Letter to Shareholder
Revenues in the first quarter of fiscal 2000 were weaker in comparison to the first quarter revenues of fiscal 1999. The decrease in sales is directly attributable to the reorganization of China's telecom regulators, which was first announced in March of 1998, but has continued through to the end of June 1999. The restructuring has resulted in a general slowdown of telecom investments in China and as such the Company's lower sales results is not unexpected. Fortunately, the consolidation of the competing regulators is now largely complete and we are seeing an increase in telecom investments once again.
Financial Review
Revenues from operations for the three months ended June 30, 1999 were $1.6 million compared to $4.6 million for the three months ended June 30, 1998. As previously noted, the decline in sales is directly attributable to the restructuring of China's telecom sector.
General & administrative expenses for the first quarter were $1.5 million compared to $1.9 million for the same period last fiscal year, representing a decrease of 21%. The decrease is largely attributable to the Company's efforts to control operational costs to improve its net margins.
Research and development costs for the three months ended June 30, 1999 were $88,000, as compared to $107,000 incurred in the three months ended June 30, 1998. The Company's research and development efforts were reduced because its primary project, an automated fiber optics monitoring system, was placed in field trials in the latter half of the 1999 fiscal year and is nearing the commercialization stage.
Depreciation and amortization expenses in the first quarter of fiscal 2000 were $51,000 as compared to $62,000 for the same period last fiscal year. A lower asset base and minimal capital asset investments contributed to the expenditure decrease. Interest expense for the first three months of fiscal 2000 was nil as the Company did not incur any short or long-term debt during the period. Interest expense for the corresponding period last fiscal year was $6,000.
The Company's share of after tax earnings from its 30% equity investment in Shanghai Hua Cheng Telecommunications Equipment Co. Ltd. ("SHC") was $113,000 in the first quarter of fiscal 2000, as compared to $142,000 for the same period last year. As in the case of T S Telecom, SHC's financial results reflect the impact of China's telecom restructuring.
As a result of the foregoing, the Company realized a first quarter net loss of $992,000, as compared to net income of $175,000 in the first quarter of the 1999 fiscal year. The first quarter net loss reflects income taxes of $58,000.
Cash used in operations in the first quarter was $358,000, as compared to $9,000 for the corresponding period last fiscal year. The decrease in operating cash flows is primarily due to the net loss realized this quarter, and offset in part by a stronger non-cash working capital position. During the first quarter of fiscal 2000 cash provided by investing activities was $22,000, reflecting loan repayment by a related party of 23,000 offset by capital asset purchases of $1,000. As at June 30, 1999, the Company had cash and cash equivalent of $695,000 with no debt or overdraft position. By comparison, the Company's cash position at June 30, 1998 was $657,000, which includes a bank overdraft position of $189,000.
Back Orders
At June 30, 1999,T S Telecom has approximately $2.3 million of undelivered contracts on its order book. Substantially all of the Company's backorders at the end of the first quarter are expected to be finalized in the second quarter of this fiscal year. The Company records the revenues and costs associated with undelivered contracts upon shipment to customers.
Outlook
The results achieved by T S Telecom this quarter were disappointing but not unexpected in view of the extensive changes in our operating environment.The Company and its management have spent considerable time and resources in the past year to minimize the negative impact arising from these macro-environment changes, and more importantly to position the Company to benefit from these changes in future. With the telecom consolidation process now nearing its completion, telecom investments in China is on the rise and the Company fully expects to realize the benefits of its efforts in the ensuing months and years.
The Company will also move forward to market and deploy new products to take advantage of the industry's movement to wireless telephony, fiber deployment and broadband services. Operationally, we will review our business to identify areas for achievable cost savings, and then move to realize them. In China we have been and will continue to position ourselves to extend our reach and capability to do business.
As always, we would like to thank all of our shareholders for their continued commitment to T S Telecom. We are confident that the worse is over, and that T S Telecom is back on track for sustainable long-term growth.
Financial statements are available from the Company. TEL: (905) 470-2282
Raymond S. H. Lau, Chairman or
Ben T. W. Chong, President & CEO
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