AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON *
REGISTRATION NO. 333-92445
---------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2 TO
FORM S-4/A
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
Sixth Business Service Group, Inc.
(Exact name of registrant as specified in its charter)
Florida 6770 Applied For
State or other jurisdiction PRIMARY STANDARD I.R.S. Employer
of incorporation INDUSTRIAL Identification No.
or organization CLASSIFICATION CODE NUMBER
2503 W. Gardner Ct.
Tampa, FL 33611
813. 831-9348
(Address, including zip code, and telephone number, including area
code, of registrant's principal executive offices)
Michael T. Williams
PRESIDENT
Sixth Business Service Group, Inc.
2503 W. Gardner Ct.
Tampa, FL 33611
TELEPHONE: 813.831.9348
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As promptly as practicable after this registration statement becomes
effective and after the closing of the merger of the proposed merger
described in this registration statement.
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b, under the securities act, check the
following box and list the securities act registration statement
number of the earlier effective registration statement for the same
offering. *[ ] *registration number,
<PAGE>
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the securities act, check the following box and list the
securities act registration statement number of the earlier effective
registration statement for the same offering. *[ ] *registration
number,
If the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is
compliance with General Instruction G, check the following box. *[ ]
_______________________________________________________________________________
CALCULATION OF REGISTRATION FEE
<TABLE>
<S> <C> <C> <C> <C>
----------------------------------------------------------------------------------------------------------
Title of each class
of securities to be Amount to Proposed maximum Proposed maximum Amount of
registered be registered offering price per unit aggregate offering price registration fee
----------------------------------------------------------------------------------------------------------
Common Stock,
$0.01 per share par 9,790,000 N/A $7,002,118 (2) $1,848.56 (3)
value
----------------------------------------------------------------------------------------------------------
</TABLE>
(1) The maximum number of shares of common stock of Registrant
which may be issued to former holders of shares of common stock
of Telesource International, Inc. pursuant to the merger
described herein.
(2) The registration fee has been calculated pursuant to Rule
457(f)(2). As of March 31, 2000, Telesource International had
retained earnings of $6,205.092. The book value of the shares to
be registered is $7,002,118. In addition, Telesource
International's common stock has a par value of $0.01 per share.
Accordingly, the maximum offering price has been determined to be
the book value of the securities to be registered.
(3) This fee has been calculated pursuant to Section 6(b) of the
Securities Act, as .0264 of one percent of $7,002,118, of which
$1,845.56 has been paid.
-------------------------------------------------------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE
REGISTRANT SHALL FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES
THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN
ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL
THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE
COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a) MAY DETERMINE.
-------------------------------------------------------------------------------
2
<PAGE>
Telesource International, Inc.
INFORMATION STATEMENT FOR SHAREHOLDERS OF TELESOURCE INTERNATIONAL, INC.
Sixth Business Service Group, Inc.
PROSPECTUS
Telesource International, Inc., a Delaware corporation, and Sixth
Business Service Group, Inc., a Florida corporation have entered into
a merger agreement. As a result of the merger, each outstanding share
of Telesource International common stock, other than dissenting
shares, as discussed later in this document, will be exchanged for one
share of Sixth Business Service Group common stock. When the merger
closes, Sixth Business Service Group will change its name to
Telesource International and will be the surviving corporation. It
will then file to have its stock quoted on the OTC Bulletin Board.
The following table contains comparative share information for
shareholders of Telesource International and Sixth Business Service
Group immediately after the closing of the merger.
<TABLE>
<S> <C> <C> <C>
-------------------------------------------------------------------------------------------------------------
Sayed Hamid Behbehani & The other former The current Total
Sons Co. W.L.L., the shareholders of shareholders of Sixth
former principal Telesource Business Service
shareholder of Telesource International Group
International
-------------------------------------------------------------------------------------------------------------
Number 6,129,000 3,661,000 210,000 10,000,000
-------------------------------------------------------------------------------------------------------------
Percentage 61.3% 36.6% 2.1% 100%
-------------------------------------------------------------------------------------------------------------
</TABLE>
Written consents are being solicited from shareholders of Telesource
International. Assuming consents are secured from shareholders owning
more than 50% of the stock of Telesource International, shareholders
who did not consent to the merger will, by otherwise complying with
Delaware corporate law, be entitled to dissenters' rights with respect
to the proposed merger. No consents will be solicited or accepted
until after the effective date of this information statement for
shareholders of Telesource International/prospectus. Based upon the
ownership of more than 50% of Telesource International common stock by
officers, directors and affiliates, it appears that a favorable vote
is assured.
The merger presents some risks. We suggest you review "Risk Factors"
beginning on page 12.
Shareholders of Telesource International who do not wish to give their
written consent have dissenters' rights of appraisal under Delaware
law. If you wish to exercise these rights, you must return the
written consent marked "No consent given" and follow other procedures.
These rights are discussed in detail beginning on *insert page #.
Neither the Securities and Exchange Commission nor any state
securities regulators have approved or disapproved the Sixth Business
Service Group common stock to be issued in the merger or if this
information statement for shareholders of Telesource International
/prospectus is truthful or complete. Any representation to the
contrary is a criminal offense.
The date of this information statement for shareholders of Telesource
International prospectus is ****, and it is first being mailed to
Telesource International shareholders on or about ***.
3
<PAGE>
SOLICITATION OF WRITTEN CONSENTS
NOTICE IS HEREBY GIVEN to shareholders of Telesource International,
Inc. that in accordance with the provisions of Delaware law, you are
asked to consider and give your written consent to a proposal to
approve:
- The merger agreement and plan of reorganization dated as of
November 30, 1999 between Telesource International, a Delaware
corporation, and Sixth Business Service Group, Inc., a Florida
corporation
- The articles of merger which will be filed with the offices of
the secretary of state of the state of Delaware.
In the materials accompanying this notice, you will find an
information statement for shareholders of Telesource
International/prospectus relating to the merger proposal and a form of
written consent. The information statement for shareholders of
Telesource International/prospectus more fully describes the proposal
and includes information about Sixth Business Service Group and
Telesource International. We strongly urge you to read and consider
carefully this document in its entirety.
Telesource International's board of directors has determined that the
merger is fair to you and in your best interests. Accordingly, the
board of directors of Telesource International has unanimously
approved the merger agreement and the board unanimously recommends
that you consent to the transaction.
Telesource International, Inc.
Jeff Karandjeff
Secretary
4
<PAGE>
WRITTEN CONSENT
If you want to give your consent and vote FOR the merger or if you do
not consent and wish to exercise dissenter's rights, please check the
box below, sign below and return to:
FOR _____
Do not consent ______
Jeff Karandjeff
Secretary
Telesource International, Inc.
860 Parkview Blvd.
Lombard, IL 60148
Shareholder #1
Signature___________________________________________________________
Print or Type
Name_____________________________________________________________
Shareholder #2
Signature____________________________________________________________
Print or Type
Name_____________________________________________________________
Number of
Shares__________________________________________________________
If you do not wish to give your consent to vote for the merger, you
may do nothing. Remember, however, that you must comply with the
appropriate provisions of Delaware law to exercise dissenters rights.
5
<PAGE>
TABLE OF CONTENTS
SOLICITATION OF WRITTEN CONSENTS 4
TABLE OF CONTENTS 6
SUMMARY 7
RISK FACTORS 12
MERGER APPROVALS 17
MERGER TRANSACTIONS 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 27
TELESOURCE INTERNATIONAL'S BUSINESS 51
TELESOURCE INTERNATIONAL'S MANAGEMENT 56
MANAGEMENT 56
CONFLICTS OF INTEREST 60
CERTAIN RELEATIONSHIPS AND RELATED TRANSACTIONS 60
TELESOURCE'S PRINCIPAL STOCKHOLDERS 62
DESCRIPTION OF TELESOURCE INTERNATIONAL CAPITAL STOCK 64
SIXTH BUSINESS SERVICE GROUP'S BUSINESS 66
DESCRIPTION OF SIXTH BUSINESS SERVICE GROUP'S CAPITAL STOCK 71
COMPARISON OF RIGHTS OF SIXTH BUSINESS SERVICE GROUP STOCKHOLDERS
AND TELESOURCE INTERNATIONAL SHAREHOLDERS 71
AVAILABLE INFORMATION 71
EXPERTS 72
LEGAL MATTERS 72
Dealer prospectus delivery obligation
Until , all dealers that effect transactions in these
securities, whether or not participating in this offering, are
required to deliver a prospectus.
6
<PAGE>
SUMMARY
In the merger, Telesource International's shareholders will exchange
shares with Sixth Business Service Group, and Sixth Business Service
Group will be the surviving company of Telesource International.
The merger agreement is attached as annex A to this document. We
encourage you to read the merger agreement, as it is the legal
document that governs the merger.
The Companies
Sixth Business Service Group, Inc.
2503 W. Gardner Ct.
Tampa, FL 33611
Telephone: 813/831-9348
We were organized under the laws of the state of Florida in April
1999. Since inception, our primary activity has been directed to
organizational efforts. We were formed as a vehicle to acquire
through a registered securities offering a private company desiring to
become an SEC reporting company in order thereafter to secure a
listing on the over the counter bulletin board.
Telesource International
860 Parkview Blvd.
Lombard, IL 60148
Telesource International was incorporated in Delaware in 1994.
Telesource International is an international engineering and
construction company, which is in the business of constructing
projects, which range from single family housing units to electrical
power generation plants. In the Commonwealth of Mariana Islands we
also operate a diesel fired electric power generation plant for the
sale of electricity to the local power grid. Our facility in Lombard
annually handles the procurement, export and shipping of several
millions of dollars worth of U.S. fabricated products for use by our
subsidiaries or for resale to customers outside of the mainland.
Telesource International was formed in 1994 to facilitate various
intra-corporate activities and, until July 1999, was a wholly owned
subsidiary of SHBC, a Kuwait-based civil, electrical and mechanical
construction company.
We conduct our operations primarily through subsidiaries. We
currently have two subsidiaries. Our Mariana subsidiary, Telesource
International CNMI Inc., handles construction and management of our
power facilities in the Common Wealth of Mariana Islands. Our second
subsidiary, Commsource International Inc., is an international export
company that facilitates the purchase of equipment fabricated in the
U.S. Our branch offices in Guam, Telesource International Pacifica
and Pacifica Power Resources, a trading company, were created to take
advantage of opportunities we believe will be available there.
Telesource International has three main operating segments:
construction services, trading activities and power generation. The
power generation activities commenced in March 1999.
Comparison of the percentage of outstanding shares entitled to vote
held by directors, executive officers and their affiliates and the
vote required for approval of the merger
7
<PAGE>
The majority of Sixth Business Service Group's shares are held by
its directors, executive officers and their affiliates. A majority
vote of the issued and outstanding shares is required to approve the
merger. Shareholders owning the majority of Sixth Business Service
Group's common stock have executed a written consent voting to approve
the merger. No further consent or any of the shareholders of Sixth
Business Service Group is necessary to approve the merger under the
laws of the state of Florida.
More than 50% of Telesource International's shares are held by its
directors, executive officers, principal shareholders and their
affiliates. A majority vote of the issued and outstanding shares is
required to approve the merger. Assuming consents are secured from
shareholders owning more than 50% of the stock of Telesource
International, shareholders who did not consent to the merger will, by
otherwise complying with Delaware corporate law, be entitled to
dissenters' rights with respect to the proposed merger. No consents
will be solicited or accepted until after the effective date of this
information statement for shareholders of Telesource
International/prospectus. Based upon the ownership of more than 50 %
of Telesource International common stock by officers, directors,
principal shareholders and affiliates, it appears that a favorable
vote is assured.
No regulatory approval required
Neither Sixth Business Service Group nor Telesource International is
aware of any governmental regulatory approvals required to be obtained
with respect to the closing of the merger, except for the filing of
the articles of merger with the offices of the secretary of state of
the state of Delaware, the filing with the Commission of the
registration statement on Form S-4 registering the shares and this
information statement for shareholders of Telesource
International/prospectus, and compliance with all applicable state
securities laws regarding the offering and issuance of the shares.
Dissenters' rights
Dissenters' rights of appraisal exist. In general, under Delaware
law, any shareholder who does not give consent for the merger and
files a written demand for appraisal with Telesource International
within 20 days after receiving notice will be paid the fair market
value of the shares on the date of the closing of the merger, as
determined by the board of directors of Telesource International. If
you wish to exercise these rights, you must return the written consent
marked "No consent given" and follow other procedures. These rights
the way you exercise them are discussed in greater detail beginning on
page *insert.
Federal income tax consequences
Tax matters are very complicated and the tax consequences of the
merger to you will depend on the facts of your own situation. You
should consult your tax advisors for a full understanding of the tax
consequences of the merger to you. Telesource International and Sixth
Business Service Group have structured the merger so that neither
Telesource International nor its shareholders should recognize gain or
loss for federal income tax purposes as a result of the merger.
Other Information for Telesource International Stockholders:
- Do not send in your Telesource International stock certificates
now. If the merger is completed, we will send you written
instructions for exchanging your shares.
- The merger has been structured as a tax-free reorganization.
The tax basis in your Telesource International common stock
will carryover and become the tax basis in your new shares of
Sixth Business Service Group common stock.
8
<PAGE>
- Like Telesource International, Sixth Business Service Group has
never paid any dividends.
-If you have any questions about the merger, please call
Bud Curley
Telesource International
860 Parkview Blvd.
Lombard, IL 60148
630-620-4787 x222
[email protected]
Selected Historical Financial Information
The following selected historical financial information of
Telesource International and Sixth Business Service Group has been
derived from their respective historical financial statements, and
should be read in conjunction with the financial statements and the
notes , which are included in this information statement for
shareholders of Telesource International/prospectus.
9
<PAGE>
Telesource International SELECTED HISTORICAL FINANCIAL INFORMATION
The following selected financial data for the three months ended
March 31, 2000 and 1999, and for the years ended December 31, 1999,
1998, 1997, 1996 and 1995 is derived from the Consolidated Financial
Statements of the Company. The data should be read in conjunction
with the Consolidated Financial Statements and other financial
information included elsewhere herein.
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Three Months Ended Twelve Months Ended
March 31, December 31,
_________________________ _____________________________________________________________
2000 1999 1999 1998 1997 1996 1995
_________________________ _____________________________________________________________
Income Statement Data: ($ in 000's) (unaudited) (unaudited) (unaudited) (unaudited)
Construction revenues $ 2,840 $ 3,334 $ 18,612 $ 26,289 $ 3,561 $ - $ -
Other revenues 1,517 988 4,424 7,179 9,815 1,553 2,606
Gross revenues 4,357 4,322 23,036 33,468 13,376 1,553 2,606
Construction costs 2,119 2,209 15,437 21,730 3,563 - -
Other costs 1,415 675 3,162 5,301 8,058 812 2,165
Gross profits 823 1,437 4,438 6,437 1,755 741 441
Salaries and employee benefits 446 208 1,034 387 453 280 115
Occupancy and expense 133 63 246 293 305 34 17
General and administrative expenses 742 455 2,056 749 347 131 235
Permanent impairment of asset - - - 271 - - -
Operating (loss) income (498) 711 1,102 4,737 651 297 74
Other income (expense):
Interest income 552 53 2,044 12 - 3 3
Interest expense (451) - (1,132) (39) (37) - (1)
Other income (expense), net - - 15 4 6 - (80)
Total other income (expense) 101 53 926 (23) (31) 3 (78)
Income before taxes (397) 765 2,028 4,714 620 300 (4)
Income tax (benefit) expense (82) (95) 378 703 26 31 -
Net (loss) income (314) 859 1,650 4,011 594 269 (4)
Common Share Data:
Net (loss) income per share $ (0.03) $ 0.09 $ 0.17 $ 0.40 $ 0.06 $ 0.03 $ -
Book value $ 0.72 $ 0.67 $ 0.75 $ 0.58 $ 0.11 $ 0.05 $ 0.02
Weighted average common shares
outstanding (in 000's) 10,000,000 10,000,000 10,000,000 10,000,000 10,000,000 10,000,000 10,000,000
Period end shares outstanding
(in 000's) 10,000,000 10,000,000 10,000,000 10,000,000 10,000,000 10,000,000 10,000,000
Balance Sheet Data:
Total assets $ 44,668 $ 33,554 $ 42,635 $ 25,596 $ 9,422 $ 1,633 $ 467,988
Working capital (5,450) 4,974 (3,255) (799) (5,288) (603) (86)
Long-term obligations 27,428 25,545 28,510 17,732 278 - -
Shareholders' equity 7,152 6,676 7,467 5,817 1,106 512 243
Performance Data:
Return (loss) on total assets (2.8%) 10.2% 3.9% 15.7% 6.3% 16.5% (0.9%)
Return (loss) on shareholders' equity (17.6%) 51.5% 22.1% 69.0% 53.7% 52.6% (1.8%)
Capital Ratios:
Quick ratio 46.0% 473.0% 51.1% 61.0% 34.2% 46.2% 61.6%
Debt to equity ratio 419.4% 374.5% 381.7% 300.1% 631.1% 200.8% 69.9%
</TABLE>
10
<PAGE>
Sixth Business Service Group SELECTED HISTORICAL FINANCIAL INFORMATION
The following selected unaudited financial data for the ten months
ended December 31, 1999 is derived from the Financial Statements of
Sixth Business Service Group. Sixth Business Service Group was
organized in March 1999 with all activity directed toward
organizational efforts:
March 31, 2000 December 31, 1999
-----------------------------------------
(unaudited)
Total assets $ 0 $ 0
Total liabilities 0 1,000
Equity 0 (1,000)
Three Months Ended Ten Months Ended
March 31, 2000 December 31, 1999
-----------------------------------------
(unaudited)
Sales 0 0
Net loss $ 1,000 $ 5,079
Net loss per share $ 0.00 $ 0.00
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS OF Telesource
International AND Sixth Business Service Group
The merger is considered in substance, a capital transaction rather
than a business combination. The merger of Telesource International
with Sixth Business Service Group will not result in any changes to
the financial statements as presented for Telesource International.
Sixth Business Service Group is a public shell and the combination is
treated as a transfer of shares for cash since the combination is not
a business combination. Pro forma information is not presented since
the combination is not a business combination.
COMPARATIVE PER SHARE DATA
<TABLE>
<S> <C> <C> <C> <C> <C>
March 31, March 31, December 31, December 31, December 31,
2000 1999 1999 1998 1997
-----------------------------------------------------------------------------------
NUMERATOR - BASIC AND DILUTED
EARNINGS PER SHARE
Net (loss) income
before and after merger $ (314,404) $ 859,198 $ 1,650,201 $ 4,010,819 $ 593,590
============ ============ ============ ============ ============
DENOMINATOR - BASIC (LOSS)
EARNINGS PER SHARE
Common stock outstanding
before and after merger 10,000,000 10,000,000 10,000,000 10,000,000 10,000,000
Basic and diluted (loss)
earnings per share
before and after merger $ (0.03) $ 0.09 $ 0.17 $ 0.40 $ 0.06
============ ============ ============ ============ ============
</TABLE>
11
<PAGE>
RISK FACTORS
You should carefully consider the risks described below before making
an investment decision in our company. In addition, you should keep in
mind that the risks described below are not the only risks that we
face. The risks described below are all the risks that we currently
believe are material risks of this offering. However, additional risks
not presently known to us, or risks that we currently believe are
immaterial, may also impair our business operations. Moreover, you
should refer to the other information contained in this prospectus for
a better understanding of our business.
Our business, financial condition, or results of operations could be
adversely affected by any of the following risks. If we are adversely
affected by the risks, then if and when our stock is listed for
trading on the bulletin board, the trading price of our common stock
could decline, and you could lose all or part of your investment.
Telesource International - Risks related to construction activities
--------------------------------------------------------------------
Our dependence on construction contracts for major projects will
cause variations in our revenues and profits from quarter to quarter.
Our quarterly operating results will depend on revenues from
contracts for major projects. We can only undertake a specific number
of projects at any one time. If we finish one project and do not have
another to start on, revenues within the quarter and possibly
subsequent periods could suffer. Management will take steps it deems
appropriate to adjust spending in a timely manner in an effort to
compensate for any unexpected revenue shortfalls. However, we might
not be able to lower spending to a level which will compensate for the
loss of construction revenues and our business and financial condition
will be harmed. If customers cancel or defer existing contracts or if
we fail to obtain new contracts in any quarter, our business, results
of operations and financial condition for that quarter and future
periods could be harmed.
We may not be able to compete successfully because the number of
competitors is increasing and some of our competitors are better
known, multinational construction companies with greater financial and
technical resources and better marketing abilities.
The market for construction services is intensely competitive and
rapidly changing. We compete directly with other firms that focus on
providing general construction services as well as services for more
sophisticated structures, including power plants and broadcasting
facilities. Many of our competitors have well-established reputations
for building residential and technical structures and have longer
operating histories and significantly greater financial, technical,
marketing, personnel and other resources than we have. We are subject
to competition that is expected to intensify in the future. If we are
not able to compete successfully in this changing market place, our
business, financial condition and operating results could suffer.
If we cannot obtain access to sufficient building raw materials,
including, but not limited to, wood, steel and concrete, fabricators
of technical subsystems and to third-party technical experts, sales of
our construction services may decline and this would hurt our
operating results.
We rely on third-party suppliers for raw materials like wood, steel
and concrete; for fabrication of technical equipment subsystems
including diesel generations, antennas, towers and transmitters, and
for providing technical expertise. If we fail to obtain what we need
from these providers, our sales revenue might decrease, or we might
12
<PAGE>
not be able to successfully compete for contracts, which could cause
our business and our financial results to suffer.
Our ability to obtain raw materials; fabrication services and
technical assistance are not under our control and are subject to a
number of outside factors, including:
- Third-parties may increase the price of the raw materials,
fabrication services or technical assistance they provide.
- Many third-party raw material suppliers, fabricators or technical
expertise providers may decide not to provide us with raw
materials, fabrication services or technical expertise.
- We have no long-term contracts with third party suppliers of raw
materials, fabrication services or technical expertise providers,
- We anticipate that our third party contracts will be usually
short term and will be cancelled if we do not fulfill our
obligations.
With no warranty reserves to cover future warranty claims on
commercial equipment we install or on the buildings we build, any
claims which are not covered by our suppliers might have to be covered
by us. We could be required to outlay substantial funds to cover
warranty claims, which could hurt our financial condition.
We offer warranties on our constructions services and power
generating plants. These warranties are usually backed up by
warranties from our vendors; however, we do not have any warranty
reserves. Should we be required to cover the cost for repairs not
covered by the warranties of our vendors or our major vendors warranty
reserves are determined to be inadequate to cover future warranty
claims, we could be required to outlay substantial funds, which could
hurt our financial condition.
Telesource International - Risks related to power generation activities
----------------------------------------------------------
If our power-generating asset fails to perform, we would be unable
to collect revenues due us for power generation. This would harm both
our cash flow and our earnings.
We own a 10-year security interest and title in a diesel fired
electric generating facility with a maximum power generation capacity
of 30 Mw located on the island of Tinian, in the Commonwealth of
Northern Mariana Islands, a U.S. possession. This facility from time
to time may experience both scheduled and unscheduled shutdowns.
Periodically, the facility will incur scheduled shutdowns in order to
perform maintenance procedures to equipment that cannot be performed
while the equipment is operating. Occasionally, the facility may also
incur unscheduled shutdowns or may be required to operate at reduced
capacity levels following the detection of equipment malfunctions, or
following minimum generation orders received by the utility. During
periods when the facility is shutdown or operating at reduced capacity
levels, we may incur losses due to the loss of its operating revenues
and/or due to additional costs which may be required to complete any
maintenance procedures. It is not possible for us to predict the
frequency of future unscheduled shutdowns or to predict the extent of
maintenance which may be required during shutdowns related to
equipment maintenance.
13
<PAGE>
We will depend on a single customer continuing to purchase electric
power, which, if they fail to do so, would reduce our revenues and may
result in losses.
Since March 1999, we began deriving a portion of our revenues from
the sale of electric power. Although our customers cannot reduce
consumption quickly and without penalty as a result of minimum
purchase requirements, if the customers default or purchase only the
minimum, our revenues will not meet projections for that quarter and
future periods, which will cause our business, results of operations
and financial condition to suffer.
Our insurance or reserves may be insufficient to cover future
claims on our power generation activities. Should we face a claim of
this sort, we may be liable for substantial monetary outlays, which
could harm our financial condition.
Our power generation activities involve significant risks to us for
environmental damage, equipment damage and failures, personal injury
and fines and costs imposed by regulatory agencies. In the event a
liability claim is made against us, or if there is an extended outage
or equipment failure or damage at our power plant for which it is
inadequately insured or subject to a coverage exclusion, and we are
unable to defend against these claims successfully or obtain
indemnification or warranty recoveries, we may be required to pay
substantial legal fees and penalties, which could harm our business.
We maintain general and excess liability, construction equipment, and
workers' compensation insurance; all in amounts consistent with
industry practices. Management believes its insurance programs are
adequate.
We need to expand in anticipation of what we anticipate will be
increasing demand for our construction service, which will require
substantial expenditures well in advance of potential revenue. If our
efforts to expand disrupt our existing business, causing projects to
be delayed, we could fail to meet our revenue projections, and out
business could suffer.
We will need to expand in anticipation of a growing user base and
larger demand for our services. Expansion will require us to make
significant up front expenditures for increasing our sales and
marketing efforts and to hire and train additional project managers,
engineers and facilities operators. Should the anticipated increased
demand fail to materialize, our financial condition, and our business,
could be harmed. Expansion must also be completed without disruptions
of existing operations.
Telesource International - Other risks
---------------------------------------
Risks in our international operations could interrupt the supply of
our construction and power generation products and services.
Our international operations are subject to the inherent risks of
doing business abroad. The loss of any or all of our international
suppliers and customers could harm our ability to deliver our
construction services and power services on time and cause our sales
to decline. Our financial performance could be harmed by many events
and circumstances relating to our international operations, including:
* Shipping delays and cancellations;
* Increases in import duties and tariffs;
* Foreign exchange rate fluctuations;
* Changes in foreign laws and regulations; and
* Political and economic instability.
14
<PAGE>
We are subject to government regulation by federal, state, and
municipal agencies and authorities, including regulations concerning
the operations of our power generation plant and the protection of the
environment. The result of changes in this governmental regulation
could be increased costs for us or increased difficulties in obtaining
necessary permits or in renewing existing permits.
While compliance with applicable regulatory requirements has not
adversely affected our operations in the past relative to our
competitive position within our industry sector, government
regulations can change, which could increase our costs in complying
with these changes. In addition, our aggregate materials operations
require operating permits granted by governmental agencies. We believe
that tighter regulations for the protection of the environment and
other factors will make it increasingly difficult to obtain new
permits and renewal of existing permits may be subject to more
restrictive conditions than currently exist.
Our operating results could be effected if our agreement with SHBC,
Inc. to purchase construction materials from us is terminated.
Sales of U.S. fabricated materials to SHBC accounted for 82.0% of
our total sales for the three months ended March 31, 2000 and 86.7% of
our total sales in 1999. The sales to SHBC are expected to decline
in the remaining nine months of 2000. The agreement with SHBC is
short-term in nature and can be cancelled at will. The loss of
purchases of U.S. fabricated materials by SHBC would cause us a
substantial drop in revenue, which would hurt our financial position
and our business.
The largest stockholder owns approximately 61% of the common stock
outstanding after the merger, which may impact the ability of minority
stockholders to influence our activities.
The largest stockholder, SHBC, including beneficial owners of
Telesource International common stock, will be able to control the
outcome of all matters submitted to a vote of the holders of common
stock, including the election of directors, amendments to our
certificate of incorporation and approval of significant corporate
transactions. These persons will beneficially own, in the aggregate,
approximately 61% of our outstanding common stock. This consolidation
of voting power could also have the effect of delaying, deterring or
preventing a change in control of Telesource International that might
be beneficial to other stockholders.
The price of our stock may fall if our insiders sell a large number
of their shares.
After the merger, we will have 10,000,000 shares of common stock
outstanding, 9,790,000 of which are being issued under this
registration statement. The remaining 210,000 shares owned by Sixth
Business Service Group shareholders before the merger plus 6,392,000
of the shares being issued hereunder which are owned by officers,
directors, control persons and affiliates plus 300,000 shares owned by
persons receiving the 300,000 shares as compensation with this
transaction are restricted securities as defined under Rule 144 of the
Securities Act and may only be sold under the Rule or otherwise under
an effective registration statement or an exemption from registration,
if available. Rule 144 generally provides that a person who has
satisfied a one year holding period for the restricted securities may
sell, within any three month period (provided we are current in our
reporting obligations under the Exchange Act) subject to resale
provisions, an amount of restricted securities which does not exceed
the greater of 1% of a company's outstanding common stock or the
average weekly trading volume in these securities during the four
calendar weeks prior to the sale. However, because the 6,392,000
insider shares are being issued under this registration statement, the
one-year holding period does not apply. A sale of shares by these
security holders, whether under Rule 144 or otherwise, may have a
depressing effect upon the price of our common stock in any market
that might develop.
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There has been no prior market for our common stock. If we don't get
our stock listed for trading after the merger, we will not have
satisfied the primary objective of the merger transaction.
Prior to this offering, you could not buy or sell our common stock
publicly. We may not be able to secure a market maker to file an
application to have our stock listed for trading. Even if we do, an
active public market for our common stock may not develop or be
sustained after the offering.
The price of our common stock may be volatile. You may not be able
to sell your stock for more than you paid for it.
The market price of the common stock may fluctuate significantly in
response to a number of factors, some of which are beyond our control,
including:
* quarterly variations in operating results
* changes in financial estimates by securities analysts
* changes in market valuation of construction and electric power
companies
* announcements by us of significant contracts, acquisitions,
strategic partnerships, joint ventures or capital commitments
If our stock prices prove to be volatile, we may be subject to
securities class action litigation, which could result in substantial
costs.
In the past, securities class action litigation has often been
brought against a company following periods of volatility in the
market price of its securities. We may in the future be the target of
similar litigation. Securities litigation could result in substantial
costs and divert management's attention and resources, which could
harm our business, operating results and financial condition.
We may be subject to penny stock rules that may make it more
difficult for you to sell your shares.
Broker-dealer practices in connection with transactions in penny
stocks are regulated by penny stock rules adopted by the Commission.
Penny stocks generally are equity securities with a price of less than
$5.00. The penny stock rules require a broker-dealer, prior to a
transaction in a penny stock not otherwise exempt from the rules, to
deliver a standardized risk disclosure document that provides
information about penny stocks and the risks in the penny stock
market. The broker-dealer also must provide the customer with current
bid and offer quotations for the penny stock, the compensation of the
broker-dealer and its salesperson in the transaction, and monthly
account statements showing the market value of each penny stock held
in the customer's account. In addition, the penny stock rules
generally require that prior to a transaction in a penny stock, the
broker-dealer make a special written determination that the penny
stock is a suitable investment for the purchaser and receive the
purchaser's written agreement to the transaction.
These disclosure requirements may have the effect of reducing the
level of trading activity in the secondary market for a stock that
becomes subject to the penny stock rules. If our shares immediately
following the closing of the merger and listing of our stock are
subject to subject to penny stock rules, our shareholders will in all
likelihood find it more difficult to sell their securities.
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MERGER APPROVALS
Approval of the merger
On November 3, 1999, Michael T. Williams as the sole member of
our board of directors approved the merger proposal. All of our
stockholders approved the merger proposal on the same date.
On November 3, 1999, Telesource International's board of directors
unanimously approved the merger proposal. Assuming consents are
secured from shareholders owning more than 50% of the stock of
Telesource International, shareholders who did not consent to the
merger will, by otherwise complying with Delaware corporate law, be
entitled to dissenters' rights with respect to the proposed merger. No
consents will be solicited or accepted until after the effective date
of this information statement/prospectus.
MERGER TRANSACTIONS
As of March 31, 2000, Telesource International had 10,000,000 shares
of common stock issued and outstanding. Before the merger occurs, SHBC
will retire 210,000 shares of Telesource International common stock by
contributing it to Telesource International. The retirement of 210,000
shares by SHBC will lower the number of shares outstanding to
9,790,000 shares at the time of the merger. The merger agreement
provides that each outstanding share of Telesource International
common stock, other than dissenting shares, as defined later in this
document, will be exchanged for one share of Sixth Business Service
Group common stock. Immediately after the closing of the merger, the
former holders of Telesource International common stock will hold in
the aggregate 9,790,000 shares, or 97.9% of the shares of Sixth
Business Service Group common stock to be outstanding immediately
after the closing of the merger, which includes the 300,000 shares
being transferred as compensation for this transaction.
Sixth Business Service Group had 1,000,000 shares of its common
stock issued and outstanding at March 31, 2000 to two shareholders,
Michael T. Williams and Nidal Zayed. In connection with the merger, we
agreed to effect a reverse split such that Mr. Williams will own
100,000 shares prior to the closing of the merger. Mr. Zayed's shares
were issued subject to reverse split protection such that his shares
will not be reduced. Accordingly, there will be 210,000 shares of
Sixth Business Service Group common stock outstanding. None of the
shares of Sixth Business Service Group common stock outstanding prior
to the closing of the merger will be converted or otherwise modified
in the merger and all of such shares not otherwise retained by our
stockholders as provided in the merger agreement will be outstanding
capital stock of Sixth Business Service Group after the closing of the
merger.
Upon closing of the merger, Sixth Business Service Group will issue
9,790,000 shares to the Telesource International shareholders on a
one-for-one basis. After the issuance of these shares, Sixth Business
Service Group will have 10,000,000 shares of its common stock
outstanding.
The agreement provides that prior to or at closing of the merger,
Sixth Business Service Group will
* Reincorporate in Delaware
* Change its name to Telesource International, Inc.
* Adopt Telesource International's articles of incorporation and
bylaws
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* Elect, effective upon the effectiveness of the merger, a new
board of directors to consist of Nidal Z. Zayed, K. J.
Semikian, Weston Marsh, Max Engler, Jeff Adams and Ibrahim M.
Ibrahim.
The agreement provides that Telesource International's shareholders
who vote against the merger are entitled to dissenters' rights with
respect to the proposed receipt of shares of Sixth Business Service
Group common stock as set forth in Delaware law.
The merger will be consummated promptly after this information
statement/prospectus is declared effective by the SEC and upon the
satisfaction or waiver of all of the conditions to the closing of the
merger. The merger will become effective on the date and time a
properly executed articles of merger are filed with the offices of the
secretary of state of Delaware. Thereafter, Telesource International
will be merged and Sixth Business Service Group, with the result that
Telesource International will cease to exist and Sixth Business
Service Group will be the surviving corporation in the merger.
Fractional shares.
As of the date of this information statement/prospectus, there were
no fractional shares of Telesource International's common stock
outstanding. Because each outstanding share of Telesource
International's common stock will be entitled to receive one share of
Sixth Business Service Group's common stock under the terms of the
merger agreement, there will be no fractional shares issued in the
merger.
Bulletin board listing
Sixth Business Service Group will be subject to the reporting
requirements of the securities exchange act of 1934 after the merger
as a result of its filing of a form 8-A electing to be a reporting
company subject to the requirements of the 1934 act.
Upon closing of the merger, Sixth Business Service Group will seek
to become listed on the over the counter bulletin board under the
symbol "****". If and when listed, the Telesource International's
shareholders will hold shares of a publicly traded Delaware
corporation subject to compliance with the reporting requirements of
the exchange act. Because the state of incorporation, articles and
bylaws of Sixth Business Service Group will be the same as those of
Telesource International prior to the merger, the rights of
shareholders of Telesource International will not change as a result
of the merger.
Background of the merger
In April 1999, Mr. Mr. Nidal Zayed, Executive Vice President of
Telesource International contacted Venture Associates to inquire about
the possibility of locating a company such as Sixth Business Service
Group to acquire Telesource International in order that Telesource
International could become an SEC reporting company and thereafter
secure a listing on the over the counter bulletin board. Venture
Associates referred Mr. Zayed to Longman & Associates, Inc., which was
retained by Telesource International in June 1999 for a fee of $90,000
plus 300,000 shares of Telesource International common stock. Venture
Associates has agreed to act as an uncompensated finder in connection
with the acquisition transaction. The common stock that was to be paid
to Longman & Associates, Inc. is to be paid by SHBC. In May, 1999,
Longman & Associates retained Sixth Business Service Group to provide
services necessary to accomplish Telesource International's objectives
for a fee of $45,000. At the request of Mr. Zayed, in May 1999, Sixth
Business Service Group sold Mr. Zayed 110,000 shares for aggregate
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consideration of $100. Thereafter, there were numerous telephone
conversations between the companies relating to various aspects of the
potential merger, including in-depth discussions concerning the steps
that needed to be taken to close the merger.
Following these discussions, representatives of Sixth Business
Service Group and Telesource International negotiated the remaining
basic structure, terms and conditions of the merger. After having
reached resolution on all open issues, a merger agreement was drafted
and Telesource International convened a special meeting of its board
of directors at which the agreement of merger and the other
transactions required by the merger agreement were discussed and
reviewed. In connection with these discussions, SHBC agreed that prior
to closing the merger, it will surrender 210,000 shares of Telesource
International common stock for retirement and will assume Telesource
International's obligation to transfer 300,000 shares as described
above. The purpose of these actions is to reduce the number of shares
of the surviving corporation to be outstanding after the merger to
10,000,000 and to have SHBC absorb the dilutive effect of the
transaction in full. All Telesource International shareholders other
than SHBC and affiliates currently own 36.61% of Telesource
International stock and will own 36.61% of Sixth Business Service
Group common stock after the merger as a result. Accordingly, no
dilution will occur to any Telesource International shareholder other
than SHBC as a result of the merger. Thereafter, on November 3, 1999,
the board of directors of Telesource International unanimously adopted
and approved the agreement of merger and the transactions required by
the merger agreement.
On November 3, 1999, Michael T. Williams, as the sole director of
Sixth Business Service Group, approved the agreement of merger and the
transactions required by the merger agreement. As of November 3, 1999,
the agreement of merger was executed and delivered by each of the
parties.
In March 2000, Mr. Longman joined Harrison Douglas, an NASD
broker/dealer. As a condition of Mr. Longman's employment, Longman &
Associates was required to assign its contract to Harrison Douglas. Of
the funds payable under the agreement assigned to Harrison Douglas,
$45,000 is being paid to us on behalf of Telesource, which we are
treating as a merger fee. Of this fee, $5,000 will be paid to Mr.
Williams as salary for acting as an executive officer and director and
signing this registration statement, and the remaining $40,000 will be
paid to Williams Law Group, P.A. as legal fees for preparation of this
registration statement. In addition, following a reverse split of our
stock prior to the closing of the merger, Mr. Williams through his
blind trust will own 100,000 shares of the surviving company.
Neither of the respective boards of Directors of Sixth Business
Service Group or Telesource International requested or received, or
will receive, an opinion of an independent investment banker as to
whether the merger is fair, from a financial point of view, to Sixth
Business Service Group and its stockholders Telesource International
and its shareholders.
Reasons for the merger
Sixth Business Service Group' reasons for the merger.
In considering the merger, the Sixth Business Service Group board
took note of the fact that a merger with Telesource International
would accomplish all of Sixth Business Service Group's business
objectives. Accordingly, the Sixth Business Service Group board
determined that the merger proposal was fair to, and in the best
interests of, Sixth Business Service Group and the Sixth Business
Service Group's stockholders.
Telesource International's reasons for the merger.
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* Increase the visibility of Telesource International's business,
which could be helpful in further developing and
commercializing Telesource International's products.
* Facilitate Telesource International's ability to raise capital
in the public markets.
* Potentially improve Telesource International's shareholders'
ability to sell their shares in the over-the-counter market.
Interests of certain persons in the merger
Upon the closing of the merger, the current directors and executive
officers of Telesource International will become the directors and
executive officers of the surviving corporation. Mr. Nidal Zayed
owns110,000 shares of Sixth Business Service Group.
Selection of Pender Newkirk & Company as auditors
After Telesource International began evaluating the option of
merging with Sixth Business Service Group, management determined that
Telesource International needed to hire an external audit firm which
is a member of the SEC Practice Division to perform a consolidated
audit of the company's financial statements and to assist the company
with SEC reporting requirements. Telesource also needed a firm with
experience in auditing companies within the construction and
engineering industry and that was prepared to begin the audit right
away. Telesource did use a local firm in Lombard, Illinois to perform
an annual audit; however, the local firm in Lombard, Illinois did not
meet the required SEC reporting experience. Telesource International
began a search for an audit firm which met these requirements and
after discussing the need to locate a firm which met our requirements
with Mike Williams of Williams Law Group, Telesource was referred to
Pender Newkirk & Company by Mr. Williams.
Material Federal Income Tax Consequences
The following discussion summarizes the material federal income tax
consequences of the merger that are generally applicable to holders of
Telesource International's common stock. This discussion is based on
currently existing provisions of the Internal Revenue Code of 1986,
existing and proposed Treasury Regulations thereunder and current
administrative rulings and court decisions, all of which are subject
to change. Any such change, which may or may not be retroactive, could
alter the tax consequences to the Telesource International
shareholders, as described herein.
Telesource International's shareholders should be aware that this
discussion does not deal with all federal income tax considerations
that may be relevant to particular shareholders in light of their
particular circumstances, such as shareholders who are dealers in
securities, banks or insurance companies, are subject to the
alternative minimum tax provisions of the code, are foreign persons,
are tax-exempt entities, are taxpayers holding stock as part of a
conversion, straddle, hedge or other risk reduction transaction, or
who acquired their shares in connection with stock option or stock
purchase plans or in other compensatory transactions. In addition, the
following discussion does not address the tax consequences of the
merger under foreign, state or local tax laws or the tax consequences
of transactions effectuated prior to, concurrently with or after the
merger as a result of its filing of a Form 8-A electing to be a
reporting company subject to the requirements of the 1934 act, whether
or not such transactions are in connection with the merger.
Accordingly, all shareholders are urged to consult their own tax
advisors as to the specific consequences of the merger to them,
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including the applicable federal, state, local and foreign tax
consequences of the merger in their particular circumstances.
Neither Sixth Business Service Group nor Telesource International
has requested, or will request, a ruling from the Internal Revenue
Service, IRS, with regard to any of the federal income tax
consequences of the merger. It is the opinion of Williams Law Group,
P.A., counsel to Sixth Business Service Group, that the merger will
constitute a reorganization under Section 368(a) of the code. The tax
opinion is based on certain assumptions, as well as representations
received from Telesource International, Sixth Business Service Group
and certain shareholders of Telesource International and will be
subject to the limitations discussed below. Of particular importance
are the assumptions and representations relating to the continuity of
interest requirement discussed below. Moreover, the tax opinions will
not be binding on the IRS nor preclude the IRS from adopting a
contrary position. The tax description set forth below has been
prepared and reviewed by Williams Law Group, and in their opinion, to
the extent such descriptions relates to statements of law, it is
correct in all material respects. The following tax consequences are
implicit in the firm's opinion that the merger is a 368(a)
reorganization.
Subject to the limitations and qualifications referred to herein,
and as a result of the merger's qualifying as a reorganization, the
following federal income tax consequences should, under currently
applicable law, result:
* No gain or loss will be recognized for federal income tax
purposes by the holders of Telesource International common stock
upon the receipt of Sixth Business Service Group common stock
solely in merger for such Telesource International common stock
in the merger, except to the extent that cash is received by the
exercise of dissenters' rights.
* The aggregate tax basis of the Sixth Business Service Group
common stock so received by Telesource International shareholders
in the merger will be the same as the aggregate tax basis of the
Telesource International common stock surrendered in merger
therefore.
* The holding period of the Sixth Business Service Group common
stock so received by each Telesource International shareholder in
the merger will include the period for which the Telesource
International common stock surrendered in merger therefore was
considered to be held, provided that the Telesource International
common stock so surrendered is held as a capital asset at the
closing of the merger.
A holder of Telesource International common stock who exercises
dissenters' rights with respect to a share of Telesource International
common stock and receives a cash payment for such share generally
should recognize capital gain or loss, if such share was held as a
capital asset at the closing of the merger, measured by the difference
between the shareholder's basis in such share and the amount of cash
received, provided that such payment is not essentially equivalent to
a dividend within the meaning of Section 302 of the code nor has the
effect of a distribution of a dividend within the meaning of Section
356(a)(2) of the code after giving effect to the constructive
ownership rules of the code. A sale of shares under an exercise of
dissenters' rights generally will not be so treated if, as a result of
such exercise, the shareholder exercising dissenters' rights owns no
shares of capital stock of the Sixth Business Service Group, either
actually or constructively within the meaning of Section 318 of the
code, immediately after the merger.
Neither Sixth Business Service Group nor Telesource International
will recognize gain solely as a result of the merger.
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Characterizing the merger as a reorganization is dependent on
certain requirements. One key requirement is that there is a
continuity of interest with respect to the business of Telesource
International. In order for the continuity of interest requirement to
be met, shareholders of Telesource International must not, under a
plan or intent existing at or prior to the closing of the merger,
dispose of so much of their Telesource International common stock in
anticipation of the merger, plus the Sixth Business Service Group
common stock received in the merger that the Telesource International
shareholders, as a group, would no longer have a significant equity
interest in the Telesource International business being conducted by
the us after the merger .
Telesource International shareholders will generally be regarded as
having a significant equity interest as long as the Sixth Business
Service Group common stock received in the merger, in the aggregate,
represents a substantial portion of the entire consideration received
by the Telesource International shareholders in the merger. This
requirement is frequently referred to as the continuity of interest
requirement. If the continuity of interest requirement is not
satisfied, the merger would not be treated as a reorganization. The
law is unclear as to what constitutes a significant equity interest or
a substantial portion. The IRS ruling guidelines require eighty
percent continuity, although such guidelines do not purport to
represent the applicable substantive law. The continuity of interest
certificates obtained from such shareholders contemplates that the
eighty percent standard will be applied. If such requirement is not
satisfied, the merger will not be treated as a reorganization.
A successful IRS challenge to the reorganization status of the
merger would result in significant tax consequences. For example,
* Telesource International would recognize a corporate level gain
or loss on the deemed sale of all of its assets equal to the
difference between
* The fair market value of all assets owned by Telesource
International less all liabilities owed by Telesource
International on the merger date
* Telesource International shareholders would recognize gain or
loss with respect to each share of Telesource International
common stock surrendered equal to the difference between the
shareholder's basis in such share and the fair market value, as
of the closing of the merger, of the Sixth Business Service
Group common stock received in merger therefore.
In such event, a shareholder's aggregate basis in the Sixth Business
Service Group common stock so received would equal its fair market
value and the shareholder's holding period for such stock would begin
the day after the merger as a result of its filing of a form 8-A
electing to be a reporting company subject to the requirements of the
1934 act is consummated.
Even if the merger qualifies as a reorganization, a recipient of
Sixth Business Service Group common stock would recognize income to
the extent that, for example, any such shares were determined to have
been received in merger for services, to satisfy obligations or in
consideration for anything other than the Telesource International
common stock surrendered. Generally, such income is taxable as
ordinary income upon receipt. In addition, to the extent that
Telesource International shareholders were treated as receiving,
directly or indirectly, consideration other than Sixth Business
Service Group common stock in merger for such shareholder's common
stock gain or loss would have to be recognized.
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Termination.
At any time prior to the Effective Date, the merger agreement may
be terminated, and the merger abandoned under certain circumstances,
including:
* By mutual consent of Sixth Business Service Group and
Telesource International
* By either party if any of the other party's representations and
warranties contained in the merger agreement shall be or shall
have become inaccurate, or if any of the other party's
covenants contained in the merger agreement shall have been
breached
* By either party if a court of competent jurisdiction or other
governmental body shall have issued a final and nonappealable
order, decree or ruling, or shall have taken any other action,
having the effect of permanently restraining, enjoining or
otherwise prohibiting the merger
* By Telesource International if the special meeting shall have
been held and the merger agreement shall not have been adopted
and approved at such meeting by the required vote
* By Telesource International if Telesource International
reasonably determines that the timely satisfaction of any
condition to its obligations to consummate the merger has
become impossible or unlikely.
Dissenters' Rights
The following summary of dissenters' rights under Delaware law is
qualified in its entirety by reference to section 262, Delaware
General Corporation Law. However, the summary does contain all
material information in section 262.
Pursuant to section 262 of the Delaware General Corporation Law, the
holder of record of any shares of Telesource International common
stock who does not vote such holder's shares in favor of adoption and
approval of the merger may assert appraisal rights and elect to have
the "fair value" of such holder's shares of Telesource International
common stock determined and paid to such holder, provided that such
holder complies with the requirements of section 262, summarized
below. All references to and summaries of the rights of the dissenting
shareholders are qualified in their entirety by reference to the text
of section 262 of the DGLC which is attached to this Information
statement as Exhibit C.
Any shareholder entitled to vote on the merger who desires that
Telesource International purchase shares of Telesource International
common stock held by such shareholder, must not vote in favor of
adoption and approval of the merger. Shares of Telesource
International common stock voted in favor of adoption and approval of
the merger will be disqualified as dissenting shares.
Shareholders whose shares are not voted in favor of adoption and
approval of the merger and who, in all other respects, follow the
procedures specified in section 262 will be entitled to have their
Telesource International common stock appraised by the Delaware Court
of Chancery and to receive payment of the "fair value" of such shares,
exclusive of any element of value arising from the accomplishment or
expectation of the merger, as determined by the Court. The procedures
set forth in section 262 must be strictly complied with. Failure to
follow any such procedures will result in a termination or waiver of
appraisal rights under section 262.
Under section 262, a holder of Telesource International common stock
may exercise appraisal rights as follows:
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* Either before the effective date of the merger or consolidation
or within ten days thereafter, Telesource International shall
notify each of the holders of any of its class or series of stock
who are entitled to appraisal rights of the approval of the
merger or consolidation and that appraisal rights are available
for any or all shares of such class or series of stock, and shall
include in such notice a copy of this section; provided that, if
the notice is given on or after the effective date of the merger
or consolidation, such notice shall be given by the surviving or
resulting corporation to all such holders of any class or series
of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the
effective date of the merger or consolidation, shall, also notify
such stockholders of the effective date of the merger or
consolidation.
* Any stockholder entitled to appraisal rights may, within 20 days
after the date of mailing of such notice, demand in writing from
the surviving or resulting corporation the appraisal of such
holder's shares. Such demand will be sufficient if it reasonably
informs the corporation of the identity of the stockholder and
that the stockholder intends thereby to demand the appraisal of
such holder's shares. If such notice did not notify stockholders
of the effective date of the merger or consolidation, either (i)
each corporation shall send a second notice before the effective
date of the merger or consolidation notifying each of the holders
of any class or series of stock of such corporation that are
entitled to appraisal rights of the effective date of the merger
or consolidation or (ii) the surviving or resulting corporation
shall send such a second notice to all such holders on or within
10 days after such effective date; provided, however, that if
such second notice is sent more than 20 days following the
sending of the first notice, such second notice need only be sent
to each stockholder who is entitled to appraisal rights and who
has demanded appraisal of such holder's shares in accordance with
this subsection. An affidavit of the secretary or assistant
secretary or of the transfer agent of the corporation that is
required to give either notice that such notice has been given
shall, in the absence of fraud, be prima facie evidence of the
facts stated therein.
* For purposes of determining the stockholders entitled to receive
either notice, each corporation may fix, in advance, a record
date that shall be not more than 10 days prior to the date the
notice is given, provided, that if the notice is given on or
after the effective date of the merger or consolidation, the
record date shall be such effective date. If no record date is
fixed and the notice is given prior to the effective date, the
record date shall be the close of business on the day next
preceding the day on which the notice is given.
* The written demand for appraisal must be made by or for the
holder of record of shares of Telesource International common
stock. Accordingly, such demand must be executed by or for such
shareholder of record, fully and correctly, as such stockholder's
name appears on the stock certificates representing the shares.
If the applicable shares are owned of record in a fiduciary
capacity, such as by a trustee, guardian or custodian, execution
of the demand should be made in such capacity, and if the
applicable shares are owned of record by more than one person, as
in a joint tenancy or tenancy in common, such demand should be
executed by or for all joint owners. An authorized agent,
including one of two or more joint owners, may execute the demand
for appraisal for a shareholder of record. However, the agent
must identify the record owner(s) and expressly disclose the fact
that, in executing the demand, the agent is acting as agent for
the record owner(s).
* A record owner, such as a broker, who holds shares as nominee for
other persons may exercise appraisal rights with respect to the
shares held for all or less than all of such other persons. In
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such case, the written demand should set forth the number of
shares covered by it. Where no number of shares is expressly
mentioned, the demand will be presumed to cover all shares
standing in the name of such record owner.
* Within 10 days after the closing of the merger, Telesource
International is required to, and will, notify each shareholder
who has satisfied the foregoing conditions of the date on which
the closing of the merger occurred and that appraisal rights are
available with respect to shares for which a demand has been
submitted. Within 120 days after the closing of the merger,
Telesource International, or any such shareholder who has
satisfied the foregoing conditions and is otherwise entitled to
appraisal rights under section 262, may file a petition in the
court demanding a determination of the value of the shares held
by all shareholders entitled to appraisal rights. If no such
petition is filed, appraisal rights will be lost for all
shareholders who had previously demanded appraisal of their
shares. Shareholders of Telesource International seeking to
exercise appraisal rights should not assume that Telesource
International will file a petition with respect to the appraisal
of the value of their shares or that Telesource International
will initiate any negotiations with respect to the "fair value"
of such shares. Accordingly, such shareholders should regard it
as their obligation to take all steps necessary to perfect their
appraisal rights in the manner prescribed in section 262.
* Within 120 days after the date of the closing of the merger, any
shareholder who has therefore complied with the applicable
provisions of section 262 will be entitled, upon written request,
to receive from Telesource International a statement setting
forth the aggregate number of shares not voted in favor of the
merger and with respect to which demands for appraisal were
received by Telesource International, and the number of holders
of such shares. Such statement must be mailed within 10 days
after the written request therefore has been received by
Telesource International or within 10 days after expiration of
the period for delivery of demands for appraisal, which ever is
later.
* If a petition for an appraisal is timely filed, at the hearing on
such petition the court will determine the shareholders of
Telesource International entitled to appraisal rights. After
determining the shareholders entitled to an appraisal, the court
will appraise the value of the shares of Telesource International
common stock owned by such shareholders, determining the "fair
value" thereof exclusive of any element of value arising from the
accomplishment or expectation of the merger. The court will
direct payment by Telesource International of the fair value of
such shares together with a fair rate of interest, if any, on
such fair value to shareholders entitled thereto upon surrender
to Telesource International of stock certificates. The costs of
the proceeding may be determined by the court and taxed upon the
parties as the court deems equitable in the circumstances. Upon
application of a shareholder, the court may, in its discretion,
order that all or a portion of the expenses incurred by any
shareholder in connection with an appraisal proceeding, including
without limitation, reasonable attorneys' fees and fees and
expenses of experts, be charged pro rata against the value of all
the shares entitled to appraisal.
* Although Telesource International believes that the merger is
fair, no representation is made as to the outcome of the
appraisal of fair value as determined by the court and
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shareholders should recognize that such appraisal could result in
a determination of a value higher or lower than, or the same as,
the Conversion Value. Moreover, Telesource International does not
presently anticipate offering more than the Conversion Value to
any shareholder exercising appraisal rights and reserves the
right to assert, in any appraisal proceeding, that, for purposes
of section 262, the "fair value" of a share of Telesource
International common stock is less than the Conversion Value. In
determining the "fair value" of shares of Telesource
International common stock, the court is required to take into
account all relevant factors. Therefore, such determination could
be based upon considerations other than, or in addition to, the
price paid for shares of Telesource International common stock,
including, without limitation, the market value of shares and the
asset values and earning capacity of Telesource International.
In WEINBERGER V. UOP, INC. ET AL., 457 A.2d 701,713 (Del. 1983),
the Delaware Supreme court stated, among other things, that
"proof of value by any techniques or methods which are generally
considered acceptable in the financial community and otherwise
admissible in court" should be considered in an appraisal
proceeding. Section 262 provides that "fair value" is to be
"exclusive of any element of value arising from the
accomplishment or expectation of the merger." In WEINBERGER, the
Delaware Supreme court held that "elements of future value,
including the nature of the enterprise, which are known or
susceptible of proof as of the date of the merger and not the
product of speculation, may be considered."
* Any holder of shares of Telesource International common stock who
has demanded an appraisal in compliance with section 262 will
not, after the closing of the merger, be entitled to vote such
holder's shares for any purpose nor be entitled to the payment of
dividends or other distributions on such shares (other than those
payable to shareholders of record as of a date prior to the
closing of the merger).
* If (i) no petition for an appraisal is filed within 120 days
after the date of the closing of the merger or (ii) a holder of
shares delivers to Telesource International a written withdrawal
of such holder's demand for an appraisal and an acceptance of the
merger, either within 60 days after the closing of the merger or
with the written approval of Telesource International thereafter
(which Telesource International reserves the right to give or
withhold, in its sole discretion), then the right of such
shareholder to an appraisal will cease and such shareholder will
remain a shareholder of Telesource International. No appraisal
proceeding in the court will be dismissed as to any shareholder
without the approval of the court, which approval may be
conditioned on such terms as the court deems just.
It is a condition to Telesource International' obligations to
consummate the merger that the holders of no more than 1% of the
outstanding shares of Telesource International's common stock are
entitled to dissenters' rights. If demands for payment are made with
respect to more than 1%, of the outstanding shares of Telesource
International's common Stock, and, as a consequence more than 1% of
the shareholders of Telesource International become entitled to
exercise dissenters' rights, then Telesource International will not be
obligated to consummate the merger.
Accounting Treatment
For accounting purposes, the merger will be treated as a reverse
acquisition with Telesource International being treated as the
acquirer for financial reporting purposes.
Merger Procedures
Unless otherwise designated by a Telesource International
shareholder on the transmittal letter, certificates representing
shares of Sixth Business Service Group common stock issued to
Telesource International shareholders will be issued and delivered to
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the tendering Telesource International shareholder at the address on
record with Telesource International. In the event of a transfer of
ownership of shares of Telesource International common Stock
represented by certificates that are not registered in the transfer
records of Telesource International, the shares may be issued to a
transferee if such certificates are delivered to the Transfer Agent,
accompanied by all documents required to evidence such transfer and by
evidence satisfactory to the Transfer Agent that any applicable stock
transfer taxes have been paid. If any certificates shall have been
lost, stolen, mislaid or destroyed, upon receipt of
* An affidavit of that fact from the holder claiming such
certificates to be lost, mislaid or destroyed,
Such bond, security or indemnity as the surviving corporation
and the merger agent may reasonably require
* Any other documents necessary to evidence and effect the bona
fide merger, the merger agent shall issue to holder the shares
into which the shares represented by such lost, stolen, mislaid
or destroyed
* Certificates have been converted.
Neither Sixth Business Service Group, Telesource International, nor
the Transfer Agent is liable to a holder of Telesource International's
common stock for any amounts paid or property delivered in good faith
to a public official under any applicable abandoned property law.
Adoption of the merger agreement by the Telesource International's
shareholders constitutes ratification of the appointment of the
Transfer Agent.
After the closing of the merger, holders of certificates will have
no rights with respect to the shares of Telesource International
common stock represented thereby other than the right to surrender
such certificates and receive in merger the shares of Sixth Business
Service Group common stock to which such holders are entitled.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Introduction
In Management's Discussion and Analysis we explain the general
financial condition and results of operations for Telesource
International and its business subsidiaries including:
* what factors affect our business,
* what our earnings and costs were for the three months ended
March 31, 2000 and the twelve months ended December 31, 1999
and 1998, respectively,
* why those earnings and costs were different from the year
before,
* where our earnings came from,
* how all of this affects our overall financial condition,
* how our segments performed,
* where cash will come from to pay for future capital
expenditures.
As you read Management's Discussion and Analysis, it may be helpful
to refer to our Consolidated Statements of Income on page F-3, which
present the results of our operations for 1999, 1998 and 1997 and the
three months ended March 2000. In Management's Discussion and
Analysis, we analyze and explain the annual changes in the specific
line items in the Consolidated Statements of Income. Our analysis may
be important to you in making decisions about your investments in
Telesource International.
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Telesource International and Sixth Business Service Group have
agreed to merge into a new company and for the surviving company to be
named Telesource International, Inc. We plan to complete the merger
as soon as we obtain all regulatory approvals. These matters are
discussed in more detail beginning on page 5.
Overview of Telesource International
Telesource International is an international engineering and
construction company, which has among its operations power generation
and specialty construction services in the Commonwealth of Mariana
Islands. We operate a diesel fired electric power generation plant for
the sale of electricity to the local power grid. Our facility in
Lombard, Illinois annually handles the procurement, export and
shipping of several million dollars worth of U.S. fabricated products
for use by our subsidiaries or for resale to customers outside of the
mainland.
Telesource International was formed in 1994 to facilitate various
intra-corporate activities and, until July 1999, was a wholly owned
subsidiary of SHBC a Kuwait-based civil, electrical and mechanical
construction company.
We conduct our operations primarily through subsidiaries. We
currently have two subsidiaries. Our Mariana subsidiary handles
construction and management of our power facilities in the
Commonwealth of Mariana Islands. Our second subsidiary, Commsource
International located in Chicago, Illinois, is an international export
company that facilitates the purchase of equipment fabricated in the
U.S. Our branch offices in Guam, Telesource International Pacifica
and Pacifica Power Resources, a trading company, were created to take
advantage of opportunities we believe will be available there.
Telesource International has three main operating segments:
construction services, trading activities and power generation. The
power generation activities did not commence until March 1999.
* Construction services. Our main lines of construction
services cover the range from single-family housing to power
generation plants. We are now working on expanding the
business by taking advantage of opportunities to increase
market share in existing geographic areas and to expand
geographic service areas in our core lines of business. We
are currently one of the largest construction contractors in
the Commonwealth of Northern Mariana Islands.
* Power generation and sale. We have contracts to generate and
provide wholesale electrical power to local government
agencies, which is then distributed on their power grids.
In March 1999, Telesource International began generating power for
resale at its power generation plant, and this activity generated
$140,155 in operating revenues from the commissioning of the power
plant on March 31, 1999 through March 31, 2000 or less than 1% of the
combined gross revenues for Telesource International. Prior to 1999,
Telesource International had not established this segment and
therefore financial data is presented only for the three months ended
March 31, 2000 and the year ended December 31, 1999. For the years
ended December 31, 1998 and 1997, Telesource International was
involved in two other lines of business, construction and trading of
U.S. fabricated products. There were no material amounts of transfers
between lines of business. Any intersegment sales have been
eliminated. The following table sets forth segment information for
the periods indicated:
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<TABLE>
<S> <C> <C> <C> <C>
Power
Generation Construction Trading Total
----------------------------------------------------------------
March 31, 2000:
Gross revenues $ 18,822 $ 2,819,311 $ 1,519,344 $ 4,357,477
Costs and expenses 191,066 1,927,694 1,415,252 3,534,012
Gross profit (172,244) 891,617 104,092 823,465
Expenses 8,628 920,376 392,169 1,321,173
Operating profit (loss) (180,872) (28,759) (288,077) (497,708)
Other income (expense) 215,682 (114,713) - 100,969
Net income (loss) 34,810 (61,137) (288,077) (314,404)
Current assets 31,752 3,649,444 956,211 4,637,407
Costs and estimated
earnings in excess
of billings - 25,214,840 - 25,214,840
Notes receivable,
net of current portion - 11,781,120 - 11,781,120
Total assets 31,752 43,204,711 1,431,329 44,667,792
Total liabilities - 35,785,320 1,730,155 37,515,475
1999:
Gross revenues $ 121,333 $ 19,306,599 $ 3,608,419 $ 23,036,351
Costs and expenses 638,062 14,798,543 3,161,775 18,598,380
Gross profit (516,729) 4,508,056 446,644 4,437,971
Expenses 18,061 2,257,338 1,061,001 3,336,400
Operating profit (loss) (534,790) 2,250,718 (614,357) 1,101,571
Other income (expense) 721,087 205,131 30 926,248
Net income (loss) 186,297 2,078,231 (614,327) 1,650,201
Current assets 17,018 3,183,759 202,795 3,403,572
Costs and estimated
earnings in excess
of billings - 24,113,343 - 24,113,343
Notes receivable,
net of current portion - 12,022,557 - 12,022,557
Total assets 17,018 42,311,888 306,295 42,635,201
Total liabilities - 34,648,688 519,792 35,168,480
1998:
Gross revenues $ - $ 28,069,654 $ 5,398,553 $ 33,468,207
Costs and expenses - 21,931,964 5,099,326 27,031,290
Gross profit - 6,137,690 299,227 6,436,917
Expenses - 824,390 875,684 1,700,074
Operating profit (loss) - 5,313,300 (576,457) 4,736,843
Other income (expense) - (35,682) 12,453 (23,229)
Net income (loss) - 4,574,823 (564,004) 4,010,819
Current assets - 925,732 322,178 1,247,910
Costs and estimated
earnings in excess
of billings - 22,502,747 - 22,502,747
Total assets - 25,171,887 424,292 25,596,179
Total liabilities - 19,292,695 486,964 19,779,659
1997:
Gross revenues $ - $ 4,805,669 $ 8,570,339 $ 13,376,008
Costs and expenses - 3,563,007 8,057,617 11,620,624
Gross profit - 1,242,662 512,722 1,755,384
Expenses - 467,159 637,469 1,104,628
Operating profit (loss) - 775,503 (124,747) 650,756
Other expense - 30,697 - 30,697
Net income (loss) - 718,337 (124,747) 593,590
Current assets - 2,090,403 72,374 2,162,777
Costs and estimated
earnings in excess
Of billings - 5,187,997 - 5,187,997
Total assets - 8,346,759 1,074,752 9,421,511
Total liabilities - 7,042,390 1,273,420 8,315,810
</TABLE>
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Gross profit is total operating revenue less operating expenses.
Gross profit excludes general corporate expenses, interest expense,
interest income and income taxes.
Revenues from the construction of the power plant were $1,096,923
for the three months ended March 31, 2000 and $15,352,738, $22,502,747
and none for years ended 1999, 1998 and 1997, respectively. The
revenues on the construction of the power plant were included in the
construction segment. Revenues from Telesource International's related
party SHBC were $1,861,384 for the three months ended March 31, 2000
and $7,817,252, $10,945,832 and $9,052,755 for the years ended 1999,
1998 and 1997, respectively. The revenues from SHBC recognized under
the construction segment were $447,373 during the three months ended
March 31, 2000 and $4,687,665, $5,547,279 and $4,805,669 for the years
ended 1999, 1998 and 1997, respectively, and the revenues from SHBC
recognized under the trading segment were $1,414,011 for the three
months ended March 31, 2000 and $3,129,587, $5,398,553 and $4,247,086
for the years ended 1999, 1998 and 1997, respectively.
Trading revenues of $3,036 during the three months ended March 31,
2000 and $81,627 during the year ended 1999 were earned in Guam. All
other revenues recognized under the trading segment for all periods
presented were earned at our location in Lombard, Illinois. All
revenues earned under our construction and power generation segments
for all periods presented were earned within the Commonwealth of
Mariana Islands.
Long-lived assets located in the Commonwealth of Mariana Islands
were $40,154,257 at March 31, 2000 and $39,140,351, $24,246,155 and
$6,256,356 as of December 31, 1999, 1998 and 1997, respectively.
Telesource International's contracts are obtained primarily through
competitive bidding in response to advertisements by federal, state
and local agencies, and private parties. Telesource International's
bidding activity is affected by such factors as backlog, current
utilization of equipment and other resources, ability to obtain
necessary surety bonds and competitive considerations. Bidding
activity, backlog and revenue resulting from the award of new
contracts to Telesource International may vary significantly from
period to period.
Revenue from construction contracts including construction joint
ventures 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)
and insurance costs. Depreciation is provided using straight-line
methods for construction equipment. Contracts frequently extend over a
period of more than one year and revisions in cost and profit
estimates during construction are reflected in the accounting period
in which the facts that require the revision become known. Losses on
contracts, if any, are provided in total when determined, regardless
of the degree of project completion. To date Telesource International
has not recognized any losses on any contracts. Claims for additional
contract revenue are recognized in the period when it is probable that
the claim will result in additional revenue and the amount can be
reliably estimated. No claims have occurred to date. The foregoing as
well as the stage of completion, and mix of contracts at different
margins may cause fluctuations in gross profit between periods.
Financial statements based on the percentage-of-completion method
present the economic substance of Telesource's construction of the
power plant and events more clearly and more timely than if the
completed-contract method had been used. Specifically, the percentage-
of-completion method is more accurate in matching the revenues on the
construction of the power plant with the costs incurred to earn those
revenues and to match the revenues and costs with the correct
reporting period along with informing users of Telesource's financial
statements of the volume of economic activity of Telesource
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International during the reporting period. The construction and
operation of the power plant will occur over a period exceeding 10
years; however over 60% of the costs involved in the construction and
operation of the power plant occurred within the first two years of
the contract sign date. The completed-contract method would delay
recognition of profits until the completion of the contract. The
buyer of the power plant does have the right to suspend, delay or
interrupt all or any part of the construction or operation of the
power plant for the time as the buyer may determine to be appropriate
for its convenience and the buyer has the right to terminate the
contract on the power plant if Telesource is in default under terms
as outlined in the contract.
The construction industry and electric utility industry are
undergoing rapid and substantial change. Competition is increasing.
The regulatory environment is shifting. These matters are discussed
briefly in the "Competition" and "Regulatory" sections on pages 46 and
47. Telesource International continuously evaluates these changes.
Based on the evaluations, Telesource International refines its short
and long-term business plans with the primary goal of protecting our
security holders' investments and providing them with superior returns
on their investment in Telesource International. As you read
Management's Discussion and Analysis, many Telesource International
initiatives to support our primary goal are mentioned. These include
the proposed merger with Sixth Business Service Group and subsequent
listing of Telesource International's stock on the Over The Counter
system, designed to position us to remain competitive as the industry
changes by giving us improved access to the capital markets.
Cautionary Statement
This registration statement on Form S-4 contains "forward-looking
statements", as defined by the Private Securities Litigation Reform
Act of 1995, in order to provide investors with prospective
information about Telesource International. For this purpose, any
statements which are not statements of historical fact may be deemed
to be forward-looking statements. Without limiting the foregoing, the
words "believes", "anticipates", "plans", "expects" and similar
expressions are intended to identify forward-looking statements.
There are a number of important factors which could cause Telesource
International's actual results and events to differ materially from
those indicated by the forward-looking statements. These factors
include, without limitation, those set forth below under the caption "
Factors That May Affect Future Results".
Results of Operations
Three months ended March 31, 2000 compared to the three months ended
March 31, 1999
Revenue. During the three months ended March 31, 2000 revenue was
$4,357,477 and increased $35,401 or 0.8%, as compared to revenues of
$4,322,076 for the same period in 1999. The increase in revenues is
attributed to a growth in sales revenue from $739,060 to $1,431,073
for the three months ended March 31, 1999 and 2000, respectively.
Construction Revenue. The construction revenues during the three
months ended March 31, 2000 were $2,839,736 and decreased $494,578 or
14.8%, as compared to construction revenues of $3,334,314 for the same
period in 1999. During the three months ended, Telesource completed
its construction activities on Phase II of the power generation plant.
The decrease in construction revenues is attributed to the completion
of Phase II.
Sales Revenue. Sales revenue during the three months ended March 31,
2000 were $1,431,073 and increased $692,013 or 93.6%, as compared to
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sales revenue of $739,060 for the same period during 1999. The
increase in sales revenue during 2000 is attributed to an increase in
sales to our related party. The sales revenue to Telesource's related
party were in the amount of $1,414,011 and $688,651 during the three
months ended March 31, 2000 and 1999, respectively.
Rental Income. Rental income decreased $149,957 during the three
months ended March 31, 2000, from $205,000 to $55,043 for the three
months ended March 31, 1999 and 2000, respectively. The decline in
rental income is attributed to a corresponding decrease in rental
income on the radio relay station project. Rental income consists of
fees collect on rental of our equipment to our related party for use
in the construction of the radio relay station. The rental fees are
billed on a monthly basis for equipment used during the billing
period. Rental income is recognized at the time of billing.
Service Fees. Service fees declined $12,077, from $43,702 to $31,625
during the three months ended March 31, 1999 and 2000, respectively.
The service fees were recognized on service fees associated with the
construction of the radio relay station and consist of amounts billed
to a related party for project management services performed on the
radio relay station. Due to the completion and commissioning of the
radio relay station in February 2000, sales revenues, rental revenues
and service fees are expected to decrease further.
Gross Profits. For the three months ended March 31, 1999 and 2000,
respectively, gross profits were $823,465 and $1,437,343, which
represents a $613,878 or 42.7% decrease. As a percentage of revenue,
gross profit decreased during the three months ended March 31, 2000 to
18.9% from 33.3% for the same period in 1999. The decrease in gross
profits is attributed to the decrease in construction revenues
recognized during the three months ended March 31, 2000 as compared to
the same period in 1999.
Salaries and Employee Benefits. Salaries and employee benefits were
$446,075 for the three months ended March 31, 2000 as compared to
$207,854 for the same period in 1999. The increase in salaries and
employee benefits was $238,221 or a 114.6%. Salaries and employee
benefits were 4.8% of revenues during the three months ended March 31,
1999 and increased to 10.2% of revenues for the same period in 2000.
The sharp increase is attributed to the addition of staff required for
the operation of the power plant and the addition of a chief executive
officer, executive vice president and chief financial officer. Twenty-
three employees were required for the operation and maintenance of the
power plant. All of these positions were added during 1999. The
salaries for employees involved in the construction of the power plant
are capitalized during the construction phase and were not included in
salaries and employee benefits expenses during the three months ended
March 31, 1999.
Occupancy and Equipment Expenses. Occupancy and equipment expenses
increased to $132,650, or 110.7%, from $62,953 for the three months
ended March 31, 2000 and 1999, respectively. Occupancy and equipment
expenses as a percentage of revenue were 1.5% and 3.0% for the three
months ended March 3, 1999 and 2000, respectively. The increase in
occupancy and equipment expense is attributed to the additional space
required for offices and storage of equipment.
General and Administrative Expenses. General and administrative
expenses include costs associated with Telesource International's
estimating and bidding activities, and other administrative costs.
General and administrative expenses increased from $455,361 to
$742,448 for the three months ended March 31, 1999 and 2000,
respectively and increased to 17.0% of gross revenues, from 10.5% of
gross revenues for the three months ended March 31, 2000 and 1999,
respectively. Telesource incurred director fees of $35,000 during the
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first quarter of 2000 and none in same period during 1999.
Professional fees increased from $10,894 to $101,506 for the three
months ended March 31, 1999 and 2000, respectively. The increase of
$90,612 over the prior year in professional fees is attributed to the
cost associated with the Telesource's efforts to become publicly
listed. Insurance expenses increased $46,163 from $16,619 to $62,782
for the three months ended March 31, 1999 and 2000, respectively. The
increase in insurance expense is attributed to additional insurance
required for the operation of the power plant. Travel and
entertainment expense increased $119,567 from $27,213 to $146,780 for
the three months ended March 31, 1999 and 2000, respectively. The
increased travel is attributed to the need for increased involvement
by the corporate officers in Lombard, Illinois along with the
increased involvement of the chief executive officer in Telesource
International's efforts to become publicly listed. The chief executive
officer resides in Saipan.
Other Expense and Other Income. Other expense and other income, net,
increased to a net other income of $100,969 for the three months ended
March 31, 2000 as compared to $53,433 for the same period during 1999.
The increase is attributed to the interest income recognized on the
promissory notes. The promissory notes did not begin to earn interest
until the completion of Phase I on the power plant in March 1999.
Net Loss. Net loss for the three months ended March 31, 2000 was
$314,404 as compared to net income of $859,198 for the same period
during 1999. The decrease in net results during 2000 is attributed to
the completion of construction activities on the power plant and radio
relay station. The completion of the construction activities on these
two projects resulted in a decrease in construction revenues, rental
income and service fees. Earnings per share in future periods will
depend in large part on the Company's ability to successfully bid and
be awarded additional contracts for construction services.
Operating Activities
The following adjustments, which did not impact the Company's cash
flows, need to be considered in order to reconcile the Company's 2000
net loss to its net cash provided by operating activities.
Depreciation and Amortization. During the three months ended March
31, 2000, Telesource recognized depreciation of $90,887 and no
amortization.
The Company also offers the following information to discuss changes
in its operating assets and liabilities which most notably impacted
its cash position during 2000:
The Company's current assets amounted to $4,637,407 as of March 31,
2000 as compared to $3,403,572 as of December 31, 1999. The increase
is due to an increase in accounts receivable in the amount of
$1,560,608 at March 31, 2000. The increase in accounts receivable is
attributed primarily to the housing project on the island of Saipan.
The billing cycle for this project is quarterly and collection of
invoices on this project are taking approximately ninety days after
billing which results in a build up of receivables on the project. The
time required for collection is the result of Telesource's customer on
the housing project invoicing the Department of Housing and Urban
Development upon receipt of an invoice from Telesource. Telesource is
not paid until after our customer has collected on their invoice to
the Department of Housing and Urban Development.
Costs and estimated earnings in excess of billings increased
$1,101,497 to $25,214,840 at March 31, 2000 from $24,113,343 at December
31, 1999. The increase is attributed to the work performed on phase II
of the power generation plant construction contract and work performed
on other construction projects.
Premises and equipment decreased $60,704 to $1,830,484 at March 31,
2000 as compared to $1,891,188 at December 31, 1999. Purchases of
equipment during the three months ended March 31, 2000 were $30,183
and depreciation for the same period was $90,887.
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Accounts payable and accrued expenses amounted to $6,507,283 as of
March 31, 2000 as compared to $5,510,317 at December 31, 1999. The
increase of 18.1% in accounts payable and accrued expenses is
attributed to the goods and services purchased for construction
activities currently underway. Customer deposits remained unchanged in
the amount of $125,000 at March 31, 2000 as compared to December 31,
1999.
Notes payable classified as short term increased from $500,000 to
$3,000,000 as of March 31, 2000 as compared to December 31, 1999. The
increase in short term borrowings consist of $500,000 due to the
Citytrust Bank in May 2000, a $1,000,000 line of credit with the Bank
of Hawaii due in March 2001 and $1,500,000 line of credit with the
Hongkong and Shanghai Banking Corporation due in January 2001. The
$500,000 letter credit with Citytrust Bank was extended in May 2000
for thirty days and was subsequently paid off in June 2000. In June
2000, a new short term loan was established with Citytrust Bank in the
amount of $550,000 due in June 2001.
Notes payable classified as long term decreased from $28,000,000 at
December 31, 1999 to $27,000,000 at March 31, 2000. The reduction in
long term debt is a result of a reclassification of the $1,000,000 due
to the Bank of Hawaii from long term debt to short term debt.
Warranty Reserve. The Company does not record a warranty expense.
Work performed under warranties is performed at the expense of the
equipment manufacturer. Telesource has not experienced any losses
associated with warranty work to date.
Financing Activities
Unsecured Line of Credit with the Commercial Bank of Kuwait, New
York Branch - Telesource International used the full amount of a
credit line with $25 million of available credit under an unsecured
loan from the Commercial Bank of Kuwait, New York Branch. The loan
has an interest rate of LIBOR plus 300 basis points. Under the terms
of the loan agreement, interest payments are due annually and the
principal balance is due at maturity. This loan is scheduled to
mature in February 2002. This loan has a guarantee of repayment to
the Commercial Bank of Kuwait, New York Branch, from Telesource
International's largest shareholder, SHBC and its major shareholders.
See "Certain Relationships and Related Transactions".
Telesource International was granted an unsecured letter of credit
with the Kuwait Real Estate Bank for $2,000,000 and had subsequently
borrowed $2,000,000 on this letter of credit at March 31, 2000. The
loan has an interest rate of LIBOR plus 250 basis points. This loan
was originated on May 2, 1999 and will mature on May 2, 2001. Under
the terms of the loan agreement, the loan is due in lump sum at
maturity. This line of credit is guaranteed by SHBC and its major
shareholders.
Telesource International was granted a $1,000,000 line of credit
from the Bank of Hawaii. This line of credit is secured by
certificates of deposits held at the Bank of Hawaii and has an
interest rate of 1% over the certificate of deposit rate. The line
has a maturity in March 2001 with interest payments due monthly and
principal due at maturity. Telesource International had fully
utilized this line of credit at March 31, 2000.
On January 24, 2000, Telesource International was granted a
$2,000,000 line of credit from The Hongkong and Shanghai Banking
Corporation Limited, Guam Branch. This line of credit is secured by
the promissory notes Telesource International holds on the power
generation plant. This line of credit has a maturity January 31, 2001
with interest payments due monthly and principal due at maturity.
This line bears an interest rate of the bank's prime rate plus 1.5%.
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On May 15, 2000, Telesource International was granted a $2,000,000
line of credit from the Bank of Hawaii. This line of credit is secured
by the promissory notes Telesource International holds on the power
generation plant. This line of credit has a maturity of January 31,
2001 with interest payments due monthly and principal due at maturity.
This line bears an interest rate of the bank's prime rate plus 1.0%.
Common Stock - Telesource International received a capital
contribution from its stockholder, SHBC, in the amount of $700,000 in
1998. In July 1999, Telesource International announced that its Board
of Directors approved a one-for-ten thousand stock split to
stockholders of record on July 26, 1999. There was only one
shareholder of record on the record date, SHBC. All references in this
document to number of shares and per share amounts of Telesource
International's common stock have been retroactively restated to
reflect the increased number of shares outstanding.
Treasury Stock - Telesource International from time to time may make
purchases of its own common stock. Telesource International did not
purchase any treasury stock during the three months ended March 31,
2000.
Liquidity and Capital Resources
At March 31, 2000, Telesource International had $500,000 in unused
credit lines. Borrowings at March 31, 2000 were of $30,000,000, with
$500,000 maturing on May 21, 2000, $1,500,000 maturing on January 31,
2001, $1,000,000 maturing on March 26, 2001 and the remaining balance
of $27,000,000 maturing after March 31, 2001. Telesource International
had a negative working capital level of $5,450,403 at March 31, 2000
and $3,254,908 at December 31, 1999. The net cash used by operating
activities for the three months ended March 31, 2000 were $1,705,922.
The cash used in operating activities was primarily used in the
construction of the housing project on the island of Saipan. The net
cash used by operating activities were covered primarily by increased
borrowings during 2000 of $1,500,000.
Additional funding in future periods will come mainly from the
collection of payments on the power plant, collection of progress
payments on projects under construction and additional credit lines to
meet the cash flow needs of Telesource International. Short term
financing is expected to be in the form of additional lines of credit
from our existing banking relationships. Long term financing will be
in the form of a replacement of existing borrowings with term loans or
the sale of additional shares of stock.
SHBC and its majority stockholders have provided guarantees on
credit lines in the amount of $25,000,000 from the Commercial Bank of
Kuwait and $2,000,000 from the Kuwait Real Estate Bank. SHBC and its
majority stockholders are under no commitment to provide additional
guarantees on any additional debt and are not expected to provide
additional guarantees on any additional debt. Without SHBC and its
majority stockholders guarantee on additional borrowings, we expect
future borrowings will require collateral from Telesource
International sufficient to protect the lender. Telesource
International expects future borrowings to be secured by our own
receivables and promissory notes.
Telesource will collect $2,160,000 from the guaranteed promissory
note payments of $180,000 per month. Telesource will also collect
$600,000 from the operating fee on the power plant at $50,000 per
month. Telesource owns non-revocable promissory notes with a guarantee
of payment and a total balance to be collected as of March 31, 2000 of
$19,260,000. As of June 30, 2000, Telesource International has pledged
$7,200,000 in promissory notes to secure an additional $4,000,000 in
lines of credit established in 2000. The remaining balance of
promissory notes of $12,600,000 are available to secure additional
loans to meet Telesource International's cash flow requirements if
needed.
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While Telesource International believes it has sufficient financing
for its current working capital needs, Telesource is considering
bidding on additional projects in addition to the current backlog.
There can be no assurance that Telesource International's present
capital and financing will be sufficient to finance future operations
thereafter. 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
shareholders. If additional financing beyond current levels becomes
necessary, there can be no assurance that the financing can be
obtained on satisfactory terms. In this event, Telesource
International could be required to restrict its operations.
Power Plant Project
In 1997, we were awarded a contract to design, build and operate a
10 to 30 megawatt power plant. The contract divided the construction
into three phases with each phase adding 10 megawatts of power
production capability. Construction of phase I began in 1998 and was
completed in March of 1999. Construction of phase II began in 1999 and
was completed in March 2000. The third phase will be constructed at
the discretion of our Mariana subsidiary as the demand for power
increases. Revenue from the contract to design, build and operate the
10 to 30 megawatt power plant is recognized using the percentage-of-
completion method of accounting, based upon costs incurred and
projected costs. Realized construction costs on phase I and phase II
were $12,504,813 and $18,328,499 during 1999 and 1998, respectively.
Construction revenues recognized during 1999 and 1998 were $15,352,738
and $22,502,747, respectively. The power plant construction revenues
were 66.7% and 67.0% of revenues for 1999 and 1998, respectively.
The power plant began producing power in March 1999. During 1999,
the operations for the power plant recognized gross revenues on power
produced of $121,333, costs and expenses of $638,062 for a gross loss
of $516,729. General and administrative expenses were $18,061 and
other income of $721,087 for a net income of $186,297. The other
income recognized in 1999 in power generation of $721,087 is
attributed primarily to the interest recognized on the notes
receivable. The notes receivable and monthly operation and maintenance
fee were discounted to their net present value at December 31, 1998.
There were ten payments on the promissory notes of $180,000 each and
ten payments on the operation and maintenance fee of $50,000 each
recognized in 1999 for a total of $1,840,000. As of March 31, 2000, we
have collected thirteen payments on the promissory notes in the amount
of $180,000 each and thirteen payments on the operation and
maintenance fee of $50,000 each. Production fees collected for
electricity produced from inception of power production in March 1999
to March 31, 2000 were $426,924. The production fee is in addition to
the operation and maintenance fee of $50,000 each month.
In March 1999, Telesource International completed its construction
activities on phase I of the power generation plant located on the
island of Tinian. Telesource International began operations of the
plant and thus billed $13,115,690 for construction of the power
generation plant which were converted to promissory notes due on the
power plant. There are 120 promissory notes with a payment amount of
$180,000 each to be made on a monthly basis upon completion of phase I
of the power plant for a total amount to be collected by Telesource
International of $21,600,000. Prior to completion of phase I, the
costs and estimated earnings in excess earnings included amounts that
would be converted to notes receivable. At December 31, 1998 the costs
and estimated earnings in excess of billings were $22,502,747 and upon
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commissioning in March 1999, the promissory notes included in costs
and estimated earnings at December 31, 1998 were converted to notes
receivable. At March 31, 1999, the total promissory notes of
$21,600,000 were converted to notes receivable at their net present
value of $13,620,809. The promissory notes are recognized at their
respective net present value as of the reporting date and are divided
between the current amounts to be collected in the following twelve
months and the long term amount. The current portion of notes
receivable were $907,822 and none at December 31, 1999 and 1998,
respectively, along with the long term portion of notes receivable of
$12,022,557 and none as of December 31, 1999 and 1998, respectively.
As of May 31, 2000, Telesource has received fourteen payments on the
promissory notes or a total of $2,520,000. The payments are split
between the estimated net present value at December 31, 1998 with the
remaining balance being recognized as collection of interest on the
notes receivable.
There were current costs and estimated earnings in excess of
billings of $629,724 and none as of December 31, 1999 and 1998 are
shown at their respective net present values and the current amounts
are expected to be collected in the following twelve months. The long
term costs and estimated earnings in excess of billings will be
realized over the life of the contract or a ten year period. These
amounts will be billed as a portion of the power production. Upon
receipt of Telesource International's monthly invoice, the CUC shall
pay each of the following:
a. For a period of ten years from the date of substantial completion
of phase I, Telesource will be paid $0.02 production per kilowatt
hour produced for the first 5,140,000 kilowatt hours each month
("Base Load").
b. For a period of ten years upon completion and commissioning of
phase II, Telesource will be paid $0.065 production fee per
kilowatt hour produced in excess of the Base Load.
The construction of phase I also includes a monthly operation and
maintenance fee of $50,000 per month to be paid to Telesource for as
long as Telesource is responsible for the operations and management of
the power plant. The operation and maintenance fee is recognized at it
net present value as of December 31, 1998 on a monthly basis for a
period of eleven years with payments commencing in April 1999. To date
there have been fourteen operation and maintenance fees collected or a
total of $700,000.
Phase II of the construction on the power plant was completed and
commissioned in March 2000 along with the completion of the
transmission lines to the radio relay station on the north end of the
island. The completion of phase II brings the total power production
capacity of the power plant to 20 megawatts.
Related Party Transactions
Some of our executive officers, directors and major shareholders are
also owners, officers and/or directors of SHBC located in Kuwait.
SHBC is a civil, electrical and mechanical construction contractor
with 750 employees and over 30 years of experience. SHBC and its
affiliates was the sole shareholder of Telesource International prior
to July 1999, at which time some of the ownership was divested.
In 1996, Telesource International was subcontracted by SHBC to build
a multimillion dollar radio relay station in the Commonwealth of
Northern Mariana Islands for the United States Information Agency.
The agreement between SHBC and Telesource International included
payment to Telesource International on a monthly basis for all time
and material plus a fee of 7.5% on local purchases and procurements.
The radio relay station project was completed in early 1999, however,
an addition to the radio relay station was approved and Telesource
International was hired by SHBC to perform additional construction
services on the radio relay station under the same terms as the
original agreement and completed the additional construction services
in February 2000. Telesource International does not believe that the
subcontract with SHBC is indicative of future contracts and expected
results.
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The following table describes the condensed financial information
related to SHBC in regards only to the radio relay station project:
<TABLE>
<S> <C> <C> <C> <C> <C>
Three Months Ended Twelve Months Ended
March 31, December 31,
--------------------------------------
2000 1999 1999 1998 1997
-------------------------------------------------------------------
Construction revenues $ 362,645 $ 427,698 $ 2,180,683 $ 3,786,177 $ 3,561,055
Sales 304,552 400,369 1,691,426 2,236,888 3,801,805
Gross profit 22,841 229,023 170,930 309,328 213,245
</TABLE>
Telesource International had total sales of $1,414,011 and $688,651
during the three months ended March 31, 2000 and 1999, respectively,
and $3,129,587 and $5,427,103 during the twelve months ended December
31, 1999 and 1998, respectively to SHBC, including sales listed above
for the radio relay station project. At March 31, 2000, Telesource
had receivables of $857,578 and at December 31, 1999 and 1998 $320,109
and $186,326, respectively, due from SHBC.
Additionally, Telesource International earned rental income of
$55,043 and $205,000 for the three months ended March 31, 2000 and
1999, respectively, and $610,918 and $1,380,596 during the twelve
months ended December 31, 1999 and 1998 from SHBC along with service
fees of $31,625 and $43,702 for the three months ended March 31, 2000
and 1999, respectively, and $204,628 and $351,956 during the twelve
months ended December 31, 1999 and 1998, respectively from SHBC as
well.
Telesource recognizes the sales and expenses for trading activities
with SHBC on a gross basis since Telesource obtains legal title to
products being sold to SHBC from the time the order is delivered to
Telesource until it can be delivered to SHBC and paid for by SHBC.
During the period of Telesource's ownership, Telesource is responsible
for payment to the vendor for the goods ordered, securing adequate
insurance and determining the means of shipping for the goods.
Telesource prepares a quote for SHBC for goods to be ordered and upon
acceptance of the quote via receipt of an authorized purchase order
from SHBC, Telesource is responsible for delivering the goods as
quoted and upon the agreed to delivery date.
The above amounts, terms and related party amounts disclosed on the
financial statements are not necessarily indicative of the amounts and
terms which would have been incurred had comparable transactions been
entered into with independent parties. All expenses known to have been
incurred on behalf of or for Telesource International by SHBC were
reimbursed by Telesource International to SHBC and therefore no
allocation of expenses between SHBC and Telesource International are
necessary.
Year ended December 31, 1999 ("1999") compared to the year ended
December 31, 1998 ("1998").
Revenue. During the year ended December 31, 1999, revenue was
$23,036,351 and decreased $10,431,856, or 31.2%, as compared to
revenues of $33,468,207 for the same period in 1998. The decrease in
revenues during 1999 as compared to 1998 are attributed to decreases
in construction revenues of $7,676,538, a decrease in sales revenue of
$1,838,312, a decrease in rental income of $769,678 and a decrease in
service fees of $147,328.
Construction Revenue. The construction revenues during the year
ended December 31, 1999 were $18,612,386 and decreased $7,676,538, or
29.2%, as compared to construction revenues of $26,288,924 for the
same period in 1998. Telesource recognized construction revenues of
$15,352,738 and $22,502,747 during 1999 and 1998, respectively, on the
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construction of the power plant. The decrease in construction revenues
on the construction of the power plant were $7,150,009 and were the
result of the completion of construction of phase I in March 1999
along with the substantial completion of phase II as of December 31,
1999. Phase II was completed and commissioned in March 2000.
Sales Revenue. Sales revenue were $3,608,419 and $5,446,731, or a
decrease of $1,838,312 for 1999 and 1998, respectively. The decrease
in sales revenue are attributed to the decrease in orders for
equipment on the radio relay station for our related party, SHBC, due
to the substantial completion of the project. The radio relay station
was completed and commissioned in February 2000.
Rental Income. Rental income decreased $769,678 during 1999, from
$1,380,596 during 1998 to $610,918 during 1999 and are attributed to a
decline in equipment rental to our related party, SHBC, for the
construction of the radio relay station. Rental income consists of
fees collected on rental of our equipment to our related party for use
in the construction of the radio relay station. The rental fees are
billed on a monthly basis for equipment used during the billing
period. Rental income is recognized at the time of billing.
Service Fees. Service fees declined $147,328, from $351,956 during
1998 to $204,628 during 1999. The service fees were recognized on
service fees associated with the construction of the radio relay
station and consist of amounts billed to a related party for project
management services performed on the radio relay station. Due to the
completion and commissioning of the radio relay station in February
2000, sales revenues, rental revenues and service fees are expected to
decrease further.
Gross Profits. For the year ended December 31, 1999, gross profit
was $4,437,971, a $1,998,946 decrease from $6,436,917 for the same
period in 1998. As a percentage of revenue, gross profit grew slightly
for the year ended December 31, 1999 to 19.3% from 19.2% for the same
period in 1998. As a percentage of construction revenues, gross profit
decreased from 24.5% to 23.8% for 1998 and 1999, respectively. The
decrease in gross profit as a percentage of construction revenue is
attributed to the decrease in construction revenues recognized during
1999 as compared to 1998. As a percentage of sales revenues, gross
profit increased from 118.2% to 123.0%. Sales revenues were lower in
1999 as compared to 1998, however, due to a substantial decrease in
construction revenues, sales revenues as a percentage of gross profit
saw a modest growth of 4.8%. As a percentage of rental revenues,
gross profit increased from 466.2% to 726.4% in spite of a decrease in
rental revenues of 55.7% and is attributed to the decrease in
construction revenues of $7,676,538 or 29.2%. As a percentage of
service fee, gross profits increased from 1828.9% to 2168.8% and
again, in spite of 41.9% decrease in service fees, the decrease is
attributed to the substantial decrease in revenues recognized on
construction services.
Salaries and Employee Benefits. Salaries and employee benefits were
$1,034,948 for the year ended December 31, 1999 as compared to
$386,571 for the same period in 1998. The increase in salaries and
employee benefits was $648,377 or a 167.7%. Salaries and employee
benefits were 1.2% of revenues during 1998 and increased to 4.5% of
revenues in 1999. The sharp increase is attributed to the addition of
staff required for the operation of the power plant and the addition
of a chief executive officer, executive vice president and chief
financial officer. Twenty-three employees were required for the
operation and maintenance of the power plant. All of these positions
were added during 1999. The salaries for employees involved in the
construction of the power plant are capitalized during the
construction phase and were not included in salaries and employee
benefits expenses during 1998 and 1999.
Occupancy and Equipment Expenses. Occupancy and equipment expenses
decreased to $245,551, or 16.2%, from $293,112 for the years ended
December 31, 1999 and 1998, respectively. Occupancy and equipment
expenses as a percentage of revenue were 0.9% and 1.1% for 1998 and
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1999, respectively. The decrease in occupancy and equipment expense is
attributed to the decrease in revenues. Expenses associated with the
occupancy and equipment expenses will decrease during periods of lower
activity due to decreased usage of the equipment and a lower or
reduced requirement for maintenance.
General and Administrative Expenses. General and administrative
expenses include costs associated with Telesource International's
estimating and bidding activities, and other administrative costs.
General and administrative expenses increased from $748,935 to
$2,055,901 for the years ended December 31, 1998 and 1999,
respectively and increased to 8.9% of gross revenues, from 2.2% of
gross revenues for the years ended December 31, 1999 and 1998,
respectively. Telesource incurred director fees of $70,000 during 1999
and none in 1998. Professional fees increased from $77,652 to $286,561
for 1998 and 1999, respectively. The increase was 269.0% over the
prior year and was 1.2% of revenues for 1999 as compared to 0.2% of
revenues for 1998. The sharp increase is attributed to the cost
incurred associated with the Telesource's efforts to become publicly
listed. Expenses associated with bids and proposals increased $28,512
from $3,600 to $32,112 for 1998 and 1999, respectively. The expenses
on bids and proposals were 0.0% and 0.1% of revenues for 1998 and
1999, respectively. The increase is attributed to increased efforts by
the Telesource to win new contracts in advance of the completion of
construction on phase II of the power plant. Travel and entertainment
expense increased $154,262 from $17,417 to $171,679 for 1998 and 1999,
respectively. Travel and entertainment expenses were 0.1% and 0.7% of
revenues for 1998 and 1999, respectively. The increased travel is
attributed to the need for increased involvement by the corporate
officers in Lombard, Illinois along with the increased involvement of
the chief executive officer in Telesource International's efforts to
become publicly listed. The chief executive officer resides in Saipan.
Gross revenue taxes paid to the Commonwealth of Mariana Islands
increased $724,234 from $131,873 to $856,107 for 1998 and 1999,
respectively. The gross revenue taxes as a percentage of revenues were
0.4% and 3.7% for 1998 and 1999, respectively. The increase in gross
revenue taxes is a result of an increase in income subject to gross
revenue taxes.
Impairment of Long-Lived Asset. Telesource International recognized
an impairment of long-lived assets during 1998 in the amount of
$271,456 with no impairment recognition during 1999. Telesource
International accounts for long-lived assets in accordance with the
provisions of Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of. This statement requires that long-lived
assets and identifiable intangibles be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of
an asset to future net cash flows expected to be generated by the
asset. If the assets are considered to be impaired, the impairment to
be recognized is measured by the amount by which the carrying amount
of the assets exceed the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair
value less costs to sell. Management began evaluating the balance in
goodwill associated with its acquisition of Commsource International
in connection with its review of the operational performance of this
subsidiary. Commsource International posted a loss of $73,444 for the
twelve months ended December 31, 1997 and a loss of $195,791 for the
twelve months ended December 31, 1998. In light of these losses
recognized by Commsource International along with the lack of
necessary evidence to support the carrying value of the goodwill,
management has recognized an impairment to the full value of the
goodwill associated with Telesource International's investment in
Commsource International. Commsource International recognized net
income of $9,462 during 1999.
Other Expense and Other Income. Other expense and other income, net,
increased to a net other income of $926,248 for year ended December
31, 1999 as compared to a net expense of $23,229 for the same period
during 1998. The change is attributed to the recognition of interest
income on the notes receivable in the amount of $2,043,864 and
interest expense on the notes payable in the amount of $1,132,221 for
a net amount of interest income of $911,643.
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Net Income. Net income for the year ended December 31, 1999 amounted
to $1,650,201 or $0.17 per share as compared to net income of
$4,010,819 or $0.40 per share for the same period in 1998. The
decrease in net results during the 1999 is attributable to the
expected delay between receiving the notice to proceed with
construction on phase II and the time required to order the materials
and have them delivered along with decreases in trading activities,
rental income and service fees.
Operating Activities
The following adjustments, which did not impact Telesource
International's cash flows, need to be considered in order to
reconcile Telesource International's 1999 net income to its net cash
provided by operating activities.
Depreciation and Amortization. During 1999, Telesource International
recognized depreciation of $363,880 and no amortization.
Deferred Income Tax Benefit. Telesource International's net deferred
income tax liability amounted to $510,000 as of December 31, 1999 as
compared to $232,382 as of December 31, 1998. The increase in the
deferred tax liability is a result of the tax provision taken during
1999.
Telesource International also offers the following information to
discuss changes in its operating assets and liabilities which most
notably impacted its cash position during 1999:
Telesource International's current assets amounted to $3,403,572 as
of December 31, 1999, as compared to $1,247,910 as of December 31,
1998. The increase is due primarily to an increase in accounts
receivable and the recognition of a note receivable in the amount of
$13,620,809 during 1999. $907,822 was classified as the current
portion due on the note receivable at December 31, 1999. The note
receivable is associated with Telesource International's completion of
phase I on the construction of the power generation plant. The
completion of phase I resulted in the transfer from the balance sheet
account costs and estimated earnings in excess of estimated billings.
Telesource International began receiving installment payments in March
1999 in the amount of $180,000 per month for ten years.
Costs and estimated earnings in excess of billings increased by
$2,240,320 to $24,734,067 from $22,502,747 as of December 31, 1999 and
1998, respectively. The increase is attributed to the work performed
on phase II of the power generation plant construction contract and
work performed on other construction projects.
Premises and equipment, net of depreciation was almost unchanged at
December 31, 1999 in the amount of $1,891,188 as compared to the
balance at December 31, 1998 of $1,786,409, for a net increase of
$104,779. The increase is attributed to premises and equipment
additions required with the opening of the power generation facility
and additions made at Telesource International's corporate
headquarters.
Telesource International's accounts payable and accrued expenses
amounted to $5,510,317 as of December 31, 1999 as compared to
$1,478,774 as of December 31, 1998. The increase of 272.6% in
accounts payable and accrued expenses is attributed to the increase in
goods and services purchased during 1999 as related to the
construction activities on phase II and the other projects currently
underway at the end of the year. The growth in construction services
resulted in increased demand for construction products which in turn
increased the amount of accounts payable and accrued expenses at
December 31, 1999. Customer deposits remained unchanged at $125,000
as of December 31, 1999.
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Notes payable classified as long-term increased $10,500,000 to
$28,000,000 from $17,500,000 as of December 31, 1999 as compared to
December 31, 1998. The additional borrowings consisted of the
$7,500,000 from the Commercial Bank of Kuwait, New York Branch, a
$2,000,000 letter of credit from the Kuwait Real Estate Bank, and a
$1,000,000 line of credit with the Bank of Hawaii.
Warranty Reserve. Telesource International does not record a
warranty reserve. Work performed under warranties is performed at the
expense of the equipment manufacturer. Telesource International has
not experienced any losses associated with warranty work to date.
Financing Activities
Unsecured Line of Credit with the Commercial Bank of Kuwait, New
York Branch - Telesource International used the full amount of a
credit line with $25 million of available credit under an unsecured
loan from the Commercial Bank of Kuwait, New York Branch. The loan
has an interest rate of LIBOR plus 300 basis points. Under the terms
of the loan agreement, interest payments are due annually and the
principal balance is due at maturity. This loan is scheduled to
mature in February 2002. This loan has a guarantee of repayment to
the Commercial Bank of Kuwait, New York Branch, from Telesource
International's largest shareholder, SHBC and its major shareholders.
See "Certain Relationships and Related Transactions".
Telesource International was granted an unsecured letter of credit
with the Kuwait Real Estate Bank for $2,000,000 and had subsequently
borrowed $2,000,000 on this letter of credit at December 31, 1999.
The loan has an interest rate of LIBOR plus 250 basis points. This
loan was originated on May 2, 1999 and will mature on May 2, 2001.
Under the terms of the loan agreement, the loan is due in lump sum at
maturity. This line of credit is guaranteed by SHBC and its major
shareholders.
Telesource International was granted a $1,000,000 line of credit
from the Bank of Hawaii. This line of credit is secured by
certificates of deposits held at the Bank of Hawaii and has an
interest rate of 1% over the certificate of deposit rate. The line
has a maturity in March 2001 with interest payments due monthly and
principal due at maturity. Telesource International had fully
utilized this line of credit at December 31, 1999.
On January 24, 2000, Telesource International was granted a
$2,000,000 line of credit from The Hongkong and Shanghai Banking
Corporation Limited, Guam Branch. This line of credit is secured by
the promissory notes Telesource International holds on the power
generation plant. This line of credit has a maturity January 31, 2001
with interest payments due monthly and principal due at maturity.
This line bears an interest rate of the bank's prime rate plus 1.5%.
On May 15, 2000, Telesource International was granted a $2,000,000
line of credit from the Bank of Hawaii. This line of credit is secured
by the promissory notes Telesource International holds on the power
generation plant. This line of credit has a maturity of January 31,
2001 with interest payments due monthly and principal due at maturity.
This line bears an interest rate of the bank's prime rate plus 1.0%.
Common Stock - Telesource International received a capital
contribution from its stockholder, SHBC, in the amount of $700,000 in
1998. In July 1999, Telesource International announced that its Board
of Directors approved a one-for-ten thousand stock split to
stockholders of record on July 26, 1999. There was only one
shareholder of record on the record date, SHBC. All references in this
document to number of shares and per share amounts of Telesource
International's common stock have been retroactively restated to
reflect the increased number of shares outstanding.
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<PAGE>
Treasury Stock - Telesource International from time to time may make
purchases of its own common stock. Telesource International did not
purchase any treasury stock during the twelve months ended December
31, 1999 or the twelve months ended December 31, 1998.
Liquidity and Capital Resources
At December 31, 1999, Telesource International had fully utilized
all credit lines. Borrowings at December 31, 1999 were of $28,500,000,
with $500,000 maturing on May 21, 2000 and the remaining balance of
$28,000,000 maturing after December 31, 2000. Telesource International
had a negative working capital level of $3,254,908 and $799,367 at
December 31, 1999 and 1998, respectively. The net cash used by
operating activities for the twelve months ended December 31, 1999 and
1998 were $10,313,529 and $10,124,673, respectively. The cash used in
operating activities was primarily used in the construction of the
power plant which generated costs and estimated earnings in excess of
billings during 1999 and 1998 of $15,861,129 and $17,314,750,
respectively. The net cash used by operating activities were covered
primarily by increased borrowings during 1999 and 1998 of $11,000,000
and $17,500,000.
Additional funding in 2000 will come mainly from the collection of
payments on the power plant, collection of progress payments on
projects under construction and additional credit lines to meet the
cash flow needs of Telesource International. Short term financing is
expected to be in the form of additional lines of credit from our
existing banking relationships. Long term financing will be in the
form of a replacement of existing borrowings with term loans or the
sale of additional shares of stock.
SHBC and its majority stockholders have provided guarantees on
credit lines in the amount of $25,000,000 from the Commercial Bank of
Kuwait and $2,000,000 from the Kuwait Real Estate Bank. SHBC and its
majority stockholders are under no commitment to provide additional
guarantees on any additional debt and are not expected to provide
additional guarantees on any additional debt. Without SHBC and its
majority stockholders guarantee on additional borrowings, we expect
future borrowings will require collateral from Telesource
International sufficient to protect the lender. Telesource
International expects future borrowings to be secured by our own
receivables and promissory notes.
Telesource will collect $2,160,000 from the guaranteed promissory
note payments of $180,000 per month. Telesource will also collect
$600,000 from the operating fee on the power plant at $50,000 per
month. Telesource owns non-revocable promissory notes with a guarantee
of payment and a total balance to be collected as of December 31, 1999
of $19,800,000. As of May 25, 2000, Telesource International has
pledged $7,200,000 in promissory notes to secure an additional
$4,000,000 in lines of credit established in 2000. The remaining
balance of promissory notes of $12,600,000 are available to secure
additional loans to meet Telesource International's cash flow
requirements if needed.
While Telesource International believes it has sufficient financing
for its current working capital needs, Telesource is considering
bidding on additional projects in addition to the current backlog.
There can be no assurance that Telesource International's present
capital and financing will be sufficient to finance future operations
thereafter. 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
shareholders. If additional financing beyond current levels becomes
necessary, there can be no assurance that the financing can be
obtained on satisfactory terms. In this event, Telesource
International could be required to restrict its operations.
Outlook
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During 2000, Telesource International expects that its principal
sources of cash to fund its business activities will be from available
cash balances, operating activities, investment earnings, lines of
credit and other financing activities.
2000 Outlook
With a view towards 2000, Telesource International expects to
achieve continuing operating earnings as a result of profits from
construction and power generation activities along with the management
of its corporate general and administrative expenses. Telesource
International offers the following prospective information concerning
significant components of its 2000 results of operations which are
being compared to historical results of operations in 1999:
Power Generation Revenues. Our power generation activities are
estimated to be less than 10% of Telesource International's revenues
in 2000. During 1998, the power generation facility located on the
island of Tinian was under construction and did not begin producing
power until March 1999. Originally, Telesource International was
contracted to construct a 10 Mw plant and then in December of 1998,
Telesource International was contracted to increase its power
producing capabilities to 20 Mw. Telesource International's power
generation plant on Tinian was designed to be upgradeable to a total
power generation capability of 30 Mw. While Telesource International
expects that it will be able to sell all of its production, there can
be no assurance that our full power production capability will be
utilized at all times.
Operating Expenses. Operating expenses are expected to increase in
2000 as a result of having one full year of power plant production
activities. The completion of the second phase of construction is
expected in March 2000.
General and Administrative Expenses. General and administrative
expenses are expected to increase during 2000. The principal
administrative costs which are subject to considerable variation
pertain to Telesource International's expenses incurred in registering
its common stock and maintaining its public company status. Staffing
additions as well as increased fees for audit and legal expenses are
expected to occur. Unlike traditional offering statements, whereby
the expenses of the offering and subsequent registration of Telesource
International's common stock are netted from the proceeds of the
offering, Telesource International is not offering any securities for
sale through this registration statement. All known expenses incurred
as of December 31, 1999 for the registration statement have been
recognized in 1999. Additionally, Telesource International began
paying board fees to its board members in late 1999. The board fees
for 1999 were $70,000 and the board fees for 2000 are expected to be
approximately $140,000.
Other Expense and Other Income. Other expenses and other income are
expected to remain flat during 2000.
Finally, Telesource International remains focused on growth both
internally and externally. We believe we are working to carry out a
strategic plan that will provide us with the opportunity to capitalize
on the exciting opportunities ahead of us. We will continue to work
our plan, focusing on profitable growth in an effort to provide an
optimal level of value to our stockholders.
Year ended December 31, 1998 ("1998") compared with the year ended
December 31, 1997 ("1997")
44
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Revenue. During the year ended December 31, 1998, revenue increased
$20,092,199, or 150.2%, to $33,468,207 as compared to revenues of
$13,376,008 for the same period in 1997. The increase in gross
revenues is due primarily to Telesource International's efforts in
securing a contract to install and operate a power generation plant on
the island of Tinian and the completion of 97% of the first phase of
this contract during 1998.
Construction Revenue. Construction revenue grew $22,727,869 from
$3,561,055 to $26,288,924 for 1997 and 1998, respectively. The
construction revenue had a growth rate of 638.2% in 1998 is attributed
principally to the construction revenues recognized on the
construction of the power plant which were $22,502,747 during 1998 and
none during 1997. Construction revenues exclusive of the power
generation plant construction revenues in 1998 were $3,786,177 which
represents a 6.3% growth in construction revenues over 1997.
Sales Revenue. Sales revenue decreased 36.4% from $8,570,339 to
$5,446,731 for 1997 and 1998, respectively. The decrease in sales is
attributed to a corresponding decrease in orders from third party
customers.
Rental Income and Service Fees. Rental income increased to
$1,380,596 from $882,078 for 1998 and 1997, respectively, which
represents a growth rate of 56.5%. The increase in rental income is
due to increased equipment rental to a related party on the radio
relay station project during 1998. Service Fees. Service fees
decreased 2.9% from $362,536 to $351,956 for 1997 and 1998,
respectively.
Gross Profits. For the year ended December 31, 1998, gross profit
reached $6,436,917, a $4,681,533 increase from 1997. As a percentage
of revenue, gross profit increased in 1998 to 19.2% from 13.1% in
1997. The increased gross profit margin is attributed to the
substantial increase in construction revenues on the power plant As a
percentage of revenue, gross profit grew for the year ended December
31, 1998 to 19.2% from 13.1% for the same period in 1997. During 1997,
67.7% of all revenues recognized were from the radio relay station,
whereas the same revenues from the radio relay station fell to 32.7%
of the total revenues recognized during 1998. The increase in gross
profit as a percentage of income in 1998 to 19.2% from 13.1% in 1997
is due to the increase in revenues recognized on projects exclusive of
the radio relay station. As a percentage of construction revenues,
gross profit decreased from 49.3% to 24.5% for 1997 and 1998,
respectively. The decrease in gross profit as a percentage of
construction revenue is attributed to the substantial increase in
construction revenues recognized during 1998 as compared to 1997. As a
percentage of sales revenues, gross profit increased from 20.5% to
118.2%. Sales revenues were lower in 1998 as compared to 1997,
however, due to a substantial increase in gross profit, sales revenues
as a percentage of gross profit grew to 118.2%. As a percentage of
rental revenues, gross profit increased from 199.0% to 466.2% and is
attributed to the growth in rental revenues of $498,518 or 56.5%. As a
percentage of service fee, gross profits increased from 484.2% to
1828.9% and in spite of 2.9% decrease in service fees, the decrease is
attributed to the substantial increase in the overall gross profit.
Salaries and Employee Benefits. Salaries and employee benefits
declined to $386,571 for the twelve months ended December 31, 1998 as
compared to the same period during 1997 of $452,795. The decrease in
salaries and employee benefits was a 14.6% decrease and is attributed
to vacancies within two executive positions during 1998. These
vacancies have been filled and an increase in salaries and employee
benefits is expected to occur in future periods.
Occupancy and Equipment Expenses. Occupancy and equipment expenses
remained relatively flat at $293,112 as compared to $305,290 for the
twelve months ended December 31, 1998 and 1997, respectively.
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General and Administrative Expenses. General and administrative
expenses include administrative salaries, incentive compensation,
retirement plans, costs associated with Telesource International's
estimating and bidding activities, and other administrative costs.
General and administrative expenses increased from $346,543 in 1997 to
$748,935 in 1998 and decreased from 2.6% of revenues in 1997, to 2.2%
of revenues in 1998. The decrease as a percent of revenue is due to
the fixed nature of expenses and the increased revenue achieved in
1998. Depreciation expense increased $232,732 from $203,188 to
$435,920 for 1997 and 1998, respectively and were 1.5% of revenue
during 1997 and 1.3% of revenue during 1998. The increase in
depreciation expense is attributed to a growth in fixed assets of
56.9% during 1998 as compared to 1997. Professional fees increased
$57,315 from $20,337 to $77,652 for 1997 and 1998, respectively and
remained flat as a percentage of revenue at 0.2% for 1997 and 1998.
The increase in professional fees is attributed to an increase in
legal expenses associated with immigration issues for the employees of
Telesource International's subsidiary in the Commonwealth of Mariana
Islands along with an increase in accounting expense incurred during
1998 due to Telesource International's growth during the same period.
Gross revenue taxes paid to the Commonwealth of Mariana Islands
increased $130,103 from $1,770 to $131,873 for 1997 and 1998,
respectively. The increase in gross revenue taxes is a result of an
increase in income subject to gross revenue tax. The gross revenue
taxes as a percentage of revenue grew from 0.0% for 1997 to 0.4%
during 1998.
Impairment of Long-Lived Asset. Telesource International recognized
an impairment of long-lived assets during 1998 in the amount of
$271,456 with no impairment recognition during 1997. Management began
evaluating the balance in goodwill associated with its acquisition of
Commsource International in connection with its review of the
operational performance of this subsidiary. Commsource International
posted a loss of $73,444 for the twelve months ended December 31, 1997
and a loss of $195,791 for the twelve months ended December 31, 1998.
In light of these losses recognized by Commsource International along
with the lack of necessary evidence to support the carrying value of
the goodwill, management has recognized an impairment to the full
value of the goodwill associated with Telesource International's
investment in Commsource International.
Other Expense and Other Income. Other expense and other income
remained relatively unchanged at an expense of $23,229 for the twelve
months ended December 31, 1998 as compared to an expense of $30,697
for the same period during 1997. The $7,468 reduction in other
expenses is attributed to improved cash management.
Net Income. Net income in 1998 amounted to $4,010,819 or $0.40 per
share as compared to net income of $593,590 or $0.06 per share in
1997. The increase in net results during 1998 is attributable to
increases in our construction activities and growth in rental
revenues. Earnings per share in future periods will depend in large
part on Telesource International's ability to successfully bid and be
awarded additional contracts for construction services. There were no
power generation revenues in CNMI during 1998 or 1997 and we began
generating power at our power generation plant on the island of Tinian
in March 1999 as scheduled.
Power Plant Project
Construction revenues on the power plant grew 100% during 1998, from
none in 1997 to $22,502,747. The costs associated with the
construction revenues on the power plant were $18,328,499
and the gross profit recognized during 1998 on the power plant only
were $4,174,248. Gross profit for 1998 and 1997, exclusive of the
power plant were $2,262,699 and $1,755,384 or for a growth rate of
28.9% in gross profit during 1998 as compared to 1997 exclusive of the
gross profit earned on the power plant. The power plant construction
revenues were 67.0% and none of total revenues for 1998 and 1997,
respectively.
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Related Party Transactions
In 1996, Telesource International was subcontracted by SHBC to build
a multimillion dollar radio relay station in the Commonwealth of
Northern Mariana Islands for the United States Information Agency.
The agreement between SHBC and Telesource International included
payment to Telesource International on a monthly basis for all time
and material plus a fee of 7.5% on local purchases and procurements.
The radio relay station project was completed in early 1999, however,
an addition to the radio relay station was approved and Telesource
International was hired by SHBC to perform additional construction
services on the radio relay station under the same terms as the
original agreement and expects to complete the additional construction
services by February 2000. Telesource International does not believe
that the subcontract with SHBC is indicative of future contracts and
expected results.
The following table describes the condensed financial information
related to SHBC in regards only to the radio relay station project:
Years Ended December 31, 1998 1997
------------------------------------
Construction revenues $ 3,786,177 $ 3,561,055
Sales 2,236,888 3,801,805
------------------------------------
Gross revenues 6,023,065 7,362,860
Construction costs 3,603,465 3,563,007
Cost of sales 2,110,272 3,586,608
------------------------------------
Gross profit $ 309,328 $ 213,245
====================================
Telesource International had total sales of $5,427,103 and
$4,247,086 during the twelve months ended December 31, 1998 and 1997,
respectively to SHBC, including sales listed above for the radio relay
station project.
Additionally, Telesource International earned rental income of
$1,380,596 and $882,078 during the twelve months ended December 31,
1998 and 1997 from SHBC along with service fees of $351,956 and
$362,536 during the twelve months ended December 31, 1998 and 1997,
respectively from SHBC as well.
The above amounts, terms and related party amounts disclosed on the
financial statements are not necessarily indicative of the amounts and
terms which would have been incurred had comparable transactions been
entered into with independent parties.
Operating Activities
Telesource International had cash used by operating activities of
$10,124,673 in 1998 and cash used by operating activities of
$5,424,342 in 1997.
While Telesource International reported an overall net income of
$4,010,819 during 1998, Telesource International did not generate
significant cash from its operating activities. The following
adjustments, which did not impact Telesource International's cash
flows, need to be considered in order to reconcile Telesource
International's 1998 net income to its net cash provided by operating
activities.
Depreciation and Amortization. During 1998, Telesource International
recognized depreciation and amortization of $451,888, and an
impairment to long-lived assets of $271,456.
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Deferred Income Tax Benefit. Telesource International's net deferred
income tax liability amounted to $232,382 as of December 31, 1998 as
compared to none as of December 31, 1997. The increase in the
deferred tax liability is associated with a temporary difference
created by Telesource International's recognition of profits on its
construction activities under the percentage-of-completion method for
financial statement reporting purposes as compared to the installment
method of recognizing income for income tax purposes.
Telesource International also offers the following information to
discuss changes in its operating assets and liabilities which most
notably impacted its cash position during 1998:
Telesource International's current assets amounted to $1,247,910 as
of December 31, 1998 as compared to $2,162,777 as of December 31,
1997. The decrease in current assets by 42.3% is due to a reduction in
accounts receivable by 82.4% from $1,086,581 to $191,078 as of
December 31, 1997 and 1998, respectively. The reduction in accounts
receivable is a result of the contract to construct the power plant
which defers payments for construction services until the construction
is complete. Telesource International began receiving installment
payments in March 1999 in the amount of $180,000 per month for ten
years.
Costs and estimated earnings in excess of billings increased by
$17,314,750 to $22,502,747 from $5,187,997 as of December 31, 1998 and
1997, respectively. The increase is attributed to the power plant
construction contract which defers the payment for construction
services until completion at which time Telesource International will
begin receiving monthly installments of $180,000 for ten years.
Premises and equipment, net of depreciation increased 56.9% to
$1,786,409 from $1,138,567. The increase is attributed to additional
equipment needs associated with the growth in construction service
activities.
Excess of cost over fair value of net assets acquired amounted to
$287,424 at December 31, 1997 and none at December 31, 1998. The full
amount of the goodwill associated with the acquisition of Commsource
International was recognized as impaired in 1998 as a result of the
losses realized by Commsource International in 1997 and 1998 along
with the lack of evidence to support the carrying value of the
goodwill.
Telesource International's accounts payable and accrued expenses
amounted to $1,478,774 as of December 31, 1998 as compared to $989,532
as of December 31, 1997. The increase of 49.4% in accounts payable
and accrued expenses is attributed to the growth in construction
services realized during 1998. The growth in construction services
resulted in increased demand for construction products which in turn
increased the amount of accounts payable outstanding at December 31,
1998.
Customer deposits remained unchanged at $125,000 as of December 31,
1998 while notes payable classified as current liabilities decreased
from $6,700,000 to none at December 31, 1997 and 1998, respectively.
The decrease in notes payable classified as currently due was paid at
December 31, 1997 consisted of a $6,000,000 note payable to the
Commercial Bank of Kuwait, New York Branch, which was renewed for
$25,000,000 due in February 2002 during 1998, a $700,000 note due to
SHBC which was repaid with proceeds from a capital contribution made
by SHBC, and lastly a note payable to SHBC for $278,374 which was
repaid during 1998 by internally generated cash flows.
Warranty Reserve. Telesource International does not record a
warranty reserve. Work performed under warranty's is performed at the
expense of the equipment manufacturer. Telesource International has
not experienced any losses associated with warranty work to date.
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Financing Activities
Telesource International utilized $11,221,626 and $6,978,374 in
financing activities during the years ended December 31, 1998 and
1997, respectively. Telesource International's financing activities
are concentrated primarily in the following areas:
Unsecured Line of Credit with the Commercial Bank of Kuwait, New
York Branch, - Telesource International used $17.5 million of a credit
line with $25 million of available credit under an unsecured loan from
the Commercial Bank of Kuwait, New York Branch. The loan has an
interest rate of LIBOR plus 300 basis points. Under the terms of the
loan agreement, interest payments are due annually and the principal
balance is due at maturity. This loan is scheduled to mature in
February 2002. This loan has a guarantee of repayment to the
Commercial Bank of Kuwait, New York Branch, from Telesource
International's largest shareholder, SHBC and its major shareholders.
See "Certain Relationships and Related Transactions".
Telesource International has an unsecured line of credit with the
Kuwait Real Estate Bank for $2,000,000. The loan has an interest rate
of LIBOR plus 250 basis points. This loan was originated on May 2,
1999 and will mature on May 21, 2001. Under the terms of the loan
agreement, the loan is due in lump sum at maturity. This line of
credit is guaranteed by SHBC and its major shareholders.
Telesource International was granted a $1,000,000 line of credit
from the Bank of Hawaii. This line of credit is 100% secured by
certificates of deposits held at the Bank of Hawaii and has an
interest rate of 1% over the certificate of deposit rate. The line
has a maturity in March 2001 with interest payments due monthly and
principal due at maturity.
Common Stock - Telesource International received a capital
contribution from its stockholder, SHBC, in the amount of $700,000 in
1998, none in 1997, and a $40,000 capital contribution from SHBC in
1996. Telesource International did not receive any proceeds from the
issuance of its Common Stock during 1998, 1997 and 1996, respectively
and no additional stock was issued for these same periods.
Treasury Stock - Telesource International from time to time may make
purchases of its own common stock. Telesource International did not
purchase any treasury stock during 1998, 1997 or 1996.
Reclassification of Balances
There have been reclassifications of balances to conform the
financial statement to Generally Accepted Accounting Principles. Prior
to the preparation of this registration statement, Telesource
International maintained its accounting records on a tax basis,
specifically, Telesource International used the completed contract
method in the preparation of its financial statements for tax
purposes. In order for Telesource International to prepare its
financial statements in accordance with Generally Accepted Accounting
Principles, Telesource International changed its method of accounting
for the revenues realized on its construction contracts to the
percentage-of-completion method of accounting, and applied the
percentage-of-completion method to the financial statement information
presented herein.
Recently Issued Accounting Standards
See Note 2 to the Consolidated Financial Statements for recently
issued accounting standards which are required to be adopted in 1999.
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Legal Proceedings
Telesource International is involved in various litigation
proceedings incidental to the ordinary course of business. In the
opinion of management, the ultimate liability, if any, resulting from
the litigation would not be material in relation to Telesource
International's financial position or results of operations.
Costs
Telesource International began operating in 1994 and began verifying
Year 2000 compliance on equipment purchases before executing orders.
Telesource International had not incurred costs to remediate Year 2000
issues as of March 31, 2000. Telesource International does not
expect that the total costs to remediate Year 2000 issues would be
material to its financial position.
Interest Rates
Telesource International's subsidiary has a variable rate term loan
from the Commercial Bank of Kuwait, New York Branch,, a variable rate
term loan from Kuwait Real Estate Bank and a variable rate term loan
from the Bank of Hawaii. Telesource International offers the
following information about these debt obligations:
<TABLE>
<S> <C> <C> <C>
Description of the Balance at
Obligation 12/31/98 Interest Rate Matures
-----------------------------------------------------------------------------------
Variable rate term loan $ 17,500,000 LIBOR rate plus 3.0% February 17, 2002
Description of the Balance at
Obligation 12/31/99 Interest Rate Matures
-----------------------------------------------------------------------------------
Variable rate term loan $ 25,000,000 LIBOR rate plus 3.0% February 17, 2002
Variable rate term loan $ 2,000,000 LIBOR rate plus 2.5% May 2, 2001
Fixed rate term loan $ 1,000,000 Fixed rate of 6.25% March 26, 2001
Fixed rate letter of
credit $ 500,000 Fixed rate of 12.5% May 21, 2000
Description of the Balance at
Obligation 3/31/00 Interest Rate Matures
-----------------------------------------------------------------------------------
Variable rate term loan $ 25,000,000 LIBOR rate plus 3.0% February 17, 2002
Variable rate term loan $ 2,000,000 LIBOR rate plus 2.5% May 2, 2001
Variable rate term loan $ 2,000,000 Prime rate plus 1.5% January 31, 2001
Fixed rate term loan $ 1,000,000 Fixed rate of 6.25% March 26, 2001
Fixed rate letter of
credit $ 500,000 Fixed rate of 12.5% May 21, 2000
50
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TELESOURCE INTERNATIONAL'S BUSINESS
Telesource International is an international engineering and
construction company, with specialized knowledge and experience in the
construction of power generation and broadcasting facilities as well
as the operation of independent power generation facilities.
Telesource International was formed in 1994 to facilitate various
intra-corporate activities and, until July 1999, was a wholly owned
subsidiary of SHBC a Kuwait-based civil, electrical and mechanical
construction company.
Our activities in Micronesia are concentrated in the Commonwealth
of Northern Mariana Islands, a United States possession. Our Chicago
office is responsible for the procurement of U.S. fabricated products
to be used by our subsidiaries as well as for resale.
We conduct our operations primarily through subsidiaries. We
currently have two subsidiaries. Our Mariana subsidiary, Telesource
International CNMI Inc., handles construction and management of our
power facilities in the Commonwealth of Mariana Islands. Our second
subsidiary, Commsource International, is an international export
company that facilitates the purchase of equipment in the U.S. Our
branch offices in Guam, Telesource International Pacifica and Pacifica
Power Resources, a trading company, were created to take advantage of
opportunities we believe will be available there.
Telesource International has three main operating segments:
construction services, trading activities and power generation. Power
generation activities did not commence until March 1999.
* Construction services. Our main lines of construction services
cover the range from single-family housing to power generation plants.
We are now working on expanding the business by taking advantage of
opportunities to increase market share in existing geographic areas
and to expand geographic service areas in our core lines of business.
We are currently one of the largest construction contractors in the
Commonwealth of Northern Mariana Islands.
* Power generation and sale. We have contracts to generate and
provide wholesale electrical power to local government agencies, which
is then distributed on their power grids.
Construction Services:
Telesource International's Micronesian construction services are
primarily carried out through our Mariana subsidiary. In late 1996,
our Mariana subsidiary was subcontracted by our then-parent
corporation to build a multimillion-dollar radio relay station in the
Commonwealth of Northern Mariana Islands for the United States
Information Agency.
In 1999, through a competitive bidding process, we were awarded a
contract to build 45 housing units for the Northern Mariana Housing
Agency, a government agency. These are government-subsidized, low-
income housing units. This project is valued at $6.3 million and is a
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first phase of a potentially larger project. This project is
currently at the permitting stage. We believe there may be additional
contracts or phases in the future. Although these may never be
contracted and we may not obtain the contract if they are.
Also in 1999, we were awarded a contract to build a school
building on the island of Tinian as part of a infrastructure upgrade.
The first phase of this project is valued at $330,000 which may at a
latter date be upgraded; however, there can be no assurance that
Telesource International will be awarded the upgrade. Telesource
International has also been awarded a contract valued at approximately
$800,000 to provide overhead and underground electricity transmission
lines to a U.S. government site in the Commonwealth of Northern
Mariana Islands and for the development of a well valued at $715,000.
Non-Power Project Construction Expansion Plans:
With our expansion into Guam to take advantage of the growing
U.S. military presence there, we are currently looking for
opportunities for our construction services not only in Micronesia,
but also throughout the Pacific basin.
Specialized Construction Processes:
Building a power plant or a broadcasting facility is not like the
construction of a more conventional building. Because of the high
levels of radio frequency emissions or the generation of electrical
currents, every part of the structure is integrated into the overall
design and plays a role in making the overall facility safer and more
efficient.
The building of these specialized structures requires additional
engineering skills, the knowledge of specialized construction
techniques and relationships with specialized subcontractors. The
situation is made harder when building offshore, where distance from
raw materials and subcontractors becomes a risk factor.
Past and Present Power Generation Construction Projects:
Our power generation business involves:
* Building the power plants
* Operating the power plants for the period of time of the
contract
* Selling wholesale power to the client to be distributed on
their power grid
* The transfer of the ownership of the properties to the
clients at the end of the contract.
In 1997, the Commonwealth Utility Corporation, located in the
Commonwealth of the Northern Mariana Islands, awarded our Mariana
subsidiary a multi-million contract to design, build and operate a 10-
30 megawatt power plant.
The initial 10 megawatts are now on-line, completed within
budget and on time; the plant has been operational since March 1999.
The second phase of the project is currently under construction, and
by March 2000, we anticipate that an additional 10 megawatts will be
on-line. The third phase will be constructed at the discretion of our
Mariana subsidiary as the demand for power increases. Accordingly, if
power demand fails to meet our projections, this phase may never be
constructed.
Power Plant Operation and Maintenance:
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<PAGE>
The Commonwealth Utilities Corporation project in the
Commonwealth of Northern Mariana Islands is an example of a power
plant operation and maintenance project. We designed, financed and
built the power plant. We obtained financing through a $25,000,000
line of credit from the Commercial Bank of Kuwait, New York Branch,.
For this construction, we are paid $180,000 per month for ten years by
the Commonwealth Utilities Corporation. Each monthly payment is
secured by a promissory note in the amount of $180,000 issued by the
Commonwealth Utilities Corporation.
We have a 20-year lease on the land on which the power plant
is built, plus title to the entire plant and a two-month escrow
account of no less than $360,000 on which we have a first lien. In the
event of the Commonwealth Utilities Corporation being unable to meet
their obligations either for their monthly maintenance fees or for the
promissory notes, we may sell, lease, assign or transfer the power
plant or any of the plant equipment.
In the first phase, Commonwealth Utilities Corporation also pays
us a production fee of $.02 per kilowatt-hour for each kilowatt
produced on its behalf for the first 5,140,000 kilowatt hours per
month. In the second additional 10 megawatt phase, Commonwealth
Utilities Corporation has agreed to pay us an additional production
fee of $.065 per kilowatt-hour produced over the initial 5,140,000
kilowatt hours per month.
In addition, the CUC pays a service fee of $50,000 a month for
operating and maintaining the power plant.
CUC has the right to terminate the contract for operation and
maintenance at any time with six month's notice. In this event, we
would still have title to the power plant until the time we are fully
repaid.
Potential Future Power Plant Construction and Power Supply:
Based on our previous experience, we believe there will be a
growing demand for power around the world and in the U.S.; however
competition and deregulation could eliminate the financial feasibility
of these projects and thereby prevent us from taking advantage of the
expected growth in demand. In the U.S. two-thirds of the country's
installed plants are 25 years-plus old and need to be replaced and
repowered, principally with new gas combustion turbines. The U.S.
Department of Energy forecast for the U.S. power plant market shows a
forecasted average growth of 7.4% in the number of power generation
facilities and an average growth of 16.0% in the capacity of
electricity produced for the next four years. We also believe that in
those situations where the local governments lack the up-front funding
to build the additional power plants will represent an opportunity for
us to find alternative solutions up to and including having Telesource
International locate the needed project financing. Without the
additional energy, we believe that many of the infrastructure upgrades
envisioned by local governments can't take place. In our experience,
in return for our securing project financing in a manner similar to
that obtained for our project in Mariana, the CNMI, the local
governments will be willing to enter into contracts which guarantee us
a minimum amount of power consumption, coupled with long-term
operations and maintenance contracts similar to those with the
Commonwealth Utility Corporation.
We anticipate that these contracts will generally be secured by
governmental guarantees, promissory notes, liens and collateral in the
land and in the physical power plants.
Sales and Marketing Strategies:
Most of our jobs will be obtained through a public bid
process, and our clients are either governments or governmental
agencies. In obtaining contracts:
53
<PAGE>
* We perform significant market research. We analyze potential
markets, looking for future building plans or plans to expand the
capital infrastructure. Our research also includes analyzing numerous
government documents and reviewing previous and current requests for
bids.
* We are actively involved in public relations with the
governments and agencies that might contract for our services. Much of
this effort is informational, finding out what the specific needs of
each governmental agency while at the same time explaining what
services Telesource International has to offer.
* We have created and provide to potential clients a survey to
help governmental agencies evaluate whether Telesource International's
resources and services might be more efficient and cost-effective than
their current system.
We maintain three full-time marketing executives to help our
sales and marketing efforts; one in our Illinois headquarters and two
offshore. All three are salaried employees.
Competition
The independent power industry has grown rapidly over the past
twenty years. There are a large number of suppliers in the wholesale
market and a surplus of capacity, which has led to intense competition
in this market. The principal sources of competition in this market
include traditional regulated utilities who have excess capacity,
unregulated subsidiaries of regulated utilities, energy brokers and
traders, energy service companies in the development and operation of
energy-producing projects and the marketing of electric energy,
equipment suppliers and other non-utility generators like Telesource
International. Competition in this industry is substantially based on
price with competitors discovering lower cost alternatives for
providing electricity. The electric industry is also characterized by
rapid changes in regulations, which Telesource International expects
could continue to increase competition. We do not believe the CUC
facility would be significantly impacted by competition in the
wholesale energy market since its revenues are subject to contracted
rates which are substantially fixed for several years.
We also compete in the market to develop power generation
facilities. The primary bases of competition in this market are the
quality of development plans, the ability of the developer to finance
and complete the project and the price. In some cases, competitive
bidding for a development opportunity is required. Competition for
attractive development opportunities is expected to be intense as
there are a number of competitors in the industry interested in the
limited number of opportunities. Many of the companies competing in
this market have substantially greater resources than us. We believe
our project development experience and its experience in creating
strategic alignments with other development firms with greater
financial and technical resources could enable us to continue to
compete effectively in the development market if and when
opportunities arise. Presently, we believe there are a number of
opportunities for additional project development worldwide for
projects similar to those previously developed by us. However, we are
currently evaluating whether it should seek development opportunities
in other areas outside of the south pacific to diversify its
activities.
Presently, there is significant merger and consolidation activity
occurring in the electric industry. From time to time, we may
consider merger and acquisition proposals when they appear to present
an opportunity to enhance shareholder value. We are not involved in
any of these discussions or negotiations at this time.
54
<PAGE>
Energy Regulation
Our projects are subject to regulation under federal and local
energy laws and regulations. Telesource International is subject to
the requirements established by its permitting authorities, i.e.
Department of Environmental Quality ("DEQ") and the Environmental
Protection Agency ("EPA").
Presently, neither the Customer Choice Act nor proposed
legislation directly impacts us because the legislation and
restructuring plan pertain to the retail market or new contracts in
the wholesale market. However, as discussed above, we could possibly
be impacted in the future by, among other things, increases in
competition as a result of deregulation. We are actively monitoring
these developments in energy proceedings in order to evaluate the
impact on its projects and also to evaluate new business opportunities
created by the restructuring of the electric industry.
Environmental Regulation
Our projects are subject to regulation under federal, foreign
and local environmental laws and regulations and must also comply with
the applicable laws pertaining to the protection of the environment,
primarily in the areas of water and air pollution. These laws and
regulations in many cases require a lengthy and complex process of
obtaining and maintaining licenses, permits and approvals from federal
and local agencies. As regulations are enacted or adopted in any of
these jurisdictions, we cannot predict the effect of compliance
therewith on our business. Our failure to comply with all applicable
requirements could result in delays in proceeding with any projects
under development or require modifications to operating facilities.
During periods of non-compliance, our operating facilities may be
forced to shutdown until the non-compliances are corrected. We are
responsible for ensuring compliance of its facilities with all
applicable requirements and, accordingly, attempts to minimize these
risks by dealing with reputable contractors and using appropriate
technology to measure compliance with the applicable standards.
Insurance and Bonding
We maintain general and excess liability, construction equipment,
and workers' compensation insurance; all in amounts consistent with
industry practices. We believe our insurance programs are adequate.
In connection with our business, we are in the process of
securing a surety bond which provide an additional measure of security
of our performance under some public and private sector contracts. Our
ability to obtain a surety bond depends upon our capitalization,
working capital, past performance, management expertise and other
factors. Surety companies consider these factors and their current
underwriting standards, which may change from time to time.
Employees
Telesource International presently employs 126 people,
consisting of 18 employees in management, 25 engineers and technical
staff members, six support staff members and 105 hourly employees. All
of our employees are nonunion workers, although we may employ union
subcontractors from time to time.
Ninety percent of our crews are staff, because of the technical
nature of our construction contracts. Working on a power plant,
broadcasting facility or other technical construction site requires a
higher level of expertise and a greater attention to safety issues.
55
<PAGE>
Our non-engineering level employees are hourly workers, while our
engineering and supervisory staff are on monthly salaries.
Properties
Telesource International maintains leased office spaces and
land leased for storage of construction equipment. Our Mariana
subsidiary's head office in the Commonwealth of Northern Mariana
Islands is leased for five years; we also have an office on the island
of Tinian leased on a yearly commitment. On Guam, we have an office
leased by the year with 90 days notice for termination of lease. Our
corporate offices in Illinois are leased on a month-to-month basis.
Additionally, we have approximately 10 leased vehicles in our fleet.
TELESOURCE INTERNATIONAL'S MANAGEMENT
MANAGEMENT
The names and ages of our executive officers and directors as of
June 30, 2000, and their background are as follows:
</TABLE>
<TABLE>
<S> <C>
Name and Age; Years
Served as Director Principal Occupation for Past Five Years; Other Directorships
----------------------------------------------------------------------------------------------
Khajadour Semikian Khajadour Semikian, President, joined Telesource
Age 46 International in September 1996. From January 1986 to December 1996
Director Since 1995 Mr. Semikian was Assistant General Manager with Sayed Hamid Behbehani
& Sons. Mr. Semikian attended a workshop with Wide & Co. in Hamburg,
Germany in 1975, attended the Institute of Bankers in Sussex, U.K. in
1973 for a banking course and received a degree in Electrical
Engineering in 1973. Mr. Semikian has also served as a director for
Computhink Incorporated since 1994, Telebond Insurance Corporation and
Retsa Development Incorporated since 1998.
Nidal Zayed Nidal Zayed, Executive Vice President, joined Telesource International
Age 39 in January 1996. From January 1990 to December 1995 Mr. Zayed was the
Director Since 1998 owner/President of Commsource Int'l Inc. and self-employed in the
practice of law during this period and to date. Mr. Zayed passed the
Illinois Bar in November 1985. In June 1985 Mr. Zayed received a law
degree from Loyola University School of Law and in June 1982 he
received a B.A. in Accounting from Loyola University of Chicago. Mr.
Zayed does serve as Chairman for Computhink Incorporated and as a
director for Computhink since 1994.
Max Engler From 1988 to present Mr. Engler has been an
Age 50 independent Financial Consultant and Mr. Engler is also on the Board
Director Since 1997 of Directors of various companies in Switzerland and abroad. From
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<PAGE>
1984 to 1988 Mr. Engler headed the Private Banking desk (Middle East
and Far East) of Bank Leu as Vice President. Mr. Engler received a
diploma of Commerce from the High School of Commerce of Schwyz,
Switzerland and from 1971 to 1975 went through an extensive training
program with Union Bank of Switzerland and became an investment
advisor. Mr. Engler has also served as a director for Computhink
Incorporated since 1998. Mr. Engler also is a director for Belmoral
S.A., Computhink Ltd., Telesource International CNMI Inc., Retsa
Development Inc., Golden Osprey Ltd., Computhink Technology Ltd., FSD
Holdings PLC, Litra Holdings AG, Linos Finanz AG, Trafex Ltd., R.C.W.
Enterprises S.A., Formvac S.A., Sanop AG, and Protea Beratungs-und
Finanz AG.
Weston W. Marsh Mr. Marsh joined the Board of Directors for
Age 49 Telesource International in 1999. He is a member of the law firm
Director Since 1999 Freeborn and Peters. Prior to joining Freeborn and Peters in
September, 1990, Mr. Marsh served as the Assistant General Counsel in
charge of all litigation and claims for the nation's seventh largest
railroad. Mr. Marsh has handled and supervised the strategy of
billion-dollar antitrust cases, large environmental litigation, and a
variety of commercial and insurance-related disputes. Mr. Marsh
obtained his law degree from the University of Illinois, where he
graduated with honors, Order of the Coif, and was associate editor of
the Law Review. He received his B.A. from Yale University and an
M.B.A. from the University of Chicago, where he graduated first in his
class.
Ibrahim M. Ibrahim Mr. Ibrahim has served as a director of
Age 57 Telesource International since 1999. He has been Head of
Director Since 1999 International Banking for The Gulf Bank K.S.C. in Kuwait since 1986.
Mr. Ibrahim served as the Vice President and Head of Credit and
Marketing for the First National Bank of Chicago for the middle east
region from 1984 to 1986 and he has also served as the Vice President
and General Manager of Continental Illinois Bahrain Branch from 1969
to 1984. Mr. Ibrahim received his M.B.A. in International Business
from De Paul University, his M.S. in Taxation and Islamic Law from the
University of Alexandria and his B.A. in Accounting from the
University of Alexandria.
Jeffery Adams Mr. Adams has served as a director of Telesource
Age 57 International since 1999. He is an Electrical Engineer trained in the
Director Since 1999 United Kingdom. From 1978 to 1986, Mr. Adams served as the marketing
director of Babcock Industries and Electrical Group of Companies. In
1986, Mr. Adams became an independent international sales marketing
consultant. From 1987 to present, Mr. Adams is the general manager
for Trafex Ltd., an engineering supplies company serving the Middle
East. From 1997 to 1999, Mr. Adams served as a director for Computhink
Ltd. in the United Kingdom.
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<PAGE>
Ralph Beck Mr. Beck has served as a director of Telesource
Age 61 International since 1999. He currently is a principal of Global
Director since 1999 Construction Solutions, L.L.C. From 1994 to 1998, Mr. Beck served as
the President of Kajima Construction Services, Inc., the N.A.
investment of a global engineering and construction firm. From 1965 to
1994, Mr. Beck was with the Turner Corporation, an international
engineering and construction firm. Mr. Beck served as the chairman of
the board for Turner Steiner International from 1987 to 1994 and as a
senior vice president for Turner Corporation.
Jeff Karandjeff Secretary, joined us in April 1997. From October 1996 to February
Age 33 1997 Mr. Karandjeff was an Associate with Schoenberg, Fisher, Newman &
Rosenberg, LTD. From June 1992 to October 1996 Mr. Karandjeff was an
associate with Treumann, Goba & Podbelsek, PC. In May 1993 Mr.
Karandjeff received a law degree from Loyola University School of Law
and passed the Illinois Bar in September 1993. In May 1988, Mr.
Karandjeff received a Bachelors Degree from Massachusetts Institute of
Technology.
Robert Swihart Joined Telesource International in March 1998 as Treasurer.
Age 53 From 1988 to 1998 Mr. Swihart held various accounting positions
including Assistant Controller with Continental Cablevision/MediaOne.
In June 1970 Mr. Swihart received an M.B.A. from Northern Illinois
University and in June 1968 he received a B.A. Business Administration
from North Park College.
Bud Curley Bud Curley joined Telesource International as its Chief Financial
Age 36 Officer in September 1999. Prior to September 1999, Mr. Curley served
as the Chief Financial Officer, Secretary and Executive Vice President
for Surety Capital Corporation and Surety Bank, N.A. from 1996 to
1999. From 1993 to 1996, Mr. Curley served as Surety Capital
Corporation and Surety Bank, N.A.'s Controller and Senior Vice
President. From 1991 to 1993, Mr. Curley served as the Controller for
Environmental Engineering and Geotechnics and from 1989 to 1991, Mr.
Curley served as a Financial Analyst for Residential Mortgage
Investments, Inc. In 1989, Mr. Curley received a B.A. in Business
Administration from the University of Texas. He has also served as a
director for Surety Capital Corporation and Surety Bank, N.A. from
1998 to 1999.
</TABLE>
Board Composition
Directors are elected annually at our annual meeting of
stockholders, and serve for the one year term for which they are
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elected and until their successors are duly elected and qualified. Our
bylaws currently provide for a board of directors comprised of seven
directors.
Executive Compensation
The following table sets forth summary information concerning the
compensation received for services rendered to us during the years
ended December 31, 1999, 1998 and 1997, respectively by the Executive
Vice President. No other executive officers received aggregate
compensation during our last fiscal year which exceeded, or would
exceed on an annualized basis, $100,000. Other annual compensation
consists of health insurance premiums paid for by us on behalf of the
named officers, and in some cases, the spouse and dependents of the
named officers.
Executive Compensation and Other Information
Summary of Cash and Other Compensation. The following table
provides summary information concerning compensation paid or accrued
by Telesource International to or on behalf of Telesource
International's most highly compensated executive officer of
Telesource International (determined as of the end of the last fiscal
year) (hereafter referred to as the "named executive officers") for
the fiscal years ended December 31, 1999, 1998 and 1997:
SUMMARY COMPENSATION TABLE
Annual Compensation
Name and All Other
Principal Position Year Salary (1) Bonus Annual
Compensation
------------------------------------------------------------------------
Khajadour Semikian 1999 $ 152,337 $ - $ -
President 1998 $ - $ - $ -
1997 $ - $ - $ -
Nidal Zayed 1999 $ 142,404 $ - $ 10,000
Executive Vice
President 1998 $ 108,830 $ - $ -
1997 $ 108,000 $ 13,185 $ -
(1) Includes salary paid by Telesource International, before any
salary reduction for contributions to Telesource International's
Savings Plan under Section 401(k) of the Internal Revenue Code of
1986, as amended (the "Code"). Telesource International paid
director fees of $10,000 in 1999 to Mr. Zayed and no director
fees for 1998 or 1997.
We have entered into an employment agreement with Khajadour Semikian
and Nidal Zayed. The term of the agreement with Mr. Semikian is from
July 1, 1999 to July 1, 2002. Under the terms of the agreement, Mr.
Semikian is required to devote his full time to our business. We have
agreed to pay him an annualized base salary of $220,000 for the
current fiscal year, subject to an increase on January 1, 2000 to
$270,000 and to remain at $270,000 per year till July 1, 2002. The
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<PAGE>
payment of cash bonuses to Mr. Semikian will be at the Board's
discretion. We have agreed to provide Mr. Semikian with health
insurance for him and his family at a reduced rate. The term of the
agreement with Mr. Zayed is from September 1, 1999 to September 1,
2002. Under the terms of the agreement, Mr. Zayed responsibilities'
comprise serving as the number two operating officer accountable for
the full range of operations. We have agreed to pay him an annualized
base salary of $125,000 per year for the term of the agreement. The
payment of cash bonuses to Mr. Zayed will be at the Board's
discretion. We have also agreed to provide Mr. Zayed with health
insurance for him and his family at a reduced rate along with a
company car.
Board Compensation
Our directors did not receive cash compensation for their services
as directors until December 1999, although some directors are
reimbursed for reasonable expenses incurred in attending board or
committee meetings. The Board has approved a resolution to increase
fees paid to each director from none to $20,000 per year beginning in
December 1999. The board fees are to be paid semiannually. In August
1999, Mr. Semikian purchased 200,000 shares of common stock at a price
per share of $3.00.
Board Committees
The Board has appointed three outside directors to serve as the
compensation committee and three outside directors to serve as the
audit committee at the December 1999 Board meeting. Prior to December
1999, Mr. Semikian, our current chief executive officer and a
director, and Mr. Zayed, an executive vice president and a director of
Telesource International, participated in deliberations of our full
board of directors concerning executive officer compensation.
CONFLICTS OF INTEREST
Existing Business Conflicts
Some of our executive officers, directors and major shareholders are
also owners, officers and/or directors of SHBC located in Kuwait.
SHBC is a civil, electrical and mechanical construction contractor
with 750 employees and over 30 years of experience. SHBC and its
affiliates was the sole shareholder of Telesource International prior
to July 1999 and will own approximately 61% of the common stock
outstanding upon completion of this transaction. SHBC and Telesource
International bid and compete within the same industries; however,
SHBC has agreed to give Telesource International a right of first
refusal to bid projects within some areas. We have described the
specific relationships and the specific areas where we have the right
of first refusal more fully under the heading "Certain Relationships
and Related Transactions" below. Additionally, SHBC and SHBC's
majority stockholders, Fouad Behbehani and Nasrallah Behbehani, have
signed as guarantors on Telesource International CNMI's promissory
note for $25,000,000 with the Commercial Bank of Kuwait, New York
Branch. The $25,000,000 promissory note is used by us to finance our
construction activities on the power plant. SHBC and SHBC's majority
stockholders, Fouad has also signed as guarantor on a $2,000,000
letter of credit from the Kuwait Real Estate Bank for Telesource
International. There can be no assurance that upon maturity of these
borrowing contracts that SHBC will continue to renew its guarantee of
the debt.
CERTAIN RELEATIONSHIPS AND RELATED TRANSACTIONS
The Behbehani's have significant ownership or control positions in
Telesource International and SHBC as noted under "Risk Factors - --
The largest stockholder owns approximately 61% of the common stock
outstanding after the merger, which may impact the ability of minority
stockholders to influence our activities." on page 14, SHBC and
Telesource International compete within the same industry; however,
Telesource International has a right of first refusal to bid projects
within the United States and its territories, the Pacific Rim and the
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Indian Ocean. This right of first refusal agreement between SHBC and
Telesource International specifically excludes projects or
modifications for the International Broadcasting Bureau's stations
located outside of the continental United States, which both SHBC and
Telesource International may freely bid.
SHBC has signed as guarantor on a $25,000,000 unsecured promissory
note for Telesource International from the Commercial Bank of Kuwait,
New York Branch, and a $2,000,000 line of credit with the Kuwait Real
Estate Bank. The $25,000,000 promissory note is used by Telesource
International to finance its construction activities for the
Commonwealth Utilities Corporation Tinian Power Plant. The $2,000,000
line of credit is used by Telesource International to meet its working
capital needs. There can be no assurance that upon maturity of these
borrowing contracts that SHBC will continue to renew its guarantee of
the debt.
Additionally, from time-to-time we may hire, on a part time or
temporary basis, individuals employed by SHBC to provide assistance to
Telesource International on some projects in the Northern Mariana
Islands. The rates paid will not exceed the fair market value of
similar services provided by unrelated third parties.
In 1996, Telesource International was subcontracted by SHBC to build
a multimillion dollar radio relay station in the Commonwealth of
Northern Mariana Islands for the United States Information Agency.
The agreement between SHBC and Telesource International included
payment to Telesource International on a monthly basis for all costs
incurred plus a fee of 7.5% on local purchases and procurements. The
radio relay station project was completed in 1998. The following
table describes the condensed financial information related to this
project:
<TABLE>
<S> <C> <C> <C> <C> <C>
Three Months Ended Twelve Months Ended
March 31, December 31,
----------------------------------------
2000 1999 1999 1998 1997
---------------------------------------------------------------------
Construction revenues $ 362,645 $ 427,698 $ 2,180,683 $ 3,786,177 $ 3,561,055
Sales 304,552 400,369 1,691,426 2,236,888 3,801,805
Gross profit 22,841 229,023 170,930 309,328 213,245
</TABLE>
Telesource International does not believe that the subcontract with
SHBC is indicative of future contracts and expected results.
Telesource International had sales to SHBC of $1,414,011 and
$688,651 for the three months ended March 31, 2000 and 1999,
respectively, and $3,129,587, $5,427,103 and $4,247,086 during the
twelve months ended December 31, 1999, 1998 and 1997. At March 31,
2000, Telesource International had receivables due from SHBC in the
amount of $2,271,448 and at December 31, 1999 and 1998, Telesource
International had receivables due from SHBC in the amount of $320,109
and $186,326, respectively.
Telesource International performed services in addition to the
construction of the radio relay station mentioned above. The following
table describes the condensed financial information related to all
services provided by Telesource International to SHBC.
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<TABLE>
<S> <C> <C> <C> <C> <C>
Three Months Ended Twelve Months Ended
March 31, December 31,
----------------------------------------
2000 1999 1999 1998 1997
---------------------------------------------------------------------
Construction revenues $ 362,645 $ 427,698 $ 3,872,177 $ 3,786,177 $ 3,561,055
Sales 1,414,011 688,651 3,129,587 5,427,103 4,247,086
Rental income 55,043 205,000 610,918 1,380,956 882,078
Service fees 31,625 43,702 204,628 351,956 362,536
Accounts receivable 857,578 208,293 320,109 186,326 490,854
Other current assets - - - 10,000 25,000
Prepaid expenses 124,290 - 170,182 - -
Accounts payable 3,216,434 92,093 1,604,811 527,203 139,100
Accrued expenses 68,628 - 598,110 202,012
Other customer deposits 125,000 125,000 125,000 125,000 125,000
Current liabilities 21,090 - 88,726 58,503 222,904
Debt - - - - 6,978,374
</TABLE>
In March 1999, Telesource International signed a three year lease
for 20,000 square meters of land. The land will be used to store
equipment for Telesource International. The lease has a total cost for
the three year period of $75,000 and was paid in full. The lease is
with Retsa Development Incorporated. Our President and CEO, K.J.
Semikian and one of our directors, Max Engler, serves on Retsa
Development Incorporated's board of directors.
Telesource International held an investment in Telebond Insurance
Corporation at March 31, 2000, in the amount of $50,000. During 1999,
Telesource International purchased insurance from Telebond in the
amount of $211,357 and $7,399 for the three months ended March 31, 2000
and held a prepaid asset for insurance in the amount of $124,290 at
March 31, 2000. Our President and CEO, K.J. Semikian serves on
Telebond Insurance Corporation's board of directors.
TELESOURCE'S PRINCIPAL STOCKHOLDERS
The following table sets forth some information regarding the
beneficial ownership of our Common Stock as of March 31, 2000 by SHBC,
which owned 100% of all outstanding common stock as of June 30, 1999,
which was reduced to 66.4% ownership by March 31, 2000. SHBC sold
3,361,000 shares in August 1999.
Number of Shares: 6,639,000
Percentage ownership by SHBC at March 31, 2000: 66.4%
The following table sets forth some information regarding the
beneficial ownership of our Common Stock as of the March 31, 2000 by:
* Each shareholder known by us to own beneficially more than 5%
of the common stock
* Each executive officer
* Each director and all directors and executive officers as a
group:
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Name Number of Percentage Percentage
Shares before merger(1) after merger
------------------------------------------------------------------------------
Khajadour J. Semikian 200,000 2.00% 2.00%
Nidal Zayed(2) 110,000 * 1.10%
Max Engler(3) 50,000 * *
Ibrahim M. Ibrahim 10,000 * *
Jeffrey H. Adams 1,000 * *
--------------------------------------------------
All directors and named
executive officers as
a group (number in
group: five persons) 371,000 2.61% 3.71%
==================================================
Sayed Hamid Behbehani &
Sons Co. W.L.L. (4) 6,639,000(5) 66.39% 61.29%
==================================================
* Less than 1% of all the issued and outstanding shares of Common Stock.
(1) This table is based upon information derived from
our stock records and information furnished by persons named.
Unless otherwise indicated in the footnotes to this table and
subject to community property laws where applicable, we believe
that each of the shareholders named in this table has sole or
shared voting and investment power with respect to the shares
indicated as beneficially owned. Applicable percentages are based
upon 10,000,000 shares of Common Stock outstanding as of March
31, 2000.
(2) Mr. Zayed owns 110,000 shares of Sixth Business Service Group.
(3) Max Engler serves as a board director for Litra Holding AG.
Litra Holding AG owns directly 495,000 shares of Telesource
International's common stock. Based upon information provided to
Telesource International, Telesource International does not
consider these shares to be beneficially owned by Mr. Engler.
(4) Includes 2,020,000 shares of Common Stock held by the Behbehani
family in the following manner:
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Who Relationship Number of Shares
------------------------------------------------------------------------------
Nasrallah S. H. S. A. Behbehani 725,000
Aster I. Behbehani 495,000
Salman F. Behbehani 250,000
Eqbal E. A. A. Al-Behbehani 200,000
Amal N. S. H. S. A. Behbehani 100,000
Anwar N. S. H. S. A. Behbehani 100,000
Nasarallah Behbehani & Sons Co. W.L.L. 100,000
Najeeb S. H. Behbehani 50,000
-------------
Total shares held directly by the
Behbehani family members 2,020,000
-------------
Sayed Hamid Behbehani & Sons Co. W.L.L. 4,619,000
-------------
Total SHBC and beneficially held 6,639,000
=============
(5) SHBC and beneficially held common stock will be 6,639,000 shares
before the merger which will decrease by 510,000 shares in
connect on with the merger to 6,129,000. The decrease in
ownership of 510,000 shares by SHBC will occur as follows:
300,000 shares will be distributed to Longman and Associates for
their services provided in connection with the completion of the
merger and 210,000 shares will be given to Telesource
International to be retired which in turn will eliminate the
dilution to all other existing Telesource International
shareholders which would have occurred as a result of the merger
without the retirement of the 210,000 shares of SHBC common
stock.
DESCRIPTION OF TELESOURCE INTERNATIONAL CAPITAL STOCK
Telesource International is authorized to issue fifty million
(50,000,000) shares of Common Stock, par value $0.01 per share,
10,000,000 of which shares were issued and outstanding as of June 30,
2000. At June 30, 2000, Telesource International had 192 shareholders
of record.
In July 1999, Telesource International announced that its Board of
Directors approved a one-for-ten thousand stock split to stockholders
of record on July 26, 1999. There was only one shareholder of record
on the record date, SHBC. All references in the financial statements
to number of shares and per share amounts of Telesource
International's common stock have been retroactively restated to
reflect the increased number of shares outstanding.
Holders of shares are entitled to one vote per share, without
cumulative voting, on all matters to be voted on by shareholders.
Therefore, the holders of a majority of the shares voting for the
election of directors can elect all the directors without the
concurrence of any other shareholder. Subject to preferences that may
be applicable to any outstanding preferred stock, shareholders are
entitled to receive ratably the dividends as may be declared by the
Board of Directors out of funds legally available. In the event of a
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<PAGE>
liquidation, dissolution or winding up of Telesource International,
shareholders are entitled to share ratably in all assets remaining
after payment of liabilities and the liquidation preference of any
outstanding preferred stock. Shares of the Common Stock have
preemptive rights for thirty days, to subscribe for, purchase or
otherwise acquire any shares of stock of the same class of the
corporation or any equity and/or voting shares of stock of any class
of the corporation which the corporation proposes to issue or any
rights or options which the corporation proposes to grant for the
purchase of shares of stock of the same class of the corporation or of
equity and/or voting shares of any class of stock of the corporation
or for the purchase of any stock, bonds, securities, or obligations of
the corporation which are convertible into or exchangeable for, or
which carry any rights to subscribe for, purchase or otherwise acquire
shares of stock of the same class of the corporation or equity and/or
voting shares of any class of the corporation, whether now or
hereafter authorized or created, whether having unissued or treasury
status, and whether the proposed issue, reissue, or grant is for cash,
property, or any other lawful consideration; and after the expiration
of said thirty days, any and all the shares of stock, rights, options
bonds, securities or obligations of the corporation may be issued,
reissued, transferred or granted by the Board of Directors, as the
case may be, to the persons, firms, corporations and associations, and
for the lawful consideration, and on the terms, as the Board of
Directors in its discretion may determine. There are no conversion
rights or redemption or sinking fund provisions with respect to the
shares.
The transfer agent and registrar of the common stock is American
Securities Transfer & Trust, Inc., 12039 West Alameda Parkway,
Lakewood, CO 80228.
Indemnification of Directors and Officers
Section 145 of the General Corporation Law of the State of Delaware
(the "Act") empowers a corporation to indemnify it directors and
officers and to purchase insurance with respect to liability arising
out of their capacity as directors and officers. The Act further
provides that indemnification permitted thereunder shall not be deemed
exclusive of any other rights to which the directors and officers may
be entitled under the Corporation's bylaws, any agreement, vote of the
shareholders, or otherwise.
Article VII of the our bylaws provides that we shall indemnify all
persons to the full extent allowed by law, by reason of the fact that
they are or were a director, become a party or are threatened to be
made a party to any indemnifiable action, suit or proceeding. We
shall pay, in advance of the final disposition of any indemnifiable
action, suit or proceeding under this bylaw, all reasonable expenses
incurred by the director, upon receipt of an undertaking by or on
behalf of the director to repay the amount if it is ultimately
determined that he is not entitled to be indemnified by us under law.
We may indemnify persons other than directors, such as officers and
employees, as permitted by law. We may purchase and maintain
insurance on behalf of directors, officers and other persons against
any liability asserted against him, whether or not we would have the
power to indemnify the person against the liability, as permitted by
law.
Insofar as indemnification for liabilities arising under the
securities act may be permitted to directors, officers or persons
controlling the registrant under the foregoing provisions, the
registrant has been informed that in the opinion of the Securities and
Exchange Commission the indemnification is against the public policy
and is therefore, unenforceable.
Dividend Policy
Telesource International has not paid cash dividends in the past and
does not intend to pay dividends for the foreseeable future.
Telesource International intends to retain any future earnings for use
in the business of Telesource International. The payment of any
dividends in the future will be made at the discretion of the Board of
65
<PAGE>
Directors of Telesource International and will depend upon the
operating results and financial condition of Telesource International
and its subsidiaries, their capital requirements, contractual
agreements, general business conditions and other factors. Telesource
International's principal source of funds to pay dividends in the
future, if any, on the Common Stock will be cash dividends Telesource
International receives from its subsidiaries.
The transfer agent and registrar of the common stock is American
Securities Transfer & Trust, Inc., 12039 West Alameda Parkway,
Lakewood, CO 80228.
******************************************************************************
SIXTH BUSINESS SERVICE GROUP'S BUSINESS
History and Organization
We were organized under the laws of the state of Florida in
March, 1999. Since inception, our primary activity has been directed
to organizational efforts. We were formed as a vehicle to acquire a
private company desiring to become an SEC reporting company in order
thereafter to secure a listing on the over the counter bulletin board.
Operations
We were organized for the purposes of creating a corporate vehicle
to seek, investigate and, if the investigation warrants, engage in
business combinations presented to us by persons or firms who or which
desire to become an SEC reporting company. We will not restrict our
search to any specific business, industry or geographical location.
We do not currently engage in any business activities that provide
any cash flow. The costs of identifying, investigating, and analyzing
business combinations will be paid with money in our treasury or
loaned by management. This is based on an oral agreement between
management and us.
Employees
We presently have no employees. Our officer and director is engaged
in business activities outside of us, and the amount of time he will
devote to our business will only be between five, 5, and twenty, 20,
hours per person per week. It is anticipated that management will
devote the time necessary each month to our affairs of until a
successful business opportunity has been acquired.
Year 2000 Issues
Because we currently have no operations, we do not anticipate
incurring significant expense with regard to Year 2000 issues.
Selected Financial Data
The following information concerning our financial position and
operations is presented below:
March 31, 2000 December 31, 1999
-------------------------------------------------------
(unaudited)
Total assets $ 0 $ 0
Total liabilities 0 1,000
Equity 0 (1,000)
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<PAGE>
Three Months Ended Ten Months Ended
March 31, 2000 December 31, 1999
-------------------------------------------------------
(unaudited)
Sales 0 0
Net loss $ 1,000 $ 5,079
Net loss per share $ 0.00 $ 0.00
Management Discussion And Analysis Or Plan Of Operation
We are a development stage entity, and have neither engaged in any
operations nor generated any revenues to date. We have no assets. Our
expenses to date, all funded by a loan from management, are $6,079. We
have agreed to pay our management a fee of $55,000, to be paid from
the merger fee.
Substantially all of our expenses that must be funded by management
will be from our efforts to identify a suitable acquisition candidate
and close the acquisition. Management has orally agreed to fund our
cash requirements until an acquisition is closed. So long as
management does so, we will have sufficient funds to satisfy our cash
requirements. This is primarily because we anticipate incurring no
significant expenditures. Before the conclusion of an acquisition, we
anticipate our expenses to be limited to accounting fees, legal fees,
telephone, mailing, filing fees, occupational license fees, and
transfer agent fees.
We do not intend to seek additional financing. At this time we
believe that the funds to be provided by management will be sufficient
for funding our operations until we find an acquisition and therefore
do not expect to issue any additional securities before the closing of
a business combination.
We expect no Year 2000 problems, as our business is not dependent
upon any computer. However, the business we acquire could experience
interruptions in its business and significant losses if it or its
customers or vendors rely on computer information systems that are
unable to accurately process dates beginning on January 1, 2000.
Properties.
We are presently using the office of Michael T. Williams, 2503 W.
Gardner Ct., Tampa FL, at no cost as our office. The arrangement is
expected to continue only until a business combination is closed,
although there is currently no such agreement between us and Mr.
Williams. We at present own no equipment, and do not intend to own
any.
Security Ownership of Beneficial Owners and Management.
The following table sets forth information about our current
shareholders. The person named below has sole voting and investment
power with respect to the shares. The numbers in the table reflect
shares of common stock held as of the date of this Information
Statement/Prospectus:
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<PAGE>
Number of Percentage Number of Percentage
Shares Pre- before Shares Post- after Merger
Merger (1) Merger Merger (1)(2)
------------------------------------------------------
Michael T. Williams(1)(3) 890,000 89% 100,000 1%
2503 W. Gardner Ct.
Tampa, FL 33611
Nidal Z. Zayed(3) 110,000 11% 110,000 1.1%
860 Parkview Blvd.
Lombard, IL 60148
All directors and 1,000,000 89% 890,000 1.1%
officers as a
group - 1 persons
(1) Owned by the Williams Blind Trust, with beneficiaries as Tenants by
the Entireties of Michael Williams and Donna Williams, his wife.
Under the terms of the trust, all sales decisions will be made
exclusively by the trustee and no details of the trust's holdings
or sales will be disclosed to the beneficiaries.
(2) Shares issued to Mr. Zayed subject to reverse split protection.
(3) Mr. Williams is a director and officer of Sixth Business Service
Group prior to the merger; however, Mr. Williams will not be a
director and officer after the merger. Mr. Zayed is not a director
or officer prior to the merger of Sixth Business Service Group ;
however, Mr. Zayed will be a director and officer after the merger.
Mr. Williams may be deemed our promoter, as that term is defined
under the securities act of 1933.
Directors and Executive Officers.
The following table and subsequent discussion sets forth information
about our director and executive officer, who will resign upon the
closing of the acquisition transaction. Our director and executive
officer was elected to his position in March, 1999.
Name Age Title
Michael T. Williams 51 President, Treasurer and Director
Michael T. Williams responsibilities will include management of our
operations as well as our administrative and financial activities.
Since 1975 Mr. Williams has been in the practice of law, initially
with the U.S. Securities and Exchange Commission until 1980, and since
then in private practice. He was also chief executive officer of
Florida Community Cancer Centers, Dunedin, FL from 1991-1995. He
received a BA from the University of Kansas and a JD from the
University of Pennsylvania.
Executive Compensation.
Mr. Williams will receive an aggregate salary of $5,000 from
inception of our business until closing of the merger.
Certain Relationships and Related Transactions.
Williams Law Group will receive a fee of $40,000 for legal services
in connection with the preparation of this registration statement. Mr.
Williams will own through his blind trust 100,000 shares of stock
after closing of the merger as a result of a reverse split.
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<PAGE>
Legal Proceedings.
We not a party to or aware of any pending or threatened lawsuits or
other legal actions.
Indemnification of Directors and Officers.
Our director is bound by the general standards for directors
provisions in Florida law. These provisions allow him in making
decisions to consider any factors as he deems relevant, including our
long-term prospects and interests and the social, economic, legal or
other effects of any proposed action on the employees, suppliers or
our customers, the community in which the we operate and the economy.
Florida law limits our director's liability.
We have agreed to indemnify our director, meaning that we will pay
for damages they incur for properly acting as director. The SEC
believes that this indemnification may not be given for violations of
the securities act of 1933.
Insofar as indemnification for liabilities arising under the
securities act may be permitted to directors, officers or persons
controlling the registrant under the foregoing provisions, the
registrant has been informed that in the opinion of the Securities and
Exchange Commission the indemnification is against the public policy
and is therefore, unenforceable.
Provisions With Possible Anti-Takeover Effects
As we will reincorporate in Delaware before the closing of the
merger, the following information about Delaware law is provided:
Section 203 of Delaware law prohibits a corporation from engaging in
a business combination with an interested stockholder for three years
following the date that the person becomes an interested stockholder.
With certain exceptions, an interested stockholder is a person or
entity who or which owns 15% or more of the corporation's outstanding
voting stock (including any rights to acquire stock pursuant to an
option, warrant, agreement, arrangement or understanding, or upon the
exercise of conversion or exchange rights, and stock with respect to
which the person has voting rights only), or is an affiliate or
associate of the corporation and was the owner of 15% or more of the
voting stock at any time within the previous three years.
For purposes of Section 203, the term business combination is
defined broadly to include mergers of the corporation or a subsidiary
with or caused by the interested stockholder; sales or other
dispositions of the interested stockholder (except proportionately
with the corporation's other stockholders) of assets of the
corporation or a subsidiary equal to ten percent or more of the
aggregate market value of the corporation's consolidated assets or its
outstanding stock; the issuance or transfer by the corporation or a
subsidiary of stock of the corporation or the subsidiary to the
interested stockholder (except for certain transfers in a conversion
or exchange or a pro rata distribution or certain other transactions,
none of which increase the interested stockholder's proportionate
ownership of any class or series of the corporation's or the
subsidiary's stock); or receipt by the interested stockholder (except
proportionately as a stockholder), directly or indirectly, of any
loans, advances, guarantees, pledges or other financial benefits
provided by or through the corporation or a subsidiary.
The three-year moratorium imposed on business combinations by
Section 203 does not apply if:
(i) prior to the date at which the stockholder becomes an
interested stockholder the board of directors approves either
the business combination or the transaction which resulted in
the person becoming an interested shareholder;
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<PAGE>
(ii) the interested stockholder owns 85% of the corporation's voting
stock upon consummation of the transaction which made him or
her an interested stockholder (excluding from the number of
shares outstanding those shares owned by directors who are also
officers of the target corporation and shares held by employee
stock plans which do not permit employees to decide
confidentially whether to accept a tender or exchange offer);
or
(iii) on or after the date the person becomes an interested
stockholder, the board approves the business combination and it
is also approved at a stockholder meeting by 66 2/3% of the
voting stock not owned by the interested stockholder.
Section 203 does not apply if the business combination is proposed
prior to the consummation or abandonment of and subsequent to the
earlier of the public announcement or a 20-day notice required under
Section 203 of the proposed transaction which
* constitutes certain
* mergers or consolidations
* sales or other transfers of assets having an aggregate market
value equal to 50% or more of the aggregate market value of all
of the assets of the corporation determined on a consolidated
basis or the aggregate market value of all the outstanding
stock of the corporation
* proposed tender or exchange offer for 50% or more of the
corporation's outstanding voting stock;
* is with or by a person who was either not an interested
stockholder during the last three years or who became an
interested stockholder with the approval of the corporation's
board of directors
* is approved or not opposed by a majority of the board members
elected prior to any person becoming an interested stockholder
during the previous three years (or their chosen successors).
Stockholder Voting on Mergers and Similar Transactions. The laws of
Delaware generally require that a majority of the stockholders of
both acquiring and target corporations approve statutory mergers. They
do not require a stockholder vote of the surviving corporation in a
merger unless the corporation provides otherwise in its certificate of
incorporation if
* the merger agreement does not amend the existing certificate of
incorporation,
* each share of stock of the surviving corporation outstanding
before the merger is an identical outstanding or treasury share
after the merger, and
* the number of shares to be issued by the surviving corporation
in the merger does not exceed 20% of the shares outstanding
immediately prior to the merger.
The laws of Delaware also generally require that a sale of all or
substantially all of the assets of a corporation be approved by a
majority of the voting shares of the corporation transferring the
assets.
Delaware law generally does not require class voting, except for
amendments to the certificate of incorporation that change the number
of authorized shares or the par value of shares of a specific class or
that adversely affect the class of shares.
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<PAGE>
DESCRIPTION OF SIXTH BUSINESS SERVICE GROUP'S CAPITAL STOCK
Common Stock
As of March 31, 2000, there were 1,000,000 shares of common stock
outstanding held of record by 2 stockholders. There will be 10,000,000
post merger shares of common stock outstanding after giving effect to
the issuance of the shares of common stock to the public under this
prospectus.
The holders of common stock are entitled to one vote for each
share held of record on all matters submitted to a vote of the
stockholders. The common stock has no preemptive or conversion rights
or other subscription rights. There are no sinking fund provisions
applicable to the common stock. The outstanding shares of common stock
are, and the shares of common stock to be issued upon completion of
this offering will be, fully paid and non-assessable.
Preferred Stock
There are no shares of preferred stock outstanding. issuance of
preferred stock with voting and conversion rights may adversely affect
the voting power of the holders of common stock, including voting
rights of the holders of common stock. In certain circumstances, an
issuance of preferred stock could have the effect of decreasing the
market price of the common stock. As of the closing of the merger, we
currently have no plans to issue any additional shares of preferred
stock.
Dividends
We have never paid any dividends and do not expect to do so after
the closing of the merger and thereafter for the foreseeable future.
Transfer Agent and Registrar
We are the transfer agent and registrar for our common stock.
COMPARISON OF RIGHTS OF SIXTH BUSINESS SERVICE GROUP STOCKHOLDERS AND
TELESOURCE INTERNATIONAL SHAREHOLDERS
Because Sixth Business Service Group will change its state of
incorporation, articles or articles and bylaws to be the same as those
of Telesource International, the rights of shareholders of Telesource
International will not change as a result of the merger.
AVAILABLE INFORMATION
Telesource International is not and, until the effectiveness of
the registration statement (as defined below), Sixth Business Service
Group was not, subject to the reporting requirements of the Exchange
Act and the rules and regulations promulgated thereunder, and,
therefore, do not file reports, proxy statements or other information
with the Commission. Under the rules and regulations of the
Commission, the solicitation of proxies from the shareholders of
Telesource International to approve the merger constitutes an offering
of Sixth Business Service Group common stock to be issued in
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<PAGE>
connection with the merger. Accordingly, Sixth Business Service Group
has filed with the Commission a registration statement on Form S-4
under the Securities Act, with respect to the offering from time to
time, the registration statement. This proxy statement/prospectus
constitutes the prospectus of Sixth Business Service Group that is
filed as part of the Registration Statement in accordance with the
rules and regulations of the Commission. Copies of the registration
statement, including the exhibits to the Registration Statement and
other material that is not included herein, may be inspected, without
charge, at the Public Reference Section of the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, DC 20549,
and may be available at the following Regional Offices of the
Commission: Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661 and 7 World Trade Center, New York, New
York 10048. Copies of the materials may be obtained at prescribed
rates from the Public Reference Section of the Commission at Judiciary
Plaza, 450 Fifth Street, N.W., Washington, DC 20549. Information on
the operation of the Public Reference Room may be obtained by calling
the Commission at 1-800-SEC-0330. In addition, the Commission
maintains a site on the World Wide Web at http://www.sec.gov that
contains reports, proxy and information statements and other
information regarding registrants that file electronically with the
Commission.
EXPERTS
The consolidated financial statements of Sixth Business Service Group,
Inc. as of December 31, 1999 and for the ten months ended December 31,
1999, also included in this prospectus and elsewhere in the
Registration Statement have been included included herein in reliance
on the report of Kingery Crouse & Hohl P.A., independent accountants,
given on the authority of that firm as experts in accounting and
auditing. The consolidated financial statements of Telesource
International, Inc. as of December 31, 1999 and 1998 and for the
years ended December 31, 1999, 1998 and 1997, also included in this
prospectus and elsewhere in the Registration Statement have been
included herein in reliance on the report of Pender Newkirk &
Company, CPAs, independent accountants, given on the authority of that
firm as experts in accounting and auditing.
LEGAL MATTERS
The validity of the shares of Sixth Business Service Group common
stock being offered by this information statement/prospectus and
certain federal income tax matters related to the exchange are being
passed upon for Sixth Business Service Group by Williams Law Group,
P.A., Tampa, FL. Mr. Williams is the sole officer and director of and
owns 890,000 shares pre merger and 100,000 shares post merger of the
stock of Sixth Business Service Group.
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PART II--INFORMATION NOT REQUIRED IN PROSPECTUS
INDEX TO FINANCIAL STATEMENTS
Page
Telesource International Inc.:
Report of Independent Accountants.......................... F-1
Consolidated Balance Sheet as of December 31, 1999 and
1998....................................................... F-2
Consolidated Statements of Income for the years ended December
31, 1999, 1998 and 1997.................................... F-3
Consolidated Statements of Shareholder's Equity for the years
ended December 31, 1999, 1998 and 1997..................... F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997........................... F-5
Notes to Consolidated Financial Statements as of December 31,
1999 and 1998.............................................. F-6
Consolidated Balance Sheet as of March 31, 2000............ F-21
Consolidated Statements of Income for the three months ended
March 31, 2000 and 1999.................................... F-22
Consolidated Statements of Cash Flows for the three months
ended March 31, 2000 and 1999.............................. F-23
Notes to Consolidated Financial Statements as of March
31, 2000 and 1999.......................................... F-24
Sixth Business Service Group
Report of Independent Accountants.......................... F-28
Balance Sheet as of December 31, 1998 and 1997, of which
only 1998 is audited....................................... F-29
Statements of Income for the years ended December 31,
1998 and 1997, of which only 1998 is audited............... F-30
Statements of Shareholder's Equity for the years ended
December 31, 1998 and 1997, of which only 1998 is audited.. F-31
Statements of Cash Flows for the years ended December
31, 1998 and 1997, of which only 1998 is audited........... F-32
Notes to Consolidated Financial Statements as of
December 31, 1998.......................................... F-33
Balance Sheet as of March 31, 2000........................ F-35
Statements of Income for the three months ended
March 31, 2000 and 1999................................... F-36
Statements of Shareholder's Equity for the three
months ended March 31, 2000 and 1999...................... F-37
Statements of Cash Flows for the three months ended
March 31, 2000 and 1999................................... F-38
Notes to Financial Statements as of March 31, 2000 and
1999...................................................... F-39
73
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Independent Auditors' Report
Board of Directors
Telesource International, Inc. and Subsidiaries
Lombard, Illinois
We have audited the accompanying consolidated balance sheets of
Telesource International, Inc. and Subsidiaries as of December
31, 1999 and 1998 and the related consolidated statements of
operations, changes in shareholders' equity, and cash flows for
the years ended December 31, 1999, 1998, and 1997. These
consolidated financial statements are the responsibility of the
management of Telesource International, Inc. and Subsidiaries.
Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. These standards require that we plan and
perform the audits to obtain reasonable assurance about whether
the consolidated financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of Telesource International, Inc. and Subsidiaries as of
December 31, 1999 and 1998 and the results of its operations and
its cash flows for the years ended December 31, 1999, 1998, and
1997 in conformity with generally accepted accounting principles.
/s/ Pender Newkirk & Company
Certified Public Accountants
Tampa, Florida
February 18, 2000
<PAGE>
TELESOURCE INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
1999 1998
----------- -----------
Assets:
Cash and cash equivalents $ 866,388 $ 958,146
Accounts receivable (including related party
of $320,109 and $186,326 at 1999 and 1998,
respectively) 710,840 191,078
Current portion notes receivable 907,822 -
Prepaid expenses (including related party of
$170,182 and none at 1999 and 1998,
respectively) 288,798 88,686
Costs and estimated earnings in excess of billings 629,724 -
Other current assets (including related party
of $0 and $10,000 at 1999 and 1998,
respectively) - 10,000
----------- -----------
Total current assets 3,403,572 1,247,910
Long term portion costs and estimated earnings
in excess of billings 24,113,343 22,502,747
Deposits 70,297 59,113
Premises and equipment, net of accumulated
depreciation of $1,044,312 and $686,102 at
1999 and 1998, respectively 1,891,188 1,786,409
Time deposits 1,000,000 -
Long term portion notes receivable 12,022,557 -
Other assets 134,244 -
----------- -----------
Total assets $42,635,201 $25,596,179
=========== ===========
Liabilities and shareholders' equity:
Accounts payable (including related party of
$1,604,811 and $527,203 at 1999 and 1998,
respectively) $ 3,917,531 $ 771,436
Accrued expenses (including related party of
$0 and $598,110 at 1999 and 1998,
respectively) 1,592,786 707,338
Customer deposits - related party 125,000 125,000
Current notes payable 500,000 -
Current liabilities - related party 88,726 58,503
Taxes payable 434,437 385,000
----------- -----------
Total current liabilities 6,658,480 2,047,277
Deferred tax liability 510,000 232,382
Long-term debt 28,000,000 17,500,000
----------- -----------
Total liabilities 35,168,480 19,779,659
----------- -----------
Commitments and contingent liabilities
Shareholders' equity:
Common stock, $0.01 par value, 50,000,000
shares authorized,10,000,000 shares issued
and outstanding 100,000 100,000
Additional paid-in capital 847,225 847,225
Retained earnings 6,519,496 4,869,295
----------- -----------
Total shareholders' equity 7,466,721 5,816,520
----------- -----------
Total liabilities and shareholders' equity $42,635,201 $25,596,179
=========== ===========
F-2
The accompanying notes are an integral
part of the consolidated financial statements.
<PAGE>
TELESOURCE INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Years Ended
------------------------------------------
1999 1998 1997
------------- ------------- ------------
<S> <C> <C> <C>
Revenues:
Construction revenues (including related party of
$3,872,119, $3,786,177 and $3,561,055 in 1999,
1998 and 1997, respectively) $ 18,612,386 $ 26,288,924 $ 3,561,055
Sales (including related party of $3,129,587,
$5,427,103 and $4,247,086 1999, 1998 and 1997,
respectively) 3,608,419 5,446,731 8,570,339
Rental income - related party 610,918 1,380,596 882,078
Service fees - related party 204,628 351,956 362,536
------------- ------------- ------------
Gross revenues 23,036,351 33,468,207 13,376,008
------------- ------------- ------------
Costs and expenses:
Construction costs 15,436,605 21,729,942 3,563,007
Cost of sales 3,161,775 5,301,348 8,057,617
------------- ------------- ------------
Gross profit 4,437,971 6,436,917 1,755,384
------------- ------------- ------------
Expenses:
Salaries and employee benefits 1,034,948 386,571 452,795
Occupancy and equipment 245,551 293,112 305,290
General and administrative 2,055,901 748,935 346,543
Impairment of long-lived assets - 271,456 -
------------- ------------- ------------
Total expenses 3,336,400 1,700,074 1,104,628
------------- ------------- ------------
Operating profit 1,101,571 4,736,843 650,756
------------- ------------- ------------
Other income (expense):
Interest income 2,043,864 12,453 -
Interest expense (1,132,221) (39,963) (36,799)
Other income, net 14,605 4,281 6,102
------------- ------------- ------------
Total other income (expense) 926,248 (23,229) (30,697)
------------- ------------- ------------
Income before income taxes 2,027,819 4,713,614 620,059
------------- ------------- ------------
Income tax expense 377,618 702,795 26,469
------------- ------------- ------------
Net income $ 1,650,201 $ 4,010,819 $ 593,590
============= ============= ============
Basic and diluted earnings per share $ 0.17 $ 0.40 $ 0.06
============= ============= ============
Weighted average shares outstanding 10,000,000 10,000,000 10,000,000
============= ============= ============
</TABLE>
F-3
The accompanying notes are an integral
part of the consolidated financial statements.
<PAGE>
TELESOURCE INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
for the years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Common Stock Additional
Par Paid-in Retained Total
Shares Value Capital Earnings Equity
---------- -------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 10,000,000 $100,000 $147,225 $ 264,886 $ 512,111
Net income 593,590 593,590
---------- -------- -------- ---------- ----------
Balance at December 31, 1997 10,000,000 100,000 147,225 858,476 1,105,701
Capital contribution by shareholder 700,000 700,000
Net income 4,010,819 4,010,819
---------- -------- -------- ---------- ----------
Balance at December 31, 1998 10,000,000 100,000 847,225 4,869,295 5,816,520
Net income 1,650,201 1,650,201
---------- -------- -------- ---------- ----------
Balance at December 31, 1999 10,000,000 $100,000 $847,225 $6,519,496 $7,466,721
========== ======== ======== ========== ==========
</TABLE>
F-4
The accompanying notes are an integral
part of the consolidated financial statements.
<PAGE>
TELESOURCE INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 1999, 1998 and 1997
<TABLE>
<S> <C> <C> <C>
Years Ended
----------------------------------------
1999 1998 1997
----------------------------------------
Cash flows from operating activities:
Net income $ 1,650,201 $ 4,010,819 $ 593,590
Adjustments to reconcile net income to net
Cash provided by (used in) operating activities:
Depreciation and amortization 363,880 451,888 219,156
Impairment of long-lived assets - 271,456 -
Changes in assets and liabilities:
Receivables (519,762) 1,482,603 (1,531,681)
Costs and estimated earnings in excess
of billings (15,861,129) (17,314,750) (4,983,579)
Other assets (335,540) 31,088 43,031
Other liabilities 4,061,766 324,841 235,141
Tax payable 49,437 385,000 -
Deferred tax liability 277,618 232,382 -
-----------------------------------------
Net cash provided by (used in) operating
activities (10,313,529) (10,124,673) (5,424,342)
-----------------------------------------
Cash flows from investing activities:
Payments received on notes receivable 690,430 - -
Purchase of interest bearing deposits in financial
institutions (1,000,000) - -
Premise and equipment expenditures (468,659) (1,083,762) (683,933)
-----------------------------------------
Net cash (used in) investing activities (778,229) (1,083,762) (683,933)
-----------------------------------------
Cash flows from financing activities:
Proceeds from borrowings 11,000,000 17,500,000 6,978,374
Payments made on borrowings - (6,978,374) -
Proceeds from shareholder contribution - 700,000 -
-----------------------------------------
Net cash provided by financing activities 11,000,000 11,221,626 6,978,374
-----------------------------------------
Net (decrease) increase in cash and cash equivalents (91,758) 13,191 870,099
Beginning cash and cash equivalents 958,146 944,955 74,856
-----------------------------------------
Ending cash and cash equivalents $ 866,388 $ 958,146 $ 944,955
=========================================
Supplemental disclosure:
Cash paid during the period for interest $ 1,953,320 $ 379,436 $ 169,038
Cash paid during the period for income taxes $ 55,537 $ 180,018 $ 100,905
</TABLE>
During 1999, the Company completed the construction of phase I and
issued a note receivable in the amount of $13,620,809. This transaction
is accounted for as a non-cash transaction on the statement of cash flows.
F-5
The accompanying notes are an integral
part of the consolidated financial statements.
<PAGE>
TELESOURCE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1999, 1998 and 1997
1. Background:
Telesource International ("Telesource" or the "Company") was
incorporated in Delaware in 1994. Telesource is an
international engineering and construction company, which is
in the business of constructing projects, which range from
single family housing units to electrical power generation
plants. In the Commonwealth of Mariana Islands (U.S.
Territory) the Company also 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 several millions of dollars worth of U.S.
fabricated products for use by the Company's subsidiaries or
for resale to customers outside of the mainland. Telesource
was formed in 1994 to facilitate various intra-corporate
activities and, until July 1999, was a wholly owned
subsidiary of Sayed Hamid Behbehani & Sons Co. W.L.L.
("SHBC"), a Kuwait-based civil, electrical and mechanical
construction company.
The Company conducts its operations primarily through
subsidiaries. Telesource currently has two subsidiaries.
The Company's Mariana subsidiary, Telesource CNMI, handles
construction and management of the Company's power
facilities in the Commonwealth of Mariana Islands and
operates a branch office in Guam to take advantage of
opportunities we believe will be available there. The
Company's second subsidiary, Commsource International, is an
international export company that facilitates the purchase
of equipment in the U.S.
Telesource has three main operating segments: construction
services, trading of U.S. fabricated goods and power
generation. The power generation activities commenced in
March 1999.
During 1999, Telesource entered into an agreement for a
merger with Sixth Business Service Group, an SEC registered
company located in Tampa, Florida. Under the proposed
structure of the transaction, Telesource will merge with and
into Sixth Business Service Group, pursuant to which merger
the shareholders of Telesource will receive shares of Sixth
Business Service Group in exchange for their shares of
Telesource stock. Sixth Business Service Group will change
its name to Telesource International, Incorporated after the
merger. The transaction involves a reverse merger, whereby
Telesource is expected to become listed on the Over The
Counter Bulletin Board. The merger is expected to occur
during the second quarter of 2000.
F-6
<PAGE>
2. Summary of Significant Accounting Policies:
Customer and Credit Concentration
The Company has a concentration with two major customers.
One customer is the Commonwealth Utilities Corporation
("CUC"). The Company was contracted by the CUC to construct
and operate a power generation facility. In March 1999, the
power generation plant became operational. Power revenues
from this plant did not begin until March 1999 and were
earned under a long-term power purchase agreement with the
same customer. The other major customer, SHBC, was the
Company's parent corporation and is now a related party. In
1997, the Company was contracted to construct a radio relay
station for SHBC and completed its construction in 1998.
The radio relay station contract was on a cost basis with a
fee to be paid to the Company in the amount of a 7.5%
premium added to the costs on any local products used in the
construction of the radio relay station. The Company's
subsidiary, Commsource International, which is involved in
the trading of U.S. fabricated products had one major
customer, SHBC, which is a related party. The Company
expects that the concentration of its revenues with SHBC
will continue for the foreseeable future.
The Company had a concentration of credit with the CUC. The
Company has received promissory notes with a net present
value of $12,930,379 at December 31, 1999 and these notes
have a payment amount of $180,000 per month for ten years.
The costs and estimated earnings in excess of billings for
the construction activities on the power generation plant
were $24,113,343 and $22,502,747 at December 31, 1999 and
1998, respectively. The Company performs ongoing credit
evaluations of its customers to determine if a provision for
credit losses is appropriate.
Power generation revenues are recognized on revenues
received on the amount of actual billings for power produced
during the reporting period. The revenues recognized on the
collection of the promissory notes and the collection of the
operation and maintenance fee are recognized as construction
revenues. The interest income recognized under the power
generation segment relates to interest on the notes
receivable.
Principals of Consolidation
The consolidated financial statements include the accounts
of the Company and its wholly-owned subsidiaries. Telesource
currently has two subsidiaries. The Mariana subsidiary,
Telesource CNMI Inc., handles construction and management of
the Company's power facilities in the Commonwealth of the
Northern Mariana Islands. Commsource International, is an
international export company that facilitates the purchase
of equipment fabricated in the U.S. Telesource CNMI, Inc.
also operates a branch office in Guam, Telesource Pacifica
and Pacifica Power Resources, a trading office which was
opened to take advantage of opportunities expected to be
available there. All significant intercompany transactions
and accounts have been eliminated.
Deposits in excess of Federal Deposit Insurance Corporation Insurance
The Company maintains cash in accounts in excess of the
Federal Deposit Insurance Corporation's insured limit of
$100,000.
Cash and Cash Equivalents
Telesource records as cash and cash equivalents all highly
liquid short-term investments with original maturities of
three months or less.
F-7
<PAGE>
2. Summary of Significant Accounting Policies: continued
Receivables
The Company extends credit to its various customers based on
the customer's ability to pay. At December 31, 1999 the
Company had a provision for credit losses in the amount of
$12,660 and no provision for credit losses at December 31,
1998.
Premises and Equipment
Premises and equipment are stated at cost less accumulated
depreciation. Depreciation is computed using the straight-
line method at rates sufficient to amortize the cost over
the estimated economic lives of the assets. Expenditures
for repairs and maintenance are expensed as incurred, and
renewals and betterments that extend the lives of assets are
capitalized. Cost and accumulated depreciation are
eliminated from the accounts when assets are sold or retired
and any resulting gain or loss is reflected in operations in
the year of disposition.
Revenue Recognition
Revenue from construction contracts including construction
joint ventures 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. Depreciation is provided using straight-line methods
for construction equipment. Contracts frequently extend over
a period of more than one year and revisions in cost and
profit estimates during construction are reflected in the
accounting period in which the facts that require the
revision become known. Losses on contracts, if any, are
provided in total when determined, regardless of the degree
of project completion. Claims for additional contract
revenue are recognized in the period when it is probable
that the claim will result in additional revenue and the
amount can be reliably estimated.
The foregoing as well as the stage of completion, and mix of
contracts at different margins may cause fluctuations in
gross profit between periods.
Revenue from the Company's trading of U.S. fabricated goods
is recognized at the time of shipment. The Company
recognizes service revenues and energy sales in the period
in which the commodity is delivered or when the work is
performed. Telesource recognizes rental revenue on the
accrual basis pursuant to contractual arrangements between
the Company and its customers.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues
and expenses during the reported period. Actual results
could differ from those estimates.
F-8
<PAGE>
2. Summary of Significant Accounting Policies: continued
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed O
The Company accounts for long-lived assets in accordance
with the provisions of Statement of Financial Accounting
Standards No. 121, Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of.
This statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by
a comparison of the carrying amount of an asset to future
net cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to
be recognized is measured by the amount by which the
carrying amount of the assets exceed the fair value of the
assets. Assets to be disposed of are reported at the lower
of the carrying amount or fair value less costs to sell.
Deferred Tax Assets and Liabilities
Deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to
differences between the financial statements carrying
amounts of existing assets and liabilities and their
respective income tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those
temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized as income in the
period that included the enactment date.
Computation of Earnings Per Share
Basic earnings per share is computed by dividing income
available to common stockholders by the weighted average
number of common shares outstanding, excluding restricted
common stock. Diluted earnings per share is computed giving
effect to all dilutive potential common shares that were
outstanding during the period. The Company did not have any
dilutive potential common shares outstanding at December 31,
1999, 1998 and 1997.
Stock Split
In July 1999, the Board of Directors approved a one-for-ten
thousand stock split to stockholders of record on July 26,
1999. There was only one shareholder of record on the record
date, SHBC. All references in the financial statements to
number of shares and per share amounts of the Company's
common stock have been retroactively restated to reflect the
increased number of shares outstanding.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board
issued Statement of Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging
Activities (SFAS No. 133). SFAS No. 133 establishes new
standards for recording derivatives in interim and annual
financial statements. On May 19, 1999, the Financial
Accounting Standards Board voted to defer the implementation
date of this statement, thereby making it effective for the
Company's fiscal year 2001. Because of the Company's minimal
use of derivatives, management does not anticipate that the
adoption of the new statement will have a significant impact
on the results of operations or the financial position of
the Company.
F-9
<PAGE>
3. Accounts Receivable:
December 31, December 31,
1999 1998
---------------------------
Construction contracts completed and in progress $ 583,104 $ 181,688
Construction material sales 127,736 9,390
---------------------------
$ 710,840 $ 191,078
===========================
4. Costs and Estimated Earnings on Uncompleted Contracts:
Long-term construction contracts in progress accounted for
using the percentage-of-completion method at December 31
consisted of:
December 31, December 31,
1999 1998
---------------------------
Costs incurred on uncompleted contracts $ 31,548,947 $ 21,729,942
Estimated earnings 7,203,394 4,174,248
---------------------------
38,752,341 25,904,190
Less billings to date 14,009,274 3,401,443
---------------------------
$ 24,743,067 $ 22,502,747
===========================
Included in the accompanying balance sheet
under the following captions:
Current portion costs and estimated earnings
in excess of billings on uncompleted
contracts $ 629,724 $ -
Long term portion costs and estimated earnings in
excess of billings on uncompleted contracts 24,113,343 22,502,747
---------------------------
$ 24,743,067 $ 22,502,747
===========================
The Company follows the policy of allocating interest as a
component of contract costs for construction contracts in
excess of one year. Interest is recognized through cost of
sales as the contract progresses under the percentage
completion method. In 1999 and 1998 the company allocated
interest to contract cost of $930,241 and $900,359
respectively.
5. Notes Receivable:
In March 1999, the Company completed its construction
activities on Phase I of a power generation plant located on
the island of Tinian. The Company began operating the plant
and thus issued notes receivable in the original amount of
$13,620,809 (the estimated net present value of the
payments) for construction of the power generation plant.
The discount rate used to determine the net preset value was
10% and was approximately 50 basis points higher than the
rate interest on the Company's unsecured $25,000,000 loan
with the Commercial Bank of Kuwait. The notes receivable
called for the Company to receive payments of $180,000 per
month, starting in March 1999 and those payments will total
$21,600,000. The Company received ten payments or $1,800,000
during the twelve months ended December 31, 1999 and
recognized $1,109,570 in interest income on the notes
receivable. The notes receivable at December 31, 1999 and
1998 were:
F-10
<PAGE>
5. Notes Receivable: continued
December 31, December 31,
1999 1998
---------------------------
Notes receivable on power generation plant $ 12,930,379 $ -
Less current portion of notes receivable 907,822 -
---------------------------
Long term portion of notes receivable $ 12,022,557 $ -
===========================
6. Premises and Equipment:
December 31, December 31,
1999 1998
---------------------------
Machinery and equipment $ 1,948,568 $ 1,580,178
Office furniture and equipment 535,294 463,038
Computer and communication equipment 99,752 88,394
Autos 211,600 206,701
Leasehold improvements 140,286 134,200
---------------------------
2,935,500 2,472,511
Less accumulated depreciation and amortization 1,044,312 686,102
---------------------------
Net premises and equipment $ 1,891,188 $ 1,786,409
===========================
F-11
<PAGE>
7. Long-Term Debt and Credit Arrangements:
Notes payable to banks and long-term debt at December 31,
1999 and 1998 are shown in the following table:
December 31, December 31,
1999 1998
---------------------------
Citytrust Bank letter of credit,
maturing on May 21, 2000.
Principal and interest are due at
maturity. This letter of Credit bears
an interest rate of 12.5%. Secured by a
personal guaranty from SHBC and its major
shareholders. $ 500,000 $ -
Bank of Hawaii credit line, maturing on
March 26, 2001. Principal and interest
due at maturity. The line of credit
bears an interest rate of 6.25% and is
secured by a time deposit in the Bank
of Hawaii in the amount of $1,000,000. 1,000,000 -
Kuwait Real Estate Bank loan maturing
on May 2, 2001. Principal is due at
maturity with interest due annually.
The note bears an interest of LIBOR bank
rate plus 2.5%. This loan is secured by
a guarantee by SHBC and its major
shareholders. 2,000,000 -
Commercial Bank of Kuwait, New York
branch, loan, maturing on February
17, 2002. Principal is due at maturity
with interest due every six months. The
note Bears an interest rate of LIBOR
bank rate plus 3%. This note is secured
by a guarantee by SHBC and its
major shareholders. 25,000,000 17,500,000
---------------------------
28,500,000 17,500,000
Less current portion 500,000 -
---------------------------
Total long term debt $ 28,000,000 $ 17,500,000
===========================
The aggregate maturities of long-term debt for each of the
five years subsequent to December 31, 1999, are as follows:
2000, $500,000; 2001, $3,000,000; 2002, $25,000,000; 2003,
none; and 2004, none.
8. Shareholders' Equity:
During the years ended December 31, 1999, 1998 and 1997,
10,000,000 shares of the Company's common stock were issued
and outstanding. The Company received a capital
contribution from its stockholder, SHBC, in the amount of
$700,000 in 1998. The proceeds from this capital
contributions was used to repay debt to the same
stockholder. The Company had no remaining debt owed to SHBC
at December 31, 1998.
F-12
<PAGE>
8. Shareholders' Equity: continued
In July 1999, the Board of Directors approved a one-for-ten
thousand stock split to stockholders of record on July 26,
1999. There was only one shareholder of record on the record
date, SHBC. All references in the financial statements to
number of shares and per share amounts of the Company's
common stock have been retroactively restated to reflect the
increased number of shares outstanding.
At December 31, 1999, SHBC had sold 5,381,000 shares of
Telesource stock to various entities and individuals,
including members of the Behbehani family. At December 31,
1999, SHBC owned directly 4,619,000 shares and beneficially
owned 6,639,000 shares (the beneficially owned shares
includes the stock held by the Behbehani family and SHBC).
9. Earnings Per Share:
In accordance with the disclosure requirements of "SFAS
128", a reconciliation of the numerator and denominator of
basic and diluted earnings per share is provided as follows:
<TABLE>
<S> <C> <C> <C>
Years Ended December 31, 1999 1998 1997
--------------------------------------------------
NUMERATOR - BASIC AND DILUTED
EARNINGS PER SHARE
Net income $ 1,650,201 $ 4,010,819 $ 593,590
==================================================
DENOMINATOR - BASIC EARNINGS
PER SHARE
Common stock
outstanding 10,000,000 10,000,000 10,000,000
==================================================
Basic and diluted earnings
per share $ 0.17 $ 0.40 $ 0.06
==================================================
</TABLE>
10. Financial Instruments With Off-Balance-Sheet Risk and
Concentrations of Credit Risk:
The Company is party to financial instruments with off-
balance-sheet risk, entered into in the normal course of
business to meet the Company's financing needs. These
financial instruments involve letters of credit. At December
31, 1999, the Company had no unused balance on its letter of
credit. The instruments involve, to varying degrees,
elements of interest rate risk in excess of the amount
recognized in the financial statements.
The Company has completed phase I construction of the power
generation plant on the island of Tinian which began
operations in March 1999. The Company is currently in the
process of constructing phase II of the power generation
plant and expects construction on phase II to be completed
in March 2000. The power generation plant will be operated
by the Company for a period of ten years upon completion of
phase II. The Company will receive monthly payments for ten
years which will include repayment to the Company for the
construction costs, fees for the generation of electricity
as well as fees for the operation and maintenance of the
power plant. The Company has received promissory notes
covering the first phase of constructing the power plant.
The promissory notes have a repayment schedule of ten years
and a payment of $180,000 per month. The Company's exposure
to credit loss in the event of nonperformance by counter
parties to the promissory notes is represented by the
contractual amount of those instruments.
F-13
<PAGE>
11. Related Party Transactions:
Certain of the Company's executive officers, directors and
major shareholders are also owners, officers and/or
directors of SHBC located in Kuwait. SHBC is a civil,
electrical and mechanical construction contractor with 750
employees and over 30 years of experience. SHBC and its
affiliates was the sole shareholder of Telesource
International prior to July 1999, at which time some of the
ownership was divested. SHBC and Telesource International
bid and compete within the same industries; however, SHBC
has agreed in writing to give the Company the right of first
refusal on projects within the United States and its
territories, the Pacific Rim and the Indian Ocean. This
right of first refusal agreement between SHBC and the
Company specifically excludes projects or modifications for
the International Broadcasting Bureau's stations located
outside of the continental United States, which both SHBC
and the Company may freely bid. Additionally, SHBC and
SHBC's majority shareholders, Fouad Behbehani and Nasrallah
Behbehani, have signed as guarantors on Telesource CNMI's
promissory note for $25,000,000 with the Commercial Bank of
Kuwait, New York Branch, and SHBC and SHBC's majority
stockholders, Fouad Behbehani and Nasrallah Behbehani have
signed as guarantors on a $500,000 letter of credit with the
Citytrust Bank. The $25,000,000 promissory note is used by
Telesource to finance the construction activities on the
power plant and the letter of credit will be used to secure
a performance surety bond on an overhead line project. SHBC
and SHBC's majority stockholders, Fouad Behbehani and
Nasrallah Behbehani, have also signed as guarantors on a
$2,000,000 line of credit with the Kuwait Real Estate Bank
for Telesource. There can be no assurance that upon
maturity of these borrowing contracts that SHBC will
continue to renew its guarantee of the debt.
Additionally, from time-to-time the Company may hire, on a
part time or temporary basis, individuals employed by SHBC
to provide assistance to Telesource on certain projects in
the Northern Mariana Islands. The rates paid will not
exceed the fair market value of similar services provided by
unrelated third parties.
In 1996, the Company was subcontracted by SHBC to build a
multimillion dollar radio relay station in the Commonwealth
of Northern Mariana Islands for the United States
Information Agency. The agreement between SHBC and the
Company included payment to the Company on a monthly basis
for all time and material plus a fee of 7.5% on local
purchases and procurements. The radio relay station project
was completed in early 1999, however, an addition to the
radio relay station was approved and the Company was hired
by SHBC to perform additional construction services on the
radio relay station under the same terms as the original
agreement and expects to complete the additional
construction services by February 2000. The Company does
not believe that the subcontract with SHBC is indicative of
future contracts and expected results.
The following table describes the condensed financial
information related to SHBC in regards only to the radio
relay station project:
<TABLE>
<S> <C> <C> <C>
Years Ended December 31, 1999 1998 1997
---------------------------------------------
Construction revenues $ 2,180,683 $ 3,786,177 $ 3,561,055
Sales 1,691,426 2,236,888 3,801,805
---------------------------------------------
Gross revenues 3,872,109 6,023,065 7,362,860
Construction costs 2,168,449 3,603,465 3,563,007
Cost of sales 1,532,730 2,110,272 3,586,608
---------------------------------------------
Gross profit $ 170,930 $ 309,328 $ 213,245
=============================================
</TABLE>
F-14
<PAGE>
11. Related Party Transactions: continued
The Company had total sales of $3,129,587, $5,427,103 and
$4,247,086 during the twelve months ended December 31, 1999,
1998 and 1997, respectively to SHBC, including sales listed
above for the radio relay station project. At December 31,
1999 and 1998, the Company had receivables due from SHBC in
the amount of $320,109 and $186,326, respectively.
Additionally, the Company earned rental income of $610,918,
$1,380,596 and $882,078 during the twelve months ended
December 31, 1999, 1998 and 1997 from SHBC along with
service fees of $204,628, $351,956 and $362,536 during the
twelve months ended December 31, 1999, 1998 and 1997,
respectively from SHBC as well.
In March 1999, the Company signed a three year lease for
20,000 square meters of land. The land will be used to store
equipment for the Company. The lease has a total cost for
the three year period of $75,000 and was paid in full. The
lease is with Retsa Development Incorporated. Our President
and CEO, K.J. Semikian and one of our directors, Max Engler,
serves on Retsa Development Incorporated's board of
directors.
The Company held an investment in Telebond Insurance
Corporation at December 31, 1999, in the amount of $50,000.
During 1999, the Company purchased insurance from Telebond
in the amount of $211,357 and held a prepaid asset for
insurance in the amount of $170,812 at December 31, 1999.
Our President and CEO, K.J. Semikian serves on Telebond
Insurance Corporation's board of directors.
The above amounts, terms and related party amounts disclosed
on the financial statements are not necessarily indicative
of the amounts and terms which would have been incurred had
comparable transactions been entered into with independent
parties. All expenses known to have been incurred on behalf
of or for the Company by SHBC were reimbursed by the Company
to SHBC and therefore no allocation of expenses between SHBC
and the Company are necessary.
12. Federal Income Tax:
The components of the provision for income taxes are as
follows:
December 31, December 31,
1999 1998
---------------------------
Currently payable $ 100,000 $ 385,000
Deferred taxes 277,618 317,795
---------------------------
$ 377,618 $ 702,795
===========================
F-15
<PAGE>
12. Federal Income Tax: continued
The difference between the provision for income taxes and
the amounts obtained by applying the statutory U.S. Federal
Income tax rate to the consolidated net income before taxes
is as follows:
December 31, December 31,
1999 1998
---------------------------
Tax expense at statutory rate $ 938,000 $ 1,602,629
Benefit of subsidiary's net
operating losses not deductible 7,000 (101,774)
Reduction of taxes due to
Northern Mariana Territorial
Income tax credit (297,382) (504,349)
Reduction of taxes due to
Northern Mariana Island
Business gross receipts tax (270,000) (293,711)
---------------------------
Effective tax rate $ 377,618 $ 702,795
===========================
The sources of significant temporary differences which gave
rise to deferred tax assets and liabilities at December 31,
1998 and 1997 are as follows:
1999 1998
---------------------------
Deferred tax assets
Tax basis of tangible and
intangible assets in excess
of book basis $ 25,000 $ 21,555
Accrued expenses not
deductible until paid - 7,500
Net operating loss carryovers 95,000 22,350
Unused alternative minimum
tax credit 490,000 476,713
---------------------------
610,000 528,118
Valuation allowance (70,000) (47,655)
---------------------------
Deferred tax assets 540,000 480,463
---------------------------
Deferred tax liabilities
Difference in reporting
gross profit on uncompleted
contracts 500,000 330,379
Taxes due on Northern Mariana
Island Business gross
receipts tax 550,000 382,466
---------------------------
1,050,000 712,845
---------------------------
Net deferred tax liability $ 510,000 $ 232,382
===========================
Telesource International, Inc., Commsource International,
Inc. and Telesource CNMI, Inc. file separate corporation
income tax returns. Telesource International, Inc. and
Commsource International, Inc. are U.S. corporations which
file separate U.S. Corporate tax returns. Telesource CNMI,
Inc. is a Commonwealth of Northern Mariana Island
corporation and files a corporation tax return for this
commonwealth.
At December 31, 1999, Telesource International, Inc. and
Commsource International, Inc. have net operating loss
carryforwards of approximately $112,000 and $170,000,
respectfully. The net operating loss carryforwards expire in
the years 2000 through 2018. The utilization of this net
operating loss carryforward is limited by Section 382 of the
Internal Revenue Code of 1986 to approximately $15,000
annually until its expiration.
F-16
<PAGE>
13. Commitments and Contingencies:
Minimum rental commitments under all noncancellable-
operating leases, primarily property, vehicles and
construction equipment, in effect at December 31, 1999 were:
Years Ending December 31,
2000 $ 199,520
2001 166,961
2002 113,718
2003 86,700
2004 4,800
--------------
Total minimum rental commitment 571,699
Less prepayments 112,672
--------------
$ 459,027
==============
Lease expense was $181,726 for the year ended December 31,
1999, $231,849 for the year ended December 31, 1998 and
$262,175 for the year ended December 31, 1997.
Telesource entered into an employment agreement with
Khajadour Semikian in June 1999 and Nidal Zayed in August
1999. The term of the agreement with Mr. Semikian is from
July 1, 1999 to July 1, 2002. Under the terms of the
agreement, Mr. Semikian is required to devote his full time
to the Company's business. The Company has agreed to pay
him an annualized base salary of $220,000 for the current
fiscal year, subject to an increase on January 1, 2000 to
$270,000 and to remain at $270,000 per year till July 1,
2002. The payment of cash bonuses to Mr. Semikian will be
at the Board's discretion. The Company has agreed to
provide Mr. Semikian with health insurance for him and his
family at a reduced rate. The term of the agreement with
Mr. Zayed is from September 1, 1999 to September 1, 2002.
Under the terms of the agreement, Mr. Zayed
responsibilities' comprise serving as the number two
operating officer accountable for the full range of
operations. The Company has agreed to pay him an annualized
base salary of $125,000 per year for the term of the
agreement. The payment of cash bonuses to Mr. Zayed will be
at the Board's discretion. The Company has also agreed to
provide Mr. Zayed with health insurance for him and his
family at a reduced rate along with a company car.
During 1999, Commsource International, a subsidiary of
Telesource, adopted a 401(k) employee benefit plan that
covers all employees who meet certain age and service
requirements. Employees may make contributions to the plan
through salary deferrals. Commsource International does not
provide any matching funds for contributions; however,
Commsource International does cover the expenses of
administering the plan. The annual costs to administer the
plan are expected to be approximately $750.
Telesource is involved in various litigation proceedings
incidental to the ordinary course of business. In the
opinion of management, the ultimate liability, if any,
resulting from such litigation would not be material in
relation to the Company's financial position or results of
operations.
14. Backlog:
The following schedule summarizes changes in backlog on
contracts during the year ended December 31, 1999. Backlog
represents the amount of revenue the Company expects to
realize from work to be performed on uncompleted contracts
in progress at year end and from contractual agreements on
which work has not yet begun.
F-17
<PAGE>
14. Backlog: continued
Backlog balance at December 31, 1998 $ 27,836,569
New contracts during the year 10,507,142
-------------
38,343,711
Less contract revenue earned
during the year 18,612,386
-------------
Backlog balance at December
31, 1999 $ 19,731,325
=============
15. Business Segment Information:
The Company adopted "SFAS No. 131", Disclosure About
Segments of an Enterprise and Related Information, in 1998.
The adoption of this statement did not have any effect on
either the current or prior year's presentation of
reportable segments. For 1998 and 1997, the Company was
primarily involved in two lines of business, construction
and trading of U.S. fabricated products.
There were no material amounts of transfers between lines of
business. Any intersegment sales have been eliminated. In
1999, Telesource had three operating segments: construction
services, trading of U.S. fabricated goods and power
generation. Power generation activities did not commence
until March 1999 and therefore no segment information is
available. The following table sets forth certain segment
information for the periods indicated:
F-18
<PAGE>
15. Business Segment Information:
<TABLE>
<S> <C> <C> <C> <C>
Power
Generation Construction Trading Total
--------------------------------------------------------------
1999:
Gross revenues $ 121,333 $ 19,306,599 $ 3,608,419 $ 23,036,351
Costs and expenses 638,062 14,798,543 3,161,775 18,598,380
Gross profit (loss) (516,729) 4,508,056 446,644 4,437,971
Expenses 18,061 2,257,338 1,061,001 3,336,400
Operating profit (loss) (534,790) 2,250,718 (614,357) 1,101,571
Other income (expense) 721,087 205,131 30 926,248
Net income (loss) 186,297 2,078,231 (614,327) 1,650,201
Current assets 17,018 3,183,759 202,795 3,403,572
Costs and estimated earnings
in excess of billings - 24,113,343 - 24,113,343
Notes receivable, net of
current portion - 12,022,557 - 12,022,557
Total assets 17,018 42,311,888 306,295 42,635,201
Total liabilities - 34,648,688 519,792 35,168,480
1998:
Gross revenues $ - $ 28,069,654 $ 5,398,553 $ 33,468,207
Costs and expenses - 21,931,964 5,099,326 27,031,290
Gross profit - 6,137,690 299,227 6,436,917
Expenses - 824,390 875,684 1,700,074
Operating profit (loss) - 5,313,300 (576,457) 4,736,843
Other income (expense) - (35,682) 12,453 (23,229)
Net income (loss) - 4,574,823 (564,004) 4,010,819
Current assets - 925,732 322,178 1,247,910
Costs and estimated
earnings in excess of
billings - 22,502,747 - 22,502,747
Total assets - 25,171,887 424,292 25,596,179
Total liabilities - 19,292,695 486,964 19,779,659
1997:
Gross revenues $ - $ 4,805,669 $ 8,570,339 $ 13,376,008
Costs and expenses - 3,563,007 8,057,617 11,620,624
Gross profit - 1,242,662 512,722 1,755,384
Expenses - 467,159 637,469 1,104,628
Operating profit (loss) - 775,503 (124,747) 650,756
Other expense - 30,697 - 30,697
Net income (loss) - 718,337 (124,747) 593,590
Current assets - 2,090,403 72,374 2,162,777
Costs and estimated
earnings in excess of
billings - 5,187,997 - 5,187,997
Total assets - 8,346,759 1,074,752 9,421,511
Total liabilities - 7,042,390 1,273,420 8,315,810
Gross profit is total operating revenue less operating
expenses. Gross profit excludes general corporate expenses,
interest expense, interest income and income taxes.
Revenues from the construction of the power plant were
$15,352,738, $22,502,747 and none for 1999, 1998 and 1997,
respectively. The revenues on the construction of the power
plant were included in the construction segment. Revenues
from the Company's related party SHBC were $7,817,252,
$10,945,832 and $9,052,755 for 1999, 1998 and 1997,
respectively. The revenues from SHBC recognized under the
construction segment were $4,687,665, $5,547,279 and
$4,805,669, respectively, and the revenues from SHBC
recognized under the trading segment were $3,129,587,
$5,398,553 and $4,247,086.
F-19
<PAGE>
15. Business Segment Information: continued
Trading revenues of $81,627 during 1999 were earned in Guam.
All other revenues recognized under the trading segment for
all periods presented were earned at our location in
Lombard, Illinois. All revenues earned under our
construction and power generation segments for all periods
presented were earned within the Commonwealth of Mariana
Islands.
Long-lived assets located in the Commonwealth of Mariana
Islands were $39,140,351, $24,246,155 and $6,256,356 as of
December 31, 1999, 1998 and 1997, respectively.
16. Subsequent Events:
The Company entered into a borrowing agreement with The
Hongkong and Shanghai Banking Corporation Limited,
("Hongkong Shanghai Bank") Guam Branch, on January 24, 2000
for a $2,000,000 line of credit. This line of credit is
secured by the promissory notes Telesource holds on the
power generation plant. This line of credit has a maturity
January 31, 2001 with interest payments due monthly and
principal due at maturity. This line bears an interest rate
of the bank's prime rate plus 1.5%.
F-20
<PAGE>
TELESOURCE INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
as of March 31, 2000
(unaudited)
Assets:
Cash and cash equivalents $ 848,835
Accounts receivable (including related party receivables of
$857,578 and unbilled receivables of $405,588) 2,271,448
Current portion notes receivable 930,707
Prepaid expenses (including related party prepaid expenses of
$124,290) 270,166
Costs and estimated earnings in excess of billings 316,251
-----------
Total current assets 4,637,407
Costs and estimated earnings in excess of billings 25,214,840
Deposits 63,826
Time deposits 1,000,000
Long term portion notes receivable, net of current portion 11,781,120
Premises and equipment, net of accumulated depreciation of
$1,135,199 1,830,484
Other assets 140,115
-----------
Total assets $44,667,792
===========
Liabilities and shareholders' equity:
Accounts payable (including related party accounts payable of
$3,216,434) $ 3,937,324
Accrued expenses (including related party accrued expenses of
$68,628) 2,569,959
Customer deposits - related party 125,000
Current notes payable 3,000,000
Current tax payable 434,437
Current liabilities - related party 21,090
-----------
Total current liabilities 10,087,810
Deferred tax liability 427,665
Long-term debt 27,000,000
-----------
Total liabilities 37,515,475
-----------
Commitments and contingent liabilities -
Shareholders' equity:
Common stock, $0.01 par value, 50,000,000 shares
authorized,10,000,000 shares issued and outstanding 100,000
Additional paid-in capital 847,225
Retained earnings 6,205,092
-----------
Total shareholders' equity 7,152,317
-----------
Total liabilities and shareholders' equity $44,667,792
===========
F-21
<PAGE>
TELESOURCE INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
for the three months ended March 31, 2000 and 1999
(unaudited)
2000 1999
----------- -----------
Revenues:
Construction revenues (including related
party construction revenues of $362,645
and $427,698 at 2000 and 1999, respectively) $ 2,839,736 $ 3,334,314
Sales (including related party sales of
$1,414,011 and $688,651 at 2000 and 1999,
respectively) 1,431,073 739,060
Rental income (including related party rental
income of $53,103 and $205,000 at 2000 and
1999, respectively 55,043 205,000
Service fees - related party 31,625 43,702
----------- -----------
Gross revenues 4,357,477 4,322,076
----------- -----------
Costs and expenses:
Construction costs 2,118,760 2,209,376
Cost of sales 1,415,252 675,357
----------- -----------
Gross profit 823,465 1,437,343
----------- -----------
Expenses:
Salaries and employee benefits 446,075 207,854
Occupancy and equipment 132,650 62,953
General and administrative 742,448 455,361
----------- -----------
Total expenses 1,312,173 726,168
----------- -----------
Operating (loss) profit (497,708) 711,175
----------- -----------
Other income (expense):
Interest income 551,886 53,433
Interest expense (450,826) -
Other income (expense), net (91) 8
----------- -----------
(Loss) income before income taxes (396,739) 764,616
----------- -----------
Income tax (benefit) expense (82,335) (94,582)
----------- -----------
Net (loss) income $ (314,404) $ 859,198
=========== ===========
Basic and diluted (loss) earnings per share $ (0.03) $ 0.09
=========== ===========
Weighted average shares outstanding 10,000,000 10,000,000
=========== ===========
F-22
<PAGE>
TELESOURCE INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the three months ended March 31, 2000 and 1999
(unaudited)
</TABLE>
<TABLE>
<CAPTION>
2000 1999
----------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (314,404) $ 859,198
Adjustments to reconcile net (loss) income to net
cash provided by (used in) operating activities:
Depreciation 90,887 123,129
Changes in assets and liabilities:
Costs and estimated earnings in excess of billings (788,024) 11,037,133
Accounts receivables (1,560,608) (700,271)
Other assets 19,232 (173,732)
Other liabilities 846,995 (401,085)
----------- ------------
Net cash provided by (used in) operating activities (1,705,922) 10,744,372
----------- ------------
Cash flows from investing activities:
Notes receivable on power generation plant (16,820,809)
Payments received on notes receivable on power generation
plant 218,552
Purchase of time deposits (1,000,000)
Premise and equipment expenditures (30,183) (55,884)
----------- ------------
Net cash provided by (used in) investing activities 188,369 (17,876,693)
----------- ------------
Cash flows from financing activities:
Proceeds from borrowings 1,500,000 7,500,000
----------- ------------
Net cash provided by financing activities 1,500,000 7,500,000
----------- ------------
Net increase in cash and cash equivalents (17,553) 367,679
Beginning cash and cash equivalents 866,388 958,146
----------- ------------
Ending cash and cash equivalents $ 848,835 $ 1,325,825
=========== ============
Supplemental disclosure:
Cash paid during the period for interest $ 643,143 $ 519,150
Cash paid during the period for federal income taxes $ - $ 55,537
</TABLE>
F-23
<PAGE>
TELESOURCE INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the three months ended March 31, 2000 and 1999
(unaudited)
1. Financial Statements:
The financial statements included herein have been prepared
by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC"). Certain
information and footnote disclosures normally included in
annual financial statements prepared in accordance with
generally accepted accounting principles have been condensed
or omitted pursuant to such rules and regulations, although
management believes that the disclosures are adequate to
make the information presented not misleading. These
condensed financial statements should be read in conjunction
with the financial statements and the notes thereto included
in the Company's registration statement on Form S-4 for the
period ended December 31, 1999. In the opinion of
management, all adjustments consisting only of normal
recurring adjustments necessary to present fairly the
financial position of the Company as of March 31, 2000, and
the results of its operations and its cash flows for the
indicated periods have been included. The results of
operations for such interim period are not necessarily
indicative of the results to be expected for the fiscal year
ending December 31, 2000.
2. Computation of Earnings Per Share:
Basic earnings per share is computed by dividing income
available to common stockholders by the weighted average
number of common shares outstanding, excluding restricted
common stock. Diluted earnings per share is computed giving
effect to all dilutive potential common shares that were
outstanding during the period. The Company did not have any
dilutive potential common shares outstanding at March 31,
2000 and 1999.
3. Notes Receivable:
In March 1999, the Company completed its construction
activities on phase I of the power generation plant located
on the island of Tinian. The Company began operations of the
plant and thus billed $13,115,690 for construction of the
power generation plant. The Company is contracted to receive
payments of $180,000 per month on these notes receivable for
120 periods or ten years. The Company received three
payments or $540,000 during the three months ended March 31,
2000 and recognized $321,448 in interest income on the notes
receivable.
F-24
<PAGE>
4. Costs and Estimated Earnings on Uncompleted Contracts:
Long-term fixed price construction contracts in progress
accounted for using the percentage-of-completion method at
March 31, 2000 consisted of:
March 31, 2000
--------------
Costs incurred on uncompleted contracts $ 33,393,334
Estimated earnings 7,817,276
------------
41,210,610
Less billings to date 15,679,519
------------
$ 25,531,091
============
Included in the accompanying balance sheet
under the following captions:
Current portion costs and estimated earnings
in excess of billings on un completed
contracts $ 316,251
Long term portion costs and estimated
earnings in excess of billings on
uncompleted contracts 25,214,840
------------
$ 25,531,091
============
5. Short-Term Debt and Credit Arrangements:
Notes payable to banks classified as short-term debt or
current maturities of long-term debt at March 31, 2000 are
shown in the following table:
March 31, 2000
--------------
Citytrust Bank letter of credit, maturing on May 21, 2000.
Principal and interest are due at maturity. This letter of
Credit bears an interest rate of 12.5%. Secured by a
personal guaranty from SHBC and its major
shareholders. $ 500,000
Bank of Hawaii credit line, maturing on March 26, 2001.
Principal and interest due at maturity. The line of credit
bears an interest rate of 6.25% and is secured by a
time deposit in the Bank of Hawaii in the amount of
$1,000,000. 1,000,000
The Hongkong and Shanghai Banking Corporation Limited credit
line for $2,000,000 maturing on January 31, 2001. Principal
due at maturity and interest is due monthly. The line of
credit bears an interest rate of 1.5% plus the bank's prime
rate of interest and is secured by the Company's promissory
notes. 1,500,000
----------
Total short-term debt $3,000,000
==========
F-25
<PAGE>
6. Long-Term Debt and Credit Arrangements:
March 31, 2000
--------------
Notes payable to banks $ 30,000,000
Less current maturities 3,000,000
------------
Total long-term debt $ 27,000,000
============
At March 31, 2000, the long term debt outstanding had a
balance of $27,000,000, borrowed on two letters of credit.
$25,000,000 on the existing note with the Commercial Bank of
Kuwait, New York Branch. This note carries a floating
interest rate of the three-month LIBOR plus 3.0% and
interest payments are due annually. This note is a balloon
note with the principal due at maturity on February 20,
2002. This note is guaranteed by SHBC, the only
stockholder at December 31, 1998 and the majority
stockholder at March 31, 2000, and SHBC's majority
stockholders, Fouad Bebehani and Nasarallah Behbehani. The
other $2,000,000 was borrowed from a letter of credit with
the Kuwait Real Estate Bank dated May 2, 1999. This letter
of credit has a maximum borrowing amount of $2,000,000 and
carries an interest rate of LIBOR plus 2.5%, interest due
annually and principal at maturity, with a maturity of May
12, 2001. This note is guaranteed by SHBC and SHBC's
majority stockholders, Fouad Behbehani and Nasarallah
Behbehani.
7. Shareholders' Equity:
During the three months ended March 31, 2000 and 1999,
10,000,000 shares of the Company's common stock were issued
and outstanding. No shares were sold or issued by the
Company during 1999 or the three months ended March 31,
2000.
In July 1999, the Board of Directors approved a one-for-ten
thousand stock split to stockholders of record on July 26,
1999. There was only one shareholder of record on the record
date, SHBC. All references in the financial statements to
number of shares and per share amounts of the Company's
common stock have been retroactively restated to reflect the
increased number of shares outstanding.
During 1999, SHBC had sold 5,381,000 shares of Telesource
stock to various entities and individuals, including members
of the Behbehani family. At March 31, 2000, SHBC owned
directly 4,619,000 shares and beneficially owned 6,639,000
shares (the beneficially owned shares includes the stock
held by the Behbehani family).
8. Earnings Per Share:
In accordance with the disclosure requirements of "SFAS
128", a reconciliation of the numerator and denominator of
basic and diluted earnings per share is provided as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31, 2000 1999
----------- -----------
<S> <C> <C>
NUMERATOR - BASIC AND DILUTED (LOSS) EARNINGS PER SHARE
Net (loss) income $ (314,404) $ 670,034
=========== ===========
DENOMINATOR - BASIC EARNINGS PER SHARE
Common stock outstanding 10,000,000 10,000,000
=========== ===========
Basic and diluted earnings per share $ (0.03) $ 0.07
=========== ===========
</TABLE>
F-26
<PAGE>
9. Commitments and Contingent Liabilities:
The Company had a retainage due in the amount of $183,455
and none on projects at March 31, 2000 and December 31,
1999, respectively, and the Company withheld a retainage on
equipment and supplies ordered from some of its vendors. The
retainage amount held by the Company due to vendors was
$150,000 and none at March 31, 2000 and December 31, 1999,
respectively. The Company had unbilled receivables at March
31, 2000 in the amount of $411,185.
Telesource entered into an employment agreement with
Khajadour Semikian in June 1999 and Nidal Zayed in August
1999. The term of the agreement with Mr. Semikian is from
July 1, 1999 to July 1, 2002. Under the terms of the
agreement, Mr. Semikian is required to devote his full time
to the business of the Company. The Company has agreed to
pay him an annualized base salary of $220,000 for 1999
which was increased on January 1, 2000 to $270,000 and to
remain at $270,000 per year till July 1, 2002. The payment
of cash bonuses to Mr. Semikian will be at the Board's
discretion. We have agreed to provide Mr. Semikian with
health insurance for him and his family at a reduced rate.
The term of the agreement with Mr. Zayed is from September
1, 1999 to September 1, 2002. Under the terms of the
agreement, Mr. Zayed responsibilities' comprise serving as
the number two operating officer accountable for the full
range of operations. We have agreed to pay him an
annualized base salary of $125,000 per year for the term of
the agreement. The payment of cash bonuses to Mr. Zayed will
be at the Board's discretion. We have also agreed to
provide Mr. Zayed with health insurance for him and his
family at a reduced rate along with a company car.
During 1999, Commsource International, a subsidiary of
Telesource, adopted a 401(k) employee benefit plan that
covers all employees who meet certain age and service
requirements. Employees may make contributions to the plan
through salary deferrals. Commsource does not provide any
matching funds for contributions; however, Commsource does
cover the expenses of administering the plan. The annual
costs to administer the plan are expected to be
approximately $750.
Telesource is involved in various litigation proceedings
incidental to the ordinary course of business. In the
opinion of management, the ultimate liability, if any,
resulting from such litigation would not be material in
relation to the Company's financial position or results of
operations.
10. Subsequent Events:
The Company entered into a borrowing agreement with the Bank
of Hawaii, Guam Branch, on May 15, 2000 for a $2,000,000
line of credit. This line of credit is secured by the
promissory notes Telesource holds on the power generation
plant. This line of credit has a maturity date of January 31, 2001
with interest payments due monthly and principal due at
maturity. This line bears an interest rate of the bank's
prime rate plus 1.0%.
F-27
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of Sixth Business Service Group,
Inc.:
We have audited the accompanying balance sheet of Sixth
Business Service Group, Inc. (the "Company"), a
development stage enterprise, as of December 31, 1999 and
the related statements of operations, stockholder's
deficit and cash flows for the period March 15, 1999 (date
of incorporation) to December 31, 1999. These financial
statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally
accepted auditing standards. Those standards require that
we plan and perform the audit to obtain reasonable
assurance about whether the financial statements
are free of material misstatement. An audit includes
examining on a test basis, evidence supporting the amounts
and the disclosures in the financial statements. An
audit also includes assessing the accounting principles
used and the significant estimates made by management, as
well as the overall financial statement presentation. We
believe our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to
above present fairly, in all material respects, the
financial position of the Company as of December 31, 1999
and the results of its operations and its cash flows for
the period March 15, 1999 (date of incorporation) to
December 31, 1999 in conformity with generally accepted
accounting principles.
The accompanying financial statements have been
prepared assuming that the Company will continue as a
going concern. As discussed in Notes A and B to the
financial statements, the Company is in the development
stage and will require a significant amount of capital to
commence its planned principal operations and proceed with
its business plan. As of the date of these financial
statements, an insignificant amount of capital has
been raised, and as such there is no assurance that the
Company will be successful in its efforts to raise the
necessary capital to commence its planned principal
operations and/or implement its business plan. These
factors raise substantial doubt about the Company's
ability to continue as a going concern. Management's
plans in regard to this matter are described in Note B.
The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ Kingery, Crouse & Hohl P.A.
Kingery, Crouse & Hohl P.A.
May 3, 2000
Tampa, FL
F-28
<PAGE>
Sixth Business Service Group, Inc.
(A Development Stage Enterprise)
BALANCE SHEET AS OF DECEMBER 31, 1999
ASSETS
TOTAL ASSETS $ -
============
LIABILITIES AND STOCKHOLDER'S DEFICIT
TOTAL LIABILITIES - Accrued expenses $ 1,000
STOCKHOLDER'S DEFICIT:
Preferred stock - no par value:
20,000,000 shares authorized;
zero shares issued and
outstanding -
Common stock - no par value:
50,000,000 shares authorized;
1,000,000 shares issued and
outstanding 79
Additional paid-in capital 4,000
Deficit accumulated during the
development stage $ (5,079)
------------
Total stockholder's deficit (1,000)
TOTAL LIABILITIES AND STOCKHOLDERS'
DEFICIT $ -
============
See notes to financial statements
F-29
<PAGE>
Sixth Business Service Group, Inc.
(A Development Stage Enterprise)
STATEMENT OF OPERATIONS FOR THE PERIOD MARCH 15, 1999
(DATE OF INCORPORATION) TO DECEMBER 31, 1999
EXPENSES:
Professional fees and expenses $ 5,000
Organization costs 79
----------
NET LOSS $ 5,079
==========
BASIC AND DILUTED NET LOSS PER SHARE $ 0.00
==========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 1,000,000
==========
See notes to financial statements
F-30
<PAGE>
Sixth Business Service Group, Inc.
(A Development Stage Enterprise)
STATEMENT OF STOCKHOLDER'S DEFICIT FOR THE PERIOD MARCH 15,
1999 (DATE OF INCORPORATION) TO DECEMBER 31, 1999
Deficit
Common Stock Accumulated
-------------- Additional During the
Par Paid-in Development
Shares Value Capital Stage Total
----------------------------------------------------
Balances, March 15, 1999
(date of incorporation) - $ - $ - $ - $ -
Issuance of common stock 1,000,000 79 - - 79
Capital contribution of
services - - 4,000 - 4,000
Net loss for the period,
March 15, 1999 (date of
incorporation) to
December 31, 1999 - - - (5,079) (5,079)
----------------------------------------------------
Balances, at December 31,
1999 1,000,000 $ 79 $ 4,000 $(5,079) $(1,000)
====================================================
See notes to financial statements
F-31
<PAGE>
Sixth Business Service Group, Inc.
(A Development Stage Enterprise)
STATEMENT OF CASH FLOWS FOR THE PERIOD MARCH 15, 1999
(DATE OF INCORPORATION) TO DECEMBER 31, 1999
CASH FLOWS FROM OPERATING ACTIVITES:
Net loss $ (5,079)
Adjustments to reconcile net loss to cash used in
operating activities:
Increase in accrued expenses 1,000
Contributed services and expenses 4,000
---------------
NET CASH USED IN OPERATING ACTIVITIES (79)
---------------
CASH FLOWS FROM FINANCING ACTIVITIES -
Proceeds from issuance of common stock 79
---------------
CASH PROVIDED BY FINANCING ACTIVITIES 79
---------------
NET INCREASE IN CASH AND CASH EQUIVALENTS -
---------------
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD -
---------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ -
===============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
TAXES PAID $ -
===============
INTEREST PAID $ -
===============
See notes to financial statements
F-32
<PAGE>
Sixth Business Service Group, Inc.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
NOTE A - FORMATION AND OPERATIONS OF THE COMPANY
First Business Service Group, Inc. ("we, us, our") was
incorporated under the laws of the state of Florida on
March 15, 1999. We are considered to be in the
development stage as defined in Financial Accounting
Standards Board Statement No 7, and intend to seek,
investigate and, if such investigation warrants, engage
in business combinations presented to us by persons or
firms who or which desire to become a Securities and
Exchange Commission (the "SEC") reporting company. Our
planned principal operations have not commenced,
therefore accounting policies and procedures have not yet
been established. Our fiscal year end is December 31.
NOTE B - GOING CONCERN
The accompanying 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. The
Company will require a significant amount of capital to
commence its planned principal operations and proceed with
its business plan. Accordingly, the Company's ability to
continue as a going concern is dependent upon its ability
to secure an adequate amount of capital to finance its
planned principal operations and/or implement its
business plan. The Company's plans include borrowings
from management and negotiating fees with an acquisition
candidate, however there is no assurance that they will be
successful in their efforts to raise capital. This
factor, among others, may indicate that the Company
will be unable to continue as a going concern for a
reasonable period of time.
NOTE C - INCOME TAXES
During the period March 15, 1999 (date of incorporation)
to December 31, 1999, we recognized losses for both
financial and tax reporting purposes. Accordingly, no
deferred taxes have been provided for in the
accompanying statement of operations.
F-33
<PAGE>
NOTE D - RELATED PARTY TRANSACTIONS
The value of services provided by our stockholder during
the period March 15, 1999 (date of incorporation) to
December 31, 1999 was $4,000 and is included as
professional fees and expenses in the accompanying
statement of operations. In addition, the stockholder has
agreed to pay corporate, organizational and other costs
incurred by us and provide the following services at no
cost to us until a business combination is effected:
1. Preparation and filings of required documents with the
Securities and Exchange Commission.
2. Location and review of potential target companies.
NOTE E - LOSS PER SHARE
We compute net loss per share in accordance with SFAS
No. 128 "Earnings per Share" ("SFAS No. 128") and SEC
Staff Accounting Bulletin No. 98 ("SAB 98"). Under the
provisions of SFAS No. 128 and SAB 98, basic net loss
per share is computed by dividing the net loss available
to common stockholders for the period by the weighted
average number of common shares outstanding during the
period. Diluted net loss per share is computed by dividing
the net loss for the period by the number of common and
common equivalent shares outstanding during the period.
There were no common equivalent shares outstanding as of
December 31, 1999.
F-34
<PAGE>
Sixth Business Service Group, Inc.
(A Development Stage Enterprise)
March 31, December 31,
2000 1999
(Unaudited)
--------------------------
ASSETS
TOTAL ASSETS $ - $ -
==========================
LIABILITIES AND STOCKHOLDER'S DEFICIT
TOTAL LIABILITIES - Accrued expenses $ - $ 1,000
STOCKHOLDER'S DEFICIT:
Preferred stock - no par value:
20,000,000 shares authorized;
zero shares issued and outstanding - -
Common stock - no par value:
50,000,000 shares authorized;
1,000,000 shares issued and
outstanding 79 79
Additional paid-in capital 6,000 4,000
Deficit accumulated during the
development stage $ (6,079) $ (5,079)
--------------------------
Total stockholder's deficit (1,000) (1,000)
TOTAL LIABILITIES AND STOCKHOLDERS'
DEFICIT $ - $ -
==========================
See notes to financial statements
F-35
<PAGE>
Sixth Business Service Group, Inc.
(A Development Stage Enterprise)
Period
March 15,
Three 1999 (date
Months of
Ended incorporation)
March 31, To March 31,
2000 1999
-----------------------------
EXPENSES:
Professional fees and expenses $ 1,000 $ 2,000
Organization costs - 79
-----------------------------
NET LOSS $ - $ 2,079
=============================
NET LOSS PER SHARE $ 0.00 $ 0.00
=============================
See notes to financial statements
F-36
<PAGE>
Sixth Business Service Group, Inc.
(A Development Stage Enterprise)
STATEMENT OF STOCKHOLDER'S EQUITY
For the three months ended March 31, 2000
(unaudited)
Deficit
Common Stock Accumulated
-------------- Additional During the
Par Paid-in Development
Shares Value Capital Stage Total
-----------------------------------------------------
Balances, December 31, 1999
1,000,000 $ 79 $ 4,000 $ (5,079) $(1,000)
-----------------------------------------------------
Capital contribution 1,000 1,000
Capital contribution of
services - - 1,000 - 1,000
Net loss for the three
months ended March 31,
2000 - - - (1,000) (1,000)
----------------------------------------------------
Balances, at December 31,
1999 1,000,000 $ 79 $ 6,000 $(6,079) $ -
====================================================
See notes to financial statements
F-37
<PAGE>
Sixth Business Service Group, Inc.
(A Development Stage Enterprise)
STATEMENT OF CASH FLOWS
(Unaudited)
Three Period
Months March 15,
Ending 1999 (date
March 31, of
2000 incorporation)
To March 31,
1999
-------------------------
CASH FLOWS FROM OPERATING ACTIVITES:
Net loss $ - $ (79)
-------------------------
NET CASH USED IN OPERATING ACTIVITIES - (79)
-------------------------
CASH FLOWS FROM FINANCING ACTIVITIES -
Proceeds from issuance of common stock - 79
-------------------------
CASH PROVIDED BY FINANCING ACTIVITIES - 79
-------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS - -
-------------------------
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD - -
-------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ - $ -
=========================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
TAXES PAID $ - $ -
=========================
INTEREST PAID $ - $ -
=========================
See notes to financial statements
F-38
<PAGE>
Sixth Business Service Group, Inc.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE A - FORMATION AND OPERATIONS OF THE COMPANY
Sixth Business Service Group, Inc. ("we", "us", "our")
was incorporated under the laws of the state of Florida on
March 15, 1999. We are considered to be in the
development stage, as defined in Financial Accounting
Standards Board Statement No. 7. We intend to investigate
and, if such investigation warrants, engage in business
combinations. Our planned principal operations have
not commenced, therefore accounting policies and
procedures have not yet been established.
The preparation of financial statements in accordance
with generally accepted accounting principles requires
management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the
date of the financial statements and revenues and expenses
during the reporting period. Actual results could differ
from those estimates.
Our accompanying unaudited financial statements have been
prepared in accordance with generally accepted accounting
principals for interim financial information and the
instructions to Form 10-QSB and Rule 10-1 of Regulation
S-X of the Securities and Exchange Commission (the"SEC").
Accordingly, these financial statements do not include
all of the footnotes required by generally accepted
accounting principals. In the opinion of management, all
adjustments (consisting of normal and recurring
adjustments) considered necessary for a fair
presentation have been included. Operating results for
the three months ended March 31, 2000 are not
necessarily indicative of the results that may be
expected for the year ended December 31, 2000.
NOTE B - GOING CONCERN
The accompanying 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. We have an
accumulated deficit of $6,079 as of March 31, 2000. We do
not currently engage in business activities that provide
any cash flow, accordingly our ability to continue as a
going concern is dependent on our management's ability to
fund our cash requirements until a business combination
is closed. These factors among others may indicate that we
will be unable to continue as a going concern for a
reasonable period of time.
The financial statements do not include any adjustments
that might be necessary if we are unable to continue as a
going concern.
F-39
<PAGE>
NOTE C - INCOME TAXES
During the period March 15, 1999 (date of incorporation)
to March 31, 2000, we recognized losses for both financial
and tax reporting purposes. Accordingly, no deferred taxes
have been provided for in the accompanying statement
of operations.
NOTE D - RELATED PARTY TRANSACTION
Our President, who is also a shareholder, has agreed, in
writing, to fund all of our expenses until such time as an
acquisition transaction is closed. None of these funds
expended on our behalf will be reimbursable to our
President, accordingly these amounts will be reflected
in our financial statements as contributed capital.
F-40
<PAGE>
PART II--INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Delaware
Under Section 145 of the Delaware General Corporation Law, the
Registrant has broad powers to indemnify its Directors and officers
against liabilities they may incur in such capacities, including
liabilities under the Securities Act.
Under Section 145 of the Delaware Law, a corporation generally has
the power to indemnify its present and former directors, officers,
employees and agents against expenses incurred by them in connection
with any suit to which they are or are threatened to be made a party
by reason of their serving in such positions so long as they acted in
good faith and in a manner they reasonably believed to be in or not
opposed to, the best interests of the corporation and with respect to
any criminal action, they had no reasonable cause to believe their
conduct was unlawful. The Registrant believes that these provisions
are necessary to attract and retain qualified persons as Directors and
officers. These provisions do not eliminate the Directors' duty of
care, and, in appropriate circumstances, equitable remedies such as
injunctive or other forms of non-monetary relief will remain available
under Delaware Law. In addition, each Director will continue to be
subject to liability (i) for breach of the Directors' duty of loyalty
to the Registrant or its stockholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the Delaware General
Corporation Law, or (iv) for any transaction from which the Director
derived an improper personal benefit. The provisions also does not
affect a Directors' responsibilities under any other law, such as the
federal securities law or state or federal environmental laws.
Florida
Florida Business Corporation Act. Section 607.0850(1) of the
Florida Business Corporation Act (the "FBCA") provides that a Florida
corporation, such as Sixth Business, shall have the power to indemnify
any person who was or is a party to any proceeding (other than an
action by, or in the right of, the corporation), by reason of the fact
that he is or was a director, officer, employee, or agent of the
corporation or is or was serving at the request of the corporation as
a director, officer, employee, or agent of the corporation or is or
was serving at the request of the corporation as a director, officer,
employee, or agent of another corporation, partnership, joint venture,
trust, or other enterprise against liability incurred in connection
with such proceeding, including any appeal thereof, if he acted in
good faith and in a manner he reasonably believed to be in, or not
opposed to, the best interests of the corporation and, with respect to
any criminal action or proceeding, had no reasonable cause to believe
his conduct was unlawful.
Section 607.0850(2) of the FBCA provides that a Florida corporation
shall have the power to indemnify any person, who was or is a party to
any proceeding by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that he is or was a
director, officer, employee, or agent of the corporation or is or was
serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, against expenses and amounts paid in
settlement not exceeding, in the judgment of the board of directors,
74
<PAGE>
the estimated expense of litigating the proceeding to conclusion,
actually and reasonably incurred in connection with the defense or
settlement of such proceeding, including any appeal thereof. Such
indemnification shall be authorized if such person acted in good faith
and in a manner he reasonably believed to be in, or not opposed to,
the best interests of the corporation, except that no indemnification
shall be made under this subsection in respect of any claim, issue, or
matter as to which such person shall have been adjudged to be liable
unless, and only to the extent that, the court in which such
proceeding was brought, or any other court of competent jurisdiction,
shall determine upon application that, despite the adjudication of
liability but in view of all circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which
such court shall deem proper.
Section 607.850 of the FBCA further provides that: (i) to the extent
that a director, officer, employee or agent of a corporation has been
successful on the merits or otherwise in defense of any proceeding
referred to in subsection (1) or subsection (2), or in defense of any
proceeding referred to in subsection (1) or subsection (2), or in
defense of any claim, issue, or matter therein, he shall be
indemnified against expense actually and reasonably incurred by him in
connection therewith; (ii) indemnification provided pursuant to
Section 607.0850 is not exclusive; and (iii) the corporation may
purchase and maintain insurance on behalf of a director or officer of
the corporation against any liability asserted against him or incurred
by him in any such capacity or arising out of his status as such
whether or not the corporation would have the power to indemnify him
against such liabilities under Section 607.0850.
Notwithstanding the foregoing, Section 607.0850 of the FBCA provides
that indemnification or advancement of expenses shall not be made to
or on behalf of any director, officer, employee or agent if a judgment
or other final adjudication establishes that his actions, or omissions
to act, were material to the cause of action so adjudicated and
constitute: (i) a violation of the criminal law, unless the director,
officer, employee or agent had reasonable cause to believe his conduct
was lawful or had no reasonable cause to believe his conduct was
unlawful; (ii) a transaction from which the director, officer,
employee or agent derived an improper personal benefit; (iii) in the
case of a director, a circumstance under which the liability
provisions regarding unlawful distributions are applicable; or (iv)
willful misconduct or a conscious disregard for the best interests of
the corporation in a proceeding by or in the right of the corporation
to procure a judgment in its favor or in a proceeding by or in the
right of a shareholder.
Section 607.0831 of the FBCA provides that a director of a Florida
corporation is not personally liable for monetary damages to the
corporation or any other person for any statement, vote, decision, or
failure to act, regarding corporate management or policy, by a
director, unless: (i) the director breached or failed to perform his
duties as a director; and (ii) the director's breach of, or failure to
perform, those duties constitutes: (A) a violation of criminal law,
unless the director had reasonable cause to believe his conduct was
lawful or had no reasonable cause to believe his conduct was unlawful;
(B) a transaction from which the director derived an improper personal
benefit, either directly or indirectly; (C) a circumstance under which
the liability provisions regarding unlawful distributions are
applicable; (D) in a proceeding by or in the right of the corporation
to procure a judgment in its favor or by or in the right of a
shareholder, conscious disregard for the best interest of the
corporation, or willful misconduct; or (E) in a proceeding by or in
the right of someone other than the corporation or a shareholder,
recklessness or an act or omission which was committed in bad faith or
with malicious purpose or in a manner exhibiting wanton and willful
disregard of human rights, safety, or property.
Articles and Bylaws. The Company's Articles of Incorporation and
the Company's Bylaws provide that the Company shall, to the fullest
extent permitted by law, indemnify all directors of the Company, as
well as any officers or employees of the Company to whom the Company
has agreed to grant indemnification.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
75
<PAGE>
The exhibits and financial statement schedules listed on the
accompanying Exhibit Index are filed as part of this Registration
Statement and such Exhibit Index is hereby incorporated by reference.
ITEM 22. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes:
(1) To respond to requests for information that is incorporated
by reference into the prospectus pursuant to Items 4, 10(b), 11
or 13 of this Form, within one business day of receipt of such
request, and to send the incorporated documents by first class
mail or other equally prompt means. This includes information
contained in documents filed subsequent to the effective date of
the Registration Statement through the date of responding to the
request;
(2) To supply by means of a post-effective amendment all
information concerning a transaction, and the company being
acquired involved therein, that was not the subject of and
included in the registration statement when it became effective;
(3) The undersigned registrant hereby undertakes as follows:
that prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this
registration statement, by any person or party who is deemed to
be an underwriter within the meaning of Rule 145(c), the issuer
undertakes that such reoffering prospectus will contain the
information called for by the applicable registration form with
respect to reofferings by persons who may be deemed underwriters,
in addition to the information called for by the other items of
the applicable form.
(4) The registrant undertakes that every prospectus (i) that is
filed pursuant to paragraph (3) immediately preceding, or (ii)
that purports to meet the requirements of Section 10(a)(3) of the
Act and is used in connection with an offering of securities
subject to Rule 415, will be filed as a part of an amendment to
the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any
liability under the Securities Act of 1933, each such post-
effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
76
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant
has duly caused this Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Tampa, State
of Florida, on July 10, 2000.
Sixth Business Service Group, INC.
By: /s/ MICHAEL T. WILLIAMS.
------------------------------
President and Treasurer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/MICHAEL T. WILLIAMS. President and Treasurer July, 10 2000
77
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
-------- --------------------------------
2.01 Agreement and Plan of Merger and Plan of Reorganization dated as
of November 30, 1999 among Sixth Business Service Group, Inc. and
Telesource International, Inc.**
3.01 Certificate of Incorporation of Sixth Business Service Group**
3.02 By-laws of Sixth Business Service Group**
5.01 Opinion of Williams Law Group P.A. regarding the validity of the
securites being registered.**
5.02 Tax Opinion of Williams Law Group P.A. regarding Federal Income Tax
consequenses of the merger of Telesource International, Inc. and
Sixth Business Service Group, Inc.
10.01 Agreement for Design, Supply of Plant and Equipment, Private
Construction, Maintenance and Operation, and Transfer of Ownership
dated June 10, 1997**
10.02 Agreement for Design, Supply of Plant and Equipment, Private
Construction, Maintenance and Operation, and Transfer of Ownership,
Change Order Number1, dated November 30, 1998**
10.03 Agreement for Design, Supply of Plant and Equipment, Private
Construction, Maintenance and Operation, and Transfer of Ownership,
Change Order Number 2, dated November 30, 1998**
10.04 Agreement and Contract for Construction of Koblerville Expansion
Project between the Northern Mariana Islands and Telesource
International dated July 28, 1998**
10.05 Agreement between Sayed Hamid Behbehani & Sons, Co. W.L.L. and
Telesource International CNMI, Inc., Radio Relay Station Subcontract
dated January 6, 1997 and Addendum dated August 27, 1998**
10.06 Memorandum of Understanding between Sayed Hamid Behbehani &
Sons, Co. W.L.L. and Telesource International, Inc. regarding right of
first refusal for certain areas**
10.07 Memorandum of Understanding between Sayed Hamid Behbehani &
Sons, Co. W.L.L. and Telesource International, Inc. regarding
commission fees**
10.08 Agreement to Supply Series of Doors and Associated Equipment for
the United States Department of State for the Construction of
Diplomatic Housing in Kuwait between P.W.S. International, Inc., the
supplier, and Telesource International, Inc., the contractor, dated
August 31, 1999**
10.09 Agreement to Supply Electrical Items for Power Plant Subcontract
between Wheeler Power Systems, the subcontractor, and Commsource
International, Inc., the contractor, dated June 10, 1998**
10.10 Note Agreement between the Commercial Bank of Kuwait, New York
Branch, and Telesource International CNMI, Inc. dated August 20, 1998**
10.11 Term Loan Agreement between the Kuwait Real Estate Bank and
Telesource International CNMI, Inc. dated May 2, 1999*
10.12 Line of Credit Agreement between the Bank of Hawaii and
Telesource International CNMI, Inc.*
10.13 Credit Agreement between Hongkong and Shanghai Bank Corporation,
Limited and Telesource CNMI, Inc. dated January 21, 2000**
10.14 Lease of Tinian Land between the Commonwealth Utilities
Corporation and Telesource International CNMI, Inc.**
10.15 Employment Contract between K.J. Semikian and Telesource
International, Inc.**
10.16 Employment Contract between Nidal Z. Zayed and Telesource
International, Inc.**
10.17 Adoption Agreement for Aetna Life Insurance and Annuity Company
Standardized 401(k) Profit Sharing Plan and Trust between Aetna Life
Insurance and Annuity Company and Commsource International, Inc. dated
November 13, 1998**
23.01 Consent of independent accountants to Telesource International,
Inc. with respect to the use of its February 18, 2000 Report
23.02 Consent of Williams Law Group P.A.**
23.03 Consent of Independent Accountants to Sixth Business Service Group,
Inc. with respect to the use of it's 5/3/2000 report.
* To be filed by Amendment
** Filed Previously
No. of shares outstanding was lower in 1997. Sold stock to SHBC with the
payoff of the $700k loan.
No. of shares outstanding was lower in 1997. Sold stock to SHBC with the
payoff of the $700k loan.
78
<PAGE>
