CABLETEL COMMUNICATIONS CORP - 10-Q Quarterly Report

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the Quarter Ended March 31, 2003		Commission File Number 1-13332

CABLETEL COMMUNICATIONS CORP.

(Exact name of registrant as specified in its charter)


Ontario, Canada (State or other jurisdiction of incorporation or organization)		8647 8526 (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

Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No

Indicate the number of shares outstanding of each of the Registrant’s classes of common stock as of the latest practicable date:


Class		Outstanding as at May 12, 2003

Common Stock, no par value		7,167,612

CABLETEL COMMUNICATIONS CORP.
FORM 10-Q
FOR THE QUARTER ENDED
MARCH 31, 2003

INDEX


		Page No.

Part I.	Financial Information		3
Item 1.	Financial Statements		3
	Balance Sheet as at March 31, 2003 and December 31, 2002		3
	Statement of Operations and Deficit for the 3 month period ended March 31, 2003 and 2002		4
	Statement of Cash Flows for the 3 month period ended March 31, 2003 and 2002		5
	Notes to Financial Statements		6-26
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		27-37
Item 3.	Quantitative and Qualitative Disclosures of Market Risk		38
Item 4.	Controls and Procedures		38
Part II.	Other Information		39
Item 1.	Legal Proceedings		39
Item 6.	Exhibits and Reports on Form 8-K		39

The Company is a “Foreign Private Issuer” as defined in Rule 3b-4 under the Securities Exchange Act of 1994, as amended. Although as a Foreign Private Issuer the Company is eligible to file reports on Form 6-K, the Company has voluntarily elected to file quarterly reports on Form 10-Q.

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CABLETEL COMMUNICATIONS CORP.

CONSOLIDATED BALANCE SHEETS
(Canadian Funds)


			March 31,			December 31,
			2003			2002

ASSETS
CURRENT
	Cash		$	39,893		$	63,169
	Accounts receivable (net of allowance of $120,865; 2002 – $109,914)			10,941,445			14,291,574
	Inventory (Note 2)			10,543,436			10,488,445
	Other receivables (Note 8i)			238,750			235,000
	Income taxes recoverable			—			120,000
	Prepaid expenses, deposits and other			1,067,369			1,407,169

				22,830,893			26,605,357
PROPERTY, PLANT AND EQUIPMENT (Note 3)				1,923,390			2,198,086
DEFERRED REFINANCING FEES				566,667			633,334
GOODWILL				168,589			161,616
PRODUCT DEVELOPMENT COSTS (net of amortization of $112,144; 2002 – $103,517)				23,004			31,631

			$	25,512,543		$	29,630,024

LIABILITIES
CURRENT
	Bank indebtedness (Note 4)		$	9,455,842		$	12,461,424
	Accounts payable			6,646,836			6,736,089
	Accrued liabilities			1,648,740			1,994,647
	Current portion of long-term debt (Note 5)			2,200,813			2,067,558

				19,952,231			23,259,718
LONG-TERM DEBT (Note 5)				591,499			1,154,088

				20,543,730			24,413,806

COMMITMENTS AND CONTINGENCIES (Note 9)
SHAREHOLDERS’ EQUITY
CAPITAL STOCK (Note 6)
	AUTHORIZED
		Unlimited First preferred shares, issuable in series
		Unlimited Common shares ISSUED
	ISSUED
		7,167,612 Common shares (2002 – 7,167,612)		16,136,761			16,136,761
	Paid in Capital – Warrant			164,000			164,000
DEFICIT				(11,331,948	)		(11,084,543	)

				4,968,813			5,216,218

			$	25,512,543		$	29,630,024

See accompanying notes to financial statements.

CABLETEL COMMUNICATIONS CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
(Canadian Funds)

FOR THE THREE MONTHS ENDED MARCH 31,


		2003			2002

SALES		$	11,118,347		$	13,183,686
COST OF SALES			9,119,653			10,735,672

GROSS PROFIT			1,998,694			2,448,014

EXPENSES
	Selling, general and administrative		1,924,019			2,147,769
	Amortization		50,406			65,085
	Interest – bank indebtedness		160,806			147,524
	Interest – long-term debt		91,078			17,685

			2,226,309			2,378,063

EARNINGS (LOSS) FROM OPERATIONS			(227,615	)		69,951
	Loss on disposition of assets		31,269			—

EARNINGS (LOSS) BEFORE INCOME TAXES			(258,884	)		69,951
	Income taxes (recovery)		(11,479	)		9,000

NET EARNINGS (LOSS) FOR THE PERIOD			(247,405	)		60,951
DEFICIT, beginning of period			(11,084,543	)		(10,066,426	)

DEFICIT, end of period		$	(11,331,948	)	$	(10,005,475	)

Earnings (loss) per share (Note 7)
	Basic		($0.03	)	$	0.01

	Fully diluted		($0.03	)	$	0.01

See accompanying notes to financial statements.

CABLETEL COMMUNICATIONS CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Canadian Funds)

FOR THE THREE MONTHS ENDED MARCH 31,


		2003			2002

OPERATING ACTIVITIES
	Net income (loss) for the period	$	(247,405	)	$	60,951
	Amortization		125,314			65,093
	Amortization of deferred refinancing fees		66,667			—
	Loss on disposition of assets		31,269			—
	Imputed interest		(3,750	)		(4,000	)
	Change in accounts receivable		3,350,129			1,225,161
	Change in inventory		(54,991	)		387,039
	Change in prepaid expenses, deposits and other		339,800			(9,536	)
	Change in accounts payable and accrued liabilities		(435,160	)		(722,322	)
	Change in income taxes recoverable		120,000			(34,981	)

			3,291,873			967,405

FINANCING ACTIVITIES
	Bank indebtedness		(3,005,582	)		(941,307	)
	Repayment of long-term debt		(429,334	)		(30,777	)

			(3,434,916	)		(972,084	)

INVESTING ACTIVITIES
	Goodwill acquired		(6,973	)		—
	Disposition of assets		126,740			5,911

			119,767			5,911

CHANGE IN CASH			(23,276	)		1,232
CASH, beginning of period			63,169			12,292

CASH, end of period		$	39,893		$	13,524

SUPPLEMENTARY CASH FLOW INFORMATION
	Interest paid	$	251,884		$	169,209

	Income taxes paid	$	—		$	—

See accompanying notes to financial statements.

CABLETEL COMMUNICATIONS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Canadian Funds)

MARCH 31, 2003

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in Canada, which, except as described in Note 12, conform, in all material respects, with the accounting principles generally accepted in the United States.

(a) General

In the opinion of management, the accompanying unaudited financial statements contain all adjustments (consisting of only normal recurring adjustments) which, are necessary to present fairly the consolidated financial position as at March 31, 2003 and the consolidated results of operations and the consolidated cash flows for the three months ended March 31, 2003 and 2002.

While management believes that the disclosures presented are adequate to make the information not misleading, it is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and the notes included in the Company’s latest annual report on Form 10-K.

The interim financial statements follow the same accounting policies and methods of their application as the most recent annual financial statements. However, the interim financial statements do not include all disclosures necessary to conform in all respects to the requirements of Canadian generally accepted accounting principles for annual financial statements.

(b) Consolidation

The consolidated financial statements include the accounts of the wholly-owned subsidiaries, Stirling (Israel) Ltd., and Stirling Connectors, U.S.A., Inc., and as of November 1, 2002, Allied Wire and Cable Ltd., “(ALLIED)” as a result of the Company’s ability to convert it’s convertible debenture into 100% ownership of all Allied issued and outstanding common shares for a nominal consideration.

The consolidated financial statements include the accounts of the Company after eliminations of inter-company transactions.

(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.

CABLETEL COMMUNICATIONS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Canadian Funds)

MARCH 31, 2003

2. INVENTORY


	March 31,		December 31,
	2003		2003

Raw Material	$	275,481	$	293,783
Work in process		476,361		483,497
Finished goods		9,791,594		9,711,165

	$	10,543,436	$	10,488,445

3. PROPERTY, PLANT AND EQUIPMENT


	March 31, 2003						December 31, 2002
	Accumulated						Accumulated

	Cost		Amortization		Net		Cost		Amortization		Net

	$		$		$		$		$		$
Leasehold improvements		711,090		310,816		400,274		711,090		296,093		414,997
Equipment		3,978,085		2,454,969		1,523,116		4,136,094		2,353,005		1,783,089

		4,689,175		2,765,785		1,923,390		4,847,184		2,649,098		2,198,086

For the 3 months ending March 31, 2002, 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. The Company had re-utilized all these assets in its manufacturing operations during the year ended December 31, 2002.

4. BANK INDEBTEDNESS

On May 16, 2002, Cabletel entered into a Revolving Credit Facility Agreement with LaSalle Business Credit, a division of ABN AMRO BANK N.V., Canada Branch (“LaSalle”) for a three year committed fifteen million Canadian dollars (CDN$15,000,000) facility, or its United States dollar equivalent. Canadian Dollar borrowings under the Revolving Credit Facility bears interest at the LaSalle Prime Reference Rate plus two percent (2.0%). United States dollar borrowings under the Revolving Credit Facility bears interest at the LaSalle U.S. Base Reference Rate plus two percent (2.0%).

CABLETEL COMMUNICATIONS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Canadian Funds)

MARCH 31, 2003

4. BANK INDEBTEDNESS (continued)

The facilities are secured by a first priority security position on all personal property (including without limitation accounts, contract rights, inventory, machinery and equipment, and general intangibles, existing and future, second position in the case of certain machinery and equipment securing prior loan by the Business Development Bank of Canada, and general intangibles), existing and future.

The facility contains certain customary covenants. As of March 31, 2003, as a result of a variation from the required minimum adjusted net worth, interest coverage ratio and debt service ratio, the Company had a technical violation of the applicable covenants. The Company is working with its’ lender to resolve the matter and expects to receive either a waiver or amendment to the agreement shortly. There can be no assurance that the Company will be successful in obtaining either a waiver or amendment. In the event that the Company is unable to obtain such waiver or amendment it could adversely affect the Company.

As of November 1, 2002, the Company began consolidating the results of Allied, as a result of the Company’s ability to convert it’s convertible debenture into 100% ownership of all issued and outstanding common shares of Allied for a nominal consideration. Subsequently, on May 9, 2003, Cabletel exercised its option and acquired all the outstanding shares of Allied. Allied is currently in negotiations with its senior bank lender with regards to an extension of its senior bank facility beyond its current maturity date. If Allied is unable to obtain such an extension, this could adversely affect the consolidated results of the Company.

5. LONG-TERM DEBT


				March 31,		December 31,
				2003		2002

	(i	)	Term loan-Leaseholds	$	316,426	$	324,337
(ii)			Term loan-Equipment		389,400		401,200
(iii)			Term loan-Note		2,086,486		2,496,109

					2,792,312		3,221,646
			Less: Current portion		2,200,813		2,067,558

				$	591,499	$	1,154,088

(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.

CABLETEL COMMUNICATIONS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Canadian Funds)

MARCH 31, 2003

5. LONG-TERM DEBT (continued)

(ii) Long-term debt bears interest at Business Development Bank of Canada (“BDC”) prime plus 0.75% per annum payable monthly over a period of 5 years. This debt was provided by the BDC to purchase production machinery used in the manufacturing of connectors. BDC has provided a total facility of $700,000 which is available to the company for capital purchases and is collateralized by the assets acquired under this facility.

(iii) Contemporaneously with the Company entering into the new Revolving Credit Facility, the Company renegotiated credit terms with a major supplier. That renegotiation included the conversion of US $2.2 million in outstanding payables owed by the Company into a senior subordinated promissory note, which resulted in the Company taking a charge of $164,000 on loss on settlement of debt. The senior subordinated promissory note is in the principal amount of US $2.2 million, and bears interest at the rate of 12% per annum and is repayable in agreed upon monthly installments of between US $60,000 and US $120,000 over the next two years. In connection with that renegotiation, the Company also issued to the supplier a Warrant to acquire up to 200,000 shares of the Company’s common stock at an exercise price of CDN $1.64 per share up to and including May 31, 2007. The fair value of the Warrant was estimated on the date of the grant using the fair value recognition method, with the following assumptions: risk free interest rate of 5%, dividend yield of 0%, theoretical volatility of .90 and the expected life of 2 years.

6. CAPITAL STOCK


	Number		Amount

Balance, December 31, 2002		7,167,612	$	16,136,761

Balance, March 31, 2003		7,167,612	$	16,136,761

CABLETEL COMMUNICATIONS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Canadian Funds)

MARCH 31, 2003

6. CAPITAL STOCK (continued)

Stock Option Plan

Under the terms of a stock option plan approved by the shareholders in May, 1994 and amended in November of 1999, and March of 2002, 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 March 31, 2003, 506,000 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, 2002

1,444,000

1.53 – 9.28

3.88

Balance at March 31, 2003

1,444,000

1.53 – 9.28

3.88

In connection with the settlement of outstanding accounts payable (Note 5iii), common shares have been reserved for warrants on the following basis:


			Exercise		Weighted
	Shares		Price		Average

			$		$
Outstanding and Exercisable
Balance at December 31, 2002		200,000		1.64		1.64

1.		SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

		These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in Canada, which, except as described in Note 12, conform, in all material respects, with the accounting principles generally accepted in the United States.

	(a)		General

			In the opinion of management, the accompanying unaudited financial statements contain all adjustments (consisting of only normal recurring adjustments) which, are necessary to present fairly the consolidated financial position as at March 31, 2003 and the consolidated results of operations and the consolidated cash flows for the three months ended March 31, 2003 and 2002.

			While management believes that the disclosures presented are adequate to make the information not misleading, it is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and the notes included in the Company’s latest annual report on Form 10-K.

			The interim financial statements follow the same accounting policies and methods of their application as the most recent annual financial statements. However, the interim financial statements do not include all disclosures necessary to conform in all respects to the requirements of Canadian generally accepted accounting principles for annual financial statements.

	(b)		Consolidation

			The consolidated financial statements include the accounts of the wholly-owned subsidiaries, Stirling (Israel) Ltd., and Stirling Connectors, U.S.A., Inc., and as of November 1, 2002, Allied Wire and Cable Ltd., “(ALLIED)” as a result of the Company’s ability to convert it’s convertible debenture into 100% ownership of all Allied issued and outstanding common shares for a nominal consideration.

			The consolidated financial statements include the accounts of the Company after eliminations of inter-company transactions.

	(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.

		For the 3 months ending March 31, 2002, 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. The Company had re-utilized all these assets in its manufacturing operations during the year ended December 31, 2002.

4.		BANK INDEBTEDNESS

		On May 16, 2002, Cabletel entered into a Revolving Credit Facility Agreement with LaSalle Business Credit, a division of ABN AMRO BANK N.V., Canada Branch (“LaSalle”) for a three year committed fifteen million Canadian dollars (CDN$15,000,000) facility, or its United States dollar equivalent. Canadian Dollar borrowings under the Revolving Credit Facility bears interest at the LaSalle Prime Reference Rate plus two percent (2.0%). United States dollar borrowings under the Revolving Credit Facility bears interest at the LaSalle U.S. Base Reference Rate plus two percent (2.0%).

4.		BANK INDEBTEDNESS (continued)

		The facilities are secured by a first priority security position on all personal property (including without limitation accounts, contract rights, inventory, machinery and equipment, and general intangibles, existing and future, second position in the case of certain machinery and equipment securing prior loan by the Business Development Bank of Canada, and general intangibles), existing and future.

		The facility contains certain customary covenants. As of March 31, 2003, as a result of a variation from the required minimum adjusted net worth, interest coverage ratio and debt service ratio, the Company had a technical violation of the applicable covenants. The Company is working with its’ lender to resolve the matter and expects to receive either a waiver or amendment to the agreement shortly. There can be no assurance that the Company will be successful in obtaining either a waiver or amendment. In the event that the Company is unable to obtain such waiver or amendment it could adversely affect the Company.

		As of November 1, 2002, the Company began consolidating the results of Allied, as a result of the Company’s ability to convert it’s convertible debenture into 100% ownership of all issued and outstanding common shares of Allied for a nominal consideration. Subsequently, on May 9, 2003, Cabletel exercised its option and acquired all the outstanding shares of Allied. Allied is currently in negotiations with its senior bank lender with regards to an extension of its senior bank facility beyond its current maturity date. If Allied is unable to obtain such an extension, this could adversely affect the consolidated results of the Company.

5.		LONG-TERM DEBT

	(ii)		Long-term debt bears interest at Business Development Bank of Canada (“BDC”) prime plus 0.75% per annum payable monthly over a period of 5 years. This debt was provided by the BDC to purchase production machinery used in the manufacturing of connectors. BDC has provided a total facility of $700,000 which is available to the company for capital purchases and is collateralized by the assets acquired under this facility.

	(iii)		Contemporaneously with the Company entering into the new Revolving Credit Facility, the Company renegotiated credit terms with a major supplier. That renegotiation included the conversion of US $2.2 million in outstanding payables owed by the Company into a senior subordinated promissory note, which resulted in the Company taking a charge of $164,000 on loss on settlement of debt. The senior subordinated promissory note is in the principal amount of US $2.2 million, and bears interest at the rate of 12% per annum and is repayable in agreed upon monthly installments of between US $60,000 and US $120,000 over the next two years. In connection with that renegotiation, the Company also issued to the supplier a Warrant to acquire up to 200,000 shares of the Company’s common stock at an exercise price of CDN $1.64 per share up to and including May 31, 2007. The fair value of the Warrant was estimated on the date of the grant using the fair value recognition method, with the following assumptions: risk free interest rate of 5%, dividend yield of 0%, theoretical volatility of .90 and the expected life of 2 years.

6.		CAPITAL STOCK (continued)

		Stock Option Plan

		Under the terms of a stock option plan approved by the shareholders in May, 1994 and amended in November of 1999, and March of 2002, 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 March 31, 2003, 506,000 options remain available to be granted. Stock options become exercisable at dates determined by the Compensation Committee.