airport expansion project, and to provide financing for other
projects. SHBC has also provided materials procurement financing for the
Company on the prison project in the CNMI.
14
TELESOURCE INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
8. Related Party Transactions, continued
Additionally, from time to time the Company may hire, on a part time or
temporary basis, individuals employed by SHBC to provide assistance to
Telesource on certain projects in the Northern Mariana Islands.
The following table provides a summary of financial information related to
all services provided by SHBC to the Company:
Three Months Ended Three Months Ended
March 31, March 31,
2004 2003
------------------ ------------------
Construction cost $383,622 $ --
The following table summarizes all balances related to transactions with
SHBC as of March 31, 2004 and as of December 31, 2003:
March 31, 2004 December 31, 2003
Accounts payable $4,328,282 $3,467,719
The Company held an investment in Telebond Insurance Corporation at March
31, 2004 and at December 31, 2003 in the amount of $79,687 and $77,695. The
Company purchased insurance from Telebond and paid premiums of $5,000 and
$2,027 during the three months ended March 31, 2004 and 2003, respectively.
The Company's President and CEO, K.J. Semikian, served on Telebond
Insurance Corporation's board of directors and as President of Telebond,
and Mr. Semikian owned 10% of the stock of Telebond during 2003. Subsequent
to March 31, 2004, Telesource sold its investment in Telebond.
During the first three months of 2004, the Company paid Computhink Inc. a
total of $30,771 and a total for the twelve months ended December 31, 2004
to Computhink, Inc of $112,018. The payments to Computhink Inc. covers rent
for office space occupied by the Company and for computer hardware and
software provided by Computhink Inc. K.J. Semikian, the Company's Chief
Executive Officer, and Nidal Zayed, the Company's Chief Operating Officer,
serve on the Board of Directors for Computhink.
The Company sold 2,000,000 shares of common stock to Ernil Continental (a
related party) and 2,200,000 shares of common stock to Halbarad Group Ltd.
(a related party) during the second quarter of 2004 at a price of $1.00 per
share for a total consideration of $4,200,000. During the fourth quarter of
2004, the Company sold 1,166,706 shares of common stock to Ernil
Continental (a related party) and 1,181,530 shares of common stock to
Halbarad Group Ltd. (a related party) at a price of $0.50 per share for a
total consideration of $1,174,118.
15
TELESOURCE INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(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 Three Months Ended
March 31, 2004
--------------------------------------------------------------
Power Generation
and Construction
of Power Plants Trading Construction Total
---------------- ------------ ------------ ------------
Revenue $ 1,304,121 - 1,589,322 2,893,443
Interest income - - - -
Interest expense 342,272 - - 342,272
Depreciation and amortization 6,922 13,127 113,033 133,082
Net income/(loss) to common
stockholders 247,139 (13,127) (6,258,680) (6,024,668)
Total capital expenditures 42,600 9,500 238,254 290,354
Total assets 14,909,781 173,023 8,005,638 23,088,442
For the Three Months Ended
March 31, 2003
--------------------------------------------------------------
Power Generation
and Construction
of Power Plants Trading Construction Total
---------------- ------------ ------------ ------------
Revenue $ 577,165 - 5,691,111 6,268,276
Interest income - - - -
Interest expense 429,177 - - 429,177
Depreciation and amortization 1,031 6,052 95,359 102,442
Net income/(loss) to common
stockholders 146,957 (5,586) (333,792) (192,421)
Total capital expenditures - - 488,406 488,406
Total assets 14,199,965 3,586,601 9,698,180 27,484,746
The basis used to attribute revenues to individual countries is based upon
where the services are provided.
The power generation segment includes revenues from the Company's power
station on Tinian, Commonwealth of Northern Mariana Islands in the amount
of $540,023 and $577,165 for the three months ended March 31, 2004 and
2003, respectively, as well as revenues from the power stations operated by
the Company in Fiji in the amount of $764,098 and none for the three months
ended March 31, 2004 and 2003, respectively.
Construction revenues of $837,713 and $343,765 were recognized within the
Republic of Palau for the three months ended March 31, 2004 and 2003,
respectively. All other revenues within the construction segment for the
three months ended March 31, 2004 and 2003 were earned in the Commonwealth
of Northern Marianna Islands.
16
TELESOURCE INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
10. Significant Revision in Contract Estimate
During 2004, the Company determined that the cost estimate for the prison
construction project located in Saipan was increased by $3.1 million
dollars. The revised cost estimate resulted in an expected loss on the
prison project of $166,500. This change in estimate reduced gross profit
during the first three months of 2004 by $1.9 million. The Company expects
the prison project to be completed in the first half of 2005. The Company
also had a cost revision on a project located in Cyprus during 2004, the
Company determined that the cost estimate for the radio relay project
located in Cyprus was increased by $1.0 million dollars. The revised cost
estimate resulted in an expected loss on the Cyprus project of $792,000.
This change in estimate reduced gross profit during the first three months
of 2004 by $1 million. The Company has completed the initial phase of the
Cyprus project in December 2004.
11. Subsequent Events
The Company sold 2,000,000 shares of common stock to Ernil Continental (a
related party) and 2,200,000 shares of common stock to Halbarad Group Ltd.
(a related party) during the second quarter of 2004 at a price of $1.00 per
share for a total consideration of $4,200,000. During the fourth quarter of
2004, the Company sold 1,166,706 shares of common stock to Ernil
Continental (a related party) and 1,181,530 shares of common stock to
Halbarad Group Ltd. (a related party) at a price of $0.50 per share for a
total consideration of $1,174,118.
During the fourth quarter of 2004, the Company agreed to convert all of the
outstanding shares of preferred stock plus the accumulated dividend due and
scheduled dividends through 2008 on the preferred stock into common stock
at a conversion price of $1.00 per share equaling 12,873,978 shares of
common stock. The inclusion of future preferred shareholder dividends
through 2008 was an inducement to the preferred shareholders to convert
their preferred stock into common stock in 2004.
Subsequent to March 31, 2004, the Company incurred an additional $1.85
million in debt owed to Bent Marketing, Ltd. During the fourth quarter of
2004, the Company agreed to convert debt payable for both principal and
interest to Bent Marketing in the amount of $5,552,024 at a conversion
price of $0.50 per share into common stock for a total of common stock
issued to Bent Marketing under this debt conversion of 11,104,047. The
Company also agreed to convert debt payable for both principal and interest
to Solas Investments in the amount of $517,500 at a conversion price of
$0.50 per share into common stock for a total of common stock issued to
Solas Investments under this debt conversion of 1,035,000.
The Company has paid off the balance due on its credit facility with the
Kuwait Real Estate Bank in April 2004 as agreed to. The Company has paid
off the credit facility with City Trust Bank in December 2004 as agreed to.
The Company has renewed and extended its loans with the Bank of Hawaii
which now have a current maturity date of June 3, 2005. The Company has
renewed and extended its loans with the Al Ahli Bank of Kuwait which now
have a current maturity date of September 30, 2005. The Company's loan with
Al Ahli Bank of Kuwait is treated as short term due to the debt covenant
violation.
On July 31, 2004, Telesource International, Inc. held its 2004 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; (ii) ratified
the amendment to the Company's Articles of Incorporation to increase the
number of authorized common stock from 50,000,000 to 100,000,000; and (iii)
ratified the amendment to the Company's Articles of Incorporation to
increase the number of authorized preferred stock from 10,000,000 to
50,000,000.
17
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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.
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 three months ended March 31, 2004 compared to the
three months ended March 31, 2003
Revenues
Construction Revenues. Construction revenues decreased 18.6% to $3.5 million
from $5.4 million for the three months ended March 31, 2004 compared to March
31, 2003. The decrease is due to the completion of the West Tinian Airport
project during 2003 and recognition of additional costs to be incurred on the
prison project of $3.1 million along with a loss to be realized on a project
located in Cyprus in the amount of $1.0 million. The full loss to be realized on
the initial phase of the Cyprus project has been recognized in the first quarter
of 2004. Telesource has only four significant construction contracts currently
underway: the Adult Correctional Facility on the island of Saipan, the expansion
of a radio relay station on the island of Tinian, a radio relay station in
Cyprus and the construction projects located within the Republic of Palau.
Service Fees - Power Generation Plant. Service fees - power generation plant
increased 244.6% to $956,332 from $277,536 for the three months ended March 31,
2003. The growth in service fees - power generation plant is due to the addition
of an operation and maintenance agreement for two power plants located in Fiji.
Rental Income. Rental income decreased to $88,916 from $246,117 for the three
months ended March 31, 2004 and 2003, respectively. The decrease in rental
income is due to the completion of a rental agreement with the Guam Power
Authority for the rental of seven bucket trucks during the first quarter of
2003. Rental income is also not expected to be a significant component of
revenues for the foreseeable future.
Finance Lease Revenues. Finance lease revenues decreased 12.8% to $261,311 from
$299,629 for the three months ended March 31, 2004. 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 decreased 27.1% to $3.1 million
from $4.3 million for the three months ended March 31, 2004 compared to March
31, 2003. Construction cost includes cost to a related party in the amount of
$383,622 which were paid to Sayed Hamid Behbehani & Sons Co. W.L.L. ("SHBC") for
goods and materials purchased on the prison project located in Saipan.
Construction costs as a percentage of construction revenues were 237.2% and
78.8% for the three months ended March 31, 2004 and 2003, respectively. The
negative margin during the first quarter of 2004 is due to the revised cost
estimate on the prison project which reduced construction revenues by $2.2
million and a revised cost estimate on the radio relay station in Cyprus which
reduced construction revenues by $1.0 million.
Operations and Maintenance Costs - Power Generation Plant. Operations and
maintenance costs - power generation plant increased to $719,113 from $217,792
for the three months ended March 31, 2004. The increased costs during 2004 were
a result of the addition of the operation and maintenance of two power plants
located in Fiji.
18
Provision for Losses on Contracts in Progress. The Company recognized a
provision in the amount of $166,052 to cover an expected loss on the prison
project located in Saipan. The Company also recognized a provision in the amount
of $792,194 to cover an expected loss on the radio relay station in Cyprus.
Provision for Unbilled and Uncollected Accounts. The Company has recorded a
provision for amounts that have not billed on the West Tinian Airport project
located on Tinian in the amount of $1.3 million. The Company has filed a claim
on the airport expansion project which includes the unbilled amounts however the
client has not accepted the Company's claim. The Company is vigorously
attempting to resolve its claims against the West Tinian Airport; however, there
can be no assurance that the Company's claims will succeed and these amounts
will be collected.
Salaries and Employee Benefits. Salaries and employee benefits decreased 15.4%
to $412,812 from $488,099 for the three months ended March 31, 2004 as compared
to 2003. The decrease in salaries and employee benefits is attributed to
staffing reductions.
Occupancy and Equipment. Occupancy and equipment expenses increased 14.9% to
$69,603 from $60,569 for the three months ended March 31, 2004. The increase in
occupancy and equipment cost during the first quarter of 2004 is due to
additional cost to operate the Cyprus office.
General and Administrative Expenses. General and administrative expenses
decreased 3.2% to $976,621 from $1.0 million for the three months ended March
31, 2004 as compared to the same period in 2003. The decrease is attributed to
cost cutting efforts of management.
Other Expense, Net. Other expense increased 4.0% to $337,087 from $324,274 for
the three months ended March 31, 2004 compared to March 31, 2003. The increase
is primarily attributed to decrease in other income during 2004.
Net Loss. Net loss was $6,024,668 as compared to a net loss of $192,421 for the
three months ended March 31, 2004 and 2003, respectively. The increase in net
loss during the first quarter of 2004 is attributed primarily to losses realized
in construction segment for the Company.
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 construction contracts accounted for using the
percentage-of-completion method of accounting in progress at March 31, 2004:
Uncompleted contracts as of December 31, 2003 $ 15,098,231
New contracts and change orders added during the
first three months of 2004 1,820,264
-----------
16,918,495
Less: Construction revenue for the three months
ended March 31, 2004 1,480,170
-----------
Balance at March 31, 2004 $ 15,438,325
===========
19
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. 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 March 2005 $ 15,261 $ 102 $ 10,028
April 2005 to March 2008 11,940 50 -
Thereafter 4,000 - -
------------- ------------- -------------
Total $ 31,201 $ 152 $ 10,028
============= ============= =============
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 March 31, 2004, 18,000,000 shares of Telesource
International's common stock were issued and outstanding.
Cash used in operating activities during the three months ended March 31, 2004
and 2003 was $2.1 million and $527,523, respectively. The cash used in operating
activities was principally due to the loss incurred during the first three
months of 2004.
Cash used in investing activities was $290,353 and $488,406 for the three months
ended March 31, 2004 and 2003, respectively. The cash used in investing
activities during 2004 is attributed to capital purchases.
Cash provided by financing activities generated $2.7 million for the three
months ended March 31, 2004 as compared to cash provided by financing activities
of $1.2 million for the same period in 2003. The cash generated by financing
activities came from additional borrowings and the proceeds from the sale of
$1.0 million worth of common stock during 2004.
Telesource International had a working capital deficit of $14.7 million at March
31, 2004. The deficit is a result of a significant amount of loans for the
Company being classified as short term as of March 31, 2004
Telesource is substantially dependent upon SHBC to provide resources for
operating, working capital, and business expansion. SHBC has given a guarantee
or provided a letter of credit for a majority of the credit facilities now in
place for Telesource as of March 31, 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.
While Telesource International believes it has sufficient financing for its
current working capital needs, 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 2005 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
20
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 Company has paid off the balance due on its credit facility with the Kuwait
Real Estate Bank in April 2004 as agreed to. The Company has paid off the credit
facility with City Trust Bank in December 2004 as agreed to. The Company has
renewed and extended its loans with the Bank of Hawaii which now have a current
maturity date of June 3, 2005. The Company has renewed and extended its loans
with the Al Ahli Bank of Kuwait which now have a current maturity date of
September 30, 2005. The Company's loan with Al Ahli Bank of Kuwait is treated as
short term due to the debt covenant violation.
On July 31, 2004, Telesource International, Inc. held its 2004 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; (ii) ratified the amendment to the Company's
Articles of Incorporation to increase the number of authorized common stock from
50,000,000 to 100,000,000; and (iii) ratified the amendment to the Company's
Articles of Incorporation to increase the number of authorized preferred stock
from 10,000,000 to 50,000,000.
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 March 31, 2004 and December 31, 2003, the Registrant had
total debt obligations, including current and long-term obligations, totaling
$31.2 million and $29.6 million, respectively. Of these amounts, fixed rate
obligations totaled $4.7 million and $2.3 million, and variable rate obligations
totaled $26.5 million and $27.2 million, as of March 31, 2004 and December 31,
2003, respectively. Assuming a 1.0% increase in interest rates on the
Registrant's variable rate obligations, annualized interest expense would have
been approximately $265,000 higher in 2004 and $272,000 higher in 2003 based on
the respective outstanding balances on an annualized basis of variable rate
obligations at March 31, 2004 and December 31, 2003. The Registrant has no
interest rate swap or exchange agreements.
21
The Registrant had gross revenues of $974,971 for the three months ended March
31, 2004 which were denominated in a foreign currency, or Fijian Dollar. The
revenues realized which were denominated in Fijian Dollar were realized under an
operations and maintenance agreement. All construction contracts currently
underway for the Registrant are denominated in the U.S. dollar; accordingly, the
Registrant has no material exposure to foreign currency exchange risk. The
Registrant has no foreign currency exchange contracts.
Based on the nature of the Registrant's business, it has no direct exposure to
commodity price risk.
Item 4. Controls and Procedures
Deficiencies in the Company's Controls and Procedures
- -----------------------------------------------------
In connection with the review of the Company's financial statements for the
quarter ended March 31, 2004, L J Soldinger Associates LLC, the independent
registered accounting firm, notified the Audit Committee and management, of
certain deficiencies they identified that existed in the design and operation of
our internal controls that L J Soldinger Associates LLC considers to be material
weaknesses in the effectiveness of the Company's internal controls pursuant to
standards established by the American Institute of Certified Public Accountants.
A "material weakness" is a reportable condition in which the design or operation
of one or more of the specific internal control components has a defect or
defects that could have a material adverse effect on the Company's ability to
record, process, summarize and report financial data in the financial statements
in a timely manner. The material weaknesses identified by the independent
registered accounting firm included the following weaknesses in various
financial areas of the Company:
o Failed to maintain its accounting records in an accurate, orderly,
timely manner which precluded the Company from meeting the regulatory
filing deadlines.
o Maintaining an inefficient consolidation process which fails to
provide readily identifiable information, or transparency, as to the
source of the accounting data and related consolidating adjustments
made - both at the parent and subsidiary levels.
o Recording various journal entries at the consolidation level but not
recording them at the subsidiary level resulting in accumulated
differences between the consolidated trial balances and subsidiary
trial balances.
o Failing to timely perform an internal review of the general ledger
account balances in order to i) identify and correct bookkeeping
errors, ii) make required period end accruals, and iii) reconcile
supporting detail to account balances.
o Lack of appropriate procedures to establish and maintain appropriate
cost estimates for construction projects.
o Lack of appropriate controls related to maintaining a current accurate
backlog schedule.
o Maintaining accounting records for the Guam office on spreadsheets
outside of the Company's standard accounting software.
o Failure to prepare orderly and concise supporting detail records for
amounts comprising expense accruals.
o Lack of certain controls relating to monitoring and investigating
intercompany balances and related differences and elimination of the
intercompany balances in the consolidation process.
During the course of their audit of our Consolidated Financial Statements for
the fiscal year ended December 31, 2003, our previous independent auditors, KPMG
LLP, advised management and the Audit Committee of our Board of Directors that
they had identified deficiencies in internal control. The deficiencies are
considered to be material weaknesses as defined under standards established by
the American Institute of Certified Public Accountants. The material weaknesses
identified are as follows:
o The monthly and quarterly closing procedures did not provide
information on a timely basis in order to meet financial reporting
requirements, namely, the financial statements required by Form 10-K.
o The monthly monitoring process for certain projects in Saipan did not
provide accurate project information on a timely basis for financial
reporting purposes.
22
Telesource International is committed to maintaining disclosure controls and
procedures that are designed to ensure that information required to be disclosed
in its Exchange Act reports is recorded, processed, summarized and reported
within the time periods specified in the Commission's rules and forms, and that
such information is accumulated and communicated to its management, including
its Chief Executive Officer and Chief Financial Officer, as appropriate, to
allow for timely decisions regarding required disclosure. In designing and
evaluating the disclosure controls and procedures, management recognizes that
any controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control objectives
and are subject to certain limitations, including the exercise of judgment by
individuals, the difficulty in identifying unlikely future events, and the
difficulty to eliminate misconduct completely. As a result, there can be no
assurance that our disclosure controls and procedures will prevent all errors or
fraud or ensure that all material information will be made known to management
in a timely manner.
As a result of further centralization of the Company's operations, in 2003 the
Company identified two material weaknesses in internal controls.
o The monthly and quarterly closing procedures did not provide
information on a timely basis in order to meet financial reporting
requirements, namely, the financial statements required by Form 10-K.
o The monthly monitoring process for certain projects in Saipan did not
provide accurate project information on a timely basis for financial
reporting purposes.
We have taken measures to improve the effectiveness of our internal controls and
we believe these efforts address the matters described above. Certain measures
we have taken through May 31, 2004 include, but are not limited to, the
following:
o centralized our United States regional finance organization, with
direct reporting responsibilities to the Chief Financial Officer;
o hired additional qualified and experienced personnel, specifically in
finance, including a controller located in our main operations area of
the Western Pacific; and
o established training plans for personnel.
As required by Rule 13a-15(b) of the Exchange Act, Telesource has carried out an
evaluation, under the supervision and with the participation of its management,
including its Chief Executive Officer and its Chief Financial Officer, of the
effectiveness of the design and operation of its disclosure controls and
procedures. The evaluation examined those disclosure controls and procedures as
of December 31, 2003, the end of the period covered by this report. Based upon
the evaluation, Telesource's management, including its Chief Executive Officer
and its Chief Financial Officer, concluded that, as of March 31, 2004,
Telesource's disclosure controls and procedures were effective, except as
described above, at the reasonable assurance level to ensure that information
required to be disclosed in Telesource's reports filed or submitted under the
Exchange Act was accumulated and communicated to Telesource's management,
including its Chief Executive Officer and its Chief Financial Officer, as
appropriate to allow timely decisions regarding required disclosure.
It will take some time before we have in place the rigorous disclosure controls
and procedures, including internal controls and procedures, that our Board of
Directors and senior management are striving for. As a result of our efforts,
however, we believe that our Consolidated Financial Statements fairly present,
in all material respects, our financial condition, results of operations and
cash flows as of, and for, the periods presented and that this Form 10-Q, and
that this report contains the information required to be included in accordance
with the Exchange Act.
During 2004, we continued to make improvements in our financial reporting by
continuing to hire qualified personnel and refine our formal review processes.
We will continue to assess our internal controls and procedures and will take
any further actions that we deem necessary.
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 2003 and no new material legal
proceedings have become reportable events during the three months
ended March 31, 2004.
ITEM 2. SALE OF UNREGISTERED SECURITIES
-------------------------------
Sale of Unregistered Securities
The Company sold or issued upon conversion of preferred stock and debt
a total of 32.6 million shares of unregistered common stock during
2004. During the first quarter of 2004, the Company sold 1,000,000
shares of common stock to an investor, Al Amal Investments, on January
27, 2004 at $1 per share. Proceeds from the sale were received by the
Company on January 27, 2004.
The Company sold 2,000,000 shares of common stock to Ernil Continental
(a related party) and 2,200,000 shares of common stock to Halbarad
Group Ltd. (a related party) during the second quarter of 2004 at a
price of $1.00 per share for a total consideration of $4,200,000.
During the fourth quarter of 2004, the Company sold 1,166,706 shares
of common stock to Ernil Continental (a related party) and 1,181,530
shares of common stock to Halbarad Group Ltd. (a related party) at a
price of $0.50 per share for a total consideration of $1,174,118.
During the fourth quarter of 2004, the Company agreed to convert all
of the outstanding shares of preferred stock plus the accumulated
dividend due and scheduled dividends through 2008 on the preferred
stock into common stock at a conversion price of $1.00 per share
equaling 12,873,978 shares of common stock.
Subsequent to March 31, 2004, the Company incurred an additional $1.85
million in debt owed to Bent Marketing, Ltd. During the fourth quarter
of 2004, the Company agreed to convert debt payable for both principal
and interest to Bent Marketing in the amount of $5,552,024 at a
conversion price of $0.50 per share into common stock for a total of
common stock issued to Bent Marketing under this debt conversion of
11,104,047. The Company also agreed to convert debt payable for both
principal and interest to Solas Investments in the amount of $517,500
at a conversion price of $0.50 per share into common stock for a total
of common stock issued to Solas Investments under this debt conversion
of 1,035,000.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
----------------------------------------------------
On July 31, 2004, Telesource International, Inc. held its 2004 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; (ii)
ratified the amendment to the Company's Articles of Incorporation to
increase the number of authorized common stock from 50,000,000 to
100,000,000; and (iii) ratified the amendment to the Company's
Articles of Incorporation to increase the number of authorized
preferred stock from 10,000,000 to 50,000,000.
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 18,588,550 --
Jeff Adams 18,588,550 --
Max Engler 18,588,550 --
Ibrahim Ibrahim 18,588,550 --
Weston Marsh 18,588,550 --
K.J. Semikian 18,588,550 --
Nidal Z. Zayed 18,588,550 --
Broker
Votes For Votes Against Abstentions Non-Votes
--------------- --------------- --------------- ---------------
Ratification of an 18,588,550 -- -- --
amendment to the Articles
of Incorporation to
increase authorized
common stock
Common Common Preferred Preferred
Stockholder Stockholder Stockholder Stockholder
Votes For Votes Against Votes For Votes Against
--------------- --------------- --------------- ---------------
Ratification of an 18,588,550 -- 9,799,999 --
amendment to the Articles
of Incorporation to
increase authorized
preferred stock
25
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
---------------------------------
(a) Exhibits.
Exhibit 31.1 Certificate of the Chief Executive Officer
pursuant to Rule 13a-14(a) of the Exchange Act of
1934
Exhibit 31.2 Certificate of the Chief Financial Officer
pursuant to Rule 13a-14(a) of the Exchange Act of
1934
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 2002.
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 2002.
(b) Reports on Form 8-K.
The Company filed the following reports on Form 8-K during the
last quarter of the period covered by this report:
(1) Current Report on Form 8-K dated April 20, 2004 announcing
that there would be a delaying in the filing of the Company's
2003 Form 10-K;
(2) Current Report on Form 8-K dated May 18, 2004 announcing that
there would be a delaying in the filing of the Company's first
quarter Form 10-Q;
(3) Current Report on Form 8-K dated August 16, 2004 announcing
that the resignation of KPMG;
26
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 February 10, 2005 /s/ K.J. Semikian
-------------------------------------
K.J. Semikian
President and Chief Executive Officer
February 10, 2005 /s/ Bud Curley
-------------------------------------
Bud Curley
Chief Financial Officer
27
Index to Exhibits
Exhibits
--------
31.1 Certificate of the Chief Executive Officer pursuant to Rule
13a-14(a) of the Exchange Act of 1934
31.2 Certificate of the Chief Financial Officer pursuant to Rule
13a-14(a) of the Exchange Act of 1934
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.
28