ITEM 2.
DESCRIPTION OF PROPERTY
The Company operates out of the following warehouse and office facilities in five Canadian cities across Canada and one warehouse and office facility in the United States.
The Company believes its properties are adequate for its current needs.
ITEM 3.
ITEM 3.
LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company is a party or to which any of its properties is subject.
ITEM 4.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
ITEM 5.
MARKET FOR A REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Shares currently trade on the TSX and on the AMEX under the symbol TTV. The Company’s Common Shares are the only class of shares issued and outstanding. The Common Shares were listed and posted for trading on the TSX on May 19, 1994 and on the AMEX on September 13, 1994.
The high and low sales prices for the Common Shares on the AMEX during 2002 and 2001 that the Common Shares were traded thereon were as follows:
Fiscal Year Ended December 31,
American Stock Exchange
On March 17, 2003 the last reported per Common Share sale price on the AMEX was U.S.$1.20. There were approximately 47 holders of record of the Common Shares as of March 17, 2003.
The Company has never declared or paid cash dividends on its capital stock, and the Company’s Board of Directors does not intend to declare or pay any dividends on the Common Stock in the foreseeable future. Earnings of the Company, if any, are expected to be retained for use in expanding the Company’s business. The declaration and payment in the future of any cash or stock dividends on the Common Shares will be at the discretion of the Board of Directors of the Company and will depend upon a variety of factors, including the ability of the Company to service its outstanding indebtedness and to pay its dividend obligations on securities ranking senior to the Common Shares, if any, the Company’s future earnings, if any, capital requirements, financial condition and such other factors as the Company’s Board of Directors may consider to be relevant from time to time. In addition, the Company is currently restricted from paying dividends under the terms of its credit facilities.
ITEM 6.
ITEM 6.
SELECTED FINANCIAL DATA
The following selected financial data is extracted from the Consolidated Financial Statements of the Company and should be read in conjunction therewith and the notes related thereto included elsewhere in this Annual Report. The Consolidated Financial Statements of the Company have been prepared on a continuity of interest basis.
STATEMENT OF OPERATIONS
BALANCE SHEET
ITEM 7.
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” includes discussion and analysis of our consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in Canada, which, except as described in Note 15 of the accompanying financial statements, conform, in all material respects, with the accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. These estimates and their underlying assumptions form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other objective sources. Management bases its estimates, as appropriate, when changes in events or circumstances indicate that revisions may be necessary. Significant accounting estimates reflected in our financial statements include the allowance for doubtful accounts, inventory excess and obsolescence reserves, discounts, allowances and rebates, income tax valuation allowances and impairment reviews for investments, fixed assets, goodwill and other intangibles. Although these estimates are based on management’s knowledge of and experience with past and current events and on management’s assumptions about future events, it is at least reasonably possible that they may ultimately differ materially from actual results.
Management believes that the following critical accounting policies require more significant judgments and estimates in the preparation of the Company’s consolidated financial statements. We maintain allowances for doubtful accounts for estimated losses expected to result from the inability of our customers to make required payments. These estimates are based on management’s evaluation of the ability of our customers to make payments, focusing on customer financial difficulties and age of receivable balances. An adverse change in financial condition of a significant customer or group of customers could materially affect management’s estimates related to doubtful accounts. We record estimated reductions to revenue for customer programs and incentive offerings, such as discounts, allowances, and rebates. These estimates are based on contract terms, historical experience, and other factors. Management believes it has sufficient historical experience to allow for reasonable and reliable estimation of these reductions to revenue. However, declining market conditions could result in increased estimates of sales returns and allowances resulting in incremental reductions to revenue. We maintain allowances for excess and obsolete inventory. These estimates are based on management’s assumptions about and analysis of relevant factors including current levels of orders and backlog, shipment experience, forecasted demand and market conditions. We do not believe our products are subject to a significant risk of obsolescence in the short term and management believes it has the ability to adjust inventory levels to declining demand. However, if actual market conditions become less favorable than anticipated by management, additional allowances for excess and obsolete inventory could be required. Management reviews intangible assets, investments and other long-lived assets for impairment when events or changes in circumstances indicate that their carrying values may not be fully recoverable. Goodwill is tested for impairment annually and on
an interim basis when events or circumstances change. Management assesses potential impairment of the carrying values of these assets based on market prices, if available, or assumptions about and estimates of future cash flows expected to arise from these assets. Future cash flows may be adversely impacted by operating performance, market conditions, and other factors. If an impairment is indicated by this analysis, the impairment charge to be recognized, if any, would be measured as the amount by which the carrying value exceeds fair value, estimated by management based on market prices, if available, or forecasted cash flows, discounted using a discount rate commensurate with the risks involved. Assumptions related to future cash flows and discount rates involve management judgment and are subject to significant uncertainty. If actual future cash flows, discount rates and other assumptions used in the assessment and measurement of impairment differ from management’s estimates and forecasts, additional impairment charges could be required. Discussion of 2002 impairment charges is located within the Company’s Management Discussion and Analysis of Financial Condition and Results of Operations for the Year Ended December 31, 2002.
The following discussion should be read in conjunction with the Company’s Consolidated Financial Statements and Notes thereto included elsewhere in this Annual Report.
RESULTS OF OPERATIONS
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
Consolidated net sales for the year ended December 31, 2002 decreased by $4,491,824 or 7.7% to $53,629,075 compared to consolidated net sales of $58,120,899 for the year ended December 31, 2001. The decrease is primarily attributable to the Company’s Distribution and Technology segments where financial and market conditions that impacted growth in the cable, technology and satellite industry resulted in reduced capital spending within the industry during the year. However, the Distribution segment has benefited from its arrangement to supply product for a major project in Eastern Canada. This was supplemented by increased sales in the Manufacturing segment of 19% for the year ended December 31, 2002.
The following table shows comparative sales by segment:
Net sales of $42,615,216 in the Distribution segment for the year ended December 31, 2002 reflects a decrease of $4,100,381 or 8.8% compared to $46,715,597 for the year ended December 31, 2001. The decrease in the Distribution segment is attributable to financial and market conditions that impacted growth in the cable, technology and satellite industry resulting in reduced capital spending within the industry during the year.
Net sales in the Manufacturing segment of $9,355,703 for the year ended December 31, 2002, reflects an increase of $1,496,671 or 19.0%, compared to $7,859,032 for the year ended December 31, 2001. The increase is primarily due to an increase in sales to foreign countries. For the year ended December 31, 2002, sales to foreign countries, primarily the United States, were $8,405,887 compared to $6,974,839 for the year ended December 31, 2001. The Company had 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, through the May 2002 acquisition of its distributor in the United States, the Company established a sales force throughout the U.S. to better service customers.
Net sales of $2,730,643 in the Technology segment for the year ended December 31, 2002 reflects a decrease of $1,699,817 or $38.4%, compared to $4,430,460 for the year ended December 31, 2001. The decrease is primarily due to continued project postponements in the networking industry due to the financial environment within the Technology sector.
Gross profit for the year ended December 31, 2002 of $10,744,578 increased by $1,086,221 or 11.2% compared to a gross profit of $9,658,357 for the year ended December 31, 2001. Gross margin for the year ended December 31, 2002 was 20.0% compared to 16.6% for the year ended December 31, 2001. The primary reason for the increase in gross margin for the year ended December 31, 2002 was efficiencies achieved in the Company’s Manufacturing segment. This segment is now concentrating on manufacturing one model of connector in house, while having the balance of the Company’s requirements produced at a lower cost in the Far East. Demand for the Manufacturing segment’s products has enabled production to ramp up to a level where higher volumes are produced more efficiently and yield a higher gross margin. In addition, the manufacturing segment comprises a higher percentage of overall sales for the year ended December 31, 2002, which generates a higher gross margin when averaged with the results of the Company’s other segments.
Gross profit of $7,624,991 in the Cabletel Distribution segment for the year ended December 31, 2002 reflects a decrease of $167,587 or 2.2% compared to $7,792,578 for the year ended December 31, 2001. Gross margin for the Distribution segment for the year ended December 31, 2002 was 17.9% an increase compared to a gross margin of 16.7% for the year ended December 31, 2001. The increase is primarily due to a change in product mix. The segment experienced higher sales of hardware products and reduced sales in cable products which are generally sold at a lower profit margin.
Gross profit of $2,703,205 in the Manufacturing segment for the year ended December 31, 2002 reflects an increase of $1,531,679 or 130.7% compared to gross profit of $1,171,526 for the
year ended December 31, 2001. Gross margin for the Manufacturing segment for the year ended December 31, 2002 was 28.9% an increase compared to a gross margin of 14.9% for the year ended December 31, 2001. The increase is primarily due to 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 $416,382 in the Technology segment for the year ended December 31, 2002 reflects a decrease of $277,871 or 40.0% compared to $694,253 for the year ended December 31, 2001. Gross margin for the Technology segment for the year ended December 31, 2002 was 15.2%, which is slightly lower compared to the prior year gross margin of 15.7%. 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 year ended December 31, 2002 decreased $1,015,524 or 9.5% to $9,633,169 compared to $10,648,693 for the year ended December 31, 2001. As a percentage of sales, selling, general and administrative expenses for the year ended December 31, 2002 were 18.0% compared to 18.3% for the year ended December 31, 2001. The Company has made a conscious effort to reduce costs, including reductions in the Company’s labour force, as well as reduce international marketing costs.
For the year ended December 31, 2002 there were no charges recognized as special charges. Special charges for the year ended December 31, 2001 were $357,836, which 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. In light of the industry and economic environment, and capital market trends impacting both Cabletel current operations and expected future growth rates, the Company has implemented steps to optimize results and drive efficiencies in the business by streamlining operations and activities in order to return the Company to profitability.
Interest expense increased $185,623 to $1,072,730 for the year ended December 31, 2002 compared to $887,107 for the year ended December 31, 2001. Interest expense on bank indebtedness for the year ended December 31, 2002 of $771,423 decreased by $28,518 down from $799,941 for the year ended December 31, 2001. Interest expense on long-term debt was $301,307 which represents an increase of $214,141 up from $87,166 for the year ended December 31, 2001. The decrease in interest expense on bank indebtedness reflects lower interest rates on lower levels of borrowings of the Company’s line of credit for the year. Interest expense on long-term debt was incurred on a long-term note from the renegotiation of credit terms with a major supplier during the second quarter of 2002 and is not comparable to the same period last year.
Loss from operations before write-off of other assets, loss on settlement of debt and income taxes for the year ended December 31, 2002 was $220,163 compared to a loss of $2,485,271 for the year ended December 31, 2001. This is reflective of the increase in gross
profit. Total operating expenses of $10,964,741 for the year ended December 31, 2002 were $1,178,887 lower than $12,143,628 reported for the year ended December 31, 2001.
Income taxes for the year ended December 31, 2002 were $67,809 compared to $420,847 for the year ended December 31, 2001. In assessing its future tax assets, management must consider 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. The Company has income tax losses in the amount of approximately $3,489,000 expiring in 2009.
For the year ended December 31, 2002, the Company wrote off other assets in the amount of $566,145 related to an amount owed to the Company by Allied Wire and Cable Ltd. The Company took the write-off in connection with the termination of its previously announced agreement to acquire Allied. 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. During the second quarter of 2002, the Company had determined that it was not in its best interest to continue to pursue the acquisition and as a result wrote off the amounts owed by Allied to the Company. Subsequently, on November 1, 2002, the Company entered into a transaction with Allied and certain related companies pursuant to which Cabletel has been granted an option to acquire all of the capital stock of Allied for nominal consideration. As part of the proposed transaction Cabletel has agreed to provide an additional $100,000 in inventory and advance $50,000 in cash to Allied.
For the year ended December 31, 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 Common Shares at an exercise price of Cdn. $1.64 per share up to and including May 31, 2007.
Inclusive of the previously mentioned write offs, for the year ended December 31, 2002, the Company incurred a net loss of $1,018,117 compared to a net loss of $2,906,118 for the year ended December 31, 2001. Basic and fully diluted loss per share for the year ended December 31, 2002 was $0.14 compared to basic and fully diluted loss per share of $0.41 for the year ended December 31, 2001.
RESULTS OF OPERATIONS
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
Consolidated net sales for the year ended December 31, 2001 decreased by $16,371,660 or 22% to $58,120,899 compared to consolidated net sales of $74,492,559 for the year ended December 31, 2000. Reduced volumes in all product categories 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 of $46,715,597 in the Distribution segment for the year ended December 31, 2001 reflects a decrease of $12,343,617 or 20.9% compared to $59,059,214 for the year ended December 31, 2000. The decrease is primarily the result of reduced capital spending by Canadian cable operators.
Net sales in the Manufacturing segment of $7,859,032 for the year ended December 31, 2001, reflects a decrease of $5,079,689 or 39.3% compared to $12,938,721 for the year ended December 31, 2000. The decrease is primarily due to a slow down in the growth in the cable industry. Sales to foreign countries for the year ended December 31, 2001 were $6,974,839 compared to $11,929,981 for the year ended December 31, 2000. The decrease is due to a major contract with an Israeli company terminating in 2001. Sales to Israel for the year ended December 31, 2001 were $855,266 compared to $7,953,483 for the year ended December 31, 2000. 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 a sales force throughout the U.S. to better service customers. As a result, sales to the U.S. for the year ended December 31, 2001 were $5,370,113 compared to sales of $3,489,598 for the year ended December 31, 2000.
Net sales of $4,430,460 in the Technology segment for the year ended December 31, 2001 reflects an increase of $957,096 or $27.6% compared to $3,473,364 for the year ended December 31, 2000. The increase is primarily due to an aggressive focus on sales to the networking industry as well as to a maturing of the Technology segment, which commenced in January 1999.
Gross profit for the year ended December 31, 2001 of $9,658,357 decreased $4,437,318 or 31.5% compared to gross profit of $14,095,675 for the year ended December 31, 2000. Gross margin for the year ended December 31, 2001 was 16.6% compared to 18.9% for the year ended December 31, 2000. The primary reason for the decrease in gross margin for the year ended December 31, 2001 was an inventory obsolescence charge taken during the year totaling $500,000. The reduction is also reflective of a change in product mix as well as the effects of a more competitive environment. In addition, higher manufacturing costs were incurred during the first half of the year, which due to the competitive environment, could not be passed on to customers.
Gross profit of $7,792,578 in the Distribution segment for the year ended December 31, 2001 reflects a decrease of $1,133,165 or 12.7% compared to $8,925,743 for the year ended December 31, 2000. Gross margin for the Distribution segment for the year ended December 31, 2001 was 16.7% an increase compared to a gross margin of 15.1% for the year ended December 31, 2000. The increase is primarily due to a change in product mix.
Gross profit of $1,171,526 in the Manufacturing segment for the year ended December 31, 2001 reflects a decrease of $3,458,967 or 74.7% compared to gross profit of $4,630,493 for the year ended December 31, 2000. The decrease is primarily due to the charging of manufacturing expenses through cost of sales of fixed overhead. As production levels declined, the Company experienced unfavorable manufacturing cost variances since fixed manufacturing costs were spread over a lower volume of units. Consequently, in July 2001, Management decided to lay-off all hourly production workers at Stirling Canada. The Company is currently purchasing Stirling connector products from its supplier in the Far East and manufacturing selective products locally.
Gross profit of $694,253 in the Technology segment for the year ended December 31, 2001 reflects an increase of $154,814 or 28.7% compared to $539,439 for the year ended December 31, 2000. Gross margin for the Technology segment for the year ended December 31, 2001 was 15.7%, which is comparable to the prior year gross margin of 15.5%. The Technology segment benefited from a more favorable product mix during the first part of the year but the effects of a more competitive environment were evident during the second half of the year.
Selling, general and administrative expenses for the year ended December 31, 2001 decreased $1,041,157 or 8.9% to $10,648,693 compared to $11,689,850 for the year ended December 31, 2000. Included in selling, general and administrative expenses are charges of $934,000 relating to an increase in allowance for doubtful accounts amounting to $454,000 and a write off of $480,000 legal, consulting, and financing costs relating to acquisitions and financings that did not materialize. The decrease is primarily due to a reduction in international marketing costs as a result of decreased foreign sales and the result of a reduction in moving and relocating costs, which were recorded in the prior period. As a percentage of sales, selling, general and administrative expenses for the year ended December 31, 2001 were 18.2% compared to 15.6% for the year ended December 31, 2000.
Special charges for the year ended December 31, 2001 were $357,836, relating 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. No similar charge was taken for the comparable period ending December 31, 2000. In light of the industry and economic environment, and capital market trends impacting both Cabletel current operations and expected future growth rates, the Company has implemented steps to optimize results and drive efficiencies in its business by streamlining operations and activities in order to return the Company to profitability.
Interest expense increased $104,054 to $887,107 for the year ended December 31, 2001 compared to $783,053 for the year ended December 31, 2000. The increase in interest expense reflects higher borrowings on 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.
Loss from operations before taxes for the year ended December 31, 2001 was $2,485,271 compared to earnings from operations before taxes of $1,385,599 for the year ended December 31, 2000. This reflects a decrease in gross profit. Total operating expenses of $12,143,628 for the year ended December 31, 2001 were $566,448 lower than $12,710,076 reported for the year ended December 31, 2000. The 2001 results are impacted by lower international marketing costs as a result of a reduction in foreign sales.
Income taxes for the year ended December 31, 2001 were $420,847 compared to $452,814 for the year ended December 31, 2000. In assessing its tax future assets, management must consider 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 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 has been reduced to nil.
Net income for the year ended December 31, 2001 was a loss of $2,906,118 compared to net income of $932,785 for the year ended December 31, 2000. Basic loss per share was $0.41 for the year ended December 31, 2001 compared to basic earnings per share of $0.13 for the year ended December 31, 2000. Fully diluted loss per share was $0.41 for the year ended December 31, 2001 compared to fully diluted earnings per share of $0.12 for the year ended December 31, 2000.
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 $447,177 was used during the year ended December 31, 2002 for financing activities. Of such amount, $732,140 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 long-term debt on an equipment loan. Offsetting the above amount was $284,963 provided by bank indebtedness.
Net cash provided by operating activities for the year ended December 31, 2002 was $616,255. Cash flow from reductions in inventory was $774,190. Also, operating cash flow included reductions in accounts receivable amounting to $104,618 off set by increases in prepaid expenses, deposits and other in the amount of $1,396,043. Also off setting the cash inflows were outflows of cash used to reduce accounts payable and accrued liabilities in the amount of $862,402.
Net cash used in investing activities for the year ended December 31, 2002 was $118,201. Investing activities reflect capital expenditures in replacing factory equipment and leasehold improvements.
On May 16, 2002, Cabletel entered into a Revolving Credit Facility Agreement with LaSalle Business Credit, a division of ABN AMRO BANK N.V., Canada Branch (“LaSalle”) for a three year committed fifteen million dollars ($15,000,000), or its United States dollar equivalent. The new facility replaced the Company’s previous $12 million credit facility with HSBC Bank Canada.
The new facility contains certain customary covenants. As of December 31, 2002, as a result of a variation from the required minimum adjusted net worth, interest coverage ratio and debt service ratio, the Company had a technical violation of the applicable covenants. On March 25, 2003, the Company entered into a waiver and amendment to its credit agreement with its senior bank lender to remedy the above mentioned technical violations of minimum adjusted net worth, interest coverage ratio and debt service ratio covenants contained in its senior credit facility.
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 Common Shares at an exercise price of $1.64 per share up to and including May 31, 2007.
As of November 1, 2002, the Company began consolidating the results of Allied, as a result of the Company’s ability to convert it’s convertible debenture into 100% ownership of all issued and outstanding common shares of Allied for nominal consideration. Allied is currently in negotiations with its senior bank lender with regards to an extension of its senior bank facility beyond its current maturity date. If Allied is unable to obtain such an extension, Cabletel does not intend to exercise its option. This event could adversely affect the consolidated results of the Company.
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.
RECENT UNITED STATES ACCOUNTING PRONOUNCEMENTS
On January 1, 2002, the Company adopted SFAS No. 141, SFAS No. 142, SFAS No. 143 and SFAS No. 144. The adoption of these statements did not have a material impact on the Company’s results of operations or financial condition.
(ii)
Statement of Financial Accounting Standards No. 146 (SFAS No. 146)
In July 2002, the FASB issued SFAS No. 146, which addresses significant issues regarding the recognition, measurement, and reporting of costs that are associated with exit and disposal activities, including restructuring activities that are currently accounted for pursuant to the guidance that the Emerging Issues Task Force (“EITF”) has set forth in EITF issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring)”. SFAS No. 146 revises the accounting for certain lease termination costs and employee termination benefits, which are generally recognized in connection with restructuring activities. The adoption of this statement is not expected to have a material effect on the Company’s results of operations or financial condition.
(iii)
Statement of Financial Accounting Standards No. 148 (SFAS No. 148)
In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure”. SFAS No. 148 amends the transition and disclosure provisions of SFAS No. 123. The Company is currently evaluating SFAS No. 148 to determine if it will adopt SFAS No. 123 to account for Employee stock options using the fair value method and, if so, when to begin transition to that method.
(iv)
FASB Interpretation No. 45 (FIN 45)
In November 2002, the FASB issued FIN 45, which expands previously issued accounting guidance and disclosure requirements for certain guarantees. FIN 45 requires the Company to recognize an initial liability for the fair value of an obligation assumed by issuing a guarantee. The provision for initial recognition and measurement of the liability will be applied on a prospective basis to guarantees issued or modified after December 31, 2002. The adoption of FIN 45 is not expected to materially affect the Company’s results of operations or financial condition.
(v)
FASB Interpretation No. 46 (FIN 46)
In January 2003, FASB issued FIN 46, “Consolidation of Variable Interest Entities” which requires the consolidation of variable interest entities, as defined. FIN 46 is applicable to financial statements to be issued by the Company after 2002; however, disclosures are required currently if the Company expects to consolidate any variable interest entities.
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.
RISK FACTORS
Gross Profit for the Manufacturing Segment Disclosures
Gross profit for the product category disclosures within Management’s Discussion and Analysis of Financial Condition and Results of Operations section of this report was derived from estimates using standard product margins and an allocation of manufacturing variances.
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.
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, Persona Communications Inc., Shaw Communications Inc., and COGECO Cable Inc., Cabletel’s largest customers which have accounted for approximately 33%, 28%, 4%, 3% and 3%, respectively, of the Company’s total sales for the 12 month period ending December 31, 2002, 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.
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 at December 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 is 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 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.
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.
ITEM 7A.
ITEM 7A.
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 December 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.
ITEM 8.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The Financial Statements of the Company for the three year period ended December 31, 2002 are hereby incorporated by reference.
ITEM 9.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10.
DIRECTORS AND OFFICERS OF THE REGISTRANT
The following table sets forth the name and municipality of residence, the age, the position held with Cabletel and the principal occupation of each of the directors and executive officers of Cabletel:
(1)
Member of the audit committee.
(2)
Member of the compensation committee.
Each of the foregoing directors and executive officers of Cabletel has been engaged in the current occupations shown opposite their respective names for the last five years or as stated below.
Mr. Peterson was elected as a director of Cabletel on August 11, 2000 and subsequently appointed Chairman of the Board on December 12, 2000. Mr. Peterson was formerly Premier of Ontario, and is presently Chairman of Cassels Brock & Blackwell LLP, one of Canada’s leading legal firms, as well as Chairman of Cassels Pouliot Noriega, an international affiliate of Toronto, Montreal and Mexico City law firms. Mr. Peterson is also a member of the boards of Rogers Communications Inc., Rogers AT&T Wireless, National Life Assurance Co., Industrial-Alliance Life Assurance Company, BNP Paribas (Canada), SMK Speedy International Inc., Inscape, Vector Aerospace Corporation, Ivanhoe Cambridge, and Tesma International Inc. Prior to serving in the legislature, Mr. Peterson was President and Chief Executive Officer of C.M. Peterson, a national distributor of electronic products.
Mr. Biggar became a director of Cabletel on June 27, 2001 and is currently Executive Vice-President with Magna International Inc. From August 1999 to March 2001 Mr. Biggar was Executive Vice-President and Chief Financial Officer for Cambridge Shopping Centres Ltd., and from April 1996 to January 1999 was Senior Vice-President, Investments, of Barrick Gold Corporation. Mr. Biggar is also a member of the board of Manitou Capital Corporation.
Mr. Margolis became a director in August of 1996 in connection with the ANTEC Canadian Business Acquisition. From 1986-1992, Mr. Margolis was Vice President, General Counsel and Secretary of Anixter.
Mr. Faust became a director in August of 1996 in connection with the ANTEC Canadian Business Acquisition. From 1989-1994, Mr. Faust held various executive positions with General Instrument Corporation and is also a director of Arris Corporation, Evolve Communications and Optimal Systems.
Mr. Cochrane became a director in August of 1999 and is currently the President of Teletoon Inc. He has held this position since October 2001. From November 1990 to September 2001 he was the President and Chief Operating Officer of Family Channel Inc.
Mr. Walling was appointed Chief Executive Officer and President of Cabletel in October 1998. Prior to 1998, Mr. Walling served as President of Star Choice Television Network Inc. (1995-1998). From 1992 to 1998, he was President of Walling Corporation. See “Item 11.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Set forth below is information relating to the beneficial ownership within the meaning of Rule 13(d)(3) under the Act of Common Shares by all persons known by Cabletel to beneficially own more than 5% of the issued and outstanding Common Shares of Cabletel as at March 17, 2003.
(1)
In May 2000, ARC International Corporation (“ARC”), was placed into the hands of a receiver in Ontario, Canada and ceased operating as a going-concern. The Company has been advised that all of ARC’s assets would be liquidated and sold. The Company understands and has been advised that ARC’s senior lender in the United States, GMAC Commercial Credit LLC (“GMAC”), which had a security interest in the Common Shares of the Company held by ARC (the “ARC Shares”), has realized on its security interest and taken possession of the ARC Shares. To date, GMAC has not advised the Company regarding its plans, if any, with respect to the ARC Shares.
Set forth below is information relating to the beneficial ownership of Common Shares by all executive officers and directors of the Company as at March 17, 2003. The Common Shares shown as “beneficially owned” include all securities, which pursuant to Rule 13(d)(3) under the United States Securities and Exchange Act of 1934, as amended may be deemed to be beneficially owned. The address of each person is c/o Cabletel Communications Corp., 230 Travail Rd., Markham, Ontario, Canada, L3S 3J1.
As at March 17, 2003, the directors and executive officers of Cabletel as a group beneficially owned 987,300 Common Shares, representing approximately 12.24% of all Common Shares outstanding.
ITEM 13.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
COUNSEL
In March 2002, the Company appointed Cassels Brock & Blackwell LLP as its Corporate Counsel, a firm of which Cabletel’s Chairman is also a Senior Partner and Chairman. For the year ended December 31, 2002, the Company paid to Cassels, Brock & Blackwell LLP an amount of $60,172 for services provided to the Company.
EXECUTIVE LOAN AGREEMENTS
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 loans were used for personal matters.
Since December 19, 2000, the following directors and officers of the Company have been indebted to the Company in the respective amounts set out opposite their names below. In each case, the indebtedness was incurred in connection with the loans made to such directors and officers under the executive loan agreements.
PART IV
The Company’s Chief Executive Officer and Chief Financial Officer (collectively, the “Certifying Officers”) are responsible for establishing and maintaining disclosure controls and procedures for establishing and maintaining disclosure controls and procedures for the Company. Such officers have concluded (based upon their evaluation of these controls and procedures as of a date within 90 days of filing of this report) that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in this report is accumulated and communicated to the Company’s management, including its Certifying Officers as appropriate, to allow timely decisions regarding required disclosure. The Certifying Officers also have indicated that there were no significant changes in the Company’s internal controls or other factors that could significantly affect such controls subsequent to the date of their evaluation, and there were no corrective actions with regard to significant deficiencies and material weakness.
ITEM 15.
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
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.
10.23
Previously filed on Cabletel Current Report on Form 8-K, dated May 2, 2002 and incorporated herein by reference. Under ITEM 5 of that 8-K the Company announced that it had obtained a facility extension until May 31, 2002 with its main bank lender that will permit Cabletel to continue negotiations related to a commitment the Company received from an asset-based lender.
10.24
Previously filed on Cabletel Current Report on Form 8-K, dated May 16, 2002 and incorporated herein by reference. 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.
10.25
Previously filed on Cabletel Current Report on Form 8-K, dated May 29, 2002 and incorporated herein by reference. Under ITEM 5 of that 8-K the Company announced that, concurrent with its previously reported establishment of a new $15 million revolving credit facility with LaSalle Business Credit, Cabletel also renegotiated credit terms with a major supplier that included conversion of US$2.2 million in outstanding payables owed by Cabletel into a senior subordinated promissory note.
10.26
Previously filed on Cabletel Current Report on Form 8-K, dated November 5, 2002 and incorporated herein by reference. Under ITEM 5 of that 8-K the Company announced that it has entered into a transaction with Allied Wire and Cable Ltd., and certain related companies pursuant to which Cabletel has been granted an option to acquire all of the capital stock of Allied.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 25, 2003
CABLETEL COMMUNICATIONS CORP.
By:
/s/ D. Gregory Walling
By:
/s/ Ron Eilath
D. Gregory Walling
President & Chief Executive Officer
Ron Eilath
Chief Financial Officer
By:
/s/ David R. Peterson
By:
/s/ William J. Biggar
David R. Peterson
Chairman of the Board & Director
William J. Biggar
Director
By:
/s/ Len Cochrane
By:
/s/ James L. Faust
Len Cochrane
Director
James L. Faust
Director
By:
/s/ Lawrence A. Margolis
Lawrence A. Margolis
Director
CABLETEL COMMUNICATIONS CORP.
- CONSOLIDATED FINANCIAL STATEMENTS -
AND SCHEDULES
TO
ANNUAL REPORT ON
FORM 10-K FOR FISCAL YEAR
ENDED DECEMBER 31, 2002
Kraft, Berger, Grill, Schwartz, Cohen & March LLP
Chartered Accountants
Auditors Report
To the Shareholders and the Board of Directors of
CABLETEL COMMUNICATIONS CORP.
We have audited the consolidated balance sheets of CABLETEL COMMUNICATIONS CORP. as at December 31, 2002 and 2001 and the consolidated statements of operations and deficit and cash flows for each of the three years ended December 31, 2002, 2001 and 2000. These consolidated financial statements are the responsibility of the company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing standards in Canada and the United States of America. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the company as at December 31, 2002 and 2001 and the results of its operations and its cash flows for each of the three years ended December 31, 2002, 2001 and 2000 in accordance with accounting principles generally accepted in Canada.
Our audit also included the financial statement schedule as and for each of the three years ended December 31, 2002, included in the Index at Item 14(a)(2). This financial statement schedule is the responsibility of the company’s management. In our opinion, the financial statement schedule, when considered in relation to the consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
KRAFT, BERGER, GRILL, SCHWARTZ, COHEN & MARCH LLP
Chartered Accountants
Toronto, Ontario
February 14, 2003, except for the Note 4,
which is dated March 25, 2003
CABLETEL COMMUNICATIONS CORP.
CONSOLIDATED BALANCE SHEETS
(Canadian Funds)
December 31,
ASSETS
See accompanying notes to financial statements.
APPROVED ON BEHALF OF THE BOARD:
/s/ D. Gregory Walling
/s/ William J. Biggar
D. Gregory Walling
President, Chief Executive Officer and Director
William J. Biggar
Director
CABLETEL COMMUNICATIONS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
(Canadian Funds)
FOR THE YEARS ENDED DECEMBER 31,
See accompanying notes to financial statements.
CABLETEL COMMUNICATIONS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Canadian Funds)
FOR THE YEARS ENDED DECEMBER 31,
Non-cash activities included the conversion of $U.S. 2.2 million of accounts payable to long-term debt (See Note 5).
See accompanying notes to financial statements
CABLETEL COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Canadian Funds)
DECEMBER 31, 2002, 2001 AND 2000
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 15, conform, in all material respects, with the accounting principles generally accepted in the United States.
(a)
Organization and Basis of Presentation
Cabletel Communications Corp., (together with its consolidated subsidiaries, except as the context otherwise indicates, “Cabletel” or the “Company”) is primarily a Canadian distribution and manufacturing company headquartered in Markham, Ontario with major offices and distribution warehouses located in Montreal, Quebec; Vancouver, British Columbia; Dartmouth, Nova Scotia; and Calgary, Alberta.
The Company operates in three business segments, Distribution, Manufacturing and Technology. The Distribution Segment is carried out through Cabletel Communications Corp., a full-service distributor of broadband equipment to the Canadian television and telecommunications industries, offering a wide variety of products required to construct, build, maintain and upgrade broadcasting and telecommunications systems. The Manufacturing Segment is carried out through Stirling Connectors, which manufactures and sells brass and aluminum coaxial connectors for use in cable distribution systems. The majority of Stirling’s sales are to foreign markets. The Technology Segment provides products to broadcasters, network providers and a wide-variety of companies building the infrastructure to support the Internet economy.
As at December 31, 2002, ARRIS (formerly ANTEC Corporation), whose common shares are publicly traded on the NASDAQ Stock Exchange, effectively controlled approximately 20.23% of the outstanding Cabletel common stock. At December 31, 2002, GMAC Commercial Credit LLC, effectively controlled approximately 46.60% of the outstanding Cabletel common stock.
(b)
Consolidation
The consolidated financial statements include the accounts of the wholly-owned subsidiaries, Stirling (Israel) Ltd., Stirling Connectors, U.S.A., Inc., and as of November 1, 2002, Allied Wire and Cable Ltd., as a result of the Company’s ability to convert it’s convertible debenture into 100% ownership of all Allied issued and outstanding common shares for a nominal consideration.
The consolidated financial statements include the accounts of the Company after eliminations of inter-company transactions.
CABLETEL COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Canadian Funds)
DECEMBER 31, 2002, 2001 AND 2000
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(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)
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.
(e)
Property, Plant and Equipment
Property, Plant and Equipment are recorded at cost. Amortization is being provided for over the estimated useful life of the asset on the straight-line basis at the following annual rates. The Company does not amortize temporarily unutilized equipment.
Equipment
Leasehold improvements
- 20 to 50%
- Over the life of the applicable lease
(f)
Foreign Currency Translation
Monetary assets and liabilities are translated into Canadian dollars at the year-end exchange rate, while foreign currency revenues and expenses are translated at the exchange rate in effect on the date of the transaction.
Non-monetary items are translated at historical exchange rates. The Company’s foreign wholly-owned subsidiaries are considered to be fully integrated operations and therefore any resulting exchange gain or loss is recorded in income. Resulting exchange loss of $260,094 (2001 - loss of $296,739; 2000 - gain of $19,272) are included in income.
(g)
Future Income Taxes
The company provides for income taxes using the asset and liability method as required by the Canadian Institute of Chartered Accountants (CICA) Handbook section 3465. The asset and liability method requires that income taxes reflect the expected future tax consequences of temporary differences between the carrying amounts of assets or liabilities and their tax bases. Future income tax assets and liabilities are determined for each temporary difference based on the tax rates, which are expected to be in effect when the underlying items of income and expense are expected to be realized.
CABLETEL COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Canadian Funds)
DECEMBER 31, 2002, 2001 AND 2000
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(h)
Product Development Costs
Product development costs are stated at cost, net of amortization. These expenses, related to the development of new product lines, are recoverable through future sales. Amortization is provided over a period of 5 years based on the life expectancy of the product.
(i)
Deferred Refinancing Fees
Deferred refinancing fees relate to costs incurred in connection with the Company’s refinancing of its long-term debt with ABN AMRO. (See Note 4) Deferred refinancing fees are amortized over three years being the life of the loan.
(j)
Stock Option Plan
The Company grants stock options for a fixed number of shares to employees with an exercise price equal to the fair value of the shares at the date of grant. The Company does not recognize compensation expense for the stock based compensation plan when stock or stock options are issued to employees. Any consideration paid by employees on exercise of stock options or purchase of stock is credited to share capital. If stock or stock options are repurchased from employees, the excess of the consideration paid over the carrying amount of the stock or stock option cancelled is charged to retained earnings.
(k)
Estimates
The preparation of financial statements in accordance with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reported period. These estimates are reviewed periodically, and, as adjustments become necessary, they are reported in earnings in the period in which they become known.
(l)
Reclassification
Certain amounts in prior years’ consolidated financial statements have been reclassified to conform to current year presentation.
CABLETEL COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Canadian Funds)
DECEMBER 31, 2002, 2001 AND 2000
3.
PROPERTY, PLANT AND EQUIPMENT
CABLETEL COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Canadian Funds)
DECEMBER 31, 2002, 2001 AND 2000
4.
BANK INDEBTEDNESS (continued)
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 prior loan by the Business Development Bank of Canada, and general intangibles), existing and future. The weighted average interest rate was 5.91% on the $CDN borrowings and 6.64% on the $US borrowings.
The new facility contains certain customary covenants. As of December 31, 2002, as a result of a variation from the required minimum adjusted net worth, interest coverage ratio and debt service ratio, the Company had a technical violation of the applicable covenants. On March 25, 2003, the Company entered into a waiver and amendment to its credit agreement with its senior bank lender to remedy the above mentioned technical violations of minimum adjusted net worth, interest coverage ratio and debt service ratio covenants contained in its senior credit facility.
5.
LONG-TERM DEBT
CABLETEL COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Canadian Funds)
DECEMBER 31, 2002, 2001 AND 2000
5.
LONG-TERM DEBT (continued)
(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 on settlement of debt. The senior subordinated promissory note is in the principal amount of US $2.2 million, and 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:
CABLETEL COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Canadian Funds)
DECEMBER 31, 2002, 2001 AND 2000
CABLETEL COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Canadian Funds)
DECEMBER 31, 2002, 2001 AND 2000
In connection with the settlement of outstanding accounts payable (Note 5iii), common shares have been reserved for warrants on the following basis:
CABLETEL COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Canadian Funds)
DECEMBER 31, 2002, 2001 AND 2000
7.
CAPITAL STOCK (continued)
In December 2001, the CICA issued Handbook Section 3870 “Stock-Based Compensation and Other Stock-Based Payments.” Effective for the Company’s fiscal year beginning January 1, 2002, the new section requires the use of a fair-value based approach of accounting for certain specified stock-based awards. For all other employee stock-based awards, the section encourages but does not require that a fair-value based approach be used. 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 CICA Handbook Section 3870, 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%; dividend yield of 0%; theoretical volatility assumption of .90; three years vesting provision on certain options granted in 2002 and the expected lives of options of 3 years.
As Reported
Pro-Forma
CABLETEL COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Canadian Funds)
DECEMBER 31, 2002, 2001 AND 2000
7.
INCOME TAXES
The provision (benefit) for income taxes consists of:
Sources of Future Income Tax Balances
CABLETEL COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Canadian Funds)
DECEMBER 31, 2002, 2001 AND 2000
7.
INCOME TAXES (continued)
In assessing its future tax assets, management considers whether it is more likely than not that some portion or all of the future tax assets will be realized. The ultimate realization of future tax assets is dependent upon the generation of future taxable income during periods in which those temporary differences become deductible.
The Company has income tax losses in the amount of approximately $3,489,000 expiring in 2009. The benefit of the losses has not been recognized in these financial statements.
8.
EARNINGS PER SHARE
CABLETEL COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Canadian Funds)
DECEMBER 31, 2002, 2001 AND 2000
8.
EARNINGS PER SHARE (continued)
The following table sets forth the computation of basic and diluted earnings per share:
9.
RELATED PARTY TRANSACTIONS
(i)
The Company was party to certain agreements and transactions in the normal course of business with a company which was Cabletel’s largest shareholder. The agreement with this company was terminated on May 31, 2000. Significant related party transactions not disclosed elsewhere include:
CABLETEL COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Canadian Funds)
DECEMBER 31, 2002, 2001 AND 2000
9.
RELATED PARTY TRANSACTIONS (continued)
(a)
Commitments for leased premises and certain contracts have been made as follows:
(b)
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.
11.
ACQUISITION OF ALLIED WIRE AND CABLE LTD.
On November 1, 2002, the Company entered into a transaction with Allied and certain related companies pursuant to which Cabletel has been granted an option to acquire all of the capital stock of Allied for a nominal consideration. As part of the proposed transaction, Cabletel has agreed to provide an additional $100,000 in inventory and advance $50,000 in cash to Allied. As previously reported, the Company’s second quarter results included a write-off related to Allied. The Company took that write-off in connection with the termination of its previously announced agreement to acquire Allied.
As set out in note 1(b), Allied has been accounted for by the purchase method and as such results of operations for this business have been included for the period beginning November 1, 2002. Approximately $161,616 of goodwill was recorded in connection with the transaction. The acquisition was accounted for as follows:
CABLETEL COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Canadian Funds)
DECEMBER 31, 2002, 2001 AND 2000
11.
ACQUISITION OF ALLIED WIRE AND CABLE LTD. (continued)
(a)
Credit Risk
The Company’s Distribution and Technologies divisions are engaged in the sale of telecommunication products principally in Canada to a diversified group of customers within the telecommunications industry. In the Manufacturing division, approximately 90% of total revenue is derived from sales to international customers. At December 31, 2002, accounts receivable from international customers represented approximately 16% of
CABLETEL COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Canadian Funds)
DECEMBER 31, 2002, 2001 AND 2000
total outstanding accounts receivable. The sales are to a diversified group of customers in the telecommunications industry. The company performs ongoing credit evaluation of its customers’ financial condition and, generally, requires no collateral from its customers although foreign sales are insured through the Export Development Corporation to the maximum allowable.
(b)
Currency risk
The Company is subject to currency risk through its activities in the United States and Israel. Unfavorable changes in the exchange rate may affect the operating results of the Company. The Company does not actively use derivative instruments to reduce its exposure to foreign currency risk. However, dependent on the nature, amount and timing of foreign currency receipts and payments, the Company may enter into forward exchange contracts to mitigate the associated risks. There were no forward exchange contracts outstanding at December 31, 2002 and 2001.
(c)
Fair value of financial assets and liabilities
The carrying amounts of the Company’s financial assets and liabilities including cash, accounts receivable, accounts payable, and accrued liabilities, approximate fair value due to the short-term maturity of these items.
The fair value of short-term loans and long-term debt approximates the carrying amounts due to recent negotiations or variable rates based on prime.
The carrying value of other receivables approximates fair value due to the use of the market interest rates used in calculating net present value.
14.
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 years ended December 31, 2002, 2001 and 2000.
CABLETEL COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Canadian Funds)
DECEMBER 31, 2002, 2001 AND 2000
14.
SEGMENTED INFORMATION (continued)
Summary of Business Segment
Net Revenue
Identifiable Assets:
CABLETEL COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Canadian Funds)
DECEMBER 31, 2002, 2001 AND 2000
14.
SEGMENTED INFORMATION (continued)
Expenditures on Property, Plant and Equipment
Amortization
(Includes amortization in cost of sales and amortization of prepaid financing costs.)
Summary by Geographical Area
Net Revenue
(Revenues are attributed based on the location of the customer.)
Property, Plant and Equipment
(Property, Plant, Equipment by geographical area are based on location of facilities.)
CABLETEL COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Canadian Funds)
DECEMBER 31, 2001, 2000 AND 1999
14.
SEGMENTED INFORMATION (continued)
Sales that exceed 10% of total revenue within the Distribution segment are listed below.
CABLETEL COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Canadian Funds)
DECEMBER 31, 2002, 2001 AND 2000
15.
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.
(i)
Under Canadian GAAP costs classified as development costs are charged in the income statement unless they meet certain criteria; in which case, the costs must be deferred and amortized. Under U.S. GAAP all costs classified as either research or development costs are charged in the income statement as incurred.
(ii)
Due to the fact that the Company does not have legal ownership of the common shares of Allied, U.S. GAAP does not allow consolidation of Allied results of operations.
Reconciliation of Net Earnings From Canadian GAAP to United States GAAP
CABLETEL COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Canadian Funds)
DECEMBER 31, 2002, 2001 AND 2000
15.
UNITED STATES ACCOUNTING PRINCIPLES (continued)
Balance Sheet Presentation Comparing Canadian GAAP to United States GAAP
ASSETS
CABLETEL COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Canadian Funds)
DECEMBER 31, 2002, 2001 AND 2000
15.
UNITED STATES ACCOUNTING PRINCIPLES (continued)
Statement of Cash Flow Presentation Comparing Canadian GAAP to United States GAAP
CABLETEL COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Canadian Funds)
DECEMBER 31, 2002, 2001 AND 2000
15.
UNITED STATES ACCOUNTING PRINCIPLES (continued)
CABLETEL COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Canadian Funds)
DECEMBER 31, 2002, 2001 AND 2000
15.
UNITED STATES ACCOUNTING PRINCIPLES (continued)
CABLETEL COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Canadian Funds)
DECEMBER 31, 2002, 2001 AND 2000
15.
UNITED STATES ACCOUNTING PRINCIPLES (continued)
As Reported - U.S. GAAP
Pro-Forma - U.S. GAAP
CABLETEL COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Canadian Funds)
DECEMBER 31, 2002, 2001 AND 2000
15.
UNITED STATES ACCOUNTING PRINCIPLES (continued)
CABLETEL COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Canadian Funds)
DECEMBER 31, 2002, 2001 AND 2000
15.
UNITED STATES ACCOUNTING PRINCIPLES (continued)
SFAS No. 146 revises the accounting for certain lease termination costs and employee termination benefits, which are generally recognized in connection with restructuring activities. The adoption of this Statement is not expected to have a material effect on the Company’s results of operations or financial condition.
(iii)
Statement of Financial Accounting Standards No. 148 (SFAS No. 148)
In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure”. SFAS No. 148 amends the transition and disclosure provisions of SFAS No. 123. The Company is currently evaluating SFAS No. 148 to determine if it will adopt SFAS No. 123 to account for Employee stock options using the fair value method.
(iv)
FASB Interpretation No. 45 (FIN 45)
In November 2002, the FASB issued FIN 45, which expands previously issued accounting guidance and disclosure requirements for certain guarantees. FIN 45 requires the Company to recognize an initial liability for the fair value of an obligation assumed by issuing a guarantee. The provision for initial recognition and measurement of the liability will be applied on a prospective basis to guarantees issued or modified after December 31, 2002. The adoption of FIN 45 is not expected to materially affect the Company’s results of operations or financial condition.
(v)
FASB Interpretation No. 46 (FIN 46)
In January 2003, FASB issued FIN 46, “Consolidation of Variable Interest Entities” which requires the consolidation of variable interest entities, as defined. FIN 46 is applicable to financial statements to be issued by the Company after 2002; however, disclosures are required currently if the Company expects to consolidate any variable interest entities.
Exhibit 21
Subsidiaries at December 31,
Direct Wholly-Owned Subsidiaries
Jurisdiction
Stirling (Israel) Ltd.
Israel
Stirling Connectors U.S.A., Inc.
Delaware
CABLETEL COMMUNICATIONS CORP.
SCHEDULE II
(Canadian Funds)
VALUATION AND QUALIFYING ACCOUNTS
CERTIFICATIONS
I, Greg Walling, certify that:
1. I have reviewed this annual report on Form 10-K of Cabletel Communications Corp.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and
c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6. The registrant’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 25, 2003
/s/Gregory Walling
Gregory Walling
President and CEO
CERTIFICATION
I, Ron Eilath, certify that:
1. I have reviewed this annual report on Form 10-K of Cabletel Communications Corp.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6. The registrant’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 25, 2003
/s/Ron Eilath
Ron Eilath
Chief Financial Officer