SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended Commission File Number
March 31, 2002 1-13332
CABLETEL COMMUNICATIONS CORP.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ontario, Canada 8647 8526
- -------------------------------- ----------------------------------
(State or other jurisdiction of (Canadian Federal Tax Account No.)
incorporation or organization)
230 Travail Rd.
Markham, Ontario, Canada L3S 3J1
----------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (905) 475-1030
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock as of the latest practicable date:
Class Outstanding as at May 10, 2002
- -------------------------- ------------------------------
Common Stock, no par value 7,167,612
1
CABLETEL COMMUNICATIONS CORP.
FORM 10-Q
FOR THE QUARTER ENDED
MARCH 31, 2002
INDEX
PAGE NO.
--------
Part I. Financial Information
Item 1. Financial Statements
Balance Sheet as at
March 31, 2002 and December 31, 2001 3
Statement of Operations and Deficit
For the 3 month period ended March 31, 2002 and 2001 4
Statement of Cash Flows
For the 3 month period ended March 31, 2002 and 2001 5
Notes to Financial Statements 6 - 21
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 22 - 32
Item 3. Quantitative and Qualitative Disclosures of Market Risk 32
Part II. Other Information 33
Item 1. Legal Proceedings 33
Item 6. Exhibits and Reports on Form 8-K 33
The Company is a "Foreign Private Issuer" as defined in Rule 3b-4 under the
Securities Exchange Act of 1994, as amended. Although as a Foreign Private
Issuer the Company is eligible to file reports on Form 6-K, the Company has
voluntarily elected to file quarterly reports on Form 10-Q.
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CABLETEL COMMUNICATIONS CORP.
CONSOLIDATED BALANCE SHEETS
(CANADIAN FUNDS)
ASSETS
MARCH 31, DECEMBER 31,
2002 2001
------------ -------------
CURRENT
Cash $ 13,524 $ 12,292
Accounts receivable
(net of allowance of $616,421; 2001 - $847,194) 12,930,264 14,155,425
Inventory (Note 2) 10,242,918 10,629,957
Income taxes recoverable 154,981 120,000
Prepaid expenses, deposits and other 771,379 761,843
------------ ------------
24,113,066 25,679,517
PROPERTY, PLANT AND EQUIPMENT (Note 3) 2,235,444 2,297,821
OTHER ASSETS 604,809 606,720
OTHER RECEIVABLES (Note 8(i)) 224,000 220,000
PRODUCT DEVELOPMENT COSTS
(net of amortization of $77,628; 2001 - $69,011) 57,510 66,137
------------ ------------
$ 27,234,829 $ 28,870,195
============ ============
LIABILITIES
CURRENT
Bank indebtedness (Note 4) $ 10,367,665 $ 11,308,972
Accounts payable 7,692,557 8,757,675
Accrued liabilities 2,188,976 1,848,091
Long-term debt (Note 5) 172,120 171,385
------------ ------------
20,421,318 22,086,123
LONG-TERM DEBT (Note 5) 682,225 713,737
------------ ------------
21,103,543 22,799,860
============ ============
COMMITMENTS AND CONTINGENCIES (Note 9)
SHAREHOLDERS' EQUITY
CAPITAL STOCK (Note 6)
AUTHORIZED
Unlimited First preferred shares, issuable in series
Unlimited Common shares
ISSUED
7,167,612 Common shares (2001 - 7,167,612) 16,136,761 16,136,761
DEFICIT (10,005,475) (10,066,426)
------------ ------------
6,131,286 6,070,335
------------ ------------
$ 27,234,829 $ 28,870,195
============ ============
See accompanying notes to financial statements.
3
CABLETEL COMMUNICATIONS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
(CANADIAN FUNDS)
FOR THE THREE MONTHS ENDED MARCH 31,
2002 2001
------------ ------------
SALES $ 13,183,686 $ 14,536,333
COST OF SALES 10,735,672 12,118,557
------------ ------------
GROSS PROFIT 2,448,014 2,417,776
------------ ------------
EXPENSES
Selling, general and administrative 2,147,769 2,531,461
Amortization 65,085 59,421
Interest - bank indebtedness 147,524 256,796
Interest - long-term debt 17,685 24,705
------------ ------------
2,378,063 2,872,383
------------ ------------
EARNINGS (LOSS) BEFORE INCOME TAXES 69,951 (454,607)
Income taxes (recovery) 9,000 (239,693)
------------ ------------
NET EARNINGS (LOSS) FOR THE PERIOD 60,951 (214,914)
DEFICIT, beginning of period (10,066,426) (7,160,308)
------------ ------------
DEFICIT, end of period $(10,005,475) $ (7,375,222)
============ ============
EARNINGS (LOSS) PER SHARE (Note 7)
Basic $ 0.01 ($ 0.03)
============ ============
Fully diluted $ 0.01 ($ 0.03)
============ ============
See accompanying notes to financial statements.
4
CABLETEL COMMUNICATIONS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CANADIAN FUNDS)
FOR THE THREE MONTHS ENDED MARCH 31,
2002 2001
----------- -----------
OPERATING ACTIVITIES
Net income (loss) for the period $ 60,951 $ (214,914)
Imputed interest (4,000) (4,000)
Future income taxes -- (248,693)
Amortization 65,093 159,924
Change in provision for doubtful accounts (230,773) 110,500
Change in accounts receivable 1,455,934 7,650,264
Change in inventory 387,039 (3,696,819)
Change in other assets 1,911 --
Change in prepaid expenses, deposits and other (9,536) (553,434)
Change in accounts payable and accrued liabilities (724,233) (1,781,813)
Change in income taxes recoverable (34,981) --
----------- -----------
967,405 1,421,015
----------- -----------
FINANCING ACTIVITIES
Bank indebtedness (941,307) (1,095,621)
Issuance of common shares -- 5,671
Repayment of long-term debt (30,777) (41,892)
----------- -----------
(972,084) (1,131,842)
----------- -----------
INVESTING ACTIVITIES
(Purchase of) disposal of equipment 5,911 (153,346)
----------- -----------
5,911 (153,346)
----------- -----------
CHANGE IN CASH 1,232 135,827
CASH, beginning of period 12,292 38,219
=========== ===========
CASH, end of period $ 13,524 $ 174,046
=========== ===========
SUPPLEMENTARY CASH FLOW INFORMATION
Interest paid $ 169,209 $ 285,500
=========== ===========
Income taxes paid $ -- $ --
=========== ===========
See accompanying notes to financial statements.
5
CABLETEL COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CANADIAN FUNDS)
MARCH 31, 2002
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in Canada, which, except as
described in Note 12, conform, in all material respects, with the
accounting principles generally accepted in the United States.
(A) GENERAL
In the opinion of management, the accompanying unaudited financial
statements contain all adjustments (consisting of only normal
recurring adjustments) which, are necessary to present fairly the
consolidated financial position as at March 31, 2002 and the
consolidated results of operations and the consolidated cash flows for
the three months ended March 31, 2002 and 2001.
While management believes that the disclosures presented are adequate
to make the information not misleading, it is suggested that these
consolidated financial statements be read in conjunction with the
consolidated financial statements and the notes included in the
Company's latest annual report on Form 10-K.
The interim financial statements follow the same accounting policies
and methods of their application as the most recent annual financial
statements. However, the interim financial statements do not include
all disclosures necessary to conform in all respects to the
requirements of generally accepted accounting principles for annual
financial statements.
(B) CONSOLIDATION
The consolidated financial statements include the accounts of the
wholly-owned subsidiaries, Stirling (Israel) Ltd., and Stirling
Connectors, U.S.A., Inc.
The consolidated financial statements include the accounts of the
Company after eliminations of inter-company transactions.
(C) REVENUE RECOGNITION
Sales are recognized when legal title to the goods has been passed to
the customer, which generally occurs when products are shipped from
the Company's plant or warehouses, and collection is reasonably
assured.
6
CABLETEL COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CANADIAN FUNDS)
MARCH 31, 2002
2. INVENTORY
MARCH 31, DECEMBER 31,
2002 2001
----------- -----------
Raw Material $ 289,854 $ 284,258
Work in process 642,565 655,933
Finished goods 9,310,499 9,689,766
----------- -----------
$10,242,918 $10,629,957
=========== ===========
3. PROPERTY, PLANT AND EQUIPMENT
MARCH 31, 2002 DECEMBER 31, 2001
ACCUMULATED ACCUMULATED
----------------------------------- -----------------------------------
COST AMORTIZATION NET COST AMORTIZATION NET
--------- ------------ --------- --------- ------------ ---------
$ $ $ $ $ $
Leasehold improvements 690,090 250,569 439,521 688,024 235,296 452,728
Equipment 3,878,030 2,082,107 1,795,923 3,886,007 2,040,914 1,845,093
--------- --------- --------- --------- --------- ---------
4,568,120 2,332,676 2,235,444 4,574,031 2,276,210 2,297,821
========= ========= ========= ========= ========= =========
The Company did not amortize equipment with a carrying amount of $837,142
relating to certain manufacturing equipment during a period the equipment
was not in use. The Company assessed future cash flow based on the
Company's expected plan of operations and it was determined there was no
impairment in value. It is the Company's intention to utilize these assets
in its manufacturing operations over the current year.
4. BANK INDEBTEDNESS
At March 31, 2002, the bank indebtedness consisted of overdraft accounts,
bearing interest at prime plus 1.75% per annum and was secured by general
assignments of book debts and inventory, demand debentures constituting a
first fixed and floating charge on the remaining assets of the Company and
assignments of insurance.
On May 16, 2002, Cabletel entered into a Revolving Credit Facility
Agreement with LaSalle Business Credit, a division of ABN AMBRO BANK N.V.,
Canada Branch ("LaSalle") for a three year committed fifteen million
Canadian dollars (CAD$15,000,000), or its United States dollar equivalent.
Canadian Dollar borrowings under the Revolving Credit Facility will bear
interest at the LaSalle Prime Reference Rate plus one and a half percent
(1.5%). United States
7
CABLETEL COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CANADIAN FUNDS)
MARCH 31, 2002
4. BANK INDEBTEDNESS (continued)
Dollar borrowings under the Revolving Credit Facility will bear interest at
the LaSalle U.S. Base Reference Rate plus one and a half percent (1.5%).
The facilities are secured by a first priority security position in all
personal property (including without limitation accounts, contract rights,
inventory, machinery and equipment, second position in the case of certain
machinery and equipment securing a prior loan by the Business Development
Bank of Canada, and general intangibles), existing and future.
5. LONG-TERM DEBT
March 31, December 31,
2002 2001
-------- -----------
(i) Term loan-Leaseholds $346,945 $354,122
(ii) Term loan-Equipment 507,400 531,000
-------- --------
854,345 885,122
Less: Current portion 172,120 171,385
-------- --------
$682,225 $713,737
======== ========
(i) Long-term debt bears interest at 10% per annum, payable in equal
monthly installments of $5,264 (principal and interest) for ten years
until February 14, 2010. This debt was obtained for the improvements
of the building covered by a lease agreement and is payable to the
landlord, together with the monthly lease payments.
(ii) Long-term debt bears interest at Business Development Bank of Canada
("BDC") prime plus 0.75% per annum payable monthly over a period of 5
years. This debt was provided by the BDC to purchase production
machinery used in the manufacturing of connectors. BDC has provided a
total facility of $700,000 which is available to the company for
capital purchases and is collateralized by the assets acquired under
this facility.
Principal payments required in each of the next five years on long
term debt are as follows:
Term loan (i) Term loan (ii)
------------- --------------
2002 $29,785 $141,600
2003 32,838 141,600
2004 36,204 141,600
2005 39,914 106,200
2006 44,006 --
Beyond 2006 171,375 --
8
CABLETEL COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CANADIAN FUNDS)
MARCH 31, 2002
6. CAPITAL STOCK
NUMBER AMOUNT
----------- -----------
Balance, December 31, 2001 7,167,612 $16,136,761
Exercise of options -- --
----------- -----------
Balance, March 31, 2002 7,167,612 $16,136,761
=========== ===========
STOCK OPTION PLAN
Under the terms of a stock option plan approved by the shareholders in May,
1994 and amended in November of 1999, the Company is authorized to grant
directors, officers, employees and others options to purchase common shares
at prices based on the market price of shares as determined on the date of
grant. Stock options become exercisable at dates determined by the
Compensation Committee.
Common shares have been reserved for stock options on the following basis:
OPTION WEIGHTED
SHARES PRICE AVERAGE
---------- ----------- --------
$ $
OUTSTANDING AND EXERCISABLE
Balance at December 31, 2001 1,065,500 1.53 - 9.28 4.62
========== =========== ====
Granted 424,500 2.10 2.10
Cancelled (4,000) 1.53 - 9.28 7.34
---------- ----------- ----
Balance at March 31, 2002 1,486,000 1.53 - 9.28 3.89
========== =========== ====
9
CABLETEL COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CANADIAN FUNDS)
MARCH 31, 2002
7. EARNINGS PER SHARE
(A) BASIC EARNINGS PER SHARE
The weighted average number of shares outstanding amounted to
7,167,612 for the three months ended March 31, 2002 and 7,070,973 for
the three months ended March 31, 2001.
(B) FULLY DILUTED EARNINGS PER SHARE
The Company adopted the recommendations of CICA Handbook Section 3500,
Earnings per Share (EPS), effective January 1, 2001. The revised
section requires the presentation of both basic and diluted EPS on the
face of the income statement regardless of the materiality of
difference between them and requires the use of the treasury stock
method to compute the dilutive effect of options as opposed to the
former imputed earnings approach.
For the three months ended March 31, 2002 the exercise of outstanding
stock options do not have a dilutive effect on earnings (loss) per
share. The weighted average number of shares for diluted earnings per
share amounted to 7,623,211 and 7,217,865 for the three months ended
March 31, 2002 and 2001 respectively.
10
CABLETEL COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CANADIAN FUNDS)
MARCH 31, 2002
7. EARNINGS PER SHARE (continued)
The following table sets forth the computation of basic and diluted
earnings per share:
2002 2001
----------- -----------
NUMERATOR:
Net earnings (loss) and numerator for
basic earnings (loss) and for diluted
earnings (loss) per share $ 60,951 $ (214,914)
DENOMINATOR:
Weighted-average shares for basic
earnings per share 7,167,612 7,070,973
----------- -----------
EFFECT OF DILUTIVE SECURITIES:
Employee stock options 455,599 146,892
----------- -----------
Dilutive potential of common shares 455,599 146,892
----------- -----------
Adjusted weighted-average
shares and assumed conversions
for diluted earnings per share 7,623,211 7,217,865
----------- -----------
Basic earnings (loss) per share $ 0.01 ($ 0.03)
----------- -----------
Diluted earnings (loss) per share $ 0.01 ($ 0.03)
----------- -----------
8. RELATED PARTY TRANSACTIONS
(i) On December 12, 2000, the Company's Board of Directors approved two
executive loan agreements (i) to the President of the Company in the
amount of $150,000 and (ii) to the Chief Financial Officer of the
Company in the amount of $100,000. The loans mature on December 19,
2003, and are unsecured and interest-free. The Company carries these
loans at estimated fair value using a discount rate of 7% per annum.
11
CABLETEL COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CANADIAN FUNDS)
MARCH 31, 2002
8. RELATED PARTY TRANSACTIONS (continued)
(ii) For the three months ended March 31, 2002 the Company paid to the
Sullivan Group, an entity controlled by the President of the Company,
$13,950 and $13,950 for the three months ended March 31, 2001 relating
to charges in connection with Mr. Walling's compensation.
(iii) For the three months ended March 31, 2002 and 2001 the Company
incurred charges from Cassels, Brock & Blackwell LLP, a legal firm of
which Mr. Peterson, the Chairman of the Company is a Senior Partner,
amounting to $20,546 and $1,240 respectively for services they
provided.
9. COMMITMENTS AND CONTINGENCIES
(A) The Company is party to legal actions arising in the ordinary course
of its business. In management's opinion, the Company has adequate
insurance coverage and/or legal defenses with respect to any of these
actions and does not believe that they will materially affect the
Company's consolidated financial position or results of operations.
(B) On March 12, 2001, the Company announced that it had entered into an
agreement with Allied Wire and Cable Ltd., ("Allied") a leading
supplier of products to the cable and telecom sectors in Western
Canada, whereby Cabletel would acquire the privately-owned Allied
Group of Companies. The transaction was subject to the Company
obtaining necessary financing which had not materialized as of
December 31, 2001. As a result the Company and Allied are in the
process of restructuring the transaction.
As a result of normal business operations Allied owed Cabletel
$604,809. In connection with the negotiations, Cabletel expects to
convert this receivable into a convertible debenture investment in
Allied. The terms of the debenture are expected to be finalized by the
end of the second quarter.
12
CABLETEL COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CANADIAN FUNDS)
MARCH 31, 2002
10. SPECIAL CHARGES
For the year ended December 31, 2001, Cabletel recorded special charges of
$357,836 related to termination expenses of 42 employees, of which 32 were
engaged in manufacturing activities of Stirling Connectors and 10 were
related to inside sales and warehouse functions of Cabletel. As of March
31, 2002, the unpaid balance of these charges included in accrued
liabilities was $1,008. For the three months ended March 31, 2002 the
Company paid $202,977 relating to the previously recorded special charges.
11. SEGMENTED INFORMATION
The Company operates in three separate segments - distribution of broadband
communications equipment, distribution of technology equipment and
manufacturing of coaxial cable connectors.
It should be noted that industry segment information may be of limited
usefulness in comparing an industry segment of the Company with a similar
industry segment of another enterprise.
Selected information by operating segment is summarized below for the three
months ended March 31, 2002 and 2001.
13
CABLETEL COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CANADIAN FUNDS)
MARCH 31, 2002
11. SEGMENTED INFORMATION (continued)
SUMMARY OF BUSINESS SEGMENT
NET REVENUE
2002 2001
------------ ------------
Distribution $ 10,937,555 $ 10,946,460
Manufacturing 1,755,223 2,704,674
Technology 711,317 1,020,027
Less: Inter-company eliminations (220,409) (134,828)
------------ ------------
TOTAL NET REVENUE $ 13,183,686 $ 14,536,333
============ ============
GROSS PROFIT
2002 2001
------------ ------------
Distribution $ 1,835,421 $ 1,769,926
Manufacturing 511,013 441,968
Technology 101,580 205,882
------------ ------------
TOTAL GROSS PROFIT $ 2,448,014 $ 2,417,776
------------ ------------
Selling, general and administrative expenses (2,147,769) (2,531,461)
Amortization (65,085) (59,421)
Interest expense - other (147,524) (256,796)
- long-term debt (17,685) (24,705)
------------ ------------
(2,378,063) (2,872,373)
============ ============
Consolidated earnings (loss) before income taxes 69,951 (454,607)
============ ============
IDENTIFIABLE ASSETS:
2002 2001
------------ ------------
Distribution and Technology $ 18,704,003 $ 26,877,416
Manufacturing 8,375,845 10,563,233
Other unallocated assets 154,981 697,263
------------ ------------
TOTAL IDENTIFIABLE ASSETS $ 27,234,829 $ 38,137,912
============ ============
14
CABLETEL COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CANADIAN FUNDS)
MARCH 31, 2002
11. SEGMENTED INFORMATION (continued)
EXPENDITURES ON PROPERTY, PLANT AND EQUIPMENT
2002 2001
------------ ------------
Distribution and Technology $ 2,065 $ 63,563
Manufacturing (7,976) 89,783
------------ ------------
TOTAL EXPENDITURES $ (5,911) $ 153,346
============ ============
AMORTIZATION
(Includes amortization in cost of sales.)
2002 2001
------------ ------------
Distribution and Technology $ 53,305 $ 57,582
Manufacturing 11,788 102,342
------------ ------------
TOTAL AMORTIZATION $ 65,093 $ 159,924
============ ============
SUMMARY BY GEOGRAPHICAL AREA
NET REVENUE
(Revenues are attributed based on the location of the customer.)
2002 2001
------------ ------------
Canada $ 11,648,872 $ 11,966,487
United States 1,264,344 2,102,547
Other 270,470 467,299
------------ ------------
TOTAL NET REVENUE $ 13,183,686 $ 14,536,333
============ ============
PROPERTY, PLANT AND EQUIPMENT
(Property, Plant, Equipment and goodwill by geographical area are based on
location of facilities.)
2002 2001
---------- ----------
Canada $2,219,859 $2,444,952
United States 15,585 22,729
---------- ----------
TOTAL PROPERTY, PLANT AND EQUIPMENT $2,235,444 $2,467,681
========== ==========
15
CABLETEL COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CANADIAN FUNDS)
MARCH 31, 2002
12. UNITED STATES ACCOUNTING PRINCIPLES
In December 1999, the Securities and Exchange Commission (SEC) released
Staff Accounting Bulletin (SAB) No. 101, REVENUE RECOGNITION IN FINANCIAL
STATEMENTS. SAB No. 101 summarizes some views of the SEC on applying
accounting principles generally accepted in the United States to revenue
recognition in financial statements. The SEC believes that revenue is
realized or realizable and earned when all of the following criteria are
met: persuasive evidence of an arrangement exists, delivery has occurred or
services have been rendered, the seller's price to the buyer is fixed or
determinable and collectibility is reasonably assured. The Company believes
that its current revenue recognition policy complies with the SEC
guidelines.
The following table reconciles the net earnings (loss) as reported on the
statements of operations and deficit prepared in accordance with Canadian
GAAP to the net income that would have been reported had the financial
statements been prepared in accordance with U.S. GAAP.
2002 2001
------------ ------------
Net earnings (loss) in accordance with
Canadian GAAP $ 60,951 $ (214,914)
Reduction in amortization of
development costs (net of income taxes) 4,658 4,658
------------ ------------
Net earnings (loss) in accordance with
U.S. GAAP $ 65,609 $ (210,256)
============ ============
Total assets $ 27,177,319 $ 34,917,326
============ ============
Deficit $(10,038,562) $ (7,427,048)
============ ============
16
CABLETEL COMMUNICATIONS CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CANADIAN FUNDS)
MARCH 31, 2002
12. UNITED STATES ACCOUNTING PRINCIPLES (continued)
(A) EARNINGS PER SHARE
Earnings per share calculations under U.S. GAAP reflecting the Statement of
Financial Accounting Standards No. 128 (SFAS 128), for the three months
ended March 31, 2002 and 2001 would not differ materially from the
calculations required by the pronouncements of CICA handbook Section 3500
which was adopted at the commencement of Fiscal 2001.
(B) COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130 (SFAS 130), "Reporting
Comprehensive Income", establishes standards for the reporting and display
of comprehensive income and its components and requires restatement of all
previously reported information for comparative purposes. For the three
months ended March 31, 2002, and 2001 the Company's comprehensive income
was the same as net earnings.
(C) STATEMENT OF FINANCIAL ACCOUNTING STANDARD NO. 133 (SFAS 133)
The Company has reviewed SFAS 133 "Accounting for Derivative Instruments
and Hedging Activities". The statement establishes accounting and reporting
standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. SFAS
133 became effective for all fiscal quarters of fiscal years beginning
after June 18, 2000.
The Company has adopted the provisions of this statement as of January 1,
2001. The adoption of SFAS 133 does not have any material impact on the
Company's results of operations, financial position or cash flows.
17
CABLETEL COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CANADIAN FUNDS)
MARCH 31,2002
12. UNITED STATES ACCOUNTING PRINCIPLES (continued)
(D) ACCOUNTING FOR STOCK OPTIONS AND PRO-FORMA DISCLOSURES REQUIRED UNDER
SFAS 123
Issued by the Financial Accounting Standards Board in October, 1996,
Statement of Financial Accounting Standards No. 123, (SFAS 123),
"Accounting for Stock-Based Compensation", establishes financial
accounting and reporting standards for stock-based employee
compensation plans as well as transactions in which an entity issues
its equity instruments to acquire goods or services from
non-employees. This statement defines a fair value based method of
accounting for employee stock option or similar equity instruments,
and encourages all entities to adopt that method of accounting for all
their employee stock compensation plans. However, it also allows an
entity to continue to measure compensation cost for those plans using
the intrinsic value based method of accounting prescribed by
Accounting Principles Board Opinion No. 25, (APB 25), "Accounting for
Stock Issued to Employees".
Entities electing to remain with the accounting in APB 25 must make
pro-forma disclosures of net income and, if presented, earnings per
share, as if the fair value based methods of accounting defined by
SFAS 123 had been applied. SFAS 123 is applicable to fiscal years
beginning after December 15, 1996.
The Company accounts for its stock options under Canadian GAAP, which,
in the Company's circumstances are not materially different from the
amounts that would be determined under the provisions of the APB 25
and related interpretations in accounting for its stock option plan.
No compensation expense has been charged to the statement of
operations for the plan for the three months ended March 31, 2002 or
March 31, 2001. Had compensation expense for the Company's stock-based
compensation plan been determined based on the fair value at the grant
dates for awards under the Plan consistent with the method under SFAS
123, the Company's net income and earnings per share would have been
reported as the pro-forma amounts indicated in the table below.
The fair value of each option grant was estimated on the date of the
grant using the fair value recognition method, with the following
assumptions: risk free interest rate of 5% (2001 - 5%) dividend yield
of 0%, theoretical volatility assumption of .90 (2001 - .90), three
years vesting provision on all options granted in 2002 and 2001, and
the expected lives of options of 3 to 7 years (2001 - 3 to 7 years).
18
CABLETEL COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CANADIAN FUNDS)
MARCH 31, 2002
12. UNITED STATES ACCOUNTING PRINCIPLES (continued)
AS REPORTED
2002 2001
AS REPORTED AS REPORTED
----------- -----------
Net income (loss)
- U.S. GAAP $ 65,609 $(210,256)
Net earnings (loss) per share
Basic $ 0.01 $ (0.03)
Diluted $ 0.01 $ (0.03)
PRO-FORMA
2002 2001
PRO-FORMA PRO-FORMA
----------- -----------
Net income (loss)
- U.S. GAAP $(636,616) $(256,546)
Net earnings (loss) per share
Basic $ (0.09) $ (0.04)
Diluted $ (0.09) $ (0.04)
--------- ---------
Weighted average fair value of
options granted during this period $ 1.65 $ 2.10
(E) RECENT UNITED STATES ACCOUNTING PRONOUNCEMENTS
(i) On June 29, 2001, the FASB approved its proposed Statements of
Financial Accounting Standards No. 141 (SFAS 141), Business
Combinations, and SFAS 142, Goodwill and Other Intangible Assets. The
provisions of SFAS 141 and SFAS 142 are effective for fiscal years
beginning on or after January 1, 2002 with early adoption permitted
under certain circumstances. In all cases, the standard must be
adopted at the beginning of a fiscal year. Retroactive adoption is not
permitted.
19
CABLETEL COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CANADIAN FUNDS)
MARCH 31, 2002
12. UNITED STATES ACCOUNTING PRINCIPLES (continued)
SFAS 141 requires all business combinations to be accounted for under
the purchase method and requires the separate recognition of
intangible assets apart from goodwill if criteria are met. SFAS 142
prohibits the amortization of goodwill and indefinite life intangible
assets. Instead, goodwill and intangible assets are to be written down
whenever carrying value exceeds fair value. Intangible assets that do
not have an indefinite life must continue to be amortized. The Company
has assessed the standard and does not believe that adoption SFAS 141
and SFAS 142 will have a material impact on the Company's financial
statements.
(ii) In June 2001, the FASB approved the issuance of Statement of Financial
Accounting Standards No. 143, Accounting for Asset Retirement
Obligations (SFAS 143), which is effective for fiscal years beginning
on or after June 15, 2002. The standard establishes accounting
standards for recognition and measurement of legal obligations
associated with the retirement of tangible long-lived assets. The
Company has assessed the impact of the adoption of this new standard
and does not believe it will have a material impact on its financial
statements.
(iii)In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, Accounting for Impairment of Disposal of Long-lived
assets: (SFAS 144). SFAS 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. The
provisions of this statement are effective for financial statements
issued for fiscal years beginning after December 15, 2001. The Company
has assessed the impact of the adoption of this new standard and it
does not have a material impact on its financial statements.
20
CABLETEL COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CANADIAN FUNDS)
MARCH 31, 2002
13. SUBSEQUENT EVENTS
(A) On May 16, 2002, Cabletel entered into a Revolving Credit Facility
Agreement with LaSalle Business Credit, a division of ABN AMBRO BANK
N.V., Canada Branch ("LaSalle") for a three year committed fifteen
million Canadian dollars (CAD$15,000,000), or its United States dollar
equivalent. Canadian Dollar borrowings under the Revolving Credit
Facility will bear interest at the LaSalle Prime Reference Rate plus
one and a half percent (1.5%). United States Dollar borrowings under
the Revolving Credit Facility will bear interest at the LaSalle U.S.
Base Reference Rate plus one and a half percent (1.5%). The facilities
are secured by a first priority security position in all personal
property (including without limitation accounts, contract rights,
inventory, machinery and equipment second position in the case of
certain machinery and equipment securing a prior loan by the Business
Development Bank of Canada and general intangibles), existing and
future. (See Note 4)
(B) On April 12, 2002, the Company entered into an agreement to take over
the Stirling Connector business of its US distributor, N-R-G Control
Company ("N-R-G") of Jackson, Mississippi. The agreement includes a
provision to engage the principal of N-R-G as an agent and allows him
to earn certain commissions on sales to U.S. customers conditional
upon certain conditions being met for a period of 2 years beginning
April 12, 2002.
Included in accounts receivable at March 31, 2002 is a net amount of
$801,600 relating to the sale of products to N-R-G in the ordinary
course of business. N-R-G returned for credit approximately $300,000
of product to the Company. The Company had previously set up an
allowance totaling $204,400 as a reserve for the gross margin impact
of the anticipated return of product. A balance of approximately
$400,000 remains in accounts receivable related to N-R-G, an amount
which is equal to approximately one year of commissions and fees that
N-R-G would earn under the agreement.
(C) Contemporaneously with the Company entering into the new Revolving
Credit Facility, the Company renegotiated credit terms with a major
supplier. That renegotiation included the conversion of US $2.2
million in outstanding payables owed by the Company into a senior
subordinated promissory note. The senior subordinated promissory note
is in the principal amount of US $2.2 million, bears interest at the
rate of 12 % per annum and is repayable in agreed upon monthly
installments of between US $60,000 and US $120,000 over the next two
years. In connection with that renegotiation, the Company also issued
to the supplier a Warrant to acquire up to 200,000 shares of the
Company's common stock at an exercise price of Cdn $1.64 per share.
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2002
Consolidated net sales for the three months ended March 31, 2002 decreased by
$1,352,647 or 9% to $13,183,686 as compared to consolidated net sales of
$14,536,333 for the three months ended March 31, 2001. Reduced volumes in the
Manufacturing and Technology segments are reflective of the financial and market
conditions that impacted growth in the cable industry resulting in reduced
capital spending by the Canadian cable operators.
The following table shows comparative sales by segment:
Net Sales
Three Months Ended
March 31,
-----------------------------
2002 2001
------------ ------------
Distribution $ 10,937,555 $ 10,946,460
Manufacturing 1,755,223 2,704,674
Technology 711,317 1,020,027
Less: Inter-company sales (220,409) (134,828)
------------ ------------
Net Sales $ 13,183,686 $ 14,536,333
============ ============
Net sales of $10,937,555 in the Distribution segment for the three months
ended March 31, 2002 reflects a decrease of $8,905 compared to $10,946,460 for
the three months ended December 31, 2001. The negligible change is indicative of
a stabilization in capital spending by Canadian cable operators.
Net sales in the Manufacturing segment of $1,755,223 for the three months
ended March 31, 2002, reflects a decrease of $949,451 or 35% when compared to
$2,704,674 for the three months ended March 31, 2001. The decrease is primarily
due to a slow down in the growth in the cable industry. Also sales to foreign
countries for the three months ended March 31, 2002 were $1,534,814 compared to
$2,569,846 for the three months ended March 31, 2001. The decrease is primarily
due to lower sales to major satellite companies. The Company has taken
aggressive action in an attempt to increase sales to the U.S., by establishing
offices and warehousing facilities in Indiana to facilitate distribution of
products. In addition, the Company established sales forces throughout the U.S.
to better service customers.
22
Net sales of $711,317 in the Technology segment for the three months ended
March 31, 2002 reflects a decrease of $308,710 or 30% when compared to
$1,020,027 for the three months ended March 31, 2001. The decrease is primarily
due to project postponements in the net working industry.
Gross profit for the three months ended March 31, 2002 of $2,448,014
increased $30,238 or 1% compared to gross profit of $2,417,776 for the three
months ended March 31, 2001. Gross margin for the three months ended March 31,
2002 was 19% as compared to 17% for the three months ended March 31, 2001. The
primary reason for the increase in gross margin for the three months ended March
31, 2002 results from better efficiencies achieved in the Company's
Manufacturing segment and is also reflective of a change in product mix in the
Distribution segment.
Gross profit of $1,835,421 in the Cabletel Distribution segment for the
three months ended March 31, 2001 reflects an increase of $65,495 or 4% when
compared to $1,769,926 for the three months ended March 31, 2001. Cabletel
Distribution segment gross margin for the three months ended March 31, 2002 was
17% an increase compared to a gross margin of 16% for the three months ended
March 31, 2001. The increase is primarily due to a change in product mix.
Gross profit of $511,013 in the Manufacturing segment for the three months
ended March 31, 2002 reflects an increase of $69,045 or 16% when compared to
gross profit of $441,968 for the three months ended March 31, 2001. The increase
is primarily due to better manufacturing efficiencies achieved by eliminating
unfavorable production variances through cost cutting measures implemented in
the third quarter of 2001. The Company is currently purchasing Stirling
connector products from its supplier in the far east and manufacturing selective
products locally.
Gross profit of $101,580 in the Technology segment for the three months
ended March 31, 2002 reflects a decrease of $104,302 or 51% when compared to
$205,882 for the three months ended March 31, 2001. Technology segment gross
margin for the three months ended March 31, 2002 was 14%, which is lower than
the prior period gross margin of 20%. The Technology segment experienced the
effects of a slowdown in the industry resulting in a more competitive
environment.
Selling, general and administrative expenses for the three months ended
March 31, 2002 decreased $383,692 or 15% to $2,147,769 when compared to
$2,531,461 for the three months ended March 31, 2001. As a percentage of sales,
selling, general and administrative expenses for the three months ended March
31, 2002 were 16% compared to 17% for the three months ended March 31, 2001. The
Company has made a conscious effort to reduce certain costs which have
contributed in returning the Company to profitability.
23
Interest expense decreased $116,292 to $165,209 for the three months ended
March 31, 2002 compared to $281,501 for the three months ended March 31, 2001.
The decrease in interest expense reflects lower interest rates on borrowings of
the Company's line of credit with HSBC Bank Canada during the year as well as
interest expense on long-term debt acquired to purchase equipment and perform
leasehold improvements.
Earnings from operations before taxes for the three months ended March 31,
2002 was $69,951 as compared to a loss from operations before taxes of $454,607
for the three months ended March 31, 2001. Total operating expenses of
$2,378,063 for the three months ended March 31, 2002 were $494,320 lower than
$2,872,383 reported for the three months ended March 31, 2001.
Income taxes for the three months ended March 31, 2002 were $9,000 compared
to a recovery of $454,607 for the three months ended March 31, 2001. In
assessing its tax future assets, management considers whether it is more likely
than not that some portion or all of the future tax assets will be recognized.
The ultimate realization of future tax assets is dependent upon the generation
of future taxable income during the periods in which those temporary differences
become deductible. Management considers the projected future taxable income
projections for future taxable income over the periods, which the future tax
assets are deductible. During the year ended December 31, 2001, management
re-evaluated the likelihood of realization of the benefits of the future tax
assets and decided to revise the valuation allowance, as a result the balance of
future income taxes as of December 31, 2001 were reduced to nil.
Net income for the three months ended March 31, 2002 was $60,951 compared
to a net loss of $214,914 for the three months ended March 31, 2001. Basic
income per share was $0.01 for the three months ended March 31, 2002 compared to
basic loss per share of $0.03 for the three months ended March 31, 2001. Fully
diluted income per share was $0.01 for the three months ended March 31, 2002
compared to fully diluted loss per share of $0.03 for the three months ended
March 31, 2001.
FINANCIAL LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has funded its working capital requirements
through cash flow generated by its operations and bank indebtedness. Net cash of
$972,084 was used during the three months ended March 31, 2002 for financing
activities. Of such amount $941,307 was used to repay bank indebtedness and
$30,777 was used to repay long-term debt on a term loan from the landlord of the
Company's head office building.
24
Net cash provided by operating activities for the three months ended March
31, 2002 was $967,405. Cash flow from reductions in accounts receivable and
inventory was $1,455,934 and $387,039, respectively. Offsetting the inflows were
outflows of cash used to reduce accounts payable and accrued liabilities in the
amount of $724,233.
Net cash provided by investing activities for the three months ended March
31, 2002 was $5,911 relating to the disposition of capital assets.
On May 16, 2002, Cabletel entered into a Revolving Credit Facility
Agreement with LaSalle Business Credit, a division of ABN AMBRO BANK N.V.,
Canada Branch ("LaSalle") for a three year committed fifteen million Canadian
dollars (CAD$15,000,000), or its United States dollar equivalent. The new
facility replaces the Company's previous $12 million credit facility with HSBC
Bank Canada. With this new facility, Cabletel is well positioned to support and
accelerate its current level of activity and enhance the Company's growth
potential. Contemporaneously with the Company entering into the new Revolving
Credit Facility, the Company renegotiated credit terms with a major supplier.
That renegotiation included the conversion of US $2.2 million in outstanding
payables owed by the Company into a senior subordinated promissory note.
Changes in spending patterns of Cabletel's key customers will have a direct
effect on the results of the Company's operations and financial condition. In
particular, sales to Rogers Cable Systems Limited, East Link Cablesystems,
COGECO Cable Inc., Shaw Communications Inc., and Regional Cablesystems,
Cabletel's largest customers which have accounted for approximately 21%, 9%, 6%,
5% and 5% respectively for the 12 month period ending December 31, 2001, of the
Company's total sales. Any future decision by Rogers Cablesystems Limited or
East Link Cablesystems, to reduce purchases could have a material adverse effect
on the Company's business, results of operations, and financial condition.
The Company does not engage in any hedging activities, including, currency
hedging activities, in connection with purchases of merchandise from the United
States, sales to foreign countries, and distribution operation in Israel.
SUBSEQUENT EVENTS
(A) On May 16, 2002, Cabletel entered into a Revolving Credit Facility
Agreement with LaSalle Business Credit, a division of ABN AMBRO BANK
N.V., Canada Branch ("LaSalle") for a three year committed fifteen
million Canadian dollars (CAD$15,000,000), or its United States dollar
equivalent. Canadian Dollar borrowings under the Revolving Credit
Facility will bear interest at the LaSalle Prime Reference Rate plus
one and a half percent (1.5%). United States Dollar borrowings under
the Revolving Credit Facility will bear interest at the LaSalle U.S.
Base Reference Rate plus one and a half percent (1.5%). The facilities
are secured
25
by a first priority security position in all personal property
(including without limitation accounts, contract rights, inventory,
machinery and equipment, second position in the case of certain
machinery and equipment securing a prior loan by the Business
Development Bank of Canada, and general intangibles), existing and
future. (See Note 4)
(B) On April 12, 2002, the Company entered into an agreement to take over
the Stirling Connector business of its US distributor, N-R-G Control
Company ("N-R-G") of Jackson, Mississippi for approximately U.S.
$500,000 payable over 2 years beginning May 1, 2002.
Included in accounts receivable at March 31, 2002 is a net amount of
$801,600 relating to the sale of products to N-R-G in the ordinary
course of business. N-R-G returned for credit approximately $300,000
of product to the Company. The Company had previously set up an
allowance for bad debt totaling $204,400 as a reserve for the gross
margin impact of the anticipated return of product.
(C) Contemporaneously with the Company entering into the new Revolving
Credit Facility, the Company renegotiated credit terms with a major
supplier. That renegotiation included the conversion of US $2.2
million in outstanding payables owed by the Company into a senior
subordinated promissory note. The senior subordinated promissory note
is in the principal amount of US $2.2 million, bears interest at the
rate of 12 % per annum and is repayable in agreed upon monthly
installments of between US $60,000 and US $120,000 over the next two
years. In connection with that renegotiation, the Company also issued
to the supplier a Warrant to acquire up to 200,000 shares of the
Company's common stock at an exercise price of Cdn $1.64 per share.
OTHER
The Company's Consolidated Financial Statements have been prepared in
accordance with accounting principles generally accepted in Canada. Any material
impact of the recently issued Statements of the United States Financial
Accounting Standards Board ("FASB") which have not been adopted and, for which a
Canadian counterpart has not been issued, are described in a footnote to the
Company's Consolidated Financial Statements at the required time of adoption of
the Statement in the United States.
26
INFLATION
The Company believes that the relatively moderate rates of inflation in
recent years have not had a significant impact on its net revenues or
profitability. Historically, the Company has been able to offset any
inflationary effects by either increasing or improving cost efficiencies.
RECENT UNITED STATES ACCOUNTING PRONOUNCEMENTS
(i) On June 29, 2001, the FASB approved its proposed Statements of Financial
Accounting Standards No. 141 (SFAS 141), Business Combinations, and SFAS
142, Goodwill and Other Intangible Assets. The provisions of SFAS 141 and
SFAS 142 are effective for fiscal years beginning on or after January 1,
2002 with early adoption permitted under certain circumstances. In all
cases, the standard must be adopted at the beginning of a fiscal year.
Retroactive adoption is not permitted.
SFAS 141 requires all business combinations to be accounted for under the
purchase method and requires the separate recognition of intangible assets
apart from goodwill if criteria are met. SFAS 142 prohibits the
amortization of goodwill and indefinite life intangible assets. Instead,
goodwill and intangible assets are to be written down whenever carrying
value exceeds fair value. Intangible assets that do not have an indefinite
life must continue to be amortized. The Company has assessed the standard
and does not believe that adoption SFAS 141 and SFAS 142 will have a
material impact on the Company's financial statements.
(ii) In June 2001, the FASB approved the issuance of Statement of Financial
Accounting Standards No. 143, Accounting for Asset Retirement Obligations
(SFAS 143), which is effective for fiscal years beginning on or after June
15, 2002. The standard establishes accounting standards for recognition and
measurement of legal obligations associated with the retirement of tangible
long-lived assets. The Company has assessed the impact of the adoption of
this new standard and does not believe it will have a material impact on
its financial statements.
(iii)In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, Accounting for Impairment of Disposal of Long-lived
assets: (SFAS 144). SFAS 144 addresses financial accounting and reporting
for the impairment or disposal of long-lived assets. The provisions of this
statement are effective for financial statements issued for fiscal years
beginning after December 15, 2001. The Company has assessed the impact of
the adoption of this new standard and it does not have a material impact on
its financial statements.
27
FORWARD LOOKING STATEMENTS
Certain information and statements contained in this Management Discussion
and Analysis of Financial Condition and Results of Operations and other sections
of this report, including statements using terms such as "may," "expect,"
"anticipate," "intend," "estimate," "believe," "plan," "continue," "could be,"
or similar variations or the negative thereof, constitute forward looking
statements with respect to the financial condition, results of operations, and
business of Cabletel, including statements that are based on current
expectations, estimates, forecasts, and projections about the markets in which
the Company operates, the margins it expects from its products and its
expectations regarding selling, general and administrative expenses, as well as
management's beliefs and assumptions regarding these markets. Any statements
that are not statements about historical facts also are forward looking
statements. The Private Securities Litigation Reform Act of 1995 (the
"Litigation Reform Act") provides a "safe harbor" for forward looking
statements. These Cautionary Statements are being made pursuant to the
provisions of the Litigation Reform Act and with the intention of obtaining the
benefits of the terms of the "safe harbor" provisions of the Act. In order to
comply with the terms of the "safe harbor," the Company cautions investors that
any forward looking statements made by the Company are not guarantees of future
performance and that a variety of factors could cause the Company's actual
results to differ materially from the anticipated results or other expectations
expressed in the Company's forward looking statements. Several factors that
could cause results or events to differ from current expectations are discussed
below. These factors are not intended to be an all-encompassing list of risks
and uncertainties that may affect the operations, performance, development and
results of the Company's business. In providing forward looking statements, the
Company is not undertaking any obligation to update publicly or otherwise these
statements, whether as a result of new information, future events or otherwise.
28
RISK FACTORS
Rapid Technological change and voice data convergence
Cabletel expects that data communications traffic will grow substantially
in the future compared to the modest growth expected for voice traffic. The
growth of data traffic is expected to have a significant impact on traditional
voice networks and create market discontinuities that should drive the
convergence of data and telephony. Many of the Company's traditional customers
have already been investing in data networking and that trend is expected to
continue. Due to the evolving nature of the communications industry and the
technologies involved, there can be no assurance as to the rate of such
convergence.
Rapidly changing technologies, evolving industry standards, frequent new
product introductions, and relatively short product life cycles characterize the
markets for Cabletel's products. The Company's success is expected to depend, in
substantial part, on the timely and successful introduction of new products and
upgrades of current products to comply with emerging industry standards and to
address competing technological and product developments achieved by its
competitors. The success of new or enhanced products is dependent on a number of
factors including the timely introduction of such products, market acceptance of
new technologies and industry standards, and the pricing and marketing of such
products. An unanticipated change in one or more of the technologies affecting
telecommunications and data networking, or in market demand for products based
on specific technology could have a material adverse effect on the business,
results of operations, and financial condition of the Company if it fails to
respond in a timely and effective manner to such changes.
Competition
All aspects of Cabletel's business are highly competitive. Cabletel
competes for sales with national, regional and local distributors, wholesalers
and manufacturers of products for the cable television industry. Various
manufacturers that supply Cabletel also sell their products to Canadian cable
television operators directly or through commissioned agents. In addition,
because of the convergence of the cable telecommunications and computer
industries and rapid technological development, new competitors may seek to
enter the Canadian cable television distribution market. Many of Cabletel's
competitors or potential competitors are substantially larger and have greater
resources than the Company. Increased competition could result in price
reductions, reduced profit margins, and loss of market share, each of which
could have a material adverse effect on the business, results of operations, and
financial condition of the Company.
29
Cabletel's commodity products compete on the basis of price and delivery
time. Cabletel's higher technology products, such as transmitters and receivers,
compete on the basis of product and specifications and functionality, as well as
price.
International Growth, Foreign Exchange, and Interest Rates
Cabletel intends to continue to pursue growth opportunities in
international markets. In many international markets, long-standing
relationships, including local content requirements and type approvals, create
barriers to entry. In addition, pursuit of such international growth
opportunities may require significant investments for an extended period before
returns on such investments, if any, are realized. Such projects and investments
could be adversely affected by reversals or delays in opening of foreign markets
to new competitors, exchange controls, currency fluctuations, investment
policies, repatriation of cash, naturalization, social and political risks,
taxation and other factors, depending on the country in which such opportunities
arise. Difficulties in foreign financial markets and economies, and of foreign
financial institutions, could adversely affect demand from customers in the
affected countries.
In order to grow internationally, it is expected that the Company will be
required to provide significant amounts of customer financing in connection with
the sale of products and services.
Capital Spending of Key Customers
Changes in spending patterns of Cabletel's key customers will have a direct
effect on the results of the Company's operations and financial condition. In
particular, sales to Rogers Cable Systems Limited, East Link Cablesystems,
COGECO Cable Inc., Shaw Communications Inc., and Regional Cablesystems,
Cabletel's largest customers which have accounted for approximately 21%, 9%, 6%,
5% and 5% respectively for the 12 month period ending December 31, 2001, of the
Company's total sales. Any future decision by Rogers Cablesystems Limited or
East Link Cablesystems, to reduce purchases could have a material adverse effect
on the Company's business, results of operations, and financial condition.
30
General Industry and Market Conditions and Growth Rates
Cabletel's future operating results may be affected by various trends and
factors that must be managed in order to achieve desired operating results. In
addition, there are trends and factors beyond the Company's control, which
affect its operations. Such trends and factors include general domestic or
global economic conditions as well as competitive, technological, and regulatory
developments and trends specific to the Company's industry, customers and
markets. These conditions and events could be substantially different than
believed or expected and these differences may cause actual results to vary
materially from the forward looking statements made or the results which could
be expected to accompany such statements.
Cabletel competes in a highly volatile and rapidly growing industry that is
characterized by vigorous competition for market share and rapid technological
development carried out amidst uncertainty over adoption of industry standards
and protection of intellectual property rights. These factors could result in
aggressive pricing practices and growing competition both from start-up
companies and from well-capitalized communication companies.
Consolidations in the Telecommunications Industry
The telecommunications industry has experienced the consolidation of many
industry participants and this trend is expected to continue. Cabletel and one
or more of its competitors may each supply products to the corporations that
have merged or will merge. This consolidation could result in delays in
purchasing decisions by the merged corporations with the Company playing a
greater or lesser role in supplying the communications products to the merged
entity. These purchasing decisions of the merged companies could have a material
adverse effect on the Company's business, results of operations, and financial
condition.
Mergers among the supplier base have recently increased and this trend is
also expected to continue. The larger combined companies with pooled capital
resources may be able to provide solution alternatives with which the Company
would be put at a disadvantage to compete. The larger breadth of product
offerings these consolidated suppliers could provide could result in customers
electing to trim their supplier base for the advantages of one-stop shopping
solutions for all their product needs. These consolidated supplier companies
could have a material adverse effect on the Company's business, results of
operations, and financial conditions. Current and future strategic alliances and
acquisitions will play a strong role in the Company's ability to compete within
this changing landscape.
31
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISK
The following discussion of the Company's risk-management activities
includes "forward looking statements" that involve risks and uncertainties.
Actual results could differ materially from those projected in the forward
looking statements.
Cabletel is exposed to various market risks, including interest rates and
foreign currency rates. Changes in these rates may adversely affect its results
of operations and financial condition. To manage the volatility relating to
these typical business exposures, Cabletel may enter into various derivative
transactions, when appropriate. Cabletel does not hold or issue derivative
instruments for trading or other speculative purposes. As of March 31, 2002, the
Company had no material contracts denominated in foreign currencies.
The Company is exposed to foreign currency exchange rate risk as a result
of sales of its products in various foreign countries and manufacturing
operations conducted in Israel. In order to minimize the risks associated with
foreign currency fluctuations, most sales contracts are issued in either
Canadian or U.S. dollars. The Company constantly monitors the exchange rate
between the U.S. dollar, the Canadian dollar and the New Israel shekel to
determine if any adverse exposure exists relative to its costs of manufacturing.
The Company does not maintain New Israel shekel denominated currency. Instead,
U.S. dollars are exchanged for shekels at the time of payments.
32
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is party to legal actions arising in the ordinary course of its
business. In management's opinion, the Company has adequate insurance coverage
and/or legal defenses with respect to any of these actions and does not believe
that they will materially affect the Company's consolidated financial position
or results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
(i) The Company filed a current report on Form 8-K dated February 4,
2002. Under ITEM 5 of that 8-K the Company announced that its
primary bank lender had agreed to extend the expiration of the
term of the Company's existing bank line from January 31, 2002 to
February 28, 2002.
(ii) The Company filed a current report on Form 8-K dated March 1,
2002. Under ITEM 5 of that 8-K the Company announced that it had
received credit approval from a major asset-based lender for a
new credit facility to replace its existing operating bank line.
33
SIGNATURES
Pursuant to requirements of the Securities Exchange Act of 1934, the Company has
duly caused this report to be filed on its behalf by the undersigned, thereunto
duly authorized.
CABLETEL COMMUNICATIONS CORP.
Date: May 17, 2002 By: /s/ Gregory Walling
----------------------------------
Gregory Walling
President and Chief Executive Officer
Date: May 17, 2002 By: /s/ Ron Eilath
----------------------------------
Ron Eilath
Chief Financial Officer and
Secretary Treasurer
34