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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended Commission File Number
December 31, 2001 1-13332
Cabletel Communications Corp.
(Exact name of registrant as specified in its charter)
Ontario, Canada 8647 8526
(Jurisdiction of incorporation or organization) (Canadian Federal
Tax 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
Securities registered
pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Common Shares The Toronto Stock Exchange
The American Stock Exchange
Securities
registered pursuant to
Section 12(g) of the Act:
None.
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X]
The aggregate market value of the Common Shares (based upon the closing per
share price of the Common Shares on the American Stock Exchange on March 18,
2002) of Cabletel Communications Corp. held by non-affiliates was approximately
U.S. $11,309,622
The number of Common Shares of the Registrant outstanding as at March 18, 2002
was 7,167,612.
1
EXCHANGE RATE OF THE CANADIAN DOLLAR
The accounts of Cabletel Communications Corp. ("Cabletel" or the
"Company") are maintained in Canadian dollars. All dollar amounts contained
herein are expressed in Canadian dollars, except as otherwise indicated. As at
March 18, 2002, the rate in Canadian dollars was Cdn. $1.00 = U.S. $0.6313.
Set forth below are the exchange rates for the Canadian dollar
equivalent expressed in United States currency during the last 5 years.
Years Ended December 31,
(All amounts in United States dollars)
-------------------------------------------------------------------
1997 1998 1999 2000 2001
------ ------ ------ ------ ------
At End of Year 0.6991 0.6520 0.6929 0.6669 0.6278
Average 0.7227 0.6759 0.6738 0.6733 0.6460
High 0.7481 0.7098 0.6929 0.6970 0.6700
Low 0.6972 0.6329 0.6533 0.6421 0.6237
ACCOUNTING PRINCIPLES
Cabletel's accounts are presented in accordance with Canadian generally
accepted accounting principles. A reconciliation to United States generally
accepted accounting principles is set forth in Note 14 to the Consolidated
Financial Statements included elsewhere in this Annual Report.
FOREIGN PRIVATE ISSUER
The Company is a "Foreign Private Issuer" as defined in Rule 3b-4 under
the Securities Exchange Act of 1934, as amended (the "Act"). Although as a
Foreign Private Issuer the Company is eligible to file its annual report on Form
20-F, the Company has voluntarily elected to file its annual report on Form
10-K.
Pursuant to Rule 3a12-3(b) of the Act, securities registered by a
Foreign Private Issuer are exempt from the provisions of Sections 14(a), 14(b),
14(c), 14(f) and 16 of the Act.
2
PART I
ITEM 1. BUSINESS
GENERAL
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 St. Hubert; Quebec, Delta, British Columbia; and Dartmouth, Nova
Scotia.
Cabletel is a leader in Canada in providing the tools needed to build,
upgrade and maintain cable systems. Cabletel's manufacturing division is
becoming a recognized leader in the design and manufacturing of connectors
world-wide for cable, satellite and wireless cable systems in over 32 countries.
In 1999 the Company diversified and created Cabletel Technologies to provide
products to broadcasters, network providers and other companies involved in
connecting people and places.
The Company has historically operated as a distribution company and
recently has diversified into 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. Major product lines include coaxial
cable (i.e., cable consisting of an inner insulated core of solid wire
surrounded by an outer insulated flexible wire braid), fiber optic cable (i.e.,
cable used in the transmission of visual, audio or data information modulated on
light which is constructed from many strands of flexible and extremely narrow
glass fibers contained in a protective sheath), electronic signal modulators and
transmitters, amplifiers, fiber optic transmitters and receivers, test
equipment, satellite reception apparatus and hardware necessary for installing,
operating and maintaining products sold by the Company. Cabletel also supplies
products to data communication, utility and telephone companies. Net sales of
Cabletel's Distribution segment represented approximately 80% of the Company's
total net sales during year 2001. During year 2001, virtually all sales in the
Distribution segment were to customers in Canada.
The Manufacturing segment is carried out in Canada through Stirling
Connectors, a division of Cabletel, which is operated in the United States by
wholly-owned subsidiary, Stirling Connectors, U.S.A., Inc., and in Israel by
wholly-owned subsidiary Stirling (Israel) Ltd. Stirling manufactures and sells
brass and aluminum coaxial connectors for use in cable distribution systems. The
majority of Stirling's sales are to foreign markets. Net sales of Stirling
represented approximately 12% of the Company's total net sales for year 2001.
Stirling exported approximately 12% of its product to Israel, 77% of its product
to the U.S. and 11% of its product to other foreign markets.
3
The Technology segment provides products to broadcasters, network
providers and a wide-variety of companies building the infrastructure to support
the Internet economy. Net sales attributable to the Technology segment
represented approximately 8% of the Company's total net sales for year 2001.
Virtually all sales in the Technology segment in year 2001 were to customers in
Canada.
For further segmented information, see Note 13 of the Consolidated
Financial Statements of the Company.
Cabletel was incorporated under the laws of the Province of Ontario,
Canada on October 19, 1985. In May 1994, Cabletel effected an initial public
offering (the "Offering") of its Common Shares in certain provinces of Canada.
Cabletel's Common Shares are listed on The Toronto Stock Exchange (the "TSE")
and the American Stock Exchange (the "AMEX").
THE CANADIAN CABLE TELEVISION INDUSTRY
The Canadian cable television industry has traditionally functioned as
a re-broadcaster of television and radio signals received from the point of
original transmission and then modulated, amplified and retransmitted to
subscribers' homes. The industry is approximately 40 years old and currently
services over 8.4 million cable subscribers, of which approximately 7.8 million
subscribers are residential customers and 0.6 million are commercial
subscribers. This represents about 80% of all television households in Canada.
Prior to 1983, cable television was essentially restricted to providing "basic"
services consisting of distant signals received by way of antenna and certain
limited public service channels. Pay-TV was approved by the Canadian
Radio-television and Telecommunications Commission in 1983 and consists of a
variety of subscription channels providing recently released movies, concerts,
sporting events and other programming. Cable television operators are now
offering programming on a pay-per-view basis and are also beginning to offer
non-video services such as data transmission.
Technical developments and strategic decisions by cable system
operators and their competitors will significantly affect the Company. Cable
systems are now being bypassed by direct broadcast satellite services. New
digital technologies enable the compression of many channels into the bandwidth
currently used by one analog channel. There are new wireless technologies, which
could be used to bypass existing distribution systems. The entrance of telephone
companies into the cable industry and the consolidation of cable companies and
telephone companies may affect not only the level of capital spending in
general, but the portion thereof received by the Company.
4
SALES AND MARKETING
Cabletel markets its products across Canada through 28 sales
representatives who operate out of four regional offices located in Delta,
British Columbia; Markham, Ontario; St. Hubert, Quebec; and Dartmouth, Nova
Scotia. Virtually all of Cabletel's sales are made to Canadian customers. The
arrangements between Cabletel and its suppliers relate primarily to the Canadian
cable television market.
Cabletel's customers include almost all of the cable distribution
companies in Canada. Approximately 46% of Cabletel's sales in year 2001 were
made to the 5 largest cable system operators: Rogers Cablesystems Inc. (21%),
Shaw Communications (5%), Regional Cablesystems. (5%), Cogeco (6%), and EastLink
(9%). The five companies represent approximately 75% of the Canadian Cable
Television market (based on number of homes passed).
Backlog of firm orders at December 31, 2001 was $6,100,000 (2000;
$7,500,000) and at March 18, 2002 was approximately $8,500,000. Virtually all of
these orders are intended for shipments during 2002.
The level of Cabletel's sales to its customers is largely determined by
the capital expenditures undertaken by the cable television industry in
maintaining and upgrading its distribution system. Capital spending in the cable
industry has been cyclical, however, the amount of capital spending and
therefore the Company's sales and profits are affected by a variety of factors,
including general economic conditions, availability and cost of capital, other
demands and opportunities for capital (such as acquisitions), regulation, demand
for cable services, competition, alternate technology and real or perceived
trends or uncertainties in these factors. Maintenance and improvement of these
systems is undertaken on a seasonal basis with the result that the majority of
Cabletel's sales occur during the period from April to November of each year
however, the advent of the internet has created strong demand at times of the
year where traditionally demand had been low.
SEASONALITY
Generally, the Company's business exhibits a moderate level of
seasonality as sales of its products typically increase during the second and
third quarters, due primarily to weather conditions in Canada. This, however,
has been offset in the past year due to increased demands from our customers.
There can be no assurances that this trend will continue.
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,
5
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.
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 specifications and functionality, as
well as price.
Stirling manufactures brass and aluminum coaxial connectors for use in
cable distribution systems and its sales represented approximately 13.5% of the
Company's sales during 2001.
The manufacture of coaxial connectors consists of the production and
assembly of individual components to make connectors. The company has entered
into subcontract arrangements with suppliers in the Far East. Approximately 75%
of its production was supplied from these subcontractors in 2001. Stirling sales
could be impacted by the following: slowdowns in spending by its customers,
inability of the Company to supply products on time or quality issues relating
to its products. While Stirling has made every effort to assess the credit
worthiness of its international customers, it faces a higher risk of collections
on its receivables from foreign customers.
Cabletel's Distribution segment purchased approximately 11% of the
products manufactured by Stirling during 2001. Stirling markets the remainder of
its products through direct sales to customers and through three distributors.
Approximately 89% of Stirling's sales are made to the United States market,
Israel, and South America.
EMPLOYEES
At December 31, 2001, the Company had 62 employees, of which 55 were
employed in connection with Cabletel's Distribution and Technology segment and 7
were employed in connection with Stirling's manufacturing segment. The Company's
employees are not unionized, and the Company believes that its relationship with
its employees is excellent.
6
ITEM 2. DESCRIPTION OF PROPERTY
The Company operates out of the following warehouse and office
facilities in four cities across Canada:
Location Size Use Owned/Leased
- ---------------- -------- ------------- ------------------------------
(sq. ft.)
Markham, Ontario 61,585 Warehouse and Leased at $705,988 per annum
Manufacturing Lease expires January 31, 2010
15,659 Office
St. Hubert, Quebec 8,250 Warehouse Leased at $94,814 per annum
3,000 Office Lease expires January 31, 2003
Dartmouth, Nova Scotia 9,499 Warehouse Leased at $99,266 per annum
1,857 Office Lease expires May 31, 2005
Valparaiso, Indiana 2,800 Warehouse Leased at U.S. $31,200 per annum
800 Office Lease expires September 30, 2003
Delta, British Columbia 10,000 Warehouse Leased at $102,451 per annum
1,040 Office Lease expires March 31, 2002
The Company believes its properties are adequate for its current needs.
ITEM 3.LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company is
a party or which any of its property is the subject.
ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
7
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Common Shares currently trade on the TSE and on the AMEX under the
symbol TTV. The Company's Common Shares are the only class of shares issued and
outstanding. The Common Shares were listed and posted for trading on the TSE on
May 19, 1994, and on the AMEX on September 13, 1994.
The high and low sales prices for the Common Shares on the TSE and on
the AMEX during the portion of 2000 and 2001 that the Common Shares were traded
thereon were as follows:
FISCAL YEAR ENDED DECEMBER 31
-----------------------------------------------------------------------------
THE TORONTO STOCK EXCHANGE AMERICAN STOCK EXCHANGE
-------------------------- -----------------------------
($ CANADIAN) ($ U.S.)
HIGH LOW HIGH LOW
---- --- ---- ---
2000
----
FIRST QUARTER 13.79 5.91 9.38 4.06
SECOND QUARTER 9.98 5.45 6.88 3.63
THIRD QUARTER 6.33 3.51 4.25 2.38
FOURTH QUARTER 8.04 2.55 5.38 1.69
2001
----
FIRST QUARTER 3.97 2.61 2.63 1.75
SECOND QUARTER 3.17 2.19 2.05 1.40
THIRD QUARTER 2.61 0.87 1.71 0.55
FOURTH QUARTER 2.35 0.91 1.49 0.58
On March 18, 2002 the last reported per Common Share sale price was
$2.12. There were approximately 42 holders of record of the Common Shares as of
March 18, 2002.
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
8
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. SELECTED FINANCIAL DATA
The following selected financial data (in 000's) 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
YEARS ENDED DECEMBER 31, (IN THOUSANDS)
--------------------------------------------------------------------------------
2001 2000 1999 1998 1997
------- ------- ------- ------- -------
Sales $58,121 $74,493 $54,445 $42,630 $53,706
Expenses 12,144 12,710 8,305 *15,148 *10,076
Net earnings
(loss)** (2,906) 933 567 (7,785) (589)
NET EARNINGS (LOSS)
PER COMMON SHARE
Basic ($0.41) $0.13 $0.09 ($0.19) ($0.09)
Diluted ($0.41) $0.12 $0.08 ($0.19) ($0.09)
* Included in expenses are restructuring charges of $7,098 in 1998 and
$1,045 in 1997.
** Net earnings in 2001 include charges of $1,792 relating to an increase
in inventory obsolescence amounting to $500, increased provisions for
bad debts of $454, a write off of $480 of legal, consulting, and
financing costs relating to acquisitions and financings that did not
materialize, and $358 relating to charges comprised of employee
termination costs.
Net earnings in 1999 include a gain of $122 on sale of land and
building and gain of $73 on surrender of life insurance.
9
BALANCE SHEET
AS AT DECEMBER 31, (IN THOUSANDS)
------------------------------------------------------------------
2001 2000 1999 1998 1997
------- ------- ------- ------- -------
Total assets $28,870 $38,138 $25,368 $18,116 $28,756
Current portion of 171 169 - - -
long-term debt
Current portion due to - - - - 687
related parties
Long-term debt 714 850 - - -
Shareholders' equity 6,070 8,826 6,946 6,233 13,801
Retained earnings (deficit) (10,066) (7,160) (8,093) (8,660) (876)
10
ITEM 7. 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
YEAR ENDED DECEMBER 31, 2001 AND 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 as 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
Year Ended December 31,
----------------------------------
2001 2000
----------- -----------
Distribution $46,715,597 $59,059,214
Manufacturing 7,859,032 12,938,721
Technology 4,430,460 3,473,364
Less: Inter-company sales (884,190) (978,740)
----------- -----------
Net Sales $58,120,899 $74,492,559
=========== ===========
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% when 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% when 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. Also 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.
11
In addition, the Company established sales forces 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% when 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 was 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% as 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
results from 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 Cabletel Distribution segment for the
year ended December 31, 2001 reflects a decrease of $1,133,165 or 12.7% when
compared to $8,925,743 for the year ended December 31, 2000. Cabletel
Distribution segment gross margin 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% when 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 costs. 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% when compared to
$539,439 for the year ended December 31, 2000. Technology segment gross margin
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.
12
Selling, general and administrative expenses for the year ended
December 31, 2001 decreased $1,041,157 or 8.9% to $10,648,693 when compared to
$11,689,850 for the year ended December 31, 2000. Included in selling, general
and administrative are charges of $934,000 relating to an increase in allowance
for doubtful accounts amounting to $454,000, a write off of $480,000 of 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% year ended
December 31, 2000.
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. 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.
Earnings from operations before taxes for the year ended December 31,
2001 was a loss of $2,485,271 as compared to earnings from operations before
taxes of $1,385,599 for the year ended December 31, 2000. This is reflective of
the 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 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 management re-evaluated the likelihood of
realization of the benefits of the future tax assets and
13
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.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2000 AND YEAR ENDED DECEMBER 31, 1999
Consolidated net sales for the year ended December 31, 2000 increased
by $20,047,272 or 36.8% to $74,492,559 as compared to consolidated net sales of
$54,445,287 for the year ended December 31, 1999. The increase is reflective of
a continuing aggressive focus on sales in the Distribution and Technologies
segments as well as increased foreign sales in the Stirling Manufacturing
segment.
The following table shows comparative net sales by segment:
Net Sales
Year Ended December 31,
----------------------------------
2000 1999
----------- -----------
Distribution $59,059,214 $49,057,530
Manufacturing 12,938,721 4,307,129
Technology 3,473,364 1,968,336
Less: Inter-company sales (978,740) (887,708)
----------- -----------
Net Sales $74,492,559 $54,445,287
=========== ===========
Net sales of $59,059,214 in the Distribution segment for the year ended
December 31, 2000 reflects an increase of $10,001,684 or 20.4% when compared to
$49,057,530 for the year ended December 31, 1999. The increase primarily is
reflective of an aggressive focus on sales and stronger capital spending by
Canadian cable operators.
Net sales in the Manufacturing segment of $12,938,721 for the year
ended December 31, 2000 reflects an increase of 200% compared to $4,307,129 for
the year ended December 31, 1999. The increase is primarily due to increased
sales to Israel, which represent approximately 61% of the Manufacturing division
total net sales.
14
Net sales of $3,473,363 in the Technologies segment for the year ended
December 31, 2000 reflects and increase of $1,505,028 or 76.5% when compared to
$1,968,336 for the year ended December 31, 1999. The increase is primarily due
to an aggressive focus on sales as well as to a maturing of the Technology
segment which was commenced in January of 1999.
Gross profit for the year ended December 31, 2000 increased $5,267,564
or 59.7% compared to $8,828,111 for the year ended December 31, 1999. Gross
margin for the year ended December 31, 2000 was 18.9% as compared to 16.2% for
the year ended December 31, 1999. The primary reason for the increase in gross
margin for the year ended December 31, 2000 is the contribution from the
increase of international sales of Stirling manufacturing division, which
historically generates a higher gross margin than the distribution division.
Gross profit of $8,925,743 in the Cabletel Distribution segment for the
year ended December 31, 2000 reflects an increase of $1,535,629 or 20.8% when
compared to $7,390,114 for the year ended December 31, 1999. Cabletel
Distribution segment gross margin for the year ended December 31, 2000 was
15.1%, which is the same when compared to 15.1% for the year ended December 31,
1999.
Gross profit of $4,630,493 in the Stirling Manufacturing segment for
the year ended December 31, 2000 reflects an increase of $3,430,317 or 286% when
compared to $1,200,176 for the year ended December 31, 1999. Stirling
Manufacturing segment gross margin for the year ended December 31, 2000 was
35.8% as compared to 27.9% for the year ended December 31, 1999. The increase is
due to a product mix which yielded higher profits.
Gross profit of $539,439 in the Technologies segment for the year ended
December 31, 2000 reflects an increase of $301,618 or 127% when compared to
$237,821 for the year ended December 31, 1999. Technologies segment gross margin
for the year ended December 31, 2000 was 15.5% when compared to 12.1% for the
year ended December 31, 1999. The segment matured in its second year of
operation which accounted for better efficiency.
Selling, general and administrative expenses for the year ended
December 31, 2000 increased $4,008,502 to $11,689,850 or 52.2% compared to
$7,681,348 for the year ended December 31, 1999. The increase for the year ended
December 31, 2000 is due primarily to international marketing costs that have
been recovered in international billings of $2,163,869 as well as an increase in
new personnel to serve the increased level of sales. As a percentage of sales,
selling, general and administrative expenses increased from 14.1% for the year
ended December 31, 1999 to 15.7% for the year ended December 31, 2000.
Interest expense increased $484,184 or 162% to $783,053 for the year
ended December 31, 2000 compared to $298,869 for the year ended December 31,
1999. The higher interest expense reflects higher borrowings on the Company's
line of credit with HSBC Bank Canada amounting to $664,058 to meet higher levels
of sales and purchases of merchandise for resale as well as
15
interest expense amounting to $72,995 incurred on long-term debt acquired to
purchase capital equipment and perform leasehold improvements. In addition, the
Company recorded $46,000 of imputed interest in connection with the fair market
value calculation of Other receivables.
Operating income for the year ended December 31, 2000 was $1,385,599 as
compared to operating income of $522,276 for the year ended December 31, 1999.
This is reflective of the increases of gross profit that is greater than the
increase in total operating expenses. For the year ended December 31, 2000,
results are impacted by higher interest charges on the Company's borrowings.
For the year ended December 31, 2000, there were no non-operating gains
or expenses, as compared to a non-operating gain of $194,640 for the year ended
December 31, 1999 relating to a gain on sale of land and building of $122,070
and a cash surrender value of life insurance amounting to $72,570.
Income taxes for the year ended December 31, 2000 were $452,814
compared to $149,539 reported for the year ended December 31, 1999. The higher
income taxes for the year ended December 31, 2000 are attributable to higher
income generated. The rate of 32.7% is lower than the statutory rate of 43.95%
primarily due to the realization of future benefits of eligible capital
expenditures amounting to $279,820.
Net income for the year ended December 31, 2000 was $932,785 compared
to $567,377 for the year ended December 31, 1999. Basic earnings per share were
$0.13 for the year ended December 31, 2000 and $0.09 for the year ended December
31, 1999. Diluted earnings per share were $0.12 for the year ended December 31,
2000 and $0.08 for the year ended December 31, 1999.
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
$1,523,080 was used during the year ended December 31, 2001 for financing
activities. Of such amount $1,540,487 was used to repay bank indebtedness and
$133,216 was used to repay long-term debt on a term loan from the landlord of
the Company's head office building. Offsetting the above was funds generated by
the issuance of common shares upon the exercise of employee stock options for
$150,623.
Net cash provided by operating activities for the year ended December
31, 2001 was $1,776,934. Cash flow from reductions in inventory was $1,773,184.
Also, the increase in operating cash flow was due to reductions in accounts
receivable amounting to $5,891,739 and reductions in prepaid expenses, deposits
and other in the amount of $552,817. Offsetting the
16
inflows were outflows of cash used to reduce accounts payable and accrued
liabilities in the amount of $4,838,519.
Net cash used in investing activities for the year ended December 31,
2001 was $276,607. Investing activities reflect capital expenditures in
replacing factory equipment and leasehold improvements.
As a result of, among other things, a slowdown in the Company's
liquidation of inventory and collection of accounts receivables during 2001, in
October 2001 the Company became overdrawn on its credit facility with its main
bank lender, HSBC Bank Canada (the "Bank"), an event that would have permitted
the Bank to terminate the facility. Accordingly, on October 30, 2001, the
Company entered into an extension agreement with the Bank, that permitted the
Company to actively pursue various options to provide the Company with improved
liquidity, including, the sale of equity securities and arrangements with
certain asset-based lenders. That extension was further extended on January 30,
2002. In February 2002, the Company entered into a new extension agreement with
the Bank that provides the Company until April 30, 2002, to prepare new loan
documents and satisfy other conditions required to close the proposed financing
with the new lender. Although the company believes that an agreement will be
reached with the new lender, there can be no assurance that the Company will be
successful in finalizing the proposed transaction. In the event the Company is
unable to complete the proposed financing transaction, the Bank may have the
right to terminate the Company's current credit facility. Under such
circumstances, the Company's liquidity could be adversely affected.
At December 31, 2001, the Company's current assets exceeded its current
liabilities by $3,593,394. However, during the quarter ended December 31, 2001,
the payment of current liabilities was slower than past practice, since
liquidation of inventory and collection of accounts receivable slowed from prior
experience. The slowdown in liquidation of inventory and collection of accounts
receivable is primarily a result of the slowdown in the industry. The Company
does not believe that this fact presents a long-term liquidity concern for the
Company, however no assurances can be given to that effect.
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.
17
SUBSEQUENT EVENTS
(A) On March 12, 2001, the Company announced that it had entered into
an agreement with Allied Wire and Cable Ltd., ("Allied") a leading
supplier of products to the cable and telecom sectors in Western
Canada. The agreement granted the Company the right to acquire
Allied for a combination of cash and stock. The Company
subsequently determined not to consummate the acquisition of
Allied on the terms set forth in the agreement. The Company is
presently in the process of seeking to renegotiate the terms of
its proposed transaction with Allied. As a result of the proposed
transaction with Allied, included on the Company's consolidated
balance under "other assets" is an amount of $606,720 due from
Allied to the Company, which had previously been classified as
accounts receivable, relating to the sale of products in the
ordinary course of business.
(B) As of February 28, 2002 the Company entered into an extension
agreement until April 30, 2002 with its main bank lender, HSBC
Canada that will permit the Company to prepare new loan
documentation and satisfy other conditions required to close
refinancing based on credit approval the Company received with a
major asset-based lender for a new credit facility to replace its
existing operating bank to provide the Company with improved
liquidity.
(C) On July 11, 2001, the Company entered into an agreement with the
U.S. distributor of the Stirling Connector business to acquire
that company's related business and inventory. The Company
subsequently determined not to consummate that acquisition on its
original terms and is seeking to renegotiate the transaction.
Included in the Company's accounts receivable is a net amount of
$801,600 relating to the sale of products to that distributor in
the ordinary course of business. It is anticipated that the
renegotiated terms will provide, in part, for a credit of
approximately $170,000 against products sold by the Company to the
distributor. As a result, the Company has set up allowance for bad
debt in the amount of $54,500 as a reserve for the gross margin
impact of the anticipated return of product in addition to an
allowance of $150,000.
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.
18
INFLATION
The Company believes that the relatively moderate rates of inflation in
recent years have not had a significant impact on its net revenues or
profitability. Historically, the Company has been able to offset any
inflationary effects by either increasing or improving cost efficiencies.
RECENT UNITED STATES ACCOUNTING PRONOUNCEMENTS
(i) On June 29, 2001, the FASB approved its proposed Statements of
Financial Accounting Standards No. 141 (SFAS 141), Business
Combinations, and SFAS 142, Goodwill and Other Intangible Assets. The
provisions of SFAS 141 and SFAS 142 are effective for fiscal years
beginning on or after January 1, 2002 with early adoption permitted
under certain circumstances. In all cases, the standard must be adopted
at the beginning of a fiscal year. Retroactive adoption is not
permitted.
SFAS 141 requires all business combinations to be accounted for under
the purchase method and requires the separate recognition of intangible
assets apart from goodwill if criteria are met. SFAS 142 prohibits the
amortization of goodwill and indefinite life intangible assets.
Instead, goodwill and intangible assets are to be written down whenever
carrying value exceeds fair value. Intangible assets that do not have
an indefinite life must continue to be amortized. The Company has
assessed the standard and does not believe that adoption SFAS 141 and
SFAS 142 will have a material impact on the Company's financial
statements.
(ii) In June 2001, the FASB approved the issuance of Statement of Financial
Accounting Standards No. 143, Accounting for Asset Retirement
Obligations (SFAS 143), which is effective for fiscal years beginning
on or after June 15, 2002. The standard establishes accounting
standards for recognition and measurement of legal obligations
associated with the retirement of tangible long-lived assets. The
Company has assessed the impact of the adoption of this new standard
and does not believe it will have a material impact on its financial
statements.
(iii) In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, Accounting for Impairment of Disposal of Long-lived
assets: (SFAS 144). SFAS 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. The
provisions of this statement are effective for financial statements
issued for fiscal years beginning after December 15, 2001. The Company
has assessed the impact of the adoption of this new standard and it
does not have a material impact on its financial statements.
19
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
Liquidity Risk Factor
As a result of, among other things, a slowdown in the Company's
liquidation of inventory and collection of accounts receivables during 2001, in
October 2001 the Company became overdrawn on its credit facility with its main
bank lender, HSBC Bank Canada (the "Bank"), an event that would have permitted
the Bank to terminate the facility. Accordingly, on October 30, 2001, the
Company entered into an extension agreement with the Bank, that permitted the
Company to actively pursue various options to provide the Company with improved
liquidity, including, the sale of equity securities and arrangements with
certain asset-based lenders. That extension was further extended on January 30,
2002. In February 2002, the Company entered into a new extension agreement with
the Bank that provides the Company until April 30, 2002, to prepare new loan
documents and satisfy other conditions required to close the proposed financing
with the new lender. Although the company believes that an agreement will be
reached with the
20
new lender, there can be no assurance that the Company will be successful in
finalizing the proposed transaction. In the event the Company is unable to
complete the proposed financing transaction, the Bank may have the right to
terminate the Company's current credit facility. Under such circumstances, the
Company's liquidity could be adversely affected
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.
21
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.
International Growth, Foreign Exchange, and Interest Rates
Cabletel intends to continue to pursue growth opportunities in
international markets. In many international markets, long-standing
relationships, including local content requirements and type approvals, create
barriers to entry. In addition, pursuit of such international growth
opportunities may require significant investments for an extended period before
returns on such investments, if any, are realized. Such projects and investments
could be adversely affected by reversals or delays in opening of foreign markets
to new competitors, exchange controls, currency fluctuations, investment
policies, repatriation of cash, naturalization, social and political risks,
taxation and other factors, depending on the country in which such opportunities
arise. Difficulties in foreign financial markets and economies, and of foreign
financial institutions, could adversely affect demand from customers in the
affected countries.
In order to grow internationally, it is expected that the Company will
be required to provide significant amounts of customer financing in connection
with the sale of products and services.
22
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.
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.
23
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. 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, 2001,
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.
24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The Financial Statements of the Company for the three year period ended
December 31, 2001 are hereby incorporated by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
25
PART III
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:
Name & Municipality of Residence Age Position with Cabletel Principal Occupation
- -------------------------------- --- ---------------------- --------------------
DAVID R. PETERSON (1) ( 2) 58 Chairman of the Board and Chairman of Cassels, Brock and
Toronto, Ontario Director Blackwell LLP (a legal firm)
GREGORY WALLING 40 Chief Executive Officer, Executive Officer of Cabletel
Lindsay, Ontario President and Director
RON EILATH 46 Chief Financial Officer and Executive Officer of Cabletel
Thornhill, Ontario Secretary Treasurer
WILLIAM J. BIGGAR (1) 49 Director and Audit Executive Vice-President,
Aurora, Ontario Committee Chairman Magna International Inc.
JAMES L. FAUST 60 Director Chief Executive Officer of
Rolling Meadows, Illinois Clearband LLC, and Director of
ARRIS Corp. (formerly ANTEC
Corporation)
LAWRENCE A. MARGOLIS (1) 54 Director Executive Vice President,
Golf, Illinois Chief Financial Officer of
ARRIS Corp. (formerly ANTEC
Corporation)
LEN COCHRANE (2) 55 Director and Compensation President of Teletoon Canada
Mississauga, Ontario Committee Chairman Inc.
DAVE NOLAN 41 Vice President, Sales and Executive Officer of Cabletel
Markham, Ontario Marketing
BRUCE DOWNIE 46 Vice President, Operations Executive Officer of Cabletel
Markham, Ontario
(1) Member of the audit committee.
(2) Member of the compensation committee.
26
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), Speedy Muffler
King Inc., Inscape, Vector Aerospace Corporation, Ivanhoe Cambridge, Tesma
International Inc., and Energy Visions 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 boards of Mosaic Group Inc., and Manitou Capital Corporation.
Mr. Margolis and Mr. Faust became directors 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. From 1989-1994, Mr. Faust,
held various executive positions with General Instrument Corporation.
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. Executive Compensation - Compensation of
Executives - Employment Contract".
Mr. Eilath who serves as an executive officer of Cabletel has been employed by
the Company as Vice President, Finance from July 1997 to June 2000 and
subsequent to June 2000 as Chief Financial Officer and Secretary Treasurer. From
1995 to 1997, Mr. Eilath served as Vice President, Finance of the Mariposa
Group. Prior to 1995, he was Executive Vice President, Finance with the Greenwin
Group of Companies. See "Item 11. Executive Compensation - Compensation of
Executives - Employment Contract."
27
Mr. Nolan was appointed an executive officer of Cabletel on March 7, 2000 and is
employed by Cabletel as Vice President, Sales and Marketing. Prior to joining
the Company, Mr. Nolan served as Vice President with ANTEC Corporation, a
developer, manufacturer and supplier of optical and radio frequency transmission
equipment for the construction, rebuilding and maintenance of broadband
communications systems. See "Item 11. Executive Compensation - Compensation of
Executives - Employment Contract."
Mr. Downie was appointed as an executive officer of Cabletel in February 2001
and is employed by Cabletel as Vice President, Operations. Prior to February
2001, Mr. Downie served as Director of Operations for Cabletel.
Each member of the board of directors of Cabletel will serve until the next
annual meeting of shareholders or until his successor is duly elected. Officers
are appointed to serve, at the discretion of the board of directors of Cabletel,
until their successors are appointed. See "Item 11. Executive Compensation. -
Compensation of Executives - Employment Contract".
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF EXECUTIVES
The following table sets forth compensation to be paid or awarded to Mr.
Walling, who was appointed Chief Executive Officer in 1998, and Messrs. Eilath,
and Nolan the only executive officers of Cabletel whose total salary and bonus
for the fiscal year ended December 31, 2001 exceeded U.S. $100,000. The
following table is stated in Canadian dollars.
SUMMARY COMPENSATION TABLE
FOR YEAR ENDED DECEMBER 31, 2001
Annual Compensation Long-Term Compensation
---------------------------------------------------- ------------------------------
Other Securities All
Annual Underlying Other
Year Salary Bonus Compensation(1) Options Compensation
---- ---------- -------- --------------- ---------- -------------
GREGORY WALLING(5) 2001 $167,000(4) $45,000 $15,827(2) - $460,000
President and Chief Executive 2000 222,800 - 55,354(6) 150,000
Officer 1999 215,000 - 4,157 30,000
RON EILATH(5) 2001 $140,000 $20,000 $25,567(2) - $360,000
Chief Financial Officer, 2000 140,000 50,000 114,622(6) 75,000
Secretary, and Treasurer 1999 140,000 45,000 14,067 30,000
DAVE NOLAN(3) 2001 $125,000 $45,000 $17,466(2) - -
Vice-President, Sales and 2000 117,308 45,000 15,796 -
Marketing 1999 - - - 28,000
28
(1) Except as set out in the Summary Compensation Table, the aggregate value
of all other compensation paid to each named executive did not exceed
$50,000 or 10% of the total of the annual salary and bonus of the named
executive for the financial year.
(2) Represents car allowance and other taxable benefits.
(3) Includes commissions.
(4) Mr. Walling's compensation included $55,800 in 2001, ($55,800 in 2000;
$48,000 in 1999) paid to the Sullivan Group, an entity controlled by Mr.
Walling.
(5) Other compensation is the amount that would be due pursuant to a change
in control in the company. See "Item II - Executive Compensation -
Employee Contracts"
(6) On December 12, 2000, the Company's Board of Directors approved two
executive loan agreements providing for loans to (i) Gregory Walling,
President and Chief Executive Officer of the Company, in the amount of
$150,000 and (ii) Ron Eilath, Chief Financial Officer and Secretary
Treasurer of the Company, in the amount of $100,000. The loans mature on
December 31, 2003 and are unsecured and interest-free. The loans were
used for personal matters.
OPTIONS GRANTED IN 2001 TO EXECUTIVE OFFICERS
% of Total
Options
Granted to Cdn.$
Options Employees in Exercise or
Name Granted Fiscal Year Base Price Expiration Date 5%($) 10%($)(1)
- ----------------------- ------- ------------ ----------- --------------- ------- ---------
- - - - - -
- - - - - -
There were no option grants in 2001.
(1) Amounts shown represent hypothetical future values which may be
realized at the end of the respective option term based upon hypothetical price
appreciation of the Common Shares. Actual values which may be realized, if any,
upon any exercise of such options, will be based on the market price of the
Common Shares at the time of any such exercise and are thus dependent upon the
future performance of the Common Shares of the Company or its majority owned
subsidiary.
29
AGGREGATED OPTION EXERCISES DURING THE
YEAR ENDED DECEMBER 31, 2001 AND DECEMBER 31, 2001 OPTION VALUES
CABLETEL
Shares Number of Unexercised Value of Unexercised
Acquired on Value(2) Options as at In-the-Money Options as at
Name and Principal Position Exercise Realized December 31, 2001 December 31, 2001(1)
- --------------------------- ------- ---------- --------------------- --------------------------
- - - - -
- - - - -
There were no option exercises in 2001.
(1) Represents the difference between the exercise price of the option
and the market price of the Common Shares of Cabletel as of December 31, 2001.
Such amounts may not be realized. Actual values which may be realized, if any,
upon any exercise of such option will be based on the market price of the Common
Shares of Cabletel at the time of any such exercise and are thus dependent upon
the future performance of the Common Shares of Cabletel.
(2) Represents the difference between the exercise price of the option
and the market price of the common shares of Cabletel acquired upon the exercise
price of option as at the date of the exercise.
EMPLOYMENT CONTRACTS
On December 20, 1999, the Company entered into an employment contract with Mr.
Walling. The agreement provides for total compensation of $215,000 which
includes $167,000 in salary and $48,000 payable to The Sullivan Group, an entity
controlled by Mr. Walling which provides office administrative and other
services to the Corporation. The agreement with Mr. Walling and The Sullivan
Group contains change in control provisions requiring two (2) year payments in
the event of a change of control or 18 months payments if the contract is
terminated at anytime without cause.
On December 20, 1999, the Company entered into an employment contract with Mr.
Eilath. The agreement provides for total compensation of $140,000 and a minimum
bonus of $25,000. For the year ended December 31, 2001, Mr. Eilath was paid only
$20,000 of his entitled $25,000 bonus. The agreement with Mr. Eilath contains
change in control provisions requiring two (2) year payments to Mr. Eilath in
the event of a change of control or 18 months payments if the contract is
terminated at anytime without cause.
30
EXECUTIVE PROFIT SHARING PLAN
On May 19, 1994, Cabletel adopted an executive profit sharing plan pursuant to
which executive officers who are full-time employees of Cabletel are entitled to
receive bonuses equal to the aggregate of 2.5% of the Company's pre-tax profits
in each fiscal year. The bonus to be paid to each participating executive
officer will be determined by the Compensation Committee.
STOCK OPTION PLAN
On May 19, 1994, Cabletel adopted a stock option plan (the "Option Plan")
pursuant to which it may grant to full-time employees, senior officers and
directors of Cabletel and its subsidiaries non-assignable options ("Options") to
purchase Common Shares. The purpose of the Option Plan is to secure for Cabletel
and its shareholders the benefits of incentives inherent in share ownership by
key employees and directors.
The Option Plan is administered by the Compensation Committee which is empowered
to select the optionees to whom Options are granted in its sole discretion, and
to determine the number of Common Shares subject to each Option, the timing of
each grant of an Option, the exercise price of such Option, the duration of each
Option (which will not exceed 10 years) and any other matters relating thereto.
Any Option granted under the Option Plan is non-transferable and no person may
be issued Options, which in the aggregate represent 5% or more of the issued and
outstanding Common Shares. The exercise price of an Option granted under the
Option Plan may not be lower than the market price of the Common Shares at the
time of grant. Originally, not more than 950,000 Common Shares were issuable
pursuant to the Option Plan. However, on November 4, 1999, the Board of
Directors of the Company passed a resolution to amend the Stock Option Plan to
increase the number of Common Shares to be available under the plan by 1,000,000
Common Shares for a total of 1,950,000. This increase was subsequently approved
by Shareholders at the Company's annual general meeting of the Shareholders held
on June 28, 2000. If the holder of an Option ceases to be a full-time employee
of Cabletel or any of its subsidiaries, the Option will terminate upon the
earlier of thirty days following the day upon which the holder ceased to be a
full-time employee and the original expiration date of the Option unless the
holder ceased to be a full-time employee by reason of retirement at the normal
retirement age, death or permanent disability. The Option will terminate upon
the earlier of one year following the date of retirement, death or permanent
disability and the original expiration date of the Option.
On August 5, 1999, Cabletel amended its Option Plan to provide that if the
holder of an Option ceases to be a senior officer or director of Cabletel or any
of its subsidiaries, the Option will terminate upon the earlier of one year
following the day upon which the holder ceased to be a senior officer or
director and the original expiration date of the Option.
31
COMPENSATION OF DIRECTORS
Directors of Cabletel (other than those who are officers of Cabletel) receive
$1,000 for each meeting of the board of directors or any committee thereof which
they attend in person or $500 if they participated by teleconference. In
addition, the Chairman of the Company receives an annual retainer in the amount
of $25,000. Each director receives an annual retainer of $15,000 and each
director who acts as a board committee chairperson receives an additional
$2,500. Each of the directors who are not officers of the Company receive
options to purchase 30,000 shares of the Company's common stock at an exercise
price equal to the market close on the date granted. In addition, board
committee chairpersons receive additional options to purchased 5,000 shares of
the Company's common stock at an exercise price equal to the market close on the
date granted. These options, which vest as to 1/3 on each anniversary after
their issue date, expire ten years from the date of issue.
In respect of the fiscal year ended December 31, 2001, directors who are not
also officers of the Company received an aggregate of $102,680.
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 (i) all persons known
by Cabletel to beneficially own more than 5% of the issued and outstanding
Common Shares and (ii) all directors and executive officers of Cabletel as at
March 20, 2002.
Title of Class Identity of Person or Group Amount Owned Percent of Class
- -------------- --------------------------------------- ------------ ----------------
Common Shares GMAC Commercial Credit LLC (1) 3,340,112 46.60%
Common Shares ARRIS Corp. (formerly ANTEC Corporation) 1,450,000 20.23%
(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.
32
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 20,
2001. 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.
Amount and Nature of
Name of Beneficial Owner Beneficial Ownership(1) Percent of Class
- ------------------------ ---------------------- ----------------
GREGORY WALLING 251,150(2) 3.05%
RON EILATH 142,500(3) 1.73%
LEN COCHRANE 66,000(4) 0.80%
DAVE NOLAN 43,000(5) 0.52%
BRUCE DOWNIE 38,000(6) 0.46%
DAVID R. PETERSON 47,000(7) 0.57%
WILLIAM J. BIGGAR 35,000(8) 0.43%
JAMES L. FAUST 39,000(8) 0.47%
LAWRENCE A. MARGOLIS 30,000(9) 0.36%
All Directors and Officers as a group 691,650 8.39%
======= =====
(1) Includes options as listed in Stock Option Plan heading.
(2) Includes options to purchase 230,000 common shares.
(3) Includes options to purchase 142,500 common shares.
(4) Includes options to purchase 65,000 common shares.
(5) Includes options to purchase 43,000 common shares.
(6) Includes options to purchase 38,000 common shares.
(7) Includes options to purchase 45,000 common shares.
(8) Includes options to purchase 35,000 common shares.
(9) Includes options to purchase 30,000 common shares.
33
As at March 18, 2002, the directors and executive officers of Cabletel
as a group owned beneficially owned 691,650 Common Shares, representing
approximately 8.39% of all Common Shares outstanding.
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, 2001, the Company paid to Cassels,
Brock & Blackwell LLP an amount of $34,014 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.
AMOUNT OF
LARGEST AGGREGATE LOANS OUT-
AMOUNT OF LOANS STANDING AS AT
OUTSTANDING ----------------------------------------------------
EXECUTIVE OFFICER SINCE DECEMBER 31, 2000 MARCH 20, 2002
- ----------------- ----------------------------- --------------
Gregory Walling $150,000 $150,000
Ron Eilath $100,000 $100,000
34
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) FINANCIAL STATEMENTS AND EXHIBITS
(1) Consolidated Financial Statements
Auditors' Report of Kraft, Berger, Grill, Schwartz, Cohen &
March LLP
Balance Sheets - December 31, 2001 and December 31, 2000
Statements of Operations and Deficit - Years Ended December
31, 2001, December 31, 2000 and December 31, 1999
Statements of Cash Flows - Years Ended December 31, 2001,
December 31, 2000 and December 31, 1999
Notes to Financial Statements
(2) Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts -For the years
ended December 31, 2001, December 31, 2000 and December 31,
1999
(3) Exhibits: See exhibit following Reports on Form 8-K.
(B) REPORTS ON FORM 8-K
None
EXHIBIT INDEX
*3.1 Articles of Incorporation, as amended, of Cabletel.
*3.2 By-Laws of Cabletel.
*10.1 Cabletel Option Plan.
*10.2 Cabletel Purchase Plan.
35
*10.5 Management Services Agreement dated May 19, 1994 by and between
ARC and Cabletel.
*10.6 Bank Loan Agreement dated May 30, 1994 by and among Cabletel, ARC
and Hong Kong Bank of Canada.
*10.7 Bank Loan Agreement dated May 30, 1994 by and among Stirling, ARC
and Hong Kong Bank of Canada.
*10.8 Employment Agreement made as of January 1, 1994 by and between
Cabletel and Mr. Rittenberg.
10.12 Previously filed employment agreement as of December 20, 1999
between Cabletel and Mr. Walling and incorporated herein by
reference.
10.13 Previously filed employment agreement as of December 20, 1999
between Cabletel and Mr. Eilath and incorporated herein by
reference.
10.14 Previously filed commitment letter between Business Development
Bank and Cabletel dated as of February 8, 2000 and incorporated
herein by reference.
10.15 Previously filed executive loan agreement dated December 19, 2000,
between Cabletel and Mr. Walling and incorporated herein by
reference.
10.16 Previously filed executive loan agreement dated December 19, 2000,
between Cabletel and Mr. Eilath and incorporated herein by
reference.
10.17 Previously filed on Cabletel Current Report on Form 8-K, dated
March 16, 2001 and incorporated herein by reference.
- -----------
* Previously filed as an exhibit to Cabletel's Registration Statement on Form
20-F dated June 15, 1994, and incorporated herein by reference.
36
10.18 Previously filed on Cabletel Current Report on Form 8-K, dated
August 6, 2001 and incorporated herein by reference.
10.19 Previously filed on Cabletel Current Report on Form 8-K, dated
September 10, 2001 and incorporated herein by reference.
10.20 Previously filed on Cabletel Current Report on Form 8-K, dated
October 11, 2001 and incorporated herein by reference.
10.21 Previously filed on Cabletel Current Report on Form 8-K, dated
February 4, 2001 and incorporated herein by reference
21 List of Subsidiaries
37
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 20, 2002
CABLETEL COMMUNICATIONS CORP.
By: /s/ By: /s/
------------------------------------ -------------------------------
Gregory Walling Ron Eilath
President & Chief Executive Officer Vice President, Finance
By: /s/ By: /s/
------------------------------------- -------------------------------
David R. Peterson William J. Biggar
Chairman of the Board & Director Director
By: /s/ By: /s/
------------------------------------- -------------------------------
Len Cochrane James L. Faust
Director Director
By: /s/
-------------------------------------
Lawrence A. Margolis
Director
38
CABLETEL COMMUNICATIONS CORP.
- CONSOLIDATED FINANCIAL STATEMENTS -
AND SCHEDULES
TO
ANNUAL REPORT ON
FORM 10-K FOR FISCAL YEAR
ENDED DECEMBER 31, 2001
39
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, 2001 and 2000 and the consolidated statements of operations
and deficit and cash flows for each of the three years ended December 31, 2001,
2000 and 1999. 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 Canadian generally accepted auditing
standards. 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, 2001
and 2000 and the results of its operations and its cash flows for each of the
three years ended December 31, 2001, 2000 and 1999 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, 2001, 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
March 6, 2002, except for the Note 15,
which is dated March 20, 2002
40
CABLETEL COMMUNICATIONS CORP.
CONSOLIDATED BALANCE SHEETS
(CANADIAN FUNDS)
DECEMBER 31,
ASSETS
2001 2000
---------- -----------
CURRENT
Cash $ 12,292 $ 38,219
Accounts receivable (Note 10c and 10d)
(net of allowance of $847,194; 2000 - $276,005) 14,155,425 20,618,353
Inventory (Note 2) 10,629,957 12,903,141
Income taxes recoverable 120,000 36,456
Prepaid expenses, deposits and other 761,843 1,314,660
Future income taxes (Note 7) - 145,312
------------ -----------
25,679,517 35,056,141
PROPERTY, PLANT AND EQUIPMENT (Note 3) 2,297,821 2,465,633
FUTURE INCOME TAXES (Note 7) - 311,495
OTHER ASSETS (Note 10c) 606,720
OTHER RECEIVABLES (Note 9(ii)) 220,000 204,000
PRODUCT DEVELOPMENT COSTS (Note 1(h))
(net of amortization of $69,011; 2000 - $34,505) 66,137 100,643
------------ -----------
$ 28,870,195 $38,137,912
============ ===========
LIABILITIES
CURRENT
Bank indebtedness (Note 4) $ 11,308,972 $12,849,459
Accounts payable 8,757,675 12,768,815
Accrued liabilities 1,848,091 2,675,470
Long-term debt (Note 5) 171,385 168,616
------------ -----------
22,086,123 28,462,360
LONG-TERM DEBT (Note 5) 713,737 849,722
------------ -----------
22,799,860 29,312,082
============ ===========
COMMITMENTS AND CONTINGENCIES (Note 10)
SHAREHOLDERS' EQUITY
CAPITAL STOCK (Note 6)
AUTHORIZED
Unlimited First preferred shares, issuable in series
Unlimited Common shares
ISSUED
7,167,612 Common shares (2000 - 7,068,912) 16,136,761 15,986,138
DEFICIT (10,066,426) (7,160,308)
------------ -----------
6,070,335 8,825,830
------------ -----------
$ 28,870,195 $38,137,912
============ ===========
See accompanying notes to financial statements.
APPROVED ON BEHALF OF THE BOARD:
- -------------------------------------- ------------------------------
Gregory Walling William J. Biggar
President, Chief Executive Officer and Director
Director
41
CABLETEL COMMUNICATIONS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
(CANADIAN FUNDS)
FOR THE YEARS ENDED DECEMBER 31,
2001 2000 1999
---------- ----------- -----------
SALES $58,120,899 $74,492,559 $54,445,287
COST OF SALES 48,462,542 60,396,884 45,617,176
---------- ---------- ----------
GROSS PROFIT 9,658,357 14,095,675 8,828,111
---------- ---------- ----------
EXPENSES
Selling, general and administrative 10,648,693 11,689,850 7,681,348
Special charge (Note 11) 357,836 - -
Amortization 249,992 237,173 325,618
Interest - bank indebtedness 799,941 710,058 298,869
Interest - long-term debt 87,166 72,995 -
---------- ---------- ----------
12,143,628 12,710,076 8,305,835
---------- ---------- ---------
EARNINGS (LOSS) FROM OPERATIONS (2,485,271) 1,385,599 522,276
Gain on sale of land and building - - 122,070
Cash surrender value of life insurance - 72,570
---------- ---------- ----------
-
EARNINGS (LOSS) BEFORE INCOME TAXES (2,485,271) 1,385,599 716,916
Income taxes (Note 7) 420,847 452,814 149,539
---------- ---------- ----------
NET EARNINGS (LOSS) FOR THE PERIOD (2,906,118) 932,785 567,377
DEFICIT, beginning of period (7,160,308) (8,093,093) (8,660,470)
----------- ----------- -----------
DEFICIT, end of period $(10,066,426) $(7,160,308) $(8,093,093)
============= ============ ============
EARNINGS (LOSS) PER SHARE (Note 8)
Basic ($0.41) $ 0.13 $0.09
======= ====== =====
Fully diluted ($0.41) $ 0.13 $0.08
======= ====== =====
See accompanying notes to financial statements.
42
CABLETEL COMMUNICATIONS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CANADIAN FUNDS)
FOR THE YEARS ENDED DECEMBER 31,
2001 2000 1999
---------- ---------- ----------
OPERATING ACTIVITIES
Net income (loss) for the period $(2,906,118) $ 932,785 $567,377
Imputed interest (16,000) 46,000 25,447
Future income taxes 456,807 265,492 100,600
Amortization 478,925 489,414 501,422
Other assets (606,720) - -
Gain on sale of land and building - - (122,070)
Provision for doubtful accounts 571,189 33,516 52,000
Change in allowance for inventory obsolescence 500,000 64,677 (175,497)
Change in accounts receivable 5,891,739 (8,297,839) (5,886,174)
Change in inventory 1,773,184 (2,917,574) (1,420,056)
Change in prepaid expenses, deposits and other 552,817 (799,758) (363,413)
Change in accounts payable and accrued liabilities (4,838,519) 4,979,390 3,577,704
Change in other receivables - (250,000) -
Change in income taxes 552,304 92,315
(83,544)
---------- ---------- ----------
1,773,760 (4,901,593) (3,050,345)
---------- ---------- ----------
FINANCING ACTIVITIES
Bank indebtedness (1,540,487) 4,891,712 2,991,860
Issuance of common shares 150,623 947,488 145,405
Proceeds of long-term debt - 1,101,721 -
Repayment of long-term debt (133,216) (83,383) -
---------- ---------- ----------
(1,523,080) 6,857,538 3,107,265
---------- ---------- ----------
INVESTING ACTIVITIES
Proceeds from sale of land and building - - 949,005
Purchase of equipment (276,607) (1,945,313) (805,887)
Increase in other asset - (178,106
---------- ---------- ----------
-
(276,607) (1,945,313) (34,988)
---------- ---------- ----------
CHANGE IN CASH (25,927) 10,632 21,932
CASH, beginning of period 38,219 27,587 5,655
======== ======== =====
CASH, end of period $ 12,292 $ 38,219 $ 27,587
========= ========= ========
SUPPLEMENTARY CASH FLOW INFORMATION
Interest paid $ 887,107 $ 737,053 $ 273,422
========= ========= =========
Income taxes paid
$ - $ - $ -
======= ======= =======
See accompanying notes to financial statements.
43
CABLETEL COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CANADIAN FUNDS)
DECEMBER 31, 2001, 2000 AND 1999
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 14, 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, and Dartmouth, Nova Scotia.
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, 2001, ARRIS (formerly ANTEC Corporation),
whose common shares are publicly traded on the NASDAQ Stock
Exchange, effectively controlled approximately 20% of the
outstanding Cabletel common stock on a fully diluted basis. At
December 31, 2001, GMAC Commercial Credit LLC, effectively
controlled approximately 46% of the outstanding Cabletel
common stock on a fully diluted basis.
(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.
44
CABLETEL COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CANADIAN FUNDS)
DECEMBER 31, 2001, 2000 AND 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(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.
Building (prior to 2000) - 5%
Equipment - 20 to 50%
Leasehold improvements - 33 1/3% to 100%
(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 $296,739 (2000 - gain of $19,272;
1999 - gain of $23,481) 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.
(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.
45
CABLETEL COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CANADIAN FUNDS)
DECEMBER 31, 2001, 2000 AND 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(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.
46
CABLETEL COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CANADIAN FUNDS)
DECEMBER 31, 2001, 2000 AND 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(M) RECENT ACCOUNTING PRONOUNCEMENTS
In August 2001, the Canadian Institute of Chartered
Accountants (CICA) issued Handbook Section 3062, "Goodwill and
Other Intangible Assets." Effective for the Company's fiscal
year beginning January 1, 2002, the section changes the
accounting for goodwill from an amortization method to an
impairment-only approach. In addition, this section requires
acquired intangible assets to be separately recognized if the
benefit of the intangible assets are obtained through
contractual or other legal right, or if the intangible assets
can be sold, transferred, licensed, rented or exchanged. The
Company does not expect this section to have a material impact
on its financial statements.
In December 2001, the CICA issued Accounting Guideline 13
"Hedging Relationships." Effective for the Company's fiscal
year beginning January 1, 2003, for the purpose of applying
hedge accounting, the guideline provides guidance on the
identification, designation, documentation and effectiveness
of hedging relationships. The guideline also addresses the
discontinuance of hedge accounting. The Company does not
expect this guideline, when adopted to have a material impact
on its financial statements.
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. The section also addresses the accounting
for stock appreciation rights and awards to be settled in
cash, other financial assets and equity. The Company does not
expect this section to have an initial material impact on its
financial statements upon adoption.
47
CABLETEL COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CANADIAN FUNDS)
DECEMBER 31, 2001, 2000 AND 1999
2. INVENTORY
2001 2000
----------- -----------
Raw Material $ 284,258 $ 354,304
Work in process 655,933 515,765
Finished goods 9,689,766 12,033,072
----------- -----------
$10,629,957 $12,903,141
=========== ===========
3. PROPERTY, PLANT AND EQUIPMENT
2001 2000
ACCUMULATED ACCUMULATED
------------------------------------------- ------------------------------------------
COST AMORTIZATION NET COST AMORTIZATION NET
--------- ------------ --------- --------- ------------ ---------
$ $ $ $ $ $
Leasehold improvements 688,024 235,296 452,728 728,584 210,979 517,605
Equipment 3,886,007 2,040,914 1,845,093 3,680,176 1,732,148 1,948,028
--------- --------- --------- --------- --------- ---------
4,574,031 2,276,210 2,297,821 4,408,760 1,943,127 2,465,633
========= ========= ========= ========= ========= =========
The Company did not amortize equipment with a carrying amount of
$837,142 relating to certain manufacturing equipment during a period
the equipment was not in use. The Company assessed future cash flow
based on the Company's expected plan of operations and it was
determined there was no impairment in value. It is the Company's
intention to utilize these assets in its manufacturing operations over
the next year. The amount of amortization that would have been recorded
had the equipment been utilized would have been $110,337.
4. BANK INDEBTEDNESS
The bank indebtedness consists of overdraft accounts, bears interest at
prime plus 1.25% per annum at December 31, 2001 and increased,
subsequent to year end, to prime plus 1.75% on January 22, 2002.
(December 31, 2001 - 5.25% per annum; December 31, 2000 - 8.125% per
annum) and is secured by general assignments of book debts and
inventory, demand debentures constituting a first fixed and floating
charge on the remaining assets of the company and assignments of
insurance. The weighted average interest rate was 6.875% (2000 - 7.87%;
1999 - 7.32%).
48
CABLETEL COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CANADIAN FUNDS)
DECEMBER 31, 2001, 2000 AND 1999
4. BANK INDEBTEDNESS (continued)
On February 28, 2002, Cabletel entered into an extension agreement
until April 30, 2002 with its main bank lender, HSBC Bank Canada (the
"Bank") that will permit the Company to prepare new loan documentation
and satisfy other conditions required to close refinancing based on
credit approval the Company received with a major asset-based lender
for a new credit facility that will provide the Company with improved
liquidity. The Company expects to finalize the refinancing prior to the
expiration of the extension agreement.
5. LONG-TERM DEBT
(i) Term loan-Leaseholds $354,122
(ii) Term loan-Equipment 531,000
--------
885,122
Less: Current portion 171,385
--------
$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. (December 31, 2001
- 6.75% per annum; December 31, 2000 - 10.25% per annum)
payable monthly over a period of 5 years. This debt was
provided by the BDC to purchase production machinery used in
the manufacturing of connectors. BDC has provided a total
facility of $700,000 which is available to the company for
capital purchases and is collateralized by the assets acquired
under this facility. The weighted average interest rate was
8.81% (2000 - 10.75%).
Principal payments required in each of the next five years on
long term debt are as follows:
Term loan (i) Term loan (ii)
------------- --------------
2002 $29,785 $141,600
2003 32,838 141,600
2004 36,204 141,600
2005 39,914 106,200
2006 44,006 -
Beyond 2006 171,375 -
49
CABLETEL COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CANADIAN FUNDS)
DECEMBER 31, 2001, 2000 AND 1999
6. CAPITAL STOCK
NUMBER AMOUNT
--------- -----------
Balance, December 31, 1999 6,644,112 $15,038,650
Exercise of options 424,800 947,488
--------- -----------
Balance, December 31, 2000 7,068,912 15,986,138
Exercise of options 98,700 150,623
--------- -----------
Balance, December 31, 2001 7,167,612 $16,136,761
========= ===========
STOCK OPTION PLAN
Under the terms of a stock option plan approved by the shareholders in
May, 1994 and amended in November of 1999, the Company is authorized to
grant directors, officers, employees and others options to purchase
common shares at prices based on the market price of shares as
determined on the date of grant. At December 31, 2001, 284,900 options
remain available to be granted. 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, 1998 1,066,000 1.53 - 8.55 2.81
========= =========== ====
Exercised (99,000) 1.53 1.53
Granted 611,500 2.66 - 5.18 4.53
Cancelled (131,000) 1.53 - 2.30 1.62
--------- ----------- ----
Balance at December 31, 1999 1,447,500 1.53 - 8.55 3.73
========= =========== ====
Exercised (424,800) 1.53 - 5.90 2.26
Granted 407,000 1.49 - 9.28 6.62
Expired (100,000) 4.11 4.11
Cancelled (60,500) 1.53 - 5.92 5.49
-------- ----------- ----
Balance at December 31, 2000 1,269,200 1.53 - 9.28 4.32
========= =========== ====
Exercised (98,700) 1.53 1.53
Granted 169,000 2.31 - 3.40 2.68
Expired (163,000) 4.44 - 8.60 5.22
Cancelled (111,000) 1.53 - 9.28 4.04
--------- ----------- ----
Balance at December 31, 2001 1,065,500 1.53 - 9.28 4.62
========= =========== ====
50
The weighted average price at exercise date during 2001 was $1.53 and
in 2000 was $2.26.
At December 31, 2001, a total of 1,065,500 options were exercisable.
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
51
CABLETEL COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CANADIAN FUNDS)
DECEMBER 31, 2001, 2000 AND 1999
7. INCOME TAXES
The provision (benefit) for income taxes consists of:
2001 2000 1999
------- -------- --------
CURRENT INCOME TAXES - Federal $ 36,000 $145,985 $31,831
- Provincial (71,960) 41,337 17,108
FUTURE INCOME TAXES - Federal 301,420 175,907 65,500
- Provincial 155,387 89,585 35,100
------- ------ ------
$420,847 $452,814 $149,539
======== ======== ========
STATUTORY RATE 41.75% 43.95% 44.34%
====== ====== ======
2001 2000 1999
----------- -------- --------
Income taxes at statutory rate $(1,037,600) $608,971 $317,880
Items non-deductible for income tax purposes
and other 211,090 108,629 (15,341)
Future benefits of eligible capital
expenditures realized - (279,820) (153,000)
Large Corporation Tax 36,000 33,744 -
Benefits realized from manufacturing and
processing deduction - (18,710) -
Write down of future income tax assets
previously recognized 456,807 - -
Future income tax expense resulting from
the reduction in tax rate 24,994 - -
Unrealized benefit of losses carried forward 729,556
---------- -------- --------
INCOME TAX EXPENSE $ 420,847 $452,814 $149,539
========== ======== ========
SOURCES OF FUTURE INCOME TAX BALANCES
2001 2000
--------- ----------
Future income tax assets:
Net operating loss carry-forwards $ 729,556 $ -
Property, plant and equipment - 83,812
Eligible capital expenditure 1,703,578 2,012,695
Inter-company gains 45,160 145,313
----------- -----------
Total gross future income tax assets 2,478,294 2,241,820
Less: Valuation allowance (2,429,354) (1,740,780)
----------- -----------
Future income tax assets $ 48,940 $501,040
=========== ===========
Future income tax liabilities:
Other asset $ (24,000) $ (44,233)
Property, plant and equipment (24,940) -
----------- -----------
Future income tax liabilities (48,940) (44,233)
=========== ===========
Net future tax assets $ - $ 456,807
=========== ===========
52
CABLETEL COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CANADIAN FUNDS)
DECEMBER 31, 2001, 2000 AND 1999
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.
Management considers the projected future taxable income and
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.
The Company has income tax losses in the amount of approximately
$1,824,000 expiring in 2008. The benefit of the losses has not been
recognized in these financial statements.
8. EARNINGS PER SHARE
(A) BASIC EARNINGS PER SHARE
The weighted average number of shares outstanding amounted to
7,123,202 for the year ended December 31, 2001 and 7,004,139
and 6,555,238 for the years ended December 31, 2000 and 1999,
respectively.
(B) FULLY DILUTED EARNINGS PER SHARE
The Company adopted the recommendations of CICA Handbook
Section 3500, Earnings per Share (EPS), effective January 1,
2001. The revised section requires the presentation of both
basic and diluted EPS on the face of the income statement
regardless of the materiality of difference between them and
requires the use of the treasury stock method to compute the
dilutive effect of options as opposed to the former imputed
earnings approach.
For the year ended December 31, 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 7,180,562
and 7,393,268 and 6,949,153 for the years ended December 31,
2000, and 1999 respectively.
53
CABLETEL COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CANADIAN FUNDS)
DECEMBER 31, 2001, 2000 AND 1999
8. EARNINGS PER SHARE (continued)
The following table sets forth the computation of basic and diluted
earnings per share:
2001 2000 1999
----------- --------- ---------
NUMERATOR:
Net earnings (loss) and numerator for
basic earnings (loss) and for diluted
earnings (loss) per share $(2,906,118) $ 932,785 $ 567,377
DENOMINATOR:
Weighted-average shares for basic
earnings per share 7,123,202 7,004,139 6,555,238
----------- ---------- ----------
Effect of dilutive securities:
Employee stock options 57,360 389,129 393,915
----------- ---------- ----------
Dilutive potential of common shares 57,360 389,129 393,915
----------- ---------- ----------
Adjusted weighted-average
shares and assumed conversions
for diluted earnings per share 7,180,562 7,393,268 6,949,153
----------- ---------- ----------
Basic earnings (loss) per share ($0.41) $0.13 $0.09
----------- ---------- ----------
Diluted earnings (loss) per share ($0.41) $0.13 $0.08
----------- ---------- ----------
9. RELATED PARTY TRANSACTIONS
(i) The Company was party to certain agreements and transactions in
the normal course of business with a related company which was
Cabletel's largest shareholder. The agreement with the related
company was terminated on May 31, 2000. Significant related party
transactions not disclosed elsewhere include:
2001 2000 1999
---- -------- --------
Management fees to related company $- $142,923 $300,000
(ii) 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.
54
CABLETEL COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CANADIAN FUNDS)
DECEMBER 31, 2001, 2000 AND 1999
9. RELATED PARTY TRANSACTIONS (continued)
(iii) For the year ended December 31, 2001 the Company paid to the
Sullivan Group, an entity controlled by the President of the
Company $55,800, (2000 - $55,800; 1999 - $48,000) for charges
related to Mr. Walling's compensation.
(iv) For the year ended December 31, 2001, the Company paid Cassels,
Brock & Blackwell LLP, a legal firm of which Mr. Peterson, the
Chairman of the Company is a Senior Partner an amount of $34,014
for services they provided.
10. COMMITMENTS AND CONTINGENCIES
(a) COMMITMENTS FOR LEASED PREMISES AND CERTAIN CONTRACTS HAVE
BEEN MADE AS FOLLOWS:
2002 $980,777
2003 850,427
2004 805,254
2005 747,349
2006 705,988
Beyond 2006 2,176,796
(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.
(c) On March 12, 2001, the Company announced that it had entered
into an agreement with Allied Wire and Cable Ltd., ("Allied")
a leading supplier of products to the cable and telecom
sectors in Western Canada, whereby Cabletel would acquire the
privately-owned Allied Group of Companies. The transaction was
subject to the Company obtaining necessary financing which had
not materialized as of December 31, 2001.
As a result of normal business operations Allied owed Cabletel
$606,720. Cabletel expects to convert this receivable into a
convertible debenture investment in Allied. The terms of the
debenture are expected to be finalized by April 30, 2002.
(d) On July 11, 2001, the Company entered into an agreement to
acquire the Stirling Connector business and inventory of its
US distributor, N-R-G Control Company ("N-R-G") of Jackson,
Mississippi for its net book value on closing date. The
transaction was to have closed on September 1, 2001.
Subsequently the transaction date was deferred to April 1,
2002.
55
CABLETEL COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CANADIAN FUNDS)
DECEMBER 31, 2001, 2000 AND 1999
11. 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 December 31, 2001, the unpaid balance of these charges included in
accrued liabilities was $203,985.
12. FINANCIAL INSTRUMENTS
(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 89% of total revenue is derived from sales to
international customers. At December 31, 2001, accounts
receivable from international customers represented
approximately 19% of 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,
2001 and 2000.
56
CABLETEL COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CANADIAN FUNDS)
DECEMBER 31, 2001, 2000 AND 1999
12. FINANCIAL INSTRUMENTS (continued)
(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.
13. 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, 2001, 2000 and 1999.
57
CABLETEL COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CANADIAN FUNDS)
DECEMBER 31, 2001, 2000 AND 1999
13. SEGMENTED INFORMATION (continued)
SUMMARY OF BUSINESS SEGMENT
NET REVENUE
2001 2000 1999
----------- ----------- -----------
Distribution $46,715,597 $59,059,214 $49,057,530
Manufacturing 7,859,032 12,938,721 4,307,129
Technology 4,430,460 3,473,364 1,968,336
Less: Inter-company eliminations (884,190) (978,740) (887,708)
--------- --------- ---------
TOTAL NET REVENUE $58,120,899 $74,492,559 $54,445,287
=========== =========== ===========
GROSS PROFIT
2001 2000 1999
----------- ----------- -----------
Distribution $7,792,578 $8,925,743 $7,390,114
Manufacturing 1,171,526 4,630,493 1,200,176
Technology 694,253 539,439 237,821
------- ------- -------
TOTAL GROSS PROFIT $9,658,357 $14,095,675 $8,828,111
---------- ----------- ----------
RECONCILIATION TO EARNINGS (LOSS) BEFORE INCOME TAXES
Selling, general and administrative expenses (10,648,693) (11,689,850) (7,681,348)
Special charge (357,836) - -
Amortization (249,992) (237,173) (325,618)
Interest expense - other (799,941) (710,058) (298,869)
- long-term debt (87,166) (72,995) -
Gain on sale of land and building - - 122,070
Cash surrender value of life insurance 72,570
----------- ----------- -----------
- -
(12,143,628) (12,710,076) (8,111,195)
============ ============ ===========
Consolidated earnings (loss) before income taxes (2,485,271) 1,385,599 716,916
=========== ========= =======
IDENTIFIABLE ASSETS:
2001 2000 1999
----------- ----------- -----------
Distribution and Technology $20,375,245 $26,877,416 $20,624,148
Manufacturing 8,374,950 10,563,233 3,432,991
Other unallocated assets 120,000 697,263 1,311,060
------- ------- ---------
TOTAL IDENTIFIABLE ASSETS $28,870,195 $38,137,912 $25,368,199
=========== =========== ===========
58
CABLETEL COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CANADIAN FUNDS)
DECEMBER 31, 2001, 2000 AND 1999
13. SEGMENTED INFORMATION (continued)
EXPENDITURES ON PROPERTY, PLANT AND EQUIPMENT
2001 2000 1999
----------- ----------- -----------
Distribution and Technology $120,811 $850,602 $236,276
Manufacturing 155,796 1,094,712 569,611
------- --------- -------
TOTAL EXPENDITURES $276,607 $1,945,314 $805,887
======== ========== ========
AMORTIZATION
(Includes amortization in cost of sales.)
2001 2000 1999
----------- ----------- -----------
Distribution and Technology $228,647 $236,109 $296,817
Manufacturing 250,278 253,305 204,605
------- ------- -------
TOTAL AMORTIZATION $478,925 $489,414 $501,422
======== ======== ========
SUMMARY BY GEOGRAPHICAL AREA
NET REVENUE
(Revenues are attributed based on the location of the customer.)
2001 2000 1999
----------- ----------- -----------
Canada $51,146,057 $62,562,578 $51,025,866
United States 5,370,113 3,489,598 1,609,218
Israel 855,266 7,953,483 1,289,000
Other 749,460 486,900 521,203
----------- ----------- -----------
TOTAL NET REVENUE $58,120,899 $74,492,559 $54,445,287
=========== =========== ===========
PROPERTY, PLANT AND EQUIPMENT
(Property, Plant, Equipment and goodwill by geographical area are based
on location of facilities.)
2001 2000 1999
----------- ----------- -----------
Canada $2,280,388 $2,442,209 $975,228
United States 17,433 23,424 -
----------- ----------- -----------
TOTAL PROPERTY, PLANT AND EQUIPMENT $2,297,821 $2,465,633 $975,228
========== ========== ========
59
CABLETEL COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CANADIAN FUNDS)
DECEMBER 31, 2001, 2000 AND 1999
13. SEGMENTED INFORMATION (continued)
Sales that exceed 10% of total revenue within the Distribution segment
are listed below.
2001 2000 1999
------- ------- -------
$(000) $(000) $(000)
Rogers Cable Systems Limited $12,399 $14,311 $10,396
14. UNITED STATES ACCOUNTING PRINCIPLES
In December 1999, the Securities and Exchange Commission (SEC) released
Staff Accounting Bulletin (SAB) No. 101, REVENUE RECOGNITION IN
FINANCIAL STATEMENTS. SAB No. 101 summarizes some views of the SEC on
applying accounting principles generally accepted in the United States
to revenue recognition in financial statements. The SEC believes that
revenue is realized or realizable and earned when all of the following
criteria are met: persuasive evidence of an arrangement exists,
delivery has occurred or services have been rendered, the seller's
price to the buyer is fixed or determinable and collectibility is
reasonably assured. The Company believes that its current revenue
recognition policy complies with the SEC guidelines.
The following table reconciles the net earnings (loss) as reported on
the statements of operations and deficit prepared in accordance with
Canadian GAAP to the net income that would have been reported had the
financial statements been prepared in accordance with U.S. GAAP.
2001 2000 1999
----------- ------------ ------------
Net earnings (loss) in accordance with
Canadian GAAP $(2,906,118) $932,785 $567,377
Deferred product development costs
(net of income taxes) - - (75,223)
Reduction in amortization of
development costs (net of income taxes) 18,739 18,739
----------- ------------ ------------
-
Net earnings (loss) in accordance with
U.S. GAAP $(2,887,379) $951,524 $492,154
============ ======== ========
Total assets $28,810,270 $38,083,269 $25,208,447
=========== =========== ===========
Deficit $(10,104,171) $(7,216,792) $(8,168,316)
============= ============ ============
60
CABLETEL COMMUNICATIONS CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CANADIAN FUNDS)
DECEMBER 31, 2001, 2000 AND 1999
14. UNITED STATES ACCOUNTING PRINCIPLES (continued)
(A) EARNINGS PER SHARE
Earnings per share calculations under U.S. GAAP reflecting the
Statement of Financial Accounting Standards No. 128 (SFAS
128), for the years ended December 31, 2001, 2000, and 1999
would not differ materially from the calculations required by
the pronouncements of CICA handbook Section 3500 which was
adopted at the commencement of Fiscal 2001.
(B) COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130 (SFAS
130), "Reporting Comprehensive Income", establishes standards
for the reporting and display of comprehensive income and its
components and requires restatement of all previously reported
information for comparative purposes. For the years ended
December 31, 2001, 2000, and 1999 the Company's comprehensive
income was the same as net earnings.
(C) STATEMENT OF FINANCIAL ACCOUNTING STANDARD NO. 133 (SFAS 133)
The Company has reviewed SFAS 133 "Accounting for Derivative
Instruments and Hedging Activities". The statement establishes
accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other
contracts and for hedging activities. SFAS 133 became
effective for all fiscal quarters of fiscal years beginning
after June 18, 2000.
The Company has adopted the provisions of this statement as of
January 1, 2001. The adoption of SFAS 133 does not have any
material impact on the Company's results of operations,
financial position or cash flows.
61
CABLETEL COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CANADIAN FUNDS)
DECEMBER 31, 2001, 2000 AND 1999
14. UNITED STATES ACCOUNTING PRINCIPLES (continued)
(D) ACCOUNTING FOR STOCK OPTIONS AND PRO-FORMA DISCLOSURES
REQUIRED UNDER SFAS 123
Issued by the Financial Accounting Standards Board in October,
1996, Statement of Financial Accounting Standards No. 123,
(SFAS 123), "Accounting for Stock-Based Compensation",
establishes financial accounting and reporting standards for
stock-based employee compensation plans as well as
transactions in which an entity issues its equity instruments
to acquire goods or services from non-employees. This
statement defines a fair value based method of accounting for
employee stock option or similar equity instruments, and
encourages all entities to adopt that method of accounting for
all their employee stock compensation plans. However, it also
allows an entity to continue to measure compensation cost for
those plans using the intrinsic value based method of
accounting prescribed by Accounting Principles Board Opinion
No. 25, (APB 25), "Accounting for Stock Issued to Employees".
Entities electing to remain with the accounting in APB 25 must
make pro-forma disclosures of net income and, if presented,
earnings per share, as if the fair value based methods of
accounting defined by SFAS 123 had been applied. SFAS 123 is
applicable to fiscal years beginning after December 15, 1996.
The Company accounts for its stock options under Canadian
GAAP, which, in the Company's circumstances are not materially
different from the amounts that would be determined under the
provisions of the APB 25 and related interpretations in
accounting for its stock option plan. No compensation expense
has been charged to the statement of operations for the plan
for the twelve months ended December 31, 2001, 2000 and 1999.
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% (2000 -
5% and 1999 - 5%) dividend yield of 0%, theoretical volatility
assumption of .90 (2000 - .89 and 1999 - .89), three years
vesting provision on certain options granted in 2001, 2000 and
1999, and the expected lives of options of 3 to 7 years (2000
- 3 to 7 years, 1999 - 3 - 5 years).
62
CABLETEL COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CANADIAN FUNDS)
DECEMBER 31, 2001, 2000 AND 1999
14. UNITED STATES ACCOUNTING PRINCIPLES (continued)
AS REPORTED
2001 2000 1999
AS REPORTED AS REPORTED AS REPORTED
----------- ----------- -----------
Net income (loss)
- U.S. GAAP $(2,887,379) $951,524 $492,154
Net earnings (loss) per share
Basic ($0.41) $0.14 $0.08
Diluted ($0.41) $0.13 $0.07
PRO-FORMA
2001 2000 1999
PRO-FORMA PRO-FORMA PRO-FORMA
----------- ----------- -----------
Net income (loss)
- U.S. GAAP $(3,925,338) $(817,930) $(390,770)
Net earnings (loss) per share
Basic ($0.55) $0.12 $0.06
Diluted ($0.55) $0.12 $0.06
----------- ----------- -----------
Weighted average fair value of
options granted during this period $1.66 $4.27 $3.15
(E) RECENT UNITED STATES ACCOUNTING PRONOUNCEMENTS
(i) On June 29, 2001, the FASB approved its proposed Statements of
Financial Accounting Standards No. 141 (SFAS 141), Business
Combinations, and SFAS 142, Goodwill and Other Intangible
Assets. The provisions of SFAS 141 and SFAS 142 are effective
for fiscal years beginning on or after January 1, 2002 with
early adoption permitted under certain circumstances. In all
cases, the standard must be adopted at the beginning of a
fiscal year. Retroactive adoption is not permitted.
63
CABLETEL COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CANADIAN FUNDS)
DECEMBER 31, 2001, 2000 AND 1999
14. UNITED STATES ACCOUNTING PRINCIPLES (continued)
SFAS 141 requires all business combinations to be accounted
for under the purchase method and requires the separate
recognition of intangible assets apart from goodwill if
criteria are met. SFAS 142 prohibits the amortization of
goodwill and indefinite life intangible assets. Instead,
goodwill and intangible assets are to be written down whenever
carrying value exceeds fair value. Intangible assets that do
not have an indefinite life must continue to be amortized. The
Company has assessed the standard and does not believe that
adoption SFAS 141 and SFAS 142 will have a material impact on
the Company's financial statements.
(ii) In June 2001, the FASB approved the issuance of Statement of
Financial Accounting Standards No. 143, Accounting for Asset
Retirement Obligations (SFAS 143), which is effective for
fiscal years beginning on or after June 15, 2002. The standard
establishes accounting standards for recognition and
measurement of legal obligations associated with the
retirement of tangible long-lived assets. The Company has
assessed the impact of the adoption of this new standard and
does not believe it will have a material impact on its
financial statements.
(iii) In October 2001, the FASB issued Statement of Financial
Accounting Standards No. 144, Accounting for Impairment of
Disposal of Long-lived assets: (SFAS 144). SFAS 144 addresses
financial accounting and reporting for the impairment or
disposal of long-lived assets. The provisions of this
statement are effective for financial statements issued for
fiscal years beginning after December 15, 2001. The Company
has assessed the impact of the adoption of this new standard
and it does not have a material impact on its financial
statements.
64
CABLETEL COMMUNICATIONS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CANADIAN FUNDS)
DECEMBER 31, 2001, 2000 AND 1999
15. SUBSEQUENT EVENTS
(A) On March 12, 2001, the Company announced that it had entered
into an agreement with Allied Wire and Cable Ltd., ("ALLIED")
a leading supplier of products to the cable and telecom
sectors in Western Canada, whereby Cabletel was to have
acquired the privately-owned Allied Group of Companies subject
to board of director approval, such approval has not been
granted due to a lack of financing. The Company is negotiating
to acquire approximately 30% to 40% of Allied by way of an
interest-bearing convertible debenture. Included in other
assets is an amount of $606,720 due from Allied previously
classified as accounts receivable relating to the sale of
products in the normal course of business. The terms of the
debenture are expected to be finalized by April 30, 2002.
(B) As of February 28, 2002 the Company entered into an extension
agreement until April 30, 2002 with its main bank lender, HSBC
Canada that will permit the Company to prepare new loan
documentation and satisfy other conditions required to close
refinancing based on credit approval the Company received with
a major asset-based lender for a new credit facility to
replace its existing operating bank to provide the Company
with improved liquidity. (See Note 4)
(C) On July 11, 2001, the Company entered into an agreement to
acquire the Stirling Connector business of its US distributor,
N-R-G Control Company ("N-R-G") of Jackson, Mississippi for
approximately U.S. $500,000 payable over 2 years beginning
April 1, 2002.
Included in accounts receivable is a net amount of $801,600
relating to the sale of products to N-R-G in the ordinary
course of business. It is anticipated that N-R-G will return
for credit approximately $170,000 of product to the Company.
The Company has set up an allowance for bad debt in the amount
of $54,400 as a reserve for the gross margin impact of the
anticipated return of product in addition to a previously
provided allowance of $150,000.
65
EXHIBIT 21
Subsidiaries at December 31, 2001
Direct Wholly-Owned Subsidiaries Jurisdiction
- -------------------------------- ------------
Stirling (Israel) Ltd. Israel
Stirling Connectors U.S.A., Inc. Delaware
66
CABLETEL COMMUNICATIONS CORP.
SCHEDULE II
(CANADIAN FUNDS)
VALUATION AND QUALIFYING ACCOUNTS
CHARGED CHARGED
BALANCE AT TO COSTS & TO OTHER BALANCE AT
BEGINNING EXPENSES ACCOUNTS DEDUCTIONS END
--------- -------- -------- ---------- ----------
$ $ $ $ $
FOR THE YEAR ENDED DECEMBER 31, 2001
Allowance for uncollectible trade
Receivables 276,005 596,400 - (25,211) 847,194
Allowance for inventory obsolescence 863,241 470,007 - - 1,333,278
FOR THE YEAR ENDED DECEMBER 31, 2000
Allowance for uncollectible trade 242,489 42,000 - (8,484) 276,005
receivables
Allowance for inventory obsolescence 798,564 64,677 - - 863,241
FOR THE YEAR ENDED DECEMBER 31, 1999
Allowance for uncollectible trade
receivables 191,756 52,000 - (1,267) 242,489
Allowance for inventory obsolescence 974,061 175,497 - - 798,564
67