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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
June 30, 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
incorporation or organization) Account No.)
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 August 9, 2002
- -------------------------- --------------------------------
Common Stock, no par value 7,167,612
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CABLETEL COMMUNICATIONS CORP.
FORM 10-Q
FOR THE QUARTER ENDED
JUNE 30, 2002
INDEX
PAGE NO.
----------
Part I. Financial Information
Item 1. Financial Statements
Balance Sheet as at
June 30, 2002 and December 31, 2001 3
Statement of Operations and Deficit
For the 3 and 6 month periods ended June 30, 2002 and 2001 4
Statement of Cash Flows
For the 3 and 6 month periods ended June 30, 2002 and 2001 5
Notes to Financial Statements 6 - 19
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 20 - 29
Item 3. Quantitative and Qualitative Disclosures of Market Risk 29
Part II. Other Information 30
Item 1. Legal Proceedings 30
Item 6. Exhibits and Reports on Form 8-K 30
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
JUNE 30, DECEMBER 31,
2002 2001
------------ -------------
CURRENT
Cash $ 41,081 $ 12,292
Accounts receivable
(net of allowance of $275,008; 2001 - $847,194) 17,524,270 14,155,425
Inventory (Note 2) 10,083,930 10,629,957
Income taxes recoverable 200,192 120,000
Prepaid expenses and deposits 958,944 761,843
------------ ------------
28,808,417 25,679,517
PROPERTY, PLANT AND EQUIPMENT (Note 3) 2,197,229 2,297,821
DEFERRED REFINANCING FEES 766,667 --
OTHER (Note 9 b) 228,000 826,720
PRODUCT DEVELOPMENT COSTS
(net of amortization of $86,254; 2001 - $69,011) 48,884 66,137
------------ ------------
$ 32,049,197 $ 28,870,195
============ ============
LIABILITIES
CURRENT
Bank indebtedness (Note 4) $ 13,223,523 $ 11,308,972
Accounts payable 6,340,648 8,757,675
Accrued liabilities 3,169,428 1,848,091
Long-term debt (current portion of long-term debt) (Note 5) 1,446,482 171,385
------------ ------------
24,180,081 22,086,123
LONG-TERM DEBT (Note 5) 2,247,984 713,737
------------ ------------
26,428,065 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
Paid in Capital - Warrant 164,000 --
DEFICIT (10,679,629) (10,066,426)
------------ ------------
5,621,132 6,070,335
------------ ------------
$ 32,049,197 $ 28,870,195
============ ============
See accompanying notes to financial statements.
3
CABLETEL COMMUNICATIONS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
(CANADIAN FUNDS)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30,
FOR THE THREE MONTH FOR THE SIX MONTH
PERIOD ENDED JUNE 30, PERIOD ENDED JUNE 30,
2002 2001 2002 2001
---- ---- ---- ----
SALES $ 14,960,379 $13,766,543 $ 28,144,065 $28,302,876
COST OF SALES 12,297,387 11,111,563 23,033,059 23,230,120
------------ ----------- ------------ -----------
GROSS PROFIT 2,662,992 2,654,980 5,111,006 5,072,756
------------ ----------- ------------ -----------
EXPENSES
Selling, general and administrative 2,248,282 2,499,594 4,396,051 5,031,056
Amortization 55,220 61,628 120,305 121,049
Interest -- bank indebtedness 179,261 192,167 326,785 448,962
Interest -- long-term debt 76,574 22,863 94,259 47,568
------------ ----------- ------------ -----------
2,559,337 2,776,252 4,937,400 5,648,635
------------ ----------- ------------ -----------
INCOME (LOSS) BEFORE THE FOLLOWING 103,655 (121,272) 173,606 (575,879)
------------ ----------- ------------ -----------
Write off of other assets (Note 9 b) 604,809 -- 604,809 --
Loss on settlement of debt (Note 5iii) 164,000 -- 164,000 --
------------ ----------- ------------ -----------
768,809 -- 768,809 --
------------ ----------- ------------ -----------
LOSS BEFORE INCOME TAXES (665,154) (121,272) (595,203) (575,879)
Income taxes 9,000 (29,366) 18,000 (269,059)
------------ ----------- ------------ -----------
NET LOSS FOR THE PERIOD $ (674,154) $ (91,906) $ (613,203) $ (306,820)
------------ ----------- ------------ -----------
DEFICIT, beginning of period $(10,005,475) $(7,375,222) $(10,066,426) $(7,160,308)
------------ ----------- ------------ -----------
DEFICIT, end of period $(10,679,629) $(7,467,128) $(10,679,629) $(7,467,128)
============ =========== ============ ===========
EARNINGS (LOSS) PER SHARE (Note 7)
Basic ($0.09) ($0.01) ($ 0.09) ($0.04)
====== ====== ======= ======
Fully diluted ($0.09) ($0.01) ($ 0.09) ($0.04)
====== ====== ======= ======
See accompanying notes to financial statements.
4
CABLETEL COMMUNICATIONS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CANADIAN FUNDS)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30,
FOR THE THREE MONTH FOR THE SIX MONTH
PERIOD ENDED JUNE 30, PERIOD ENDED JUNE 30,
2002 2001 2002 2001
---- ---- ---- ----
OPERATING ACTIVITIES
Loss for the period $ (674,154) $ (91,906) $ (613,203) $ (306,820)
Imputed interest (4,000) (4,000) (8,000) (8,000)
Write off of other assets 604,809 -- 604,809 --
Loss on settlement of debt 164,000 -- 164,000 --
Future income taxes -- (38,366) -- (287,059)
Amortization 111,646 155,044 176,739 314,968
Change in accounts receivable (4,594,006) (808,605) (3,368,845) 6,952,159
Change in inventory 158,988 2,387,163 546,027 (1,309,656)
Change in other assets -- -- 1,911 --
Change in prepaid expenses,
deposits and other (987,566) (70,935) (997,102) (624,369)
Change in accounts payable
and accrued liabilities 2,697,207 (915,335) 1,972,974 (2,697,148)
Change in income taxes recoverable (45,211) -- (80,192) --
----------- ---------- ----------- -----------
$(2,568,287) 613,060 (1,600,882) 2,034,075
----------- ---------- ----------- -----------
FINANCING ACTIVITIES
Bank indebtedness incurred (repayment) 2,855,858 (719,842) 1,914,551 (1,815,463)
Issuance of common shares -- 144,952 -- 150,623
Repayment of long-term debt (228,543) (42,070) (259,320) (83,962)
----------- ---------- ----------- -----------
2,627,315 (616,960) 1,655,231 (1,748,802)
----------- ---------- ----------- -----------
INVESTING ACTIVITIES
(Purchase of) disposal of equipment (31,471) (90,477) (25,560) (243,823)
----------- ---------- ----------- -----------
(31,471) (90,477) (25,560) (243,823)
----------- ---------- ----------- -----------
CHANGE IN CASH 27,557 (94,377) 28,789 41,450
CASH, beginning of period 13,524 174,669 12,292 38,219
=========== ========== =========== ===========
CASH, end of period $ 41,081 $ 79,669 $ 41,081 $ 79,669
=========== ========== =========== ===========
SUPPLEMENTARY CASH FLOW INFORMATION
Interest paid $ 259,835 $ 219,030 $ 429,044 $ 504,530
=========== ========== =========== ===========
Income taxes paid $ -- $ -- $ -- $ --
=========== ========== =========== ===========
See accompanying notes to financial statements.
5
CABLETEL COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CANADIAN FUNDS)
JUNE 30, 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 June
30, 2002 and the consolidated results of operations and the
consolidated cash flows for the three and six months ended
June 30, 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.
(d) DEFERRED REFINANCING FEES
Deferred refinancing fees are amortized over three years being
the life of the loan.
6
CABLETEL COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CANADIAN FUNDS)
JUNE 30, 2002
2. INVENTORY
Inventory is valued at the lower of cost (first-in, first-out) and net
realizable value. Cost includes appropriate elements of duty, freight,
material, labour and overhead.
JUNE 30, DECEMBER 31,
2002 2001
----------- ------------
Raw Material $ 275,612 $ 284,258
Work in process 557,798 655,933
Finished goods 9,250,520 9,689,766
----------- -----------
$10,083,930 $10,629,957
=========== ===========
3. PROPERTY, PLANT AND EQUIPMENT
JUNE 30, 2002 DECEMBER 31, 2001
ACCUMULATED ACCUMULATED
COST AMORTIZATION NET COST AMORTIZATION NET
---- ------------ --- ---- ------------ ---
$ $ $ $ $ $
Leasehold improvements 690,090 265,905 424,185 688,024 235,296 452,728
Equipment 3,909,501 2,136,457 1,773,044 3,886,007 2,040,914 1,845,093
--------- --------- --------- --------- --------- ---------
4,599,591 2,402,362 2,197,229 4,574,031 2,276,210 2,297,821
========= ========= ========= ========= ========= =========
The Company did not amortize equipment with a carrying amount of $694,362
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. The Company is now utilizing these assets in its' manufacturing
operations and therefore commenced recording amortization on this equipment.
4. BANK INDEBTEDNESS
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 (CDN$15,000,000) facility, 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 on all personal property (including without limitation accounts,
contract rights, inventory, machinery and equipment, and general
intangibles, existing and future, 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.
7
CABLETEL COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CANADIAN FUNDS)
JUNE 30, 2002
5. LONG-TERM DEBT
June 30, December 31,
2002 2001
-------- ------------
(i) Term loan-Leaseholds $ 339,592 $354,122
(ii) Term loan-Equipment 472,000 531,000
(iii) Term loan-Note 2,882,874 --
---------- --------
3,694,466 885,122
Less: Current portion 1,446,482 171,385
---------- --------
$2,247,984 $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 (June 30, 2002 -
7.0% per annum; December 31, 2001 - 6.75% 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 of which is available to the Company for capital
purchases and is collateralized by the assets acquired under
this facility.
(iii) 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, which
resulted in the Company taking a charge of $164,000 on loss of
settlement of debt. 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 up to
and including May 31, 2007. The fair value of the Warrant was
estimated on the date of the grant using the fair value
recognition method, with the following assumptions: risk free
interest rate of 5%, dividend yield of 0%, theoretical
volatility of .90 and the expected life of 2 years.
Principal payments required in each of the next five years on
long term debt are as follows:
Term loan (i) Term loan (ii) Term loan (iii)
------------- -------------- ---------------
2002 $29,785 $141,600 724,800
2003 32,838 141,600 1,449,600
2004 36,204 141,600 914,270
2005 39,914 106,200 -
2006 44,006 - -
Beyond 2006 171,375 - -
8
CABLETEL COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CANADIAN FUNDS)
JUNE 30, 2002
6. CAPITAL STOCK
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 June 30, 2002 1,486,000 1.53 - 9.28 3.89
========= =========== ====
The contractual terms of options at various prices are as follows:
$1.53 - $4.31 less than 1 year - 10 years
$4.44 - $7.46 less than 1 year - 5 years
$8.60 - $9.28 less than 1 year - 8 years
In connection with the settlement of outstanding accounts payable (Note
5iii), common shares have been reserved for warrants on the following basis:
EXERCISE WEIGHTED
SHARES PRICE AVERAGE
------ -------- --------
$ $
OUTSTANDING AND EXERCISABLE
Balance at December 31, 2001 -- -- --
======= ==== ====
Granted 200,000 1.64 1.64
Balance at June 30, 2002 200,000 1.64 1.64
======= ==== ====
The contractual term of the warrant is as follows:
$1.64 less than 1 year - 5 years
9
CABLETEL COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CANADIAN FUNDS)
JUNE 30, 2002
7. EARNINGS PER SHARE
(a) BASIC EARNINGS PER SHARE
The weighted average number of shares outstanding for the
three months ended June 30, 2002 and 2001 amounted to
7,167,612 and 7,085,063 respectively and for the six months
ended June 30, 2002 and 2001 weighted average number of shares
outstanding amounted to 7,167,612 and 7,078,057 respectively.
(b) FULLY DILUTED EARNINGS PER SHARE
For the three and six months ended June 30, 2002 and 2001 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
7,218,004 and 7,167,447 for the three months ended June 30,
2002 and 2001 respectively. The weighted average number of
shares for diluted earning per share amounted to 7,227,131 and
7,168,485 for the six months ended June 30, 2002 and 2001
respectively.
10
CABLETEL COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CANADIAN FUNDS)
JUNE 30, 2002
7. EARNINGS PER SHARE (continued)
The following table sets forth the computation of basic and diluted
earnings per share:
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2002 2001 2002 2001
---- ---- ---- ----
NUMERATOR:
Net loss and numerator for
basic loss and for diluted
loss per share $ (674,154) $ (91,906) $(613,203) $(306,820)
DENOMINATOR:
Weighted-average shares for basic
loss per share 7,167,612 7,085,063 $7,167,612 $7,068,112
---------- ---------- ---------- ----------
EFFECT OF DILUTIVE SECURITIES:
Employee stock options 31,932 82,384 31,255 100,373
Warrants 18,460 - 28,264 --
---------- ---------- ---------- ---------
Dilutive potential of common shares 50,392 82,384 59,519 100,373
---------- ---------- ---------- ---------
Adjusted weighted-average
shares and assumed conversions
for diluted earnings per share 7,218,004 7,167,447 7,227,131 7,168,485
---------- ---------- ---------- ---------
Basic loss per share ($0.09) ($0.01) ($0.09) ($0.04)
---------- ---------- ---------- ---------
Diluted loss per share ($0.09) ($0.01) ($0.09) ($0.04)
---------- ---------- ---------- ---------
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)
JUNE 30, 2002
8. RELATED PARTY TRANSACTIONS (continued)
(ii) For the three months ended June 30, 2002 and 2001 the Company
paid to the Sullivan Group, an entity controlled by the President
of the Company, $13,950 and $13,950 respectively and for the six
months ended June 30, 2002 and 2001 $27,900 and $27,900
respectively relating to charges in connection with Mr. Walling's
compensation.
(iii) For the three months ended June 30, 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 $13,636 and $0 respectively for
services provided. For the six months ended June 30, 2002 and
2001 the Company incurred charges amounting to $14,876 and
$20,546 respectively.
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
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.
The Company has determined that it is not in its best interest to
continue to pursue the acquisition and to write-off the amounts
owed by Allied to the Company.
12
CABLETEL COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CANADIAN FUNDS)
JUNE 30, 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 June 30, 2002, the unpaid balance of these charges included in
accrued liabilities was nil. For the three months ended June 30, 2002
the Company paid $1,008 relating to the previously recorded special
charges and $203,985 for the six months ended June 30, 2002.
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 and six months ended June 30, 2002 and 2001.
13
CABLETEL COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CANADIAN FUNDS)
JUNE 30, 2002
11. SEGMENTED INFORMATION (continued)
SUMMARY OF BUSINESS SEGMENT
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------------------- ----------------------------
NET REVENUE 2002 2001 2002 2001
----------- ------------ ------------ ------------ ------------
Distribution $ 12,906,548 $ 10,358,819 $ 23,844,103 $ 21,305,279
Manufacturing 1,647,267 2,218,899 3,402,490 4,923,573
Technology 538,542 1,236,292 1,249,859 2,256,319
Less: Inter-company eliminations (131,978) (47,467) (352,387) (182,295)
------------ ------------ ------------ ------------
TOTAL NET REVENUE $ 14,960,379 $ 13,766,543 $ 28,144,065 $ 28,302,876
============ ============ ============ ============
GROSS PROFIT
Distribution $ 2,087,616 $ 2,064,965 $ 3,923,037 $ 3,834,891
Manufacturing 515,701 427,922 1,026,714 869,890
Technology 59,675 162,093 161,255 367,975
------------ ------------ ------------ ------------
TOTAL GROSS PROFIT $ 2,662,992 $ 2,654,980 $ 5,111,006 $ 5,072,756
------------ ------------ ------------ ------------
Selling, general and administrative expenses
(2,248,282) (2,499,594) (4,396,051) (5,031,056)
Amortization (55,220) (61,628) (120,305) (121,049)
Interest expense - other (179,261) (192,167) (326,785) (448,962)
- long-term debt (76,574) (22,863) (94,259) (47,568)
------------ ------------ ------------ ------------
(2,559,337) (2,776,252) (4,937,400) (5,648,635)
============ ============ ============ ============
CONSOLIDATED EARNINGS (LOSS) BEFORE
THE FOLLOWING 103,655 (121,272) 173,606 (575,879)
============ ============ ============ ============
Write-off of other assets (604,809) -- (604,809) --
Loss on settlement of debt (164,000) -- (164,000) --
------------ ------------ ------------ ------------
(768,809) -- (768,809) --
------------ ------------ ------------ ------------
LOSS BEFORE INCOME TAXES $ (665,154) $ (121,272) $ (595,203) $ (575,879)
------------ ------------ ------------ ------------
IDENTIFIABLE ASSETS:
JUNE 30, DECEMBER 31,
2002 2001
----------- -----------
Distribution and Technology $24,219,066 $20,375,245
Manufacturing 7,629,939 8,374,950
Other unallocated assets 200,192 120,000
----------- -----------
TOTAL IDENTIFIABLE ASSETS $32,049,197 $28,870,195
=========== ===========
14
CABLETEL COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CANADIAN FUNDS)
JUNE 30, 2002
11. SEGMENTED INFORMATION (continued)
EXPENDITURES ON PROPERTY, PLANT AND EQUIPMENT
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------- --------------------
2002 2001 2002 2001
-------- -------- -------- --------
Distribution and Technology $ 32,744 $ 41,750 $ 34,809 $105,312
Manufacturing (1,273) 48,727 (9,249) 138,511
-------- -------- -------- --------
TOTAL EXPENDITURES $ 31,471 $ 90,477 $ 25,560 $243,823
======== ======== ======== ========
AMORTIZATION
(Includes amortization in cost of sales.)
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------- --------------------
2002 2001 2002 2001
-------- -------- -------- --------
Distribution and Technology $ 87,094 $ 59,903 $140,399 $117,485
Manufacturing 24,552 95,141 36,340 197,483
-------- -------- -------- --------
TOTAL AMORTIZATION $111,646 $155,044 $176,739 $314,968
======== ======== ======== ========
SUMMARY BY GEOGRAPHICAL AREA
NET REVENUE
(Revenues are attributed based on the location of the customer.)
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------- -------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Canada $13,445,080 $11,595,111 $25,093,962 $23,561,598
United States 1,497,079 1,974,226 2,761,423 4,076,773
Other 18,220 197,206 288,680 664,505
----------- ----------- ----------- -----------
TOTAL NET REVENUE $14,960,379 $13,766,543 $28,144,065 $28,302,876
=========== =========== =========== ===========
PROPERTY, PLANT AND EQUIPMENT
(Property, Plant, Equipment and goodwill by geographical area are based on
location of facilities.)
JUNE 30, DECEMBER 31,
2002 2001
---------- ------------
Canada $2,184,179 $2,280,388
United States 13,050 17,433
---------- ----------
TOTAL PROPERTY, PLANT AND EQUIPMENT $2,197,229 $2,297,821
========== ==========
15
CABLETEL COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CANADIAN FUNDS)
JUNE 30, 2002
11. SEGMENTED INFORMATION (continued)
SALES INFORMATION
Sales to a customer within the Distribution segment for the three months
ended June 30, 2002 amounted to approximately $4,945,550 or 33% of total
revenue. Sales to this customer for the six months ended June 30, 2002
amounted to approximately $7,892,600 or 28% of total revenue. At June 30,
2002 this customer accounted for approximately 46% of total Cabletel
accounts receivable. The customer's account was current as per the terms
and conditions of sale. The conditions of sale to this particular customer
include payment terms of 180 days.
Sales to a customer within the Distribution segment for the three months
ended June 30, 2002 amounted to approximately $3,273,620 or 22% of total
revenue. Sales to this customer for the six months ended June 30, 2002
amounted to approximately $7,502,800 or 27% of total revenue. At June 30,
2002 this customer accounted for approximately 17% of total Cabletel
accounts receivable. The customer's account was current as per the terms
and conditions of sale.
Sales to a customer within the Manufacturing segment amounted to
approximately $2,443,500 for the six months ended June 30, 2002 of which
exceeded 10% of the Manufacturing segments total sales.
12. UNITED STATES ACCOUNTING PRINCIPLES
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.
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------------------- ----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Net loss in accordance with Canadian GAAP $ (674,154) $ (91,906) $ (613,203) $ (306,820)
Reduction in amortization of development
costs (net of income taxes) 4,658 4,658 9,316 9,316
------------ ------------ ------------ ------------
Net earnings (loss) in accordance with
U.S. GAAP $ (669,496) $ (87,248) $ (603,887) $ (297,504)
============ ============ ============ ============
Total assets $ 31,288,081 $ 33,337,974 $ 31,288,081 $ 33,337,974
============ ============ ============ ============
Deficit $(10,707,982) $ (7,514,296) $(10,707,982) $ (7,514,296)
============ ============ ============ ============
Loss on settlement of debt would be reported as an extraordinary item for
U.S. GAAP.
16
CABLETEL COMMUNICATIONS CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CANADIAN FUNDS)
JUNE 30, 2002
12. UNITED STATES ACCOUNTING PRINCIPLES (continued)
(a) EARNINGS PER SHARE
Net loss per share calculations under U.S. GAAP would require loss on
settlement of debt to be reported as an extraordinary item and
accordingly earnings per share would be disclosed as follows:
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------------------- ----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Net loss per share:
Basic from continuing operations ($0.07) ($0.01) ($0.07) ($0.04)
Basic from loss on extraordinary item ($0.02) -- ($0.02) --
--------- ---------- --------- ---------
Basic loss per share ($0.09) ($0.01) ($0.09) ($0.04)
--------- ---------- --------- ---------
Diluted from continuing operations ($0.07) ($0.01) ($0.07) ($0.04)
Diluted from loss on extraordinary item ($0.02) -- ($0.02) --
--------- ---------- --------- ---------
Diluted earnings per share ($0.09) ($0.01) ($0.09) ($0.04)
--------- ---------- --------- ---------
Weighted average shares outstanding:
Basic 7,167,612 7,085,063 7,167,612 7,078,057
--------- ---------- --------- ---------
Diluted 7,218,004 7,167,447 7,227,131 7,168,485
--------- ---------- --------- ---------
(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 and six months ended June 30,
2002, and 2001 the Company's comprehensive income was the same as net
earnings.
17
CABLETEL COMMUNICATIONS CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CANADIAN FUNDS)
JUNE 30, 2002
12. UNITED STATES ACCOUNTING PRINCIPLES (continued)
(c) 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 and six months ended June 30,
2002 or June 30, 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)
JUNE 30, 2002
12. UNITED STATES ACCOUNTING PRINCIPLES (continued)
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
----------------------------- -------------------------------
2002 2001 2002 2001
AS REPORTED AS REPORTED AS REPORTED AS REPORTED AS REPORTED
----------- ----------- ----------- ----------- -----------
Net loss
- U.S. GAAP $(674,154) $(87,248) $(613,203) $(297,504)
Net loss per share
Basic ($0.09) ($0.01) ($0.09) ($0.04)
Diluted ($0.09) ($0.01) ($0.09) ($0.04)
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
----------------------------- -------------------------------
2002 2001 2002 2001
PRO-FORMA PRO-FORMA PRO-FORMA PRO-FORMA PRO-FORMA
--------- ----------- ----------- ----------- -----------
Net loss
- U.S. GAAP $(674,154) $(132,328) $(1,315,428) $(388,874)
Net loss per share
Basic ($0.09) ($0.02) ($0.18) ($0.05)
Diluted ($0.09) ($0.02) ($0.18) ($0.05)
----------- ----------- ----------- -----------
Weighted average fair value of
options granted during this period $0.00 $1.38 $1.65 $1.79
19
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 AND SIX MONTHS ENDED JUNE 30, 2002
Consolidated net sales for the three months ended June 30, 2002 increased by
$1,193,836 or 9% to $14,960,379 as compared to consolidated net sales of
$13,766,543 for the three months ended June 30, 2001. Consolidated net sales of
$28,144,065 for the six months ended June 30, 2002 decreased by $158,811 or 0.6%
as compared to consolidated net sales of $28,302,876 for the six months ended
June 30, 2001. The primary reason for the increase for the three month period
ending June 30, 2002 is due to increased sales by the Company's Distribution
segment which continued to supply product to Canadian cable operators, primarily
for a major project in Eastern Canada. This was offset by reduced volumes in the
Manufacturing and Technology segments which are reflective of the financial and
market conditions that impacted growth in the cable, technology and satellite
industry resulting in reduced capital spending within the industry. The primary
reason for the decrease for the six month period ending June 30, 2002 is
attributable to the financial and market conditions that impacted growth in the
cable, technology and satellite industry resulting in reduced capital spending
within the industry during the first quarter of 2002.
The following table shows comparative sales by segment:
For the Three Months For the Six Months
Ended June 30, Ended June 30,
---------------------------- ----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Distribution $ 12,906,548 $ 10,358,819 $ 23,844,103 $ 21,305,279
Manufacturing 1,647,267 2,218,899 3,402,490 4,923,573
Technology 538,542 1,236,292 1,249,859 2,256,319
Less: Inter-company sales (131,978) (47,467) (352,387) (182,295)
------------ ------------ ------------ ------------
Net Sales $ 14,960,379 $ 13,766,543 $ 28,144,065 $ 28,302,876
============ ============ ============ ============
Net sales of $12,906,548 in the Distribution segment for the three months
ended June 30, 2002 reflects an increase of $2,547,729 or 25% compared to
$10,358,819 for the three months ended June 30, 2001. Net sales of $23,844,103
in the Distribution segment for the six months ended June 30, 2002 reflects an
increase of $2,538,824 or 12% compared to $21,305,279 for the six months ended
June 30, 2001. The increase is indicative of increased capital spending by
Canadian cable operators, primarily in Eastern Canada.
20
Net sales in the Manufacturing segment of $1,647,267 for the three months
ended June 30, 2002, reflects a decrease of $571,632 or 26% when compared to
$2,218,899 for the three months ended June 30, 2001. Net sales in the
Manufacturing segment of $3,402,490 for the six months ended June 30, 2002
reflects a decrease of $1,521,083 or 31% when compared to $4,923,573 for the six
months ended June 30, 2002. The decrease is primarily due to a slow down in the
growth in the cable and satellite industry. Also sales to foreign countries for
the three months ended June 30, 2002 were $1,515,289 compared to $2,171,432 for
the three months ended June 30, 2001. Sales to foreign countries for the six
months ended June 30, 2002 were $3,050,103 compared to $4,741,278 for the six
months ended June 30, 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.
Net sales of $538,542 in the Technology segment for the three months ended
June 30, 2002 reflects a decrease of $697,750 or 56% when compared to $1,236,292
for the three months ended June 30, 2001. Net sales of $1,249,859 in the
Technology segment for the six months ended June 30, 2002 reflects a decrease of
$1,006,460 or 45% when compared to $2,256,319 for the six months ended June 30,
2001. The decrease is primarily due to continued project postponements in the
net working industry due to the financial environment within the Technology
sector.
Gross profit for the three months ended June 30, 2002 of $2,662,992
increased $8,012 or 0.3% compared to gross profit of $2,654,980 for the three
months ended June 30, 2001. Gross margin for the three months ended June 30,
2002 was 17.8% as compared to 19.3% for the three months ended June 30, 2001.
Gross profit for the six months ended June 30, 2002 of $5,111,006 increased
$38,250 or 0.7% compared to gross profit of $5,072,756 for the six months ended
June 30, 2001. Gross margin for the six months ended June 30, 2002 was 18.2% as
compared to 17.9% for the six months ended June 30, 2001. The reason for the
decrease in gross margin for the three months ended June 30, 2002 results
primarily from a change in product mix in the Distribution segment and the
reason for the increase in gross margin for the six months ended June 30, 2002
is primarily the result of better efficiencies achieved in the Company's
Manufacturing segment.
Gross profit of $2,087,616 in the Cabletel Distribution segment for the
three months ended June 30, 2002 reflects an increase of $22,651 or 1% when
compared to $2,064,965 for the three months ended June 30, 2001. Cabletel
Distribution segment gross margin for the three months ended June 30, 2002 was
16.2%, a decrease when compared to a gross margin of 19.9% for the three months
ended June 30, 2001. Gross profit of $3,923,037 in the Cabletel Distribution
segment for the six months ended June 30, 2002 reflects an increase of $88,146
or 2% when compared to $3,834,891 for the six months ended June 30, 2001.
Cabletel Distribution segment gross margin for the six months ended June 30,
2002 was 16.5% a decrease when compared to a gross margin of 18.0% for the six
months ended June 30, 2001. The decrease for the three and six months ended June
30, 2002 is primarily due to a change in product mix.
21
Gross profit of $538,542 in the Manufacturing segment for the three months
ended June 30, 2002 reflects an increase of $87,779 or 17% when compared to
gross profit of $427,922 for the three months ended June 30, 2001. Manufacturing
segment gross margin for the three months ended June 30, 2002 was 31% an
increase when compared to a gross margin of 19.3% for the three months ended
June 30, 2001. Gross profit of $1,026,714 in the Manufacturing segment for the
six months ended June 30, 2002 reflects an increase of $156,824 or 15% when
compared to gross profit of $869,890 for the six months ended June 30, 2001.
Manufacturing segment gross margin for the six months ended June 30, 2002 was
30% an increase when compared to a gross margin of 18% for the six months ended
June 30, 2001. The increase for the three and six months ended June 30, 2002 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 $59,675 in the Technology segment for the three months
ended June 30, 2002 reflects a decrease of $102,418 or 63% when compared to
$162,093 for the three months ended June 30, 2001. Technology segment gross
margin for the three months ended June 30, 2002 was 11%, which is lower than the
prior period gross margin of 13%. Gross profit of $161,255 in the Technology
segment for the six months ended June 30, 2002 reflects a decrease of $206,720
or 56% when compared to $367,975 for the six months ended June 30, 2001.
Technology segment gross margin for the six months ended June 30, 2002 was 13%,
which is lower than the prior period gross margin of 16%. For the three and six
months ended June 30, 2002, 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
June 30, 2002 decreased $251,312 or 10% to $2,248,282 when compared to
$2,499,594 for the three months ended June 30, 2001. As a percentage of sales,
selling, general and administrative expenses for the three months ended June 30,
2002 were 15% compared to 18% for the three months ended June 30, 2001. Selling,
general and administrative expenses for the six months ended June 30, 2002
decreased $635,005 or 13% to $4,396,051 when compared to $5,031,056 for the six
months ended June 30, 2001. As a percentage of sales, selling, general and
administrative expenses for the six months ended June 30, 2002 were 16% compared
to 18% for the six months ended June 30, 2001. The Company has made a conscious
effort to reduce certain costs of which have contributed in returning the
Company to profitability. Such cost cutting measures included reductions in the
Company's labour force as well as reductions in international marketing costs.
Included in selling, general and administrative expenses for the three and six
month periods ending June 30, 2002 is a write-off of accounts receivable
amounting to $99,273 related to the Company's decision not to pursue the
acquisition of Allied Wire and Cable Ltd.
Interest expense increased $40,805 to $255,835 for the three months ended
June 30, 2002 compared to $215,030 for the three months ended June 30, 2001.
While interest on bank indebtedness decreased by $12,906, interest on long-term
debt increased by $53,711. Interest
22
expense decreased $75,486 to $421,044 for the six months ended June 30, 2002
compared to $496,530 for the six months ended June 30, 2001. Interest on bank
indebtedness decreased by $122,177, interest on long-term debt increased by
$46,691. The decrease in interest expense reflects lower interest rates on
borrowings of the Company's line of credit during the year while interest
expense was incurred on a long-term note from the renegotiation of credit terms
with a major supplier during the quarter and is not comparable to the same
period in the prior year.
Earnings from operations before write-off of other assets, loss on
settlement of debt and income taxes for the three months ended June 30, 2002 was
$103,655 as compared to a loss of $121,272 for the three months ended June 30,
2001. Total operating expenses of $2,559,337 for the three months ended June 30,
2002 were $216,915 lower than $2,776,252 reported for the three months ended
June 30, 2001. Earnings from operations before write-off of other assets, loss
on settlement of debt and income taxes for the six months ended June 30, 2002
was $173,606 as compared to a loss of $575,879 for the six months ended June 30,
2001. Total operating expenses of $4,937,400 for the six months ended June 30,
2002 were $711,235 lower than $5,648,635 reported for the six months ended June
30, 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.
For the three and six months ended June 30, 2002, the Company wrote off of
other assets in the amount of $604,809 related to an amount owed to the Company
by Allied Wire and Cable Ltd. For a number of months, Cabletel and Allied had
been in negotiations about restructuring their previously announced transaction
on terms that would have applied this amount to the net purchase price that
would have been paid by Cabletel for Allied's business. The Company has
determined that it is not in its best interest to continue to pursue the
acquisition and as a result is writing off the amounts owed by Allied to the
Company.
For the three and six months ended June 30, 2002, the Company recorded a
non-cash item amounting to $164,000 related to the issuance of warrants in
connection with a settlement of debt with a major supplier. In connection with
the debt settlement the Company 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 up to and including May 31, 2007.
23
Inclusive of the previously mentioned write offs, for the three months
ended June 30, 2002, the Company incurred a net loss of $674,154 compared to a
net loss of $91,906 for the three months ended June 30, 2001. Basic and fully
diluted loss per shares was $0.09 for the three months ended June 30, 2002
compared to basic and fully diluted loss per share of $0.01 for the three months
ended June 30, 2001. Inclusive of the previously mentioned write offs, for the
six months ended June 30, 2002, net loss was $613,203 compared to a net loss of
$306,820 for the six months ended June, 30, 2001. Basic and fully diluted loss
per share was $0.09 for the six months ended June 30, 2002 compared to basic and
fully diluted loss per share of $0.04 for the six months ended June 30, 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
$2,627,315 was provided during the three months ended June 30, 2002 by financing
activities. Of such amount $2,855,858 was provided by bank indebtedness and
$228,543 was used to repay long-term debt on a term loan from the landlord of
the Company's head office building, long-term debt on a note payable to a major
supplier and to repay long-term debt on an equipment loan. Net cash of
$1,655,231 was provided during the six months ended June 30, 2002 by financing
activities. Of such amount $1,914,551 was provided by bank indebtedness and
$259,320 was used to repay long-term debt on a term loan from the landlord of
the Company's head office building, long-term debt on a note payable to a major
supplier and to repay long-term debt on an equipment loan.
Net cash used in operating activities for the three months ended June 30,
2002 was $2,568,287. Cash flow from reductions in inventory amounted to $158,988
and increases in accounts payables and accrued liabilities amounted to
$2,697,207 while outflows of cash to finance accounts receivable and prepaid
expenses, deposits and other amounted to $4,594,006 and $987,566, respectively.
Net cash used in operating activities for the six months ended June 30, 2002 was
$1,600,882. Cash flow from reductions in inventory amounted to $546,027 and
increases in accounts payables and accrued liabilities amounted to $1,972,974
while outflows of cash to finance accounts receivable and prepaid expenses,
deposits and other amounted to $3,368,845 and $997,102, respectively.
Net cash used in investing activities for the three months ended June 30,
2002 was $31,471 relating to the purchase of capital assets. Net cash used in
investing activities for the six months ended June 30, 2002 was $25,560 relating
to the purchase 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
24
HSBC Bank Canada. At June 30, 2002 the Company owed $13,223,523 on its Revolving
Credit Facility compared to $11,308,972 at December 31, 2001. 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, which resulted in the Company taking a
non-cash charge of $164,000 on loss of settlement of debt. The senior
subordinated promissory note bears interest at the rate of 12% per annum and is
payable 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 up to
and including May 31, 2007.
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.
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.
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.
25
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISK
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.
INTERNATIONAL GROWTH, FOREIGN EXCHANGE, AND INTEREST RATES
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 June 30, 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 addition the Company's Distribution segment
imports approximately 80% of its' products from the United States for resale in
Canada. 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
26
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.
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.
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.
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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.
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.
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.
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.
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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.
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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
(i) Certification of Chief Executive Officer
(ii) Certification of Chief Financial Officer
(b) Reports on Form 8-K
(i) The Company filed a current report on Form 8-K dated May 16, 2002.
Under ITEM 5 of that 8-K the Company announced that it had established
a new CDN$15 million revolving credit facility with LaSalle Business
Credit, the Canadian arm of LaSalle Business Credit Inc., a subsidiary
of Chicago-based LaSalle Bank.
(ii) The Company filed a current report on Form 8-K dated May 22, 2002.
Under ITEM 5 of that 8-K the Company announced that, concurrent with
its previously reported establishment of a new CDN$15 million
revolving credit facility with LaSalle Business Credit, Cabletel also
renegotiated credit terms with a major supplier that included the
conversion of US$2.2 million in outstanding payables owed by Cabletel
into a senior subordinated promissory note.
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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: August 13, 2002 By: /s/ Gregory Walling
-------------------------------------
Gregory Walling
President and Chief Executive Officer
Date: August 13, 2002 By: /s/ Ron Eilath
-------------------------------------
Ron Eilath
Chief Financial Officer and
Secretary Treasurer
31
[CABLETEL COMMUNICATIONS CORP. LETTER HEAD]
- --------------------------------------------------------------------------------
Exhibit A-1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. 1350
(SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002)
I, D. Gregory Walling, President and Chief Executive Officer of Cabletel
Communications Corp. (the "Registrant"), certifies that to the best of my
knowledge, based upon a review of the Quarterly Report on Form 10-Q for the
period ended June 30, 2002 of the Registrant (the "Report"):
(1) The Report fully complies with the requirements of Section 13(a) of the
Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Registrant.
/s/ D. Gregory Walling
- -------------------------------
Name: D. Gregory Walling
Date: August 13, 2002
32
[CABLETEL COMMUNICATIONS CORP. LETTER HEAD]
- --------------------------------------------------------------------------------
Exhibit A-2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. 1350
(SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002)
I, Ron Eilath, Chief Financial Officer (principal financial officer) of Cabletel
Communications Corp. (the "Registrant"), certifies that to the best of my
knowledge, based upon a review of the Quarterly Report on Form 10-Q for the
period ended June 30, 2002 of the Registrant (the "Report"):
(1) The Report fully complies with the requirements of Section 13(a) of the
Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Registrant.
/s/ Ron Eilath
- ----------------------------------
Name: Ron Eilath
Date: August 13, 2002
33