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, 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 49,568,519 shares of common stock, par value $0.01 per share, of
Telesource International, Incorporated outstanding as of April 25, 2005.
TELESOURCE INTERNATIONAL, INC.
TABLE OF CONTENTS
Page No.
----------
PART I. Financial Information
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets -
September 30, 2004 and December 31, 2003 - Unaudited 1
Condensed Consolidated Statements of Operations -
nine months ended September 30, 2004 and 2003 - Unaudited 2
Condensed Consolidated Statements of Operations -
three months ended September 30, 2004 and 2003 - Unaudited 3
Condensed Consolidated Statements of Comprehensive Loss
for the nine and three months ended September 30, 2004 and
2003 - Unaudited 4
Condensed Consolidated Statements of Cash Flows -
nine months ended September 30, 2004 and 2003 - Unaudited 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
Item 4. Controls and Procedures 23
PART II. Other Information
Item 1. Legal Proceedings 26
Item 2. Sale of Unregistered Securities 26
Item 3. Defaults Upon Senior Securities 26
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 6. Exhibits 28
Signatures 29
PART 1 - FINANCIAL INFORMATION
- ------------------------------
ITEM 1. FINANCIAL STATEMENTS
TELESOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
September 30, December 31,
Assets 2004 2003
------------- -------------
(unaudited)
Current assets:
Cash and cash equivalents $ 1,217,974 $ 1,487,280
Accounts receivable 8,481,140 5,685,485
Current portion of net investment in sales-type lease 1,905,899 1,776,646
Costs and estimated earnings in excess of billings 1,737,777 3,560,452
Prepaid expenses and other current assets 1,468,292 372,029
------------- -------------
Total current assets 14,811,082 12,881,892
Net investment in sales-type lease - long term 8,038,904 9,484,925
Property, plant, and equipment, net 2,107,865 2,288,562
Other assets 101,021 128,063
------------- -------------
Total assets $ 25,058,872 $ 24,783,442
============= =============
Liabilities and Stockholders' Deficit
Current liabilities:
Current portion of long-term debt $ 7,525,764 $ 9,242,195
Accounts payable 4,568,639 3,426,122
Accounts payable - related party 6,393,443 3,467,719
Accrued expenses 1,685,604 1,895,889
Billings in excess of costs and estimated earnings 902,554 246,559
Accrued losses on contracts in progress 1,710,346 --
Other current liabilities -- 161,251
------------- -------------
Total current liabilities 22,786,350 18,439,735
Long-term debt 21,979,533 20,310,222
------------- -------------
Total liabilities 44,765,883 38,749,957
------------- -------------
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
September 30, 2004 and December 31, 2003 14,700,000 14,700,000
Common stock, $0.01 par value. Authorized 100,000,000 shares,
issued and outstanding 22,200,000 shares at September 30, 2004
and 17,000,000 shares at December 31, 2003 222,000 170,000
Additional paid-in capital 12,925,225 7,777,225
Accumulated deficit (47,540,834) (36,630,897)
Accumulated comprehensive loss -
foreign currency translation (13,402) 17,157
------------- -------------
Total stockholders' deficit (19,707,011) (13,966,515)
------------- -------------
Total liabilities and stockholders' deficit $ 25,058,872 $ 24,783,442
============= =============
See accompanying notes to condensed consolidated financial statements.
1
TELESOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (unaudited)
Nine months ended September 30, 2004 and 2003
2004 2003
------------- -------------
Revenues:
Construction revenues $ 13,207,487 $ 13,228,985
Service fees - power generation plant 2,480,143 1,621,242
Service and sales fees 79,991 32,235
Service and sales fees - related party 89,940 --
Rental income 318,918 379,277
Finance lease revenue 753,231 870,931
------------- -------------
Gross revenues 16,929,710 16,132,670
------------- -------------
Cost of revenues:
Construction costs 10,260,266 10,691,222
Construction costs -- related party 5,080,596 2,235,434
Operation and maintenance costs -
power generation plant 2,196,150 1,556,932
Cost of service and sales 376,383 --
Provision for losses on contracts in progress 2,128,078 --
Provision for unbilled and uncollected accounts 1,308,380 --
------------- -------------
Cost of revenues 21,349,853 14,483,588
------------- -------------
Gross (loss) profit (4,420,143) 1,649,082
------------- -------------
Operating expenses:
Salaries and employee benefits 1,239,682 1,337,858
Occupancy and equipment 217,540 219,919
General and administrative 3,085,947 2,699,507
------------- -------------
Total operating expenses 4,543,169 4,257,284
------------- -------------
Operating loss (8,963,312) (2,608,202)
------------- -------------
Other income (expense):
Interest expense (1,198,257) (1,469,774)
Other income, net 30,915 15,797
------------- -------------
Total other expense (1,167,342) (1,453,977)
------------- -------------
Loss before income taxes (10,130,654) (4,062,179)
Income tax expense 62,658 --
------------- -------------
Net loss $ (10,193,312) $ (4,062,179)
------------- -------------
Dividend on preferred stock 716,625 342,554
------------- -------------
Net loss to common stockholders $ (10,909,937) $ (4,404,733)
============= =============
Basic and diluted net loss to common stockholders per share $ (0.54) $ (0.29)
Weighted average common shares outstanding 20,157,511 15,000,000
See accompanying notes to condensed consolidated financial statements.
2
TELESOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (unaudited)
Three months ended September 30, 2004 and 2003
2004 2003
------------- -------------
Revenues:
Construction revenues $ 5,835,491 $ 5,181,270
Service fees - power generation plant 684,819 927,394
Service and sales fees 54,741 32,235
Service and sales fees - related party 89,940 --
Rental income 53,035 80
Finance lease revenue 240,763 280,919
------------- -------------
Gross revenues 6,958,789 6,421,898
Cost of revenues:
Construction costs 3,141,038 5,430,630
Construction costs -- related party 2,780,783 --
Operation and maintenance costs -
power generation plant 669,323 873,960
Cost of service and sales 144,805 --
Provision for losses on contracts in progress 234,857 --
------------- -------------
Cost of revenues 6,970,806 6,304,590
------------- -------------
Gross (loss) profit (12,017) 117,308
------------- -------------
Operating expenses:
Salaries and employee benefits 424,883 313,187
Occupancy and equipment 70,477 74,586
General and administrative 900,220 901,466
------------- -------------
Total operating expenses 1,395,580 1,289,239
------------- -------------
Operating loss (1,407,597) (1,171,931)
------------- -------------
Other income (expense):
Interest expense (470,713) (634,343)
Other income, net 14,477 (695)
------------- -------------
Total other expense (456,236) (635,038)
------------- -------------
Loss before income taxes (1,863,833) (1,806,969)
Income tax expense (12,533) --
------------- -------------
Net loss $ (1,851,300) $ (1,806,969)
------------- -------------
Dividend on preferred stock 238,875 157,665
------------- -------------
Net loss to common stockholders $ (2,090,175) $ (1,964,634)
============= =============
Basic and diluted net loss to common stockholders per share $ (0.09) $ (0.13)
Weighted average common shares outstanding 22,200,000 15,000,000
See accompanying notes to condensed consolidated financial statements.
3
TELESOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Loss (unaudited)
Nine months ended September 30, 2004 and 2003
Nine Months
Ended September 30,
-------------------------------
2004 2003
------------- -------------
Net loss $ (10,193,312) (4,062,179)
Preferred stock dividend (716,625) (342,554)
Other comprehensive loss:
Foreign currency translation adjustment (30,559) 26,268
------------- -------------
Comprehensive loss $ (10,940,496) (4,378,465)
============= =============
TELESOURCE INTERNATIONAL, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Loss (unaudited)
Three months ended September 30, 2004 and 2003
Three Months
Ended September 30,
-------------------------------
2004 2003
------------- -------------
Net loss $ (1,851,300) (1,806,969)
Preferred stock dividend (238,875) (157,665)
Other comprehensive loss:
Foreign currency translation adjustment -- 2,455
------------- -------------
Comprehensive loss $ (2,090,175) (1,962,179)
============= =============
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, 2004 and 2003
2004 2003
------------- -------------
Cash flows from operating activities:
Net loss $ (10,193,312) (4,062,179)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 405,479 283,864
Provision for losses on contracts in progress 2,128,078 --
Provision for unbilled and uncollected accounts 1,308,380 --
Changes in assets and liabilities:
Receivables (4,104,035) (2,367,243)
Costs and estimated earnings in excess of billings 1,822,675 (924,609)
Prepaid expenses and other current assets (1,096,263) (56,281)
Net investment in sales-type lease 1,316,768 1,199,069
Other assets 27,043 44,369
Accounts payable 1,142,517 1,514,908
Accounts payable - related party 2,925,724 216,056
Accrued expenses (866,893) (726,821)
Billings in excess of cost 655,995 --
Other liabilities (161,251) 34,773
------------- -------------
Net cash used in operating activities (4,689,095) (4,844,094)
------------- -------------
Cash flows from investing activities:
Proceeds from sale of equipment 107,466
Capital expenditures (332,248) (602,588)
------------- -------------
Net cash used in investing activities (224,782) (602,588)
------------- -------------
Cash flows from financing activities:
Payment of preferred stock dividends (477,750) (184,889)
Proceeds from sale of preferred stock -- 7,700,000
Proceeds from sale of common stock 5,200,000 --
Proceeds from borrowings 4,300,000 14,974,242
Principal payments on borrowings (4,347,120) (16,159,251)
------------- -------------
Net cash provided by financing activities 4,675,130 6,330,102
------------- -------------
Effect of exchange rate changes on cash (30,559) (28,723)
------------- -------------
Net increase in cash and cash equivalents (269,306) 854,697
Cash and cash equivalents at beginning of period 1,487,280 244,723
------------- -------------
Cash and cash equivalents at end of period $ 1,217,974 1,099,420
============= =============
Supplemental disclosure:
Cash paid during the period for interest $ 1,138,794 1,713,348
============= =============
See accompanying notes to condensed consolidated financial statements.
5
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
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".
Since the beginning of 2005, Telesource has been trading on the Pink Sheets over
the counter exchange under the ticker symbol "TSCI".
6
TELESOURCE INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
3. Summary of Significant Accounting Policies
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 September
30, 2004, the Company's current liabilities exceeded its current assets by $8.0
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 September 30,
2004 the Company had total outstanding debt of $29.5 million of which $7.5
million is due in the next twelve months. As of September 30, 2004 the Company
had an accumulated deficit of $47.5 million and total stockholders' deficit of
$19.7 million.
The Company incurred a net loss of $10.9 million to the common stockholders for
the nine months ended September 30, 2004 and net losses of $6.6 million, $4.9
million, and $7.2 million for the years ended December 31, 2003, 2002 and 2001,
respectively.
Cash used in operating activities during the nine months ended September 30,
2004 and 2003 was $4.7 million and $4.8 million, respectively. The cash used in
operating activities was principally due to the net loss incurred.
Cash used in investing activities was $224,782 for the nine months ended
September 30, 2004 as compared to net cash used in investing activities of
$602,588 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 mainly to capital purchases during 2003 for bucket
trucks leased on Guam and used in the super typhoon clean up efforts.
Cash provided by financing activities generated $4.7 million for the nine months
ended September 30, 2004 as compared to cash provided by financing activities of
$6.3 million for the same period in 2003. The cash generated by financing came
from additional net debt borrowings and the proceeds from the sale of $5.2
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 after
capital injections from the principal stockholder 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 $23.3 million of the Company's
total debt of $29.5 million.
7
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 the Company within
the next twelve months.
While the Company believes it has sufficient financing for its current
working capital needs, there can be no assurance that the Company's present
capital and financing will be sufficient to finance future operations. The
Company 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 the Company 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, the
Company 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.
8
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:
Nine months Ended
-----------------------------
September 30, September 30,
2004 2003
------------ ------------
Net loss as reported $(10,193,312) $ (4,062,179)
Preferred stock dividend (716,625) (342,554)
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 (30,885) (30,885)
------------ ------------
Pro forma net loss before dividend $(10,940,822) $ (4,435,618)
============ ============
Loss per share:
Basic and diluted - as reported $ (0.54) $ (0.29)
Basic and diluted - pro forma $ (0.54) $ (0.29)
Three months Ended
-----------------------------
September 30, September 30,
2004 2003
------------ ------------
Net loss as reported $ (1,851,300) $ (1,806,969)
Preferred stock dividend (238,875) (157,665)
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) (10,295)
------------ ------------
Pro forma net loss before dividend $ (2,100,470) $ (1,974,929)
============ ============
Loss per share:
Basic and diluted - as reported $ (0.09) $ (0.13)
Basic and diluted - pro forma $ (0.09) $ (0.13)
9
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 September 30, 2004 and December
31, 2003:
September 30, December 31,
------------- -------------
2004 2003
------------- -------------
Bent Marketing Limited loan, bearing interest of 7.0%
per annum, unsecured and maturing on December 31, 2005 4,076,025 1,680,000
Bent Marketing Limited loan, bearing interest of 7.0%
per annum, unsecured and maturing on July 31, 2005 950,000 --
Bent Marketing Limited loan, bearing interest of 7.0%
per annum, unsecured and maturing on October 31, 2005 450,000 --
Bank of Hawaii loan, due in quarterly installments of
$118,750 and interest payable monthly at the bank's
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 Sayed Hamid Behbehani & Sons Co. WLL 1,306,250 1,662,500
Bank of Hawaii loan, due in quarterly installments of
$37,941 and interest payable monthly at the bank's
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 Sayed Hamid Behbehani & Sons Co. WLL 412,404 525,017
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 112,636 430,375
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 Sayed Hamid
Behbehani & Sons Co. WLL -- 1,000,000
10
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 Sayed Hamid Behbehani & Sons Co.
WLL. In the event the Company defaults on one
installment payment, the entire loan and accrued
interest become due and payable 11,560,000 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 and a guarantee from Sayed Hamid Behbehani &
Sons Co. WLL 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 30, 2005 due in
payments of 50% of all collections from the radio relay
project in Tinian and the capitol project in Palau with
variable interest of 6.25% Secured by a guarantee from
Sayed Hamid Behbehani & Sons Co. WLL 2,532,705 3,526,812
ANZ loan due on October 1, 2004 with interest of 7.75%
payable on monthly installment 21,997 117,491
ANZ loan due on July 17, 2007 with interest of 8%
payable on monthly installment 61,556 80,801
VB Holdings Motor Vehicle due on September 24, 2006
with interest of 8% payable on monthly installment 21,724 29,421
------------- -------------
Notes payable to creditors 29,505,297 29,552,417
Less current portion 7,525,764 9,242,195
------------- -------------
Total long-term debt $ 21,979,533 20,310,222
============= =============
Subsequent to June 30, 2004, the Company had a debt covenant violation on
its loan with the Al Ahli Bank of Kuwait ("ABK"). 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. This credit facility has been
renewed on October 3, 2004 and currently has a maturity date of September
30, 2005. The Company is working to payoff the facility during the second
quarter of 2005.
Subsequent to September 30, 2004, the Company has repaid its loan with ANZ
bank which matured on October 1, 2004 and has also transferred its loan of
$7.5 million with the Commercial Bank of Kuwait to the Arab Banking
Corporation ("ABC"). The loan transferred to ABC will mature on March 31,
2006.
11
TELESOURCE INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
5. Stockholders' Equity
Preferred Stock
As of September 30, 2004, 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. 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.
At September 30, 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.
On July 31, 2004, Telesource International, Inc. held its 2004 annual
meeting of stockholders. At the annual meeting, the stockholders 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.
Common Stock
On December 31, 2003, 17,000,000 shares of the Company's common stock were
issued and outstanding.
On July 31, 2004, Telesource International, Inc. held its 2004 annual
meeting of stockholders. At the annual meeting, the stockholders 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.
On September 30, 2004, 22,200,000 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.
The Company issued common stock to two investors who are related parties
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.
Subsequent to September 30, 2004 and 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 11,104,047 shares
of common stock. 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 1,035,000 common stock.
12
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:
Nine months Ended Nine months Ended
September 30, September 30,
2004 2003
------------------ ------------------
NUMERATOR - BASIC AND DILUTED LOSS PER SHARE
Net loss $ (10,193,312) $ (4,062,179)
------------------ ------------------
Preferred Stock Dividend 716,625 342,554
------------------ ------------------
Total Numerator (10,909,937) (4,404,733)
================== ==================
DENOMINATOR - BASIC EARNINGS PER SHARE
Weighted average common stock outstanding 20,157,511 15,000,000
================== ==================
Basic loss per share $ (0.54) $ (0.29)
================== ==================
DENOMINATOR - DILUTED EARNINGS PER SHARE
Weighted average common stock outstanding 20,157,511 15,000,000
================== ==================
Diluted loss per share $ (0.54) $ (0.29)
================== ==================
The computation of diluted loss per share for the nine months ended
September 30, 2004 and 2003 does not include 13,024,998 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.
13
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:
Nine months Ended Nine months Ended
September 30, September 30,
2004 2003
------------------ -----------------
Construction cost $5,068,643 $2,235,434
The following table summarizes all balances related to transactions with
SHBC as of September 30, 2004 and as of December 31, 2003:
September 30, 2004 December 31, 2003
------------------ -----------------
Accounts payable $6,393,443 $3,467,719
The Company held an investment in Telebond Insurance Corporation at
September 30, 2004 and at December 31, 2003 in the amount of $79,464 and
$77,695. The Company purchased insurance from Telebond and paid premiums of
$11,953 and $2,027 during the nine months ended September 30, 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 September 30, 2004, Telesource sold its investment in
Telebond.
During the first nine months of 2004, the Company paid Computhink Inc. a
total of $88,078 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.
14
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 Nine months Ended
September 30, 2004
-----------------------------------------------------------------------
Power Generation
and Construction
of Power Plants Trading Construction Total
----------------- ------------- ------------- -------------
Revenue $ 3,439,569 - 13,490,141 16,929,710
Interest income - - - -
Interest expense 1,198,257 - - 1,198,257
Depreciation and amortization 22,197 29,070 354,212 405,479
Income tax expense 62,658 - - 62,658
Net income/(loss) to common
stockholders 78,838 (29,070) (10,959,705) (10,909,937)
Total capital expenditures 42,600 9,500 280,148 332,248
Total assets 14,836,626 110,502 10,111,744 25,058,872
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 1,469,774 - - 1,469,774
Depreciation and amortization 5,370 17,422 261,072 283,864
Income tax expense - - - -
Net income/(loss) to common
stockholders (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
15
TELESOURCE INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
9. Business Segment Information, continued
For the Three Months Ended
September 30, 2004
-----------------------------------------------------------------------
Power Generation
and Construction
of Power Plants Trading Construction Total
----------------- ------------- ------------- -------------
Revenue $ 1,131,777 - 5,827,012 6,958,789
Interest income - - - -
Interest expense 470,713 - - 470,713
Depreciation and amortization 6,399 11,218 137,160 154,777
Income tax benefit (12,533) - - (12,533)
Net income/(loss) to common
stockholders (173,974) (11,218) (1,904,983) (2,090,175)
Total capital expenditures - - - -
Total assets 14,836,626 110,502 10,111,744 25,058,872
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 634,343 - - 634,343
Depreciation and amortization 1,031 6,877 90,494 98,402
Income tax expense - - - -
Net income/(loss) to common
stockholders 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
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 $1,560,303 and $1,718,827 for the nine months ended September 30, 2004
and 2003, respectively, as well as revenues from the power stations
operated by the Company in Fiji in the amount of $1,879,266 and $773,346
for the nine months ended September 30, 2004 and 2003, respectively.
Construction revenues of $4,136,671 and $2,135,494 were recognized within
the Republic of Palau for the nine months ended September 30, 2004 and
2003, respectively. All other revenues within the construction segment for
the nine months ended September 30, 2004 and 2003 were earned in the
Commonwealth of Northern Marianna Islands and the United States.
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 $4.4 million
dollars. The revised cost estimate resulted in an expected loss on the
prison project of $1.1 million. This change in estimate reduced gross
profit during the first nine months of 2004 by $3.1 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
nine months of 2004 by $1 million. The Company has completed the initial
phase of the Cyprus project in December 2004. Also during 2004, the Company
determined that the cost estimated for the radio relay expansion project
located in Tinian was increased by $950,000. The revised cost estimate
resulted in a decrease in the expected profit on the radio relay station
expansion project of $746,000. The Company determined during 2004 that the
cost estimate for the Palau Museum project was increased by $490,481. The
revised cost estimate resulted in an expected loss on the Palau museum
project of $235,000.
11. Subsequent Events
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.
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 credit facility with City Trust Bank in
December 2004 as agreed to and transferred the $7.5 million loan at the
Commercial Bank of Kuwait to the Arab Banking Corporation which after the
transfer has a maturity date of March 31, 2006. 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.
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 is a discussion and analysis of Telesource International, Inc.'s
unaudited financial condition and results of operations for the three and nine
month periods ended September 30, 2004 and 2003. This section should be read in
conjunction with the condensed financial statements and related notes in Item 1
of this report and Telesource International, Inc.'s Annual Report on Form 10-K/A
for the year ended December 31, 2003.
Results of Operations for the nine months ended September 30, 2004 compared to
the nine months ended September 30, 2003
Revenues
Construction Revenues. Construction revenues were unchanged at $13.2 million for
the nine months ended September 30, 2004 compared to September 30, 2003. The
Company is working to complete the projects located in Palau, the radio relay
station on Tinian and the prison project in Saipan and is not adding additional
construction projects to the Company's backlog. The Company has revised the
estimated cost for the prison project, the project located in Cyprus and the
museum project located in Palau, these revised estimates resulted in
construction cost exceeding revenues in the amount of $1.8 million, $199,000 and
$190,000, respectively to adjust for revenues recognized in prior years. The
full loss to be realized on the prison project and the initial phase of the
Cyprus project has been recognized in the first quarter of 2004. The full loss
to be realized on the museum project in Palau has been recognized in the third
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 53.0% to $2.5 million from $1.6 million for the nine months ended
September 30, 2004. 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 in May of 2003.
Service and Sales Fees. Service and sales fees increased 427.2% to $169,931 from
$32,235 for the nine months ended September 30, 2004. Service and sales fees
included net sales revenues realized on sales to a related party. Sales revenues
are recognized net of cost. The amount of sales fees recognized on related party
sales were $89,940 and none for the nine months ended September 30, 2004 and
2003, respectively. The growth in service and sales fees is not expected to be a
significant component of revenues for the foreseeable future.
Rental Income. Rental income decreased 15.9% to $318,918 from $379,277 for the
nine months ended September 30, 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. The decrease in rental income in Guam was offset during the nine months
ended September 30, 2004 by an increase in rental income recognized in Fiji.
Rental income is not expected to be a significant component of revenues for the
foreseeable future.
Finance Lease Revenues. Finance lease revenues decreased 13.5% to $753,231 from
$870,931 for the nine months ended September 30, 2004. The decrease is due to
the declining balance of minimum lease payments, which are amortized to give a
constant rate of return.
18
Expenses
Construction Costs. Total construction costs increased 18.7% to $15.3 million
from $12.9 million for the nine months ended September 30, 2004 compared to
September 30, 2003. Construction cost includes cost to a related party in the
amount of $5,080,596 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 116.2%
and 97.7% for the nine months ended September 30, 2004 and 2003, respectively.
The negative margin during the first nine months of 2004 is due to the revised
cost estimate on the prison project which reduced construction gross profit by
$1.8 million, a revised cost estimate on the radio relay station in Cyprus which
reduced construction gross profit by $199,000 and a revised cost estimate on the
Palau museum project which reduced construction gross profit to a negative
$190,000.
Operations and Maintenance Costs - Power Generation Plant. Operations and
maintenance costs - power generation plant increased to $2.2 million from $1.6
million for the nine months ended September 30, 2004 as compared to the same
period in 2003. The increased costs during 2004 were a result of the addition of
the operation and maintenance of two power plants located in Fiji.
Cost of Service and Sales. The Company recognized cost for service and sales
during the nine months ended September 30, 2004 of $376,383 as compared to none
during the same period in 2003. The increase in cost of service and sales was
due to cost incurred in connection with rental services of equipment which
generated revenues of $318,918 during the same period in 2004.
Provision for Losses on Contracts in Progress. The Company recognized a
provision in the amount of $1.1 million 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 and
the Company recognized a provision in the amount of $234,858 to cover an
expected loss on the Palau museum project.
Provision for Unbilled and Uncollected Accounts. The Company has recorded a
provision for amounts that have not been 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 with the client, the Commonwealth Ports
Authority, 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 7.3% to
$1.2 million from $1.3 million for the nine months ended September 30, 2004 as
compared to 2003. The decrease in salaries and employee benefits is attributed
to staffing reductions.
Occupancy and Equipment. Occupancy and equipment expenses decreased 1.1% to
$217,540 from $219,919 for the nine months ended September 30, 2004. The
decrease in occupancy and equipment cost during the first nine months of 2004 is
due to the closing of the Guam office.
General and Administrative Expenses. General and administrative expenses
increased 14.3% to $3.1 million from $2.7 million for the nine months ended
September 30, 2004 as compared to the same period in 2003. The increase is
attributed to increased cost in professional fees.
Other Expense, Net. Other expense decreased 19.7% to $1.2 million from $1.5
million for the nine months ended September 30, 2004 compared to September 30,
2003. The decrease in other expense is attributed to a reduction in the amount
of debt outstanding for the period achieved through monthly principal payments
on the Commercial Bank of Kuwait debt in the amount of $180,000 per month.
Income Tax Expense. There was no income tax expense for nine months ended
September 30, 2004; however, Telesource International's subsidiary in Fiji had
taxable income of $202,121 resulting in a tax expense of $62,658 in 2004 and
none in 2003.
Net Loss to Common Stockholders. Net loss to common stockholders was $10.9
million as compared to a net loss of $4.4 million for the nine months ended
September 30, 2004 and 2003, respectively. The increase in net loss during the
first nine months of 2004 is attributed primarily to losses realized in
construction segment for the Company.
19
Results of Operations for the three months ended September 30, 2004 compared to
the three months ended September 30, 2003
Revenues
Construction Revenues. Construction revenues increased 12.6% to $5.8 million
from $5.2 million for the three months ended September 30, 2004 compared to
September 30, 2003. The increase is due to management's efforts to complete the
projects currently underway and to not pursue additional construction
opportunities. The Company did complete the West Tinian Airport project during
2003 and was in the process of closing out this project during the second
quarter of 2003. Telesource has only four significant construction contracts
currently underway and is making an effort to complete all of the construction
projects as soon as practical: 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
decreased 26.2% to $684,819 from $927,394 for the three months ended September
30, 2003. The decrease in service fees - power generation plant is due to lower
power production in Fiji which was caused by the breakdown of a 5 megawatt
generator. The generator has been repaired by the manufacturer at no cost to the
Company.
Service and Sales Fees. Service and sales fees increased 348.8% to $144,681 from
$32,235 for the three months ended September 30, 2004. Service and sales fees
included net sales revenues realized on sales to a related party. Sales revenues
are recognized net of cost. The amount of sales fees recognized on related party
sales were $89,940 and none for the three months ended September 30, 2004 and
2003, respectively. The growth in service and sales fees is not expected to be a
significant component of revenues for the foreseeable future.
Rental Income. Rental income increased to $53,035 from $80 for the three months
ended September 30, 2004 and 2003, respectively. Rental income for the three
months ended September 30, 2004 was generated in Fiji.. Rental income is also
not expected to be a significant component of revenues for the foreseeable
future.
Finance Lease Revenues. Finance lease revenues decreased 14.3% to $240,763 from
$280,919 for the three months ended September 30, 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 increased 9.0% to $5.9 million from
$5.4 million for the three months ended September 30, 2004 compared to September
30, 2003. The increase in construction cost is tied to the increase during 2004
in construction activities on the prison project and the Palau construction
projects. Construction cost includes cost to a related party in the amount of
$2,780,783 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 101.5% and
104.8% for the three months ended September 30, 2004 and 2003, respectively. The
negative margin during the third quarter of 2004 is due to the revised cost
estimate on the Palau museum project. The negative margin during the third
quarter of 2003 is due to the revised cost estimate on the West Tinian Airport
project.
Operations and Maintenance Costs - Power Generation Plant. Operations and
maintenance costs - power generation plant decreased 23.4% to $669,323 from
$873,960 for the three months ended September 30, 2004. The decreased costs
during 2004 were a result the shutdown of the 5-megawatt generator in Fiji for
repairs which resulted in a corresponding reduction in power generation revenues
of 26.2% during the third quarter of 2004 as compared to the same period in
2003.
Salaries and Employee Benefits. Salaries and employee benefits increased 35.7%
to $424,883 from $313,187 for the three months ended September 30, 2004 as
compared to 2003. The increase in salaries and employee benefits is attributed
to additional staffing in the administrative area.
20
Occupancy and Equipment. Occupancy and equipment expenses decreased 5.5% to
$70,477 from $74,586 for the three months ended September 30, 2004. The decrease
in occupancy and equipment cost during the third quarter of 2004 is due to
management's cost cutting efforts.
General and Administrative Expenses. General and administrative expenses
decreased 0.1% to $900,250 from $901,466 for the three months ended September
30, 2004 as compared to the same period in 2003. The slight decrease in general
and administrative expenses is attributed to management's efforts to limit
general and administrative cost growth.
Other Expense, Net. Other expense decreased 28.2% to $456,236 from $635,038 for
the three months ended September 30, 2004 compared to September 30, 2003. The
decrease is primarily attributed to principal payments made on debt outstanding
which resulted in a reduction in the amount of interest expense incurred..
Net Loss to Common Stockholders. Net loss to common stockholders increased to
$2.1 million as compared from $2.0 million for the three months ended September
30, 2004 and 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 construction contracts accounted for using the
percentage-of-completion method of accounting in progress at September 30, 2004:
Uncompleted contracts as of December 31, 2003 $ 15,098,231
New contracts and change orders added during the first
nine months of 2004 1,684,347
-------------
16,782,578
Less: Construction revenue for the nine months ended
September 30, 2004 13,207,487
-------------
Balance at September 30, 2004 $ 3,575,091
=============
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 September 2005 $ 7,526 $ 71 $ 15,260
October 2005 to September 2008 19,059 31 -
Thereafter 2,920 - -
--------------- --------------- ---------------
Total $ 29,505 $ 102 $ 15,260
=============== =============== ===============
21
Liquidity and Capital Resources
Since 1994, the Company's primary sources of operating funds have been bank
borrowings, contributions of equity capital and profits realized on projects
completed. On September 30, 2004, 22,200,000 shares of Telesource
International's common stock were issued and outstanding.
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 second quarter of 2005. This credit facility has been renewed and
currently has a maturity date of September 30, 2005.
Cash used in operating activities during the nine months ended September 30,
2004 and 2003 was $4.7 million and $4.8 million, respectively. The cash used in
operating activities was principally due to the loss incurred during the first
nine months of 2004.
Cash used in investing activities was $224,782 and $602,588 for the nine months
ended September 30, 2004 and 2003, respectively. The cash used in investing
activities during 2004 is attributed to capital purchases.
Cash provided by financing activities generated $4.7 million for the nine months
ended September 30, 2004 as compared to cash provided by financing activities of
$6.3 million for the same period in 2003. The cash generated by financing
activities came from additional borrowings and the proceeds from the sale of
$5.2 million worth of common stock during 2004.
Telesource International had a working capital deficit of $8.0 million at
September 30, 2004. The deficit is a result of a significant amount of loans for
the Company being classified as short term as of September 30, 2004 for loans
with a maturity of less than twelve months along with the Company's loan with
ABK which has a covenant violation.
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 September 30, 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 from the
sale of common stock during the first and second quarter of 2005 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.
Subsequent Events
The Company has paid off the credit facility with City Trust Bank in December
2004 as agreed to and has transferred its credit facility of $7.5 million with
the Commercial Bank of Kuwait to the Arab Banking Corporation with a new
maturity date of March 31, 2006. 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.
22
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.
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.
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, 2004 and December 31, 2003, the Registrant had
total debt obligations, including current and long-term obligations, totaling
$29.5 million and $29.6 million, respectively. Of these amounts, fixed rate
obligations totaled $6.2 million and $2.3 million, and variable rate obligations
totaled $23.3 million and $27.2 million, as of September 30, 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 $233,000 higher in 2004 and $272,000 higher in 2003 based on
the respective outstanding balances on an annualized basis of variable rate
obligations at September 30, 2004 and December 31, 2003. The Registrant has no
interest rate swap or exchange agreements.
The Registrant had gross revenues of $1.9 million for the nine months ended
September 30, 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.
23
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.
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;
24
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 September 30, 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.
25
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 nine months ended
September 30, 2004.
ITEM 2. SALE OF UNREGISTERED SECURITIES
-------------------------------
The Company sold or issued upon conversion of preferred stock and debt
a total of 32.7 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.
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.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
--------------------------------
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. This credit facility has been renewed and
currently has a maturity date of September 30, 2005. The Company is
working to payoff the facility during the second quarter of 2005.
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.
26
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
27
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
---------------------------------
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.
28
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 May 25, 2005 /s/ K.J. Semikian
---------------------------------------
K.J. Semikian
President and Chief Executive Officer
May 25, 2005 /s/ Bud Curley
---------------------------------------
Bud Curley
Chief Financial Officer
29
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
32.2 Certification Pursuant to Section 1350 of Chapter 63 of Title 18
of the United States Code -- Chief Financial Officer --
Corporation
30