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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|x| Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 2000; or
|_| Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
Commission File Number 0-28582
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CHANNELL COMMERCIAL CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 95-2453261
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(State or other jurisdiction of incorporation) (IRS Employer Identification No.)
26040 Ynez Road
Temecula, CA 92591-9022
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(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (909) 719-2600
Securities registered pursuant to Section 12(b) of the Act:
None
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Securities registered pursuant to Section 12(g) of the Act:
Title of Class
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Common Stock, $0.01 Par Value
Indicate by check mark whether the 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 the 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. |_|
On March 15, 2001, the Registrant had 9,077,293 shares of Common Stock
outstanding with a par value of $.01 per share. The aggregate market value of
the 3,697,126 shares held by non-affiliates of the Registrant was $22,644,897.
Shares of Common Stock held by each officer and director and by each person who
may be deemed to be an affiliate have been excluded.
TABLE OF CONTENTS
PART I
Item 1. Business ....................................................... 1
Item 2. Properties ..................................................... 7
Item 3. Legal Proceedings .............................................. 8
Item 4. Submission of Matters to a Vote of Security Holders ............ 8
PART II
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters ............................................ 9
Item 6. Selected Financial Data ........................................ 10
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations ...................................... 12
Item 7a. Quantitative and Qualitative Disclosures about Market Risk ..... 20
Item 8. Financial Statements and Supplementary Data .................... 20
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure ....................................... 21
PART III
Item 10. Executive Officers and Directors ............................... 22
Item 11. Executive Compensation ......................................... 24
Item 12. Security Ownership of Certain Beneficial Owners and
Management ..................................................... 27
Item 13. Certain Relationships and Related Transactions ................. 28
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K ....................................................... 29
FINANCIAL STATEMENTS ..................................................... F-1
GLOSSARY OF TERMS ........................................................ G-1
i
PART I
Item 1. Business
Background
Channell Commercial Corporation (the "Company") was incorporated in
Delaware on April 23, 1996, as the successor to Channell Commercial Corporation,
a California corporation. The Company's executive offices are located at 26040
Ynez Road, Temecula, California 92591-9022, and its telephone number at that
address is (909) 719-2600.
General
The Company is a designer and manufacturer of telecommunications equipment
supplied to telephone, cable television and power utility network providers
worldwide. Major product lines include a complete line of thermoplastic and
metal fabricated enclosures, advanced copper termination and connectorization
products, fiber optic cable management systems, coaxial-based passive RF
electronics and heat shrink products. The Company believes it was the first to
design, manufacture and market thermoplastic enclosure products for use in the
telecommunications industry on a wide scale, and the Company believes it
currently supplies a substantial portion of the enclosure product requirements
of a number of major community antenna television ("CATV") and telephone service
providers. The Company's enclosure products house, protect and provide access to
advanced telecommunications hardware, including both radio frequency ("RF")
electronics and photonics, and transmission media, including coaxial cable,
copper wire and optical fibers, used in the delivery of voice, video and data
services. The enclosure products are deployed within the portion of the local
signal delivery network, commonly known as the "outside plant", "local loop" or
"Last Mile", that connects the network provider's signal origination office with
its residential and business customers.
As a result of the acquisitions of RMS Electronics, Inc. ("RMS") and
Standby Electronics Corp. ("Standby Electronics") in 1997, and A.C. Egerton
(Holdings) PLC ("Egerton") in 1998, the Company is also a supplier of passive RF
electronics and a manufacturer of metal fabricated enclosures in addition to
designing and manufacturing a full range of copper and fiber optic connectivity
products. The Company also supplies enclosures for the power utility industry
and markets a complete line of grade level boxes for buried and underground
network applications, thus offering network operators a full system solution to
their outside plant requirements.
Industry
The communications industry generally experienced above average growth for
a number of years, both domestically and worldwide. Contributing to this growth
has been the increasing need for network signal transmission bandwidth to
accommodate new high-speed communications applications deployed on upgraded
existing networks and newly constructed broadband networks. Major developments
including the Internet and other high-speed data communications technologies,
on-going convergence between the CATV and telecommunications industries, and
demand for enhanced communications services, have led to a changing regulatory
and competitive environment in many markets. Throughout the world, the
deployment of new networks or improvements to existing networks for advanced
broadband applications is a national priority for many countries, permitting
them to participate and compete in the rapidly emerging information-based global
economy.
To meet today's demands and anticipating future demand, CATV, local
telephone operators and power utilities are building, rebuilding or upgrading
signal delivery networks around the world. These networks are designed to
deliver video, voice, data or power transmissions and provide Internet
connectivity to individual residences and businesses. Operators deploy a variety
of network technologies and architectures, such as HFC, FTTC, DLC and ADSL (see
"Glossary of Terms") to carry broadband and narrowband signals. These
architectures are constructed of electronic hardware connected via coaxial
cables, copper wires and/or optical fibers, including various access devices,
amplifiers, nodes, hubs and other signal transmission and powering electronics.
Many of these devices in the outside plant require housing in secure, protective
enclosures and cable management connectivity systems, such as those manufactured
by the Company.
As critical components of the outside plant, enclosure products provide
protection against weather and vandalism, ready access to devices for
technicians who maintain and manage the outside plant and, in some cases,
provide dissipation of heat generated by the active electronic hardware. CATV
and local telephone network operators place great reliance on manufacturers of
protective enclosures because any material damage to the signal delivery
networks is likely to disrupt communications services.
1
The primary drivers of demand for enclosures in the communications
industry is the construction, rebuilding, upgrading and maintenance of signal
delivery networks by CATV operators and local telephone companies. Particular
technological developments in the communications industry are resulting in
significant increases in system upgrades. For example, CATV networks are being
upgraded and prepared for advanced two-way services such as high-speed Internet
access via cable modems, telephony and PCS transport.
Within the local telephone company segment of the industry, local
telephone operators are employing new advanced technologies, such as a variety
of digital subscriber line ("DSL") technologies, which utilize installed copper
wires for broadband services. These "local loop" copper wire systems often
require significant upgrading and maintenance to provide the optimal throughput
necessary to carry high-speed broadband signals, increasing the need for fully
sealed outside plant facilities in order to sustain network reliability and
longevity. In addition, as local telephone companies build broadband networks
for the delivery of integrated voice, video and data services competitive with
CATV, they are expected to require new enclosure products designed for optical
fiber-based networks. These and other technological, regulatory and competitive
factors are expected to result in expansion of the overall long term market for
enclosure and connectivity products designed for the communications industry.
This is not to suggest that the industry's expansion will be implemented without
interruptions or material slowdowns in equipment spending by the communications
industry. Indeed, the industry has recently experienced and continues to
experience a slowdown in equipment spending in certain segments.
Business Strategy
The Company's strategy is to capitalize on opportunities in the global
communications industry by providing enclosures, connectivity products and other
complementary components to meet the evolving needs of its customers'
communications networks. The Company's wide range of products, manufacturing
expertise, application-based sales and marketing approach and reputation for
high quality products address key requirements of its customers. Principal
elements of the Company's strategy include the following:
Continue to Focus on Core Telecommunications Business. The Company will
continue to seek to capitalize on its position as a leading designer,
manufacturer and marketer of enclosures for the CATV and local telephone
industries in the United States and Canada through new product development for
both domestic and international market applications. The Company believes it
currently supplies a substantial portion of the enclosure product requirements
of a number of major CATV and telephone company operators.
In addition to its core thermoplastic enclosure products for the CATV and
telephone industries, the Company has positioned itself to increase its
participation in the large scale broadband network construction and upgrade
programs anticipated over the next several years. The Company is able to offer a
complete package of products used by all telecommunications network operators as
they upgrade their networks in order to provide additional services and expand
network capacity. These expansions and upgrades are expected to enable
telecommunications network operators to increase network bandwidth to
accommodate increased demand for faster and larger throughput of signal
transmissions and greater reliability of network performance.
The Company intends to continue to invest in the development of a broader
range of products designed specifically for telephone market applications. The
Company has achieved significant success in marketing its traditional
CATV/broadband products to local telephone companies that have been designing
and deploying broadband networks to deliver competitive video and data services.
The Company will continue to target this market for growth, both with telephone
network operators and with major system OEMs.
Expand International Presence. Management believes international markets
offer significant opportunities for increased sales in both the CATV and
telephone segments. The Company's principal international markets currently
consist of Canada, Mexico, Asia, the Pacific Rim, the Middle East and Europe.
Trends expected to result in international growth opportunities include the
on-going deregulation and privatization of telecommunications in many national
contexts around the world, the focus of numerous countries on building,
expanding and enhancing their communications systems in order to participate
fully in the information-based global economy, and multinational expansion by
many U.S. based network carriers. The Company currently operates overseas
manufacturing operations in Australia, Malaysia and the UK. The Company will
concentrate on expansion in international markets that are characterized by
deregulation or privatization of telecommunications and by the availability of
capital for the construction of signal delivery networks.
2
Develop New Products and Enter New Business Segments. The Company
continues to leverage its core capabilities in developing innovative products
that meet the evolving needs of its customers. Innovative products offered by
the Company include its new FlexPed(TM) free breathing telephony enclosures, the
Mini-Rocker(TM) insulation displacement copper connectivity products, and a
range of Rhino(TM) metal fabricated enclosures. The FiberMark(TM) line of fiber
optic splice enclosures is expected to be rolled out in 2001. The Company
continually invests in ongoing improvement and enhancement projects for the
existing products developed by the Company, several which have received U.S.
patent protection. The Company's products are designed to improve the
performance of its customers' outside plant systems. The Company has a proven
record in designing, developing and manufacturing "next generation" products
that provide solutions for its customers and offer advantages over those offered
by other suppliers to the industry. In addition, the Company seeks to diversify
its customer base by developing new products for customers outside the
communications industry that require enclosure products, such as the utility
industry.
Products
The Company currently markets over 50 product families, with several
thousand optional product configurations. The primary functions of the Company's
products designed for the telecommunications industry are cable routing and
management, equipment access, heat dissipation and security. The Company
believes that it offers one of the most complete lines of outside plant
infrastructure products in the telecommunications industry.
Enclosures. The Company manufactures precision-molded, highly engineered
and application-specific thermoplastic and metal fabricated enclosures that are
considered state-of-the-industry for many applications, having been field tested
and received approvals and standardization certifications from major CATV and
telephone company operators. Most of the Company's products are designed for
buried and underground network applications. The Company's enclosure products
provide technicians access to these networks and equipment for maintenance,
upgrades and installation of new services. Buried and underground networks and
enclosures are generally preferred by CATV operators for increased network
reliability, lower maintenance, improved security, reduced utility right-of-way
conflicts, and aesthetic appeal. The enclosure products, particularly the
thermoplastic versions, must provide advanced heat dissipation characteristics
increasingly required for the protection of active electronics in many network
installations. The Company is also a designer and manufacturer of metal
fabricated enclosures that house advanced electronics, fiber optic cable and
power systems for broadband telecommunications networks (branded as "Rhino
Enclosures(TM)"). The Company designs and manufactures a series of termination
blocks, brackets and cable management devices for mounting inside its enclosure
products. To position itself as a full-line product supplier, the Company also
offers a variety of complementary products, including thermoplastic and concrete
grade level boxes. These products are typically purchased by customers as part
of a system package and are marketed by the Company through its direct sales
force to its customer base. The Company is recognized in the industry for its
differentiated product designs and the functionality, field performance and
service life of its products.
RF Electronics. The Company is a designer and supplier of high performance
RF passive electronic devices, such as outdoor and indoor taps, signal
splitters/combiners and power inserters, all standard components deployed in
CATV systems and broadband telecommunications networks. The Company's electronic
devices and metal enclosures are complementary with the Company's core broadband
enclosure products and are important components of the Company's complete
systems approach to the outside plant requirements of CATV and telephone service
providers. New network applications, such as cable modem deployment for Internet
access, have created new technical challenges for service providers. Several new
products, including the DigiTap(TM) low intermodulation line of passive RF
devices, provide solutions to such challenges.
Copper Connectivity. The Company is a designer and manufacturer of
innovative telephone connectivity devices. The Company's Insulation Displacement
Connector ("IDC") technology provides advanced "tool-less" termination systems
for copper wires, the predominant medium used in the "Last Mile" for telephone
services worldwide. These proprietary IDC products environmentally seal network
termination points with a high level of reliability. The Company's
Mini-Rocker(TM) line of copper connectivity modules, blocks and accessories
offer tool-less installation, hinged wire-entry parts and transparent wire
receivers.
Fiber Optic Products. The Company offers a range of fiber optic cable
management products designed for use in telephone, broadband and power utility
telecommunications networks. The Company's fiber optic splice cases are used for
organizing, managing and protecting the connection points between separate
lengths of fiber optic cable in the outside plant network. Fiber optic cable
assemblies and interconnect hardware are used to connect fiber optic electronics
and fiber optic cables primarily for in-building applications. Fiber optic
electronic enclosures house optical electronics, power supplies and cables. All
of these products are designed and manufactured by the Company and marketed
worldwide.
3
Sealing Systems. The Company also specializes in the manufacture of high
performance products designed to meet or exceed the requirements of local
telephone company networks, including sealed plant products. These products are
designed with environmentally sealed specifications to provide exceptional
long-term protection for copper wires, coaxial cable and optical fibers exposed
for the purposes of splicing and termination. The sealing systems of the
Company's sealed plant products are available in several styles and
specifications which can be configured to individual customer requirements. This
provides significant value to customers in terms of faster installations,
re-entry and access, and cost management.
OEM Programs. Over the past several years, the Company has developed OEM
marketing programs through which other manufacturers incorporate the Company's
products as components of their telecommunications systems. These OEM programs
generally include exchanges of technical information that the Company can use in
developing new products and improvements and enhancements to existing designs.
The Company has established additional relationships with systems integrators
and innovative end users that provide valuable product improvement information.
The Company continues to develop new product innovations to complement its
existing product line and marketing strengths. The Company anticipates the
demand for its product line to be sustained by the continued construction of
broadband networks, both CATV and telephone, and upgrades of both existing CATV
and telephone networks to accommodate expanded video services, high-speed
Internet access and wireless PCS transport. The power utility market offers
additional growth opportunities as power utility companies move to add
telecommunications services to their customer menu.
Marketing and Sales
The Company markets its products primarily through a direct sales force of
technically trained salespeople. The Company's sales force is deployed worldwide
and divided into major market groups as follows: US; Canada; South/Central
America; Australia/Asia; and Europe/Middle East. The Company employs an
application-specific, systems approach to marketing its products, offering the
customer, where appropriate, a complete, cost-effective system solution to meet
its enclosure and other outside plant requirements. All sales personnel have
technical expertise in the products they market and are supported by the
Company's engineering and technical marketing staff.
The Company's technical and product marketing department provides its
sales force with extensive support. The field technical service personnel within
this department work closely with the outside sales staff and customers to
develop system solutions and provide a full range of technical support, training
and certification for users of the Company's products. Product marketing
personnel perform a variety of functions, including product line management and
general marketing services. These individuals also provide strategic plans for
product development, new market entry, acquisitions and strategic alliances, and
work closely with the Company's sales, engineering and manufacturing departments
to implement such strategic plans.
An internal sales/customer service department that administers and
schedules incoming orders, handles requests for product enhancements and service
inquiries also supports the Company's direct sales force. With locations in
California, Canada, the United Kingdom and Australia, this department maintains
direct communications with customers and the Company's field sales and
operations personnel.
By engaging in public relations activities, product literature
development, market research and advertising, the marketing department also
promotes and positions the Company within both domestic and international
markets. The Company regularly attends, participates and exhibits its products
at industry trade shows and conferences within domestic and international
telecommunications markets throughout the year.
Manufacturing Operations
The Company's vertically integrated manufacturing operations enables the
Company to control each step in the manufacturing process, including product
design and engineering; design and development of its own dies, tools and molds;
and wiring, assembly and packaging.
The Company's manufacturing expertise enables it to modify its product
lines to meet changing market demands, rapidly and efficiently produce large
volumes of products, control expenses and ensure product quality. Management
considers the Company's manufacturing expertise a distinct and significant
competitive advantage, providing it with the ability to satisfy the requirements
of major customers with relatively short lead-times by promptly booking and
shipping orders.
4
The Company owns a majority of its manufacturing equipment, which is
generally state-of-the-art, and manufacturing processes are performed by trained
Company personnel. These manufacturing processes include injection molding,
structural foam molding, rotational molding, metal fabrication, rubber
injection, transfer and compression molding, and termination block fabrication.
The Company has implemented several comprehensive process and quality assurance
programs, including continuous monitoring of key processes, regular product
inspections and comprehensive testing. The Company's Temecula, California
manufacturing facility has received ISO-9001 certification, a worldwide industry
standards certification.
The Company's manufacturing and distribution facilities include
approximately 367,000 square feet in Temecula, California; 7,350 square feet in
Mississauga, Ontario, Canada; 84,625 square feet in Orpington, Kent, UK; 18,000
square feet in Warrington, Cheshire, UK; 64,874 square feet in Sydney,
Australia; 44,000 square feet in Charlotte, North Carolina; and 16,000 square
feet in Selangor Darul Ehsan, Malaysia. In January 2001, the Company announced
it would consolidate the Charlotte, North Carolina distribution facility into
the Temecula operations in 2001.
Management has followed a long-term capacity plan, adding the equipment,
facilities and trained personnel as required, to support anticipated growth of
the Company's business. As a result, management believes the Company's
manufacturing facilities are adequate to meet anticipated product demand for the
foreseeable future.
Product Development and Engineering
The Company believes it was the first to design, manufacture and market
thermoplastic enclosure products for use in the telecommunications industry on a
wide scale. The Company's product development and engineering staff has designed
and tested the Company's products and has developed core competencies in product
development and engineering.
As a direct result, the Company has been able to develop a broad series of
superior products. Distinguishing characteristics of the Company's products
include:
o Effective heat dissipation qualities;
o Advanced copper IDC connectivity products;
o A superior environmental sealing and protection system that, unlike
many competitors' products, does not require gels, compounds or
other methods to maintain the required seal;
o Sub-surface network access systems;
o Product designs allowing technicians easy access through circular
covers that can be removed to fully expose the enclosed electronics;
o High performance passive RF electronics products;
o Compatibility with a variety of signal delivery network
architectures;
o Modular metal fabricated enclosure product line covering multiple
network applications;
o Versatility of design to accommodate network growth through custom
hardware and universal mounting systems that adapt to a variety of
new electronic hardware; and
o Excellent protection and management of optical fibers and cables.
The Company's product development and engineering processes enable the
Company to respond to demands of the communications industry for increasingly
sophisticated enclosure products. Many of the Company's thermoplastic enclosure
products are now considered state-of-the-industry, having been field tested and
received approvals and standardization certifications from major CATV and
telephone company operators. The Company is engaged in extensive new product
development programs in metal fabricated enclosures and telephone
connectorization devices.
The Company's product development approach is applications-based and
customer driven. A team comprised of engineering, marketing, manufacturing and
direct sales personnel work together to define, develop and deliver
comprehensive systems solutions to customers, focusing on the complete design
cycle from product concept through tooling and high-volume manufacturing. The
Company is equipped to conduct many of its own product testing requirements for
performance qualification purposes, enabling it to accelerate the product
development process. The Company spent $0.5 million in 1996, $1.0 million in
1997, $1.9 million in 1998, $2.6 million in 1999 and $2.8 million in 2000 on
research and development.
5
Customers
The Company sells its products directly to CATV operators and telephone
companies throughout the United States, Canada and certain other international
markets, principally within developed nations. The Company also sells its
products to OEMs. During 2000, the Company's five largest customers accounted
for 40.4% of total net sales. In 2000, the Company's five largest customers in
the United States (by sales volume) were AT&T Broadband, Time Warner, Cox,
Comcast and Charter. Two customers, AT&T Broadband and Time Warner, accounted
for 11.2% and 10.4%, respectively, of the Company's net sales in 2000.
In international markets, the Company's five largest customers (by sales
volume) were Rogers (Canada), Telstra (Australia), Nexans Iberica (Spain),
Telekom Malaysia and Matav Cable TV Systems (Israel).
The Company has historically operated with a relatively small backlog, and
sales and operating results in any quarter are principally dependent upon orders
booked and products shipped in that quarter. The Company's customers generally
do not enter into long-term supply contracts providing for future purchase
commitments of the Company's products. Rather, the Company believes that many of
its customers periodically review their supply relationships and adjust buying
patterns based upon their current assessment of the products and pricing
available in the marketplace. From fiscal period to fiscal period, significant
changes in the level of purchases of the Company's products by specific
customers can and do result from this periodic assessment.
Intellectual Property
Upon the consummation of its initial public offering (the "Initial Public
Offering") in 1996, the Company became the owner of all of the patents and other
technology employed by it in the manufacture and design of its products. The
Company's patents, which expire through the year 2010, cover various aspects of
the Company's products. In addition, the Company has certain trade secrets,
know-how and trademarks related to its technology and products.
Management does not believe any single patent or other intellectual
property right is material to the Company's success as a whole. The Company
intends to maintain an intellectual property protection program designed to
preserve its intellectual property assets.
Competition
The industries in which the Company operates are highly competitive. The
Company believes, however, that several factors, including its ability to
service national and multi-national customers, its direct sales force, its
specialized engineering resources and its vertically integrated manufacturing
operations provide the Company with significant competitive advantages.
Management believes the principal competitive factors in the
telecommunications equipment market are product availability, customer service,
product performance, new product capabilities and price.
Competitive price pressures are common in the industry. In the past, the
Company has responded effectively to competition with cost controls through
vertical integration utilizing advanced manufacturing techniques, cost-effective
product designs and material selection, and an aggressive procurement approach.
In the past, certain of the Company's telecommunications customers have
required relatively lengthy field testing of new products prior to purchasing
such products in quantity. With the deregulation of the telecommunications
industry and the continuing convergence occurring within the CATV and telephone
industries, it is uncertain whether, and the extent to which, such field testing
may continue to be required. While field testing can delay the introduction of
new products, it can also act as a competitive advantage for those companies
tested and approved because to a certain extent it creates a barrier to new
product introduction and sales by competitors.
6
Raw Materials; Availability of Complementary Products
The principal raw materials used by the Company are thermoplastic resins,
neoprene rubbers, hot and cold rolled steel, stainless steel and copper. The
Company also uses certain other raw materials, such as fasteners, packaging
materials and communications cable. Management believes the Company has adequate
sources of supply for the raw materials used in its manufacturing processes and
it attempts to develop and maintain multiple sources of supply in order to
extend the availability and encourage competitive pricing of these materials.
Most plastic resins are purchased under annual and multi-year contracts to
stabilize costs and improve supplier delivery performance. Neoprene rubbers are
manufactured by multiple custom compounders using the Company's proprietary
formulas. Metal products are supplied in standard stock shapes, coils and custom
rollforms. Some hot and cold rolled steels are either hot-dipped galvanized or
zinc or cadmium electro-plated. The Company outsources to local processors to
perform the coating operations.
Positioning itself as a full-line product supplier, the Company also
relies on certain other manufacturers to supply products that complement the
Company's own product line, such as grade level boxes and cable-in-conduit. The
Company believes there are multiple sources of supply for these products.
Employees
As of December 31, 2000, the Company employed 887 people, of whom 83 were
in sales, 671 were in manufacturing operations, 61 were in research and
development and 72 were in finance and administration. The Company considers its
employee relations to be good, and it recognizes that its ability to attract and
retain qualified employees is an important factor in its growth and development.
None of the Company's employees is subject to a collective bargaining agreement,
and the Company has not experienced any business interruption as a result of
labor disputes within the past five years.
Regulation
The telecommunications industry is subject to regulations in the United
States and other countries. Federal and state regulatory agencies regulate most
of the Company's domestic customers. On February 1, 1996, the United States
Congress passed the Telecommunications Act of 1996 that the President signed
into law on February 8, 1996. The Telecommunications Act lifts certain
restrictions on the ability of companies, including RBOCs and other customers of
the Company, to compete with one another and generally reduces the regulation of
the communications industry.
The Company is also subject to a wide variety of federal, state and local
environmental laws and regulations. The Company utilizes, principally in
connection with its thermoplastic manufacturing processes, a limited number of
chemicals or similar substances that are classified as hazardous. It is
difficult to predict what impact these environmental laws and regulations may
have on the Company in the future. Restrictions on chemical uses or certain
manufacturing processes could restrict the ability of the Company to operate in
the manner that it currently operates or is permitted to operate. Management
believes that the Company's operations are in compliance in all material
respects with current environmental laws and regulations. Nevertheless, it is
possible that the Company may experience releases of certain chemicals to
environmental media which could constitute violations of environmental law (and
have an impact on its operations) or which could cause the Company to incur
material cleanup costs or other damages. For these reasons, the Company might
become involved in legal proceedings involving exposure to chemicals or the
remediation of environmental contamination from past or present operations.
Because certain environmental laws impose joint and several, strict and
retrospective liability upon current owners or operators of facilities from
which there have been releases of hazardous substances, the Company could be
held liable for remedial measures or other damages (such as liability in
personal injury actions) at properties it owns or utilizes in its operations,
even if the contamination was not caused by the Company's operations.
Item 2. Properties
The Company's facilities approximate 602,000 square feet, of which
approximately 55%, 31% and 14% is used for manufacturing, warehouse and office
space, respectively. In Temecula, California, 261,000 square feet of the total
367,000 square feet are leased from William H. Channell, Sr., the Company's
Chairman of the Board and Chief Executive Officer. (See "Certain Relationships
and Related Transactions", Item 13.) The Company also leases an aggregate of
approximately 217,000 square feet of manufacturing, warehouse and office space
in Canada, Australia, Malaysia, United Kingdom and North Carolina. In connection
with the Company's restructuring plan (see Financial Statement Footnote H -
Restructuring Charge), the Company will reduce the amount of leased
manufacturing, warehouse and office space by 86,095 square feet. The
7
Company owns approximately 123,000 square feet of manufacturing, warehouse and
office space in Temecula, California and the United Kingdom. The Company
considers its current facilities to be adequate for its operations.
Item 3. Legal Proceedings
The Company is from time to time involved in ordinary routine litigation
incidental to the conduct of its business. The Company regularly reviews all
pending litigation matters in which it is involved and establishes reserves
deemed appropriate for such litigation matters. Management believes that no
presently pending litigation matters will have a material adverse effect on its
business or on its results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
8
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
The Company's Common Stock is listed and traded on the NASDAQ Stock Market
(National Market System) under the symbol CHNL. The following table sets forth,
for the periods indicated, the high and low sale prices for the Company's Common
Stock, as reported on the NASDAQ Stock Market (National Market System). There
was no existing public market for the Company's Common Stock prior to the third
quarter of 1996.
High Low
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Year Ended December 31, 1996:
Third Quarter $15.25 $11.00
Fourth Quarter 13.00 9.00
High Low
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Year Ended December 31, 1997:
First Quarter $13.75 $10.00
Second Quarter 13.75 9.63
Third Quarter 16.50 13.00
Fourth Quarter 14.00 11.00
High Low
------ ------
Year Ended December 31, 1998:
First Quarter $13.25 $ 9.63
Second Quarter 13.88 9.00
Third Quarter 11.50 7.25
Fourth Quarter 9.13 5.75
High Low
------ ------
Year Ended December 31, 1999:
First Quarter $ 9.50 $ 8.38
Second Quarter 11.38 7.88
Third Quarter 10.75 9.50
Fourth Quarter 13.63 6.75
High Low
------ ------
Year Ended December 31, 2000:
First Quarter $20.25 $10.50
Second Quarter 15.00 10.50
Third Quarter 14.94 12.00
Fourth Quarter 12.63 6.50
The Company has not declared any dividends since termination of the S
corporation election in connection with its Initial Public Offering in July
1996. For the year ending December 31, 1996, while an S corporation, the Company
declared dividends on its common stock in the amount of $14.2 million.
The Company currently anticipates it will retain all available funds to
finance its future growth and business expansion. The Company does not intend to
pay cash dividends in the foreseeable future. Under the terms of the Company's
credit agreement, the Company has agreed, under certain circumstances, not to
pay any dividends during the term of this agreement.
As of December 31, 2000, the Company had 9,077,293 shares of its Common
Stock outstanding, held by approximately 1,007 shareholders of record.
9
Item 6. Selected Financial Data
The following table sets forth financial data of the Company. The summary
financial data in the table is derived from the consolidated financial
statements of the Company. Certain pro forma, net income per share and adjusted
financial data has not been presented for all periods because it is not
applicable to those periods. The data should be read in conjunction with the
financial statements, related notes and other financial information included
therein (amounts in thousands, except per share data).
Year Ended December 31,
--------------------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- --------- ---------
OPERATING DATA:
Net sales ................................ $ 47,282 $ 59,943 $ 92,710 $ 120,680 $ 128,179
Cost of goods sold ....................... 25,447 35,032 56,578 76,115 81,108
-------- -------- -------- --------- ---------
Gross profit ............................. 21,835 24,911 36,132 44,565 47,071
Commission income (1) .................... 985 606 292 8 --
-------- -------- -------- --------- ---------
22,820 25,517 36,424 44,573 47,071
-------- -------- -------- --------- ---------
Operating expenses
Selling ............................. 6,559 7,251 11,570 14,716 15,484
General and administrative .......... 2,021 4,077 8,057 9,023 14,231
License fees(2) ..................... 531 -- -- -- --
Research and development ............ 531 1,009 1,863 2,629 2,771
Restructuring charge ................ -- -- -- -- 1,513
Asset impairment charge ............. -- -- -- -- 4,569
-------- -------- -------- --------- ---------
9,642 12,337 21,490 26,368 38,568
-------- -------- -------- --------- ---------
Income from operations ................... 13,178 13,180 14,934 18,205 8,503
Interest income (expense), net ........... 291 879 (1,076) (2,650) (2,859)
-------- -------- -------- --------- ---------
Income before income taxes ............... 13,469 14,059 13,858 15,555 5,644
Income taxes ............................. 2,359 5,589 5,749 6,221 2,076
-------- -------- -------- --------- ---------
Net income ............................... $ 11,110 $ 8,470 $ 8,109 $ 9,334 $ 3,568
======== ======== ======== ========= =========
Pro forma net income(3) .................. $ 8,921
Pro forma net income per share(4) ........ $ 1.06
Pro forma weighted average shares
outstanding(4) ................... 8,403
NET INCOME PER SHARE:
Basic .................................... $ .92 $ .88 $ 1.03 $ 0.39
Diluted .................................. $ .91 $ .88 $ 1.02 $ 0.39
OTHER DATA:
Gross margin(5) .......................... 46.2% 41.6% 39.0% 36.9% 36.7%
Operating margin(6) ...................... 27.9 22.0 16.1 15.1 6.6
EBITDA(7) ................................ $ 14,729 $ 15,224 $ 18,994 $ 24,743 $ 16,671
Capital expenditures (excluding
capital leases) .................. 1,554 5,966 10,579 9,148 11,606
S Corporation dividends declared ......... 14,157 -- -- -- --
Cash provided by (used in):
Operating activities ................. 11,424 3,730 6,606 8,073 8,352
Investing activities ................. (12,960) (8,958) (22,308) (9,361) (11,857)
Financing activities ................. 9,351 (122) 17,919 (1,728) 1,876
ADJUSTED FINANCIAL DATA(8):
Net sales (as historically reported) ..... $ 47,282
Adjusted EBITDA(9) ....................... 15,122
Adjusted income from operations .......... 13,571
Adjusted operating margin(10) ............ 28.7%
Adjusted net income ...................... $ 8,179
Adjusted net income per share(11) ........ $ .97
10
BALANCE SHEET DATA:
Current assets ..................... $31,274 $33,252 $40,505 $ 48,807 $ 51,531
Total assets ....................... 42,658 50,625 98,442 114,540 116,748
Long-term obligations
(including current maturities) .. 473 946 35,911 38,061 40,364
Stockholders' equity ............... 37,422 45,892 52,580 62,339 63,927
Notes to Selected Financial Data
(amounts in thousands, except per share data)
(1) Commission income represented the amount of commissions paid to the
Company by the manufacturer of certain cable-in-conduit products in
connection with the Company's sale of such products, which the
Company offered to its customers in order to complement its own
product line.
(2) License fees represent the amounts paid by the Company to William H.
Channell, Sr., the Company's Chairman of the Board and Chief
Executive Officer, for the use of six patents ("Channell Patents")
covering products manufactured and sold by the Company. Prior to the
consummation of the Initial Public Offering, these patents were sold
to the Company, the license fee arrangements with Mr. Channell, Sr.
were terminated and, thereafter, the Company no longer paid any
license fees with respect to the Channell Patents.
(3) Prior to the Initial Public Offering, the Company was an S
corporation for federal and state income tax purposes. The pro forma
presentation reflects the income tax provision of the Company as
recorded in its income statement plus additional tax on S
Corporation income at C Corporation rates. Such presentation does
not reflect the adjustments set forth in note (8) below. The effect
of the Company's use of a portion of the net proceeds of the Initial
Public Offering to repay outstanding bank indebtedness has not been
reflected in pro forma net income or pro forma net income per share
because the impact is not material.
(4) Pro forma net income per share has been computed by dividing pro
forma net income by the pro forma weighted average shares
outstanding. Pro forma weighted average shares outstanding include
1,558 (779 for 1996) of the shares offered by the Company at a price
of $11.00 per share, the net proceeds of which were used to fund the
distributions in connection with the termination of the Company's S
corporation status. See Footnote B to the Financial Statements
included elsewhere herein for the weighted average shares
outstanding in 1997, 1998, 1999 and 2000.
(5) Gross margin is gross profit as a percentage of net sales.
(6) Operating margin is income from operations as a percentage of net
sales.
(7) EBITDA represents income from operations before interest and income
taxes, plus depreciation and amortization expense. EBITDA is not
intended to represent cash flow, operating income or any other
measure of performance in accordance with generally accepted
accounting principles, but is included here because management
believes that certain investors find it to be a useful tool for
measuring a company's ability to service its debt.
(8) The adjusted financial data reflects, (i) the elimination of the
expense for the license fees payable to Mr. Channell, Sr., which
license fees were terminated as part of the termination of the
Company's S corporation status, (ii) an increase in Mr. Channell,
Sr.'s annual base salary from $225 to $500 in connection with the
Initial Public Offering, and (iii) provision for income taxes as if
the Company had always been a C corporation at an assumed rate of
41%.
(9) Adjusted EBITDA represents adjusted income from operations before
interest and income taxes, plus depreciation and amortization
expense. See note (7) above.
(10) Adjusted operating margin is adjusted income from operations as a
percentage of net sales.
(11) Adjusted net income per share is adjusted net income divided by
8,403 pro forma weighted average shares outstanding for 1996. The S
corporation dividends declared in 1996 include $11,665 of
distributions made in connection with the termination of the
Company's S Corporation status.
11
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
The Company is a designer and manufacturer of telecommunications equipment
supplied to telephone, cable television and power utility network providers
worldwide. The Company sells its products directly to CATV operators and
telephone companies throughout the United States, Canada, Australia, United
Kingdom and certain other international markets, principally within developed
nations. The Company believes that many of its customers periodically review
their supply relationships, and the Company can experience significant changes
in buying patterns from specific customers between fiscal periods. The Company
has historically operated with a relatively small backlog, and sales and
operating results in any quarter are principally dependent upon orders booked
and products shipped in that quarter. Further, the Company's customers generally
do not enter into long-term supply contracts providing for future purchase
commitments for the Company's products. These factors, when combined with the
Company's operating leverage and the need to incur certain capital expenditures
and expenses in part based upon the expectation of future sales, causes the
Company's operating results to be at risk to changing customer buying patterns.
If sales levels in a particular period do not meet the Company's expectations,
operating results for that period may be materially and adversely affected.
The Company uses numerous raw materials in its manufacturing processes.
Although management believes that the Company has adequate sources of supply for
such raw materials, increases in the market prices of the Company's raw
materials could significantly increase the Company's cost of goods sold and
materially adversely affect the Company's profitability. The Company's
profitability may also be materially adversely affected by decreases in its
sales volume because many of the costs associated with the Company's rent,
product development, engineering, tooling and other manufacturing processes are
essentially fixed in nature and must be spread over its sales base in order to
maintain historic levels of profitability.
In addition to Company manufactured products, the Company markets
complementary products manufactured by third parties. With respect to sales of
cable-in-conduit products, the Company generally received a commission upon the
sale of such products. Pursuant to the agreement, which was terminated in 1998,
under which the Company marketed such products during the terms thereof and for
a period of two years thereafter, both the Company and the manufacturer of such
products is prohibited from competing with the other in any product line that
is, or within the year prior to termination has been represented, manufactured
or sold by the other within the specified markets covered by the agreements.
During the periods discussed under "Results of Operations" below, the
Company's sales increases resulted primarily from additional sales to the
Company's existing customers as they have expanded, rebuilt and upgraded their
signal delivery networks in order to deliver enhanced communications services,
as well as additional sales to new customers, particularly telephone companies
that have recently entered the broadband market, international customers, and
through the RMS, Standby Electronics and Egerton acquisitions.
Results of Operations
The following table sets forth the Company's operating results for the
periods indicated expressed as a percentage of sales.
Year Ended December 31,
--------------------------
1998 1999 2000
------ ------ ------
Net sales .................... 100.0% 100.0% 100.0%
Cost of goods sold ........... 60.8 63.1 63.3
------ ------ ------
Gross profit ................. 39.2 36.9 36.7
Selling ...................... 12.4 12.2 12.1
General and administrative ... 8.7 7.5 11.1
Research and development ..... 2.0 2.1 2.2
Restructuring charge ......... -- -- 1.2
Asset impairment charge ...... -- -- 3.5
------ ------ ------
Income from operations ....... 16.1 15.1 6.6
12
Year Ended December 31,
----------------------------
1998 1999 2000
------ ------ ------
Interest income (expense), net .. (1.2) (2.2) (2.2)
------ ------ ------
Income before income taxes ...... 14.9 12.9 4.4
Income taxes .................... 6.2 5.2 1.6
------ ------ ------
Net income ...................... 8.7% 7.7% 2.8%
====== ====== ======
New Accounting Pronouncement
In 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS 133"), Accounting for Derivative
Instruments and Hedging Activities, which is effective for 2001. SFAS 133 will
require the Company to record all derivatives on the balance sheet at fair
value. For derivatives that are hedges, changes in the fair value of derivatives
will be offset by the changes in the fair value of the hedged assets,
liabilities or firm commitments. The Company believes the impact of adopting
this standard will not be material to results of operations or equity.
Comparison of the Year Ended December 31, 2000 with Year Ended December 31, 1999
Net Sales. Net sales increased $7.5 million or 6.2% from $120.7 million in
1999 to $128.2 million in 2000. The increase resulted from higher sales volume
in the U.S., Europe / Middle East and Canada, partially offset by a decline in
sales in Australia / Asia and an unfavorable foreign exchange rate caused by a
strengthening U.S. dollar compared to currencies in Europe and Australia.
Domestic sales increased $8.5 million or 10.6% from $80.0 million to $88.5
million as a result of continued growth in both network upgrade and rebuild
construction in the first half of the year. International sales decreased $1.1
million or 2.5% from $40.7 million to $39.6 million. An unfavorable change in
currency exchange rates decreased international sales reported in U.S. dollars
by $2.8 million for the year 2000. Sales in Europe/Middle East increased 14.3%
to $21.7 million due to growth in sales of fiber optic products in the U.K. and
continental Europe and growth in RF electronic products sold in Spain, Eastern
Europe and Israel. Sales in Canada increased 41.2% to $7.3 million due to growth
in sales of metal enclosures. These international sales increases were offset by
decreased sales in Australia / Asia which declined 35.5% to $10.6 million. The
decline in Australia / Asia is due to lower spending on telecommunications
network upgrades and maintenance in Australia. Sales increased in the Asian
operations of this region.
Gross Profit. Gross profit increased $2.5 million from $44.6 million in
1999 to $47.1 million in 2000 due to the increased sales level. As a percentage
of sales, gross profit was 36.9% in 1999 and 36.7% in 2000.
Selling. Selling expense increased $0.8 million or 5.2% from $14.7 million
in 1999 to $15.5 million in 2000. The increase is due to additional sales
personnel hired for eastern and southern Europe, Asia and domestic telco
products. As a percentage of net sales, selling expense decreased from 12.2% in
1999 to 12.1% in 2000.
General and Administrative. General and administrative expenses increased
$5.2 million or 57.7% from $9.0 million in 1999 to $14.2 million in 2000. The
increase is due to: 1) depreciation, telecommunications, computer equipment and
staffing costs associated with implementing the Oracle global systems platform
of approximately $2.6 million, 2) in 1999, approximately $1.1 million of
internal costs were capitalized as part of implementing Oracle which lowered
general and administrative costs reported in 1999, 3) higher administrative
costs in Canada of $0.4 million to process the higher sales volume, 4) salary,
recruiting and relocation costs of approximately $0.3 million to implement
global Finance and Human Resource functions, and, 5) higher travel costs of $0.1
million to integrate global operations. As a percentage of net sales, general
and administrative expenses increased from 7.5% in 1999 to 11.1% in 2000.
Research and Development. Research and development expenses increased $0.2
million or 5.4% from $2.6 million in 1999 to $2.8 million in 2000 due to
increased development spending for new connector products. As a percentage of
net sales, research and development expenses increased from 2.1% in 1999 to 2.2%
in 2000.
Restructuring Charge. In the fourth quarter of 2000, the Company recorded
a restructuring charge of $1.5 million associated with activities to improve
efficiency, align production costs with anticipated revenues and reduce selling,
general and administrative costs. As a result of these actions, global head
count was reduced by approximately 10% and several facilities are being
consolidated. The Charlotte, North Carolina distribution facility is being
integrated into the Temecula,
13
California operations, leased manufacturing space in Europe is being reduced and
the Hong Kong sales office is being closed with the selling functions integrated
into the Asian sales operations in Malaysia.
Asset Impairment Charge. In the fourth quarter of 2000, the Company
recorded an impairment of asset charge of $4.6 million. The charge is related to
certain production equipment in the European operations. Utilization of this
production equipment declined as newer, more automated equipment was purchased
as part of the company's capital expenditure program. As a result, the equipment
was written down by $4.6 million to reflect a reduction in the fair value of
this equipment. Depreciation expense will be reduced an average of approximately
$0.8 million per year over the next six years.
Income from Operations. As a result of the items discussed above, income
from operations decreased $9.7 million or 53.3% from $18.2 million in 1999 to
$8.5 million in 2000. As a percentage of sales, income from operations decreased
from 15.1% in 1999 to 6.6% in 2000.
Interest Income (Expense). Net interest expense increased from $2.7
million in 1999 to $2.9 million in 2000. The increase is due to a higher debt
level to fund working capital and capital expenditures and a higher interest
rate in 2000.
Income Taxes. Income taxes were $6.2 million in 1999 and $2.1 million in
2000, with effective tax rates of 40.0% and 36.8% respectively. The decrease in
the effective tax rate is due to tax planning strategies associated with
international operations that were implemented in 2000.
Comparison of the Year Ended December 31, 1999 With Year Ended December 31, 1998
Net Sales. Net sales increased $27.7 million or 29.8% from $93.0 million
in 1998 to $120.7 million in 1999, as a result of increased sales of
telecommunications enclosure and component products.
Domestic net sales increased $16.1 million or 25.3% from $63.9 million in
1998 to $80.0 million in 1999, primarily due to continued growth in both upgrade
and rebuild construction to facilitate enhanced voice, data and video
requirements, in addition to industry consolidation and convergence.
International net sales increased $11.6 million or 39.9% from $29.1 million in
1998 to $40.7 million in 1999 as a result of $30.7 million in sales of Egerton
products, including a large network upgrade in Australia, compared with
$20.1million in 1998 (for the eight months following the acquisition).
Gross Profit. Gross profit increased $8.1 million or 22.4% from $36.4
million in 1998 to $44.6 million in 1999. Of this improvement, $6.0 million was
attributable to sales of Egerton products and $2.1 million was attributable to
increased sales volume of Channell's telecommunications enclosure and component
products. Gross margin decreased from 39.2% in 1998 to 36.9% in 1999, primarily
due to a 25.6% margin contribution from Egerton revenues, while margin on
Channell's telecommunications enclosure and component products increased from
40.4% in 1998 to 41.7% in 1999 due to an increase in sales volume, which
resulted in higher operating leverage (i.e., a higher percentage of sales
relative to fixed costs).
Selling. Selling expense increased $3.1 million or 26.7% from $11.6
million in 1998 to $14.7 million in 1999, primarily as a result of $2.1 million
of increased selling expenses related to the Egerton operations (including Hong
Kong, Malaysia and New Zealand), $1.0 million of increased domestic sales and
marketing expenses associated with increased sales activities (including $0.5
million for the development of a new corporate identity program). As a
percentage of net sales, selling expense decreased from 12.4% in 1998 to 12.2%
in 1999.
General and Administrative. General and administrative expenses increased
$0.9 million or 11.1% from $8.1 million in 1998 to $9.0 million in 1999. Such
increase occurred primarily as a result of the Egerton operations and $0.5
million of goodwill amortization associated with the Egerton acquisition. As a
percentage of net sales, general and administrative expenses decreased from 8.7%
in 1998 to 7.5% in 1999.
Research and Development. Research and development expenses increased $0.7
million or 36.8% from $1.9 million in 1998 to $2.6 million in 1999, as a result
of $0.3 million of additional facility expense, $0.2 million increased research
and development supplies and $0.2 million related to Egerton. As a percentage of
net sales, research and development expenses increased from 2.0% in 1998 to 2.1%
in 1999.
Income from Operations. As a result of the items discussed above, income
from operations increased $3.3 million or 22.2% from $14.9 million in 1998 to
$18.2 million in 1999, but decreased as a percentage of net sales from 16.1% in
1998 to 15.1% in 1999.
14
Interest Income (Expense). Interest expense increased from $1.1 million in
1998 to $2.7 million in 1999, an increase of 145.5%. This increase was a result
of twelve months interest expense in 1999 on the increased borrowings to fund
the Egerton acquisition as opposed to eight months of interest expense in 1998
and 1999 capital expenditures.
Liquidity and Capital Resources
Net cash provided by operating activities was $8.1 million and $8.4
million in 1999 and 2000, respectively. Net cash used in investing activities
was $9.4 million and $11.9 million in 1999 and 2000, respectively. Net cash used
in financing activities was $1.7 million in 1999 and net cash provided by
financing activities was $1.9 million in 2000.
Accounts receivable increased from $23.2 million for the year ended
December 31, 1999 to $24.0 million for the year ended December 31, 2000,
primarily as a result of telecom customers slowing payments, partly due to
consolidation of customers which has caused back office administrative
difficulties at customers' businesses. Inventories increased from $19.4 million
for the year ended December 31, 1999, to $21.6 million for the year ended
December 31, 2000, as a result of the sales slow down in the fourth quarter and
material commitments made to satisfy a higher volume level.
The Company made capital expenditures (including capital leases) of $9.1
million and $11.6 million in 1999 and 2000, respectively. The Company acquired
machinery and equipment under capital leases totaling $3.9 million in 1999.
The Board of Directors, on April 1, 1998, having determined such action to
be in the best interest of the Company, authorized a stock repurchase plan of up
to $2.0 million worth of Company stock. The plan was subsequently increased to
$2.75 million by the Board on December 1, 2000. The Company repurchased 22,985
shares at a cost of approximately $0.2 million in 1999 and 30,900 shares of its
common stock at a cost of approximately $0.2 million in 2000.
In conjunction with the acquisition of Egerton in May 1998, the Company
entered into a new $30.0 million Credit Agreement with a bank to provide funds
for the Egerton acquisition, as well as for working capital and equipment
acquisition purposes. In July 2000, the Company increased the Credit Agreement
to $40.0 million, of which $30.0 million is a revolving facility and $10.0
million a term loan. The term loan amortization commences in March 2001. The
outstanding balance bears interest, payable monthly, at a variable rate based on
either the bank's base rate or the applicable LIBOR rate depending on the nature
of the borrowings. At December 31, 2000, the Credit Agreement's weighted average
interest rate was 7.8% and the outstanding balance was $31.0 million. The Credit
Agreement is collateralized by substantially all the Company's tangible and
intangible assets and up to 65% of the capital stock of the Company's
subsidiaries and is due April 30, 2003.
The Credit Agreement contains various financial and operating covenants
which, among other things, imposes limitations on the Company's ability to incur
additional indebtedness, merge or consolidate, sell assets except in the
ordinary course of business, make certain investments, enter into leases and pay
dividends. The Company is also required to comply with covenants related to
minimum net worth and other financial ratios.
The Company did not satisfy certain financial ratio covenants included in
the Credit Agreement as of December 31, 2000, and believes that it will not
satisfy the same covenants as of March 31, 2001. The Company is in active
discussions with its lenders to obtain a waiver or amendment of the covenant
ratios for the December 31, 2000 and March 31, 2001 measurement dates. However,
because no waiver or other amendment has been agreed to as of this date, the
entire amount of the Company's obligations under the Credit Agreement has been
re-classified to current as of this date as required by generally accepted
accounting principles. In the event the Company is unable to obtain waivers of
the covenant violations it may be required to obtain alternative financing. In
either event, the Company's costs of borrowing may be expected to increase.
The Company also had a credit facility available to the Egerton
subsidiaries, which included an overdraft facility totaling approximately $5.0
million plus the combined cash balances of those subsidiaries. The facility also
included approximately $2.0 million, to provide financing for international
letters of credit, forward exchange contracts and other items. The outstanding
balance (net of cash balances) bore interest at the bank's base rate, 5.50% at
December 31, 1999, plus a factor ranging from 1.25% to a maximum of 4.0%
depending on the amount borrowed. The facility was collateralized by the assets
of the subsidiaries. In February 2000, the Egerton credit facility was repaid
using additional borrowings from the Credit Agreement.
The Company believes that income from operations, coupled with borrowing
under its Credit Agreement will be sufficient to fund the Company's capital
expenditure and working capital requirements through 2001.
15
Forward-Looking Statement
This Report on Form 10-K contains certain forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are being provided pursuant to that legislation. In addition to the
other information contained in this Form 10-K, the following risk factors should
be carefully considered in evaluating the Company and its business. The
following is not intended as, and should not be considered, an exhaustive list
of relevant factors.
Obsolescence; Uncertainty of Market Acceptance of New Products
The communications industry is in a state of rapid technological change.
The introduction of new technologies, network architectures or changes in
industry standards can render the Company's existing products or products under
development obsolete or unmarketable. For example, satellite, wireless and other
communication technologies under development or currently being deployed may
represent a threat to copper, coaxial and fiber optic-based systems by reducing
the need for wire-line networks. To date, however, the Company believes that
these technologies have not had a significant impact on the demand for
traditional wire-line network based services. Further, management anticipates
that a number of factors, including network capacity requirements, existing
investments in wire-line networks, security and long-term cost effectiveness,
will result in continued growth of wire-line networks. However, there can be no
assurance that future advances or further development of these or other new
technologies will not have a material adverse effect on the Company's business.
The Company's growth strategies are designed, in part, to take advantage of
opportunities that the Company believes are emerging as a result of the
development of enhanced voice, video, data and other transmission networks, and
high-speed Internet access in the telecommunications industry. There can be no
assurance that demand resulting from these emerging trends will develop rapidly
or that the Company's products will be met with market acceptance.
Importance of New Product Development to Growth
A significant factor in the Company's ability to grow and remain
competitive will be its ability to anticipate changes in technology and industry
standards, and to successfully develop and introduce new products on a timely
basis. New product development often requires long-term forecasting of market
trends, development and implementation of new designs and processes, and
substantial capital commitment. Trends toward consolidation of the
communications industry and convergence of technologies may require the Company
to quickly adapt to rapidly changing market conditions and customer
requirements.
The Company's manufacturing and marketing expertise has enabled it to
successfully develop and market new products in the past. However, any failure
by the Company to anticipate or respond in a cost-effective and timely manner to
technological developments or changes in industry standards or customer
requirements, or any significant delays in product development or introduction,
could have a material adverse effect on the Company's business, operating
results and financial condition.
Concentration of Customers; Limited Backlog
The telecommunications industry is concentrated, with relatively few
operators accounting for a large percentage of the Company's available market.
Consequently, the Company's five largest customers (by sales volume) accounted
for 40.4% of the Company's total net sales in 2000. Two customers, AT&T
Broadband and Time Warner, accounted for 11.2% and 10.4% respectively, of the
Company's total net sales in 2000. Mergers and acquisitions in the
telecommunications industry are not only increasing the concentration of the
industry and of the Company's customer base, but also from time to time delaying
customers' capital expenditures as newly merged service providers consolidate
their operations.
The Company's customers typically require prompt shipment of the Company's
products within a narrow timeframe. As a result, the Company has historically
operated with a relatively small backlog. Sales and operating results in any
quarter are principally dependent upon orders booked and products shipped in
that quarter. Further, the Company's customers
16
generally do not enter into long-term supply contracts providing for future
purchase commitments for the Company's products. These factors, when combined
with the Company's operating leverage (see "Operating Leverage" below) and the
need to incur certain capital expenditures and expenses in part based upon the
expectation of future sales, may place the Company's operating results at risk
to changing customer buying patterns. If sales levels in a particular period do
not meet the Company's expectations, operating results for that period may be
materially and adversely affected.
Dependence on the Telecommunications Industry
The Company expects that sales to the telecommunications industry will
continue to represent a substantial portion of its total sales. Demand for
products within this industry depends primarily on capital spending by service
providers for constructing, rebuilding, maintaining or upgrading their systems.
The amount of capital spending and, therefore, the Company's sales and
profitability, are affected by a variety of factors, including general economic
conditions, access by service providers to financing, government regulation of
service providers, demand for services and technological developments in the
telecommunications technology. While the industry generally experienced above
average growth in the late 1990's, in the most recent several quarters, the
industry has been adversely affected by service providers' adjustments in their
capital expenditures. Although the Company anticipates these adjustments by its
customers are temporary in nature, there can be no assurance as to the timing or
magnitude of a resumption of prior spending levels by the Company's customers.
The Company's success is dependent upon continued demand for products used
in signal transmission systems from the communications industry generally,
including both CATV and telephone, which may be affected by factors beyond the
Company's control, including the convergence of video, voice, and data
transmission systems occurring within the CATV and telephone markets, continuing
consolidation of companies within those markets and the provision of Internet
access by cable operators and local telephone companies.
Price Fluctuations of Raw Materials; Availability of Complementary Products
The Company's cost of sales may be materially affected by increases in the
market prices of the raw materials used in the Company's manufacturing
processes, including resins. The Company does not engage in hedging transactions
for such materials, although it periodically enters into contracts for certain
raw materials for as much as one year or more. There can be no assurance that
price increases in raw materials can be passed on to the Company's customers
through increases in product prices. In addition, in order to position itself as
a full-line product supplier, the Company relies on certain manufacturers to
supply products that complement the Company's own product line, including grade
level boxes. Although the Company believes there are multiple sources of supply
for these products, disruptions or delays in the supply of such products could
have a material adverse effect on sales of the Company's own products.
Energy Costs and Availability
The Company's cost of sales may be materially affected by increases in the
market prices of electricity, natural gas and water used in the Company's
manufacturing processes. Recent developments in the State of California, the
site of the Company's largest manufacturing operation, not only suggest the
energy costs of California manufacturing firms are likely to increase, but also
raise the possibility of interruptions in the supply of energy to California's
manufacturing firms. There can be no assurance that the Company's energy costs
can be passed on to the Company's customers through increases in product prices.
Further, disruptions or delays in the supply of electricity, natural gas and
water to the Company could have a material adverse effect on sales of the
Company's products.
Acquisitions and Failure to Integrate Acquired Businesses
One of the Company's principal strategies is to increase its revenues,
earnings per share and the markets it serves through the acquisition of
complementary businesses. There can be no assurance that the Company will be
able to identify and acquire attractive acquisition candidates, profitably
manage such acquired businesses or successfully integrate such acquired
businesses into the Company without substantial costs, delays or other problems.
Acquisitions may involve a number of special risks, including, but not limited
to, adverse short-term effects on the Company's reported financial condition or
results of operations, diversion of management's attention, dependence on
retention, hiring and training of key personnel, risks associated with
unanticipated problems or liabilities and amortization of acquired intangible
assets, some or all of which could have a material adverse effect on the
Company's business, financial condition or results or operations.
17
In addition, there can be no assurance that businesses acquired in the
future will be profitable at the time of acquisition or that the businesses
recently acquired or acquired in the future will achieve sales and profitability
justifying the Company's investment therein or that the Company will realize the
synergies expected from such acquisitions.
The failure to obtain any or all of the desired results from these
acquisitions could have a material adverse effect on the Company's business,
financial condition or results of operations.
Impact of Operating Leverage in the Event of Sales Decline
Because the related fixed costs for rent, product development,
engineering, tooling and manufacturing are a relatively high percentage of total
costs, the Company's ability to maintain its historic profitability is dependent
on generating a sufficient volume of product sales, thereby spreading fixed
costs over the sales base. Due to this "operating leverage", a reduction in
sales or the rate of sales growth could have a disproportionately adverse effect
on the Company's financial results.
Seasonality and Fluctuations in Operating Results
The Company's business is somewhat seasonal in nature, with the first and
fourth quarters generally reflecting lower sales due to the impact of adverse
weather conditions on construction projects that may alter or postpone the needs
of customers for delivery of the Company's products. In addition, first quarter
sales also typically reflect customer delays in implementation of their annual
capital expenditure plans. The Company's operating results may also fluctuate
significantly from quarter to quarter due to several other factors, including
the volume and timing of orders from, and shipments to, major customers, the
timing of new product announcements and the availability of products by the
Company or its competitors, the overall level of capital expenditures by CATV
operators and local telephone companies, market acceptance of new and enhanced
versions of the Company's products, variations in the mix of products the
Company sells, and the availability and cost of raw materials.
Risks Associated with International Operations
International sales, including export sales from U.S. operations,
accounted for 31.4%, 34.5% and 32.5% of the Company's net sales in 1998, 1999
and 2000, respectively, and the Company expects that international sales may
increase as a percentage of sales in the future. Due to its international sales,
the Company is subject to the risks of conducting business internationally,
including unexpected changes in or impositions of legislative or regulatory
requirements, fluctuations in the U.S. dollar which could materially adversely
affect U.S. dollar revenues or operating expenses, tariffs and other barriers
and restrictions, potentially longer collection cycles, greater difficulty in
accounts receivable collection, potentially adverse taxes and the burdens of
complying with a variety of international laws and communications standards. The
Company is also subject to general geopolitical risks, such as political and
economic instability and changes in diplomatic and trade relationships, in
connection with its international operations. There can be no assurance that
these risks of conducting business internationally will not have a material
adverse effect on the Company's business.
Competition
The industries in which the Company operates are highly competitive.
Further, because of the anticipated growth in the telecommunications industry
generally, the demand for products required in signal transmission networks in
particular, the level and intensity of competition may increase in the future.
The Company's competition includes a company that has a significant market
share in the telephone segment of the industry. The Company's strategy includes
continued focus on increasing sales to this segment. While the Company's net
sales to this segment have increased, there can be no assurance that the Company
will be able to compete successfully against that company or other competitors,
many of whom may have access to greater financial resources than the Company.
18
Disruptions at the Company's Manufacturing Facility; Lease with Related Party
The majority of the Company's manufacturing operations are currently
located at the Company's facility in Temecula, California, which also includes
the Company's principal warehouse and corporate offices. The Company's success
depends in large part on the orderly operation of this facility. Because the
Company's manufacturing operations and administrative departments are
concentrated at this facility, a fire, earthquake, power interruption or other
disaster at this facility could materially and adversely affect its business and
results of operations. The Company maintains standard property and earthquake
insurance on this facility as well as business interruption insurance and
back-up data systems.
The Company currently leases a portion of its Temecula facilities from
William H. Channell, Sr., a principal stockholder and Chairman of the Board and
Chief Executive Officer of the Company. The Company believes the terms of these
leases are no less favorable than would be available from an unrelated third
party after arm's length negotiations. Although the Company has renewal options
through the year 2015 under these leases, there can be no assurance that the
Company and Mr. Channell, Sr. will be able to agree on renewal options for the
properties currently leased by the Company. The failure of the Company to renew
the leases would require the Company to relocate its existing facilities, which
could have a material adverse affect on the Company's business, financial
condition or results of operations.
Dependence on Key Personnel
The future success of the Company depends in part on its ability to
attract and retain key executive, engineering, marketing and sales personnel.
Key personnel of the Company include William H. Channell, Sr., the Chairman of
the Board and Chief Executive Officer, William H. Channell, Jr., the President
and Chief Operating Officer, and the other executive officers of the Company.
Competition for qualified personnel in the communications industry is intense,
and the loss of certain key personnel could have a material adverse affect on
the Company. The Company has entered into employment contracts with Mr.
Channell, Sr. and Mr. Channell, Jr.
Changing Regulatory Environment
The communications industry is subject to regulation in the United States
and other countries. Federal and state agencies regulate most of the Company's
domestic customers. On February 1, 1996, the United States Congress passed the
Telecommunications Act of 1996 (the "Telecommunications Act"), which the
President signed into law on February 8, 1996. The Telecommunications Act lifts
certain restrictions on the liability of companies, including RBOCs and other
customers of the Company, to compete with one another and liberally reduces the
regulation of the communications industry. While the Company believes that the
deregulation of the communications industry may increase the Company's
opportunities to provide for its customers' signal transmission network needs,
the effect of the Telecommunications Act on the market for the Company's
products is difficult to predict at this time, and there can be no assurance
that competition in the Company's markets will not intensify as a result of such
deregulation. Changes in current or future laws or regulations, in the United
States or elsewhere, could materially adversely affect the Company's business.
Uncertain Ability to Manage Growth; Risks Associated with Implementation of New
Management Information System
The growth in the Company's business has required, and is expected to
continue to require, significant Company resources in terms of personnel,
management and other infrastructure. The Company's ability to manage any future
growth effectively will require it to attract, train, motivate and manage new
employees successfully, to integrate new employees into its overall operations
and to continue to improve its operational, financial and management information
systems.
Environmental Matters
The Company is subject to a wide variety of federal, state and local
environmental laws and regulations and uses a limited number of chemicals that
are classified as hazardous or similar substances. Although management believes
that the Company's operations are in compliance in all material respects with
current environmental laws and regulations, the Company's failure to comply with
such laws and regulations could have a material adverse effect on the Company.
19
Selected Quarterly Financial Data
Set forth below is certain unaudited quarterly financial information. (See
also Footnote P to the Financial Statements included elsewhere herein.) The
Company believes that all necessary adjustments, consisting only of normal
recurring adjustments, have been included in the amounts stated below to present
fairly, and in accordance with generally accepted accounting principles, the
selected quarterly information when read in conjunction with the Financial
Statements.
Year Ended Year Ended
December 31, 1999 December 31, 2000
--------------------------------------------- -------------------------------------------
(amounts in thousands) (amounts in thousands)
1st 2nd 3rd 4th 1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- ------- ------- ------- -------
Net sales............. $24,698 $31,315 $32,938 $31,729 $32,250 $35,722 $33,182 $27,025
Gross profit.......... 9,594 12,341 12,375 10,255 11,241 13,884 12,525 9,421
Income from
operations............ 3,384 5,364 5,473 3,984 3,490 6,053 4,058 (5,098)
Income before income
taxes................. 2,847 4,778 5,015 2,915 2,887 5,310 3,541 (6,094)
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
The market risk inherent in the Company's market risk sensitivity
instruments is the potential loss arising from adverse changes in interest rates
and foreign currency exchange rates. All financial instruments held by the
Company and described below are held for purposes other than trading.
Market Risk
The Company's credit facility allows the outstanding balance to bear
interest at a variable rate based on either the bank's base rate or the
applicable LIBOR rate depending on the nature of the borrowings. The credit
facility exposes earnings to changes in short-term interest rates since the
interest rates on the credit facility are variable.
If the variable rates on the Company's credit facility were to increase by
1% from the rate at December 31, 2000, and if the Company borrowed the maximum
amount available under its credit facility ($40.0 million) for all of fiscal
2001, the Company's interest expense would increase, and net income would
decrease by $0.2 million. If LIBOR were to increase 1% from the rate at December
31, 2000, and if the Company borrowed the maximum amount available, the
Company's interest expense would increase, and also net income would decrease by
$0.2 million. A marginal income tax rate of 40.0% was used. This analysis does
not consider the effects of the reduced level of overall economic activity that
could exist in such an environment.
Foreign Exchange Risk
The Company typically does not hedge its foreign currency exposure.
Management does not believe it currently has any material exposure to foreign
currency rate fluctuations.
Item 8. Financial Statements and Supplementary Data
Consolidated Financial Statements of Channell Commercial Corporation are
as follows:
Report of Independent Certified Public Accountants ................... F-1
Consolidated Balance Sheets as of December 31, 1999 and
December 31, 2000 .............................................. F-2
Consolidated Statements of Income and Comprehensive Income
for the years ended December 31, 1998, December 31,
1999, and December 31, 2000 .................................... F-4
Consolidated Statement of Stockholders' Equity for the
years ended December 31, 1998, December 31, 1999 and
December 31, 2000 .............................................. F-5
Consolidated Statement of Cash Flows for the years ended
December 31, 1998, December 31, 1999, and December 31, 2000 .... F-6
Notes to Consolidated Financial Statements ........................... F-8
20
Financial statement schedules are as follows:
All schedules are omitted because they are not applicable, or the
required information is included in the financial statements or the
notes thereto.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There has been no Form 8-K filed reporting a change of accountants or
reporting disagreements on any matter of accounting principle, practice,
financial statement disclosure or auditing scope or procedure.
21
PART III
Item 10. Executive Officers and Directors
The following table sets forth information with respect to the Company's
current executive officers and directors and their ages as of December 31, 2000.
Name Age Positions
---- --- ---------
William H. Channell, Sr. ............. 72 Chairman of the Board and
Chief Executive Officer
William H. Channell, Jr. ............. 43 President, Chief Operating Officer
and Director
Thomas Liguori........................ 42 Chief Financial Officer
Edward J. Burke....................... 45 Vice President, Corporate
Engineering
Andrew Zogby.......................... 40 Vice President, Corporate
Marketing
Jacqueline M. Channell................ 69 Secretary and Director
Eugene R. Schutt, Jr. ................ 47 Director
Richard A. Cude ...................... 67 Director
Peter J. Hicks........................ 51 Director
Graham Gardner........................ 52 Managing Director Europe
Tim Hankinson......................... 48 Managing Director Australia and
Asia
Gary M. Napolitano.................... 45 Vice President, RF
Gary W. Baker......................... 57 Vice President, Finance
The Company's Board of Directors was comprised of six members at December
31, 2000. The directors of the Company are staggered into three classes, with
the directors in a single class elected at each annual meeting of stockholders
to serve for a term of three years or until their successors have been elected
and qualified. The authorized number of members of the Board of Directors is
currently seven. The executive officers of the Company serve at the pleasure of
the Board of Directors.
William H. Channell, Sr., the son of the Company's founder, James W.
Channell, has been the Chairman of the Board and Chief Executive Officer since
the Initial Public Offering. Prior to this time, he had held the position of
President and Chief Executive Officer since 1966. Mr. Channell, Sr. is a
co-trustee of the Channell Family Trust, which is a principal stockholder of the
Company, and is the husband of Jacqueline M. Channell and the father of William
H. Channell, Jr. His term as a Director expires in 2002.
William H. Channell, Jr. has been President and Chief Operating Officer of
the Company since the Initial Public Offering. He has been a Director of the
Company since 1984. Since joining the Company in 1979, Mr. Channell, Jr. has
held the positions of Executive Vice President, Director of Marketing and
National Sales Manager. Mr. Channell, Jr. is a principal stockholder of the
Company and is the son of William H. Channell, Sr. and Jacqueline M. Channell.
His term as a Director expires in 2003.
Thomas Liguori has been the Company's Chief Financial Officer since April
2000. Mr. Liguori joined the Company from Dole Food Company, where he served as
Chief Financial Officer of Dole Europe in Paris, France. From 1992 to 1996 he
held various financial positions with Teledyne Inc., including Vice President,
Finance for a manufacturer of consumer and industrial products. From 1986 to
1992 Mr. Liguori was a management consultant with Deliotte & Touche. He has 20
years of financial, accounting and management experience.
22
Edward J. Burke has been the Company's Vice President, Corporate
Engineering since May 1996 and has served in various similar capacities with the
Company since 1984. Mr. Burke has held various technical positions in the
thermoplastic product engineering and tooling design field since 1978.
Andrew M. Zogby has been the Company's Vice President, Corporate Marketing
since March 1996. Prior to joining the Company, Mr. Zogby was Director of
Strategic Marketing, Broadband Connectivity Group for ADC Telecommunications, a
publicly traded, telecommunications equipment supplier to both telephone and
CATV network providers worldwide. He had been with ADC Telecommunications since
1990. Mr. Zogby has held various technical marketing positions in the
telecommunications equipment industry since 1984.
Jacqueline M. Channell has been the Company's Secretary and a Director
since 1966. She is a co-trustee of the Channell Family Trust, which is a
principal stockholder of the Company, and is the wife of William H. Channell,
Sr. and the mother of William H. Channell, Jr. Mrs. Channell's term as a
Director expires in 2001.
Eugene R. Schutt, Jr. has been a Director of the Company since July 1996.
Mr. Schutt is the President and CEO of FirstDoor.com, Inc. Prior to joining
FirstDoor.com, he served as CEO of CD1Financial.com, an automotive finance and
leasing company owned by CarsDirect.com. Mr. Schutt has also served as President
of Avco Financial Services and Pratt Industries, Inc. Mr. Schutt has over 26
years of experience in executive management positions and has served on the
board of directors of numerous companies. Mr. Schutt's term as a Director
expires in 2002.
Richard A. Cude became a director of the Company during 1996. Mr. Cude has
been the General Manager of the Los Angeles Support Center for Courtaulds PLC
London, England since 1994 and has served in various capacities with Courtaulds
since 1988. Prior to that, Mr. Cude has been with various companies involved in
the marketing of products to the communications and telecommunications industry.
Mr. Cude is currently retired. Mr. Cude's term as a Director expires in 2003.
Peter J. Hicks became a Director of the Company in March, 2000. Mr. Hicks
is a managing director of Linx Partners, an investment firm specializing in
private industrial equity investments. From 1987 to 1999, Mr. Hicks was a
managing director of Schroder and Company. Mr. Hicks has more than 23 years of
investment banking and corporate finance experience and has served on the board
of directors of numerous companies. Mr. Hicks' term as a Director expires in
2001.
Graham Gardner joined the Company in 1998 as Managing Director Europe as a
result of the acquisition of Egerton. Mr. Gardner had been Managing Director of
Egerton since 1986. Mr. Gardner has been in the telecommunications equipment
industry since 1971.
Tim Hankinson joined the Company in 1998 as Managing Director Australia
and Asia as a result of the acquisition of Egerton. Mr. Hankinson had been
Managing Director of Egerton since 1991. Prior to 1991, Mr. Hankinson had served
as General Manager of an Australian aircraft manufacturer.
Gary M. Napolitano joined the Company in January 1997 as Vice President
and General Manager of RF as a result of the acquisition of RMS. Mr. Napolitano
had been President of RMS since 1992 and was the Vice President, Finance prior
to becoming President.
Gary W. Baker has been the Company's Vice President, Finance since May
1996, and served as Chief Financial Officer from 1990 to April 2000. Mr. Baker
was the Company's Corporate Controller from 1985 to 1990. From 1983 to 1985, Mr.
Baker was the Corporate Controller of Symbolics, Inc., a publicly traded
manufacturer of computer products, and has over 30 years of public and private
accounting experience.
Compensation of Directors
Directors who are also officers of the Company (except as indicated below)
receive no additional compensation for their services as directors. The
Company's non-management directors receive compensation consisting of an annual
retainer fee of $15,000 plus $1,000 for attendance at any meeting of the Board
of Directors or any committee thereof, plus direct out-of-pocket costs related
to such attendance. Mrs. Channell also receives non-management director retainer
and attendance fees. Mrs. Channell does not receive separate compensation for
serving as the Company's Secretary. In addition, pursuant to the Company's 1996
Incentive Stock Plan (as described below), each non-management director
(including Mrs. Channell) received options to acquire 1,000 shares of the
Company's Common Stock with an exercise price equal to the Initial Public
Offering price, and on the date of each of the Company's annual stockholder
meetings after the Initial Public Offering, each non-management director
(including non-executive officers who serve as directors) serving on the Board
of Directors immediately following such meeting are to receive options to
acquire an additional 1,000 shares of the Company's Common Stock with an
exercise price equal to the market value of the Common Stock on the date such
options are granted. These options will become exercisable at a rate of 33 1/3%
per year commencing on the first anniversary of the date of issuance and will
have a term of 10 years.
Section 16(a) Beneficial Ownership Reporting Compliance
Information required by Item 405 of Regulation S-K is incorporated by
reference to the Company's Proxy Statement relating to its 2000 annual meeting
of stockholders.
23
Item 11. Executive Compensation
Summary Compensation Table
The following table sets forth the annual and long-term compensation of
the Company's Chief Executive Officer and the four additional most highly
compensated executive officers for the year ended December 31, 2000
(collectively, the "Named Officers").
Awards Payouts
------------------------ ----------
Securities
Other Annual Restricted Underlying All Other
Name and Positions Annual Compensation Compensation Stock Options/ LTIP Compensation
Held with the Company Years Salary($) Bonus($) ($)(1) Awards($) SARs(#) Payouts($) ($)(2)
--------------------- ----- --------- -------- ------------ ---------- --------- ---------- ------------
William H. Channell, Sr......... 2000 $420,000 $166,667 $ -- $ -- -- $ -- $ --
Chairman of the Board and 1999 420,000 -- -- -- -- -- --
Chief Executive Officer 1998 520,000 -- -- -- -- -- --
William H. Channell, Jr......... 2000 $598,000 $605,000(3) -- -- -- -- $ 3,588
President and Chief 1999 520,000 -- -- -- 50,000 -- 3,120
Operating Officer 1998 520,000 $360,000 -- -- 25,000 4,257
Thomas Liguori.................. 2000 $150,000 $78,000 -- -- 25,000 -- $ 900
Chief Financial Officer
Edward J. Burke................. 2000 $146,219 $88,405 -- -- 10,000 -- $ 4,365
Vice President, 1999 141,505 87,141 -- -- 5,500 -- 4,245
Corporate Engineering 1998 136,063 81,666 -- -- 2,000 -- 4,082
Andrew Zogby.................... 2000 $172,113 $114,983 -- -- 6,750 -- $ 5,163
Vice President, 1999 167,205 24,335 -- -- 6,000 5,000
Corporate Marketing
(1) For each individual named, compensation excludes perquisites and other
personal benefits, that did not exceed the lesser of $50,000 or 10% of the
total annual salary and bonus reported for such individual.
(2) Payments to the Company's 401K plan.
(3) The bonus of William H. Channell Jr. shown in 2000 is based on company
performance in 1999 (see Incentive Compensation Plan).
1996 Incentive Stock Plan
The Company's 1996 Incentive Stock Plan (the "Stock Plan") currently
permits the granting to the Company's key employees, directors and other service
providers of (i) options to purchase shares of the Company's Common Stock and
(ii) shares of the Company's Common Stock that are subject to certain vesting
and other restrictions ("Restricted Stock"). Initially, a maximum of 750,000
shares of Common Stock were reserved for issuance under the Stock Plan. In 1999,
the Stock Plan was amended to allow a maximum of 1,500,000 shares to be issued
under the Plan.
During 2000, the Company granted 122,050 "non-qualified" options to 38
employees and directors. After cancellation of options previously issued to
terminated employees, there were options to acquire 848,950 shares of Common
Stock outstanding at December 31, 2000. These options vest at a rate of 33 1/3%
per year beginning on the first anniversary of the date of issuance and have a
term of 10 years.
The Stock Plan is administered by the Compensation Committee of the Board
of Directors. The aggregate number of stock options or shares of Restricted
Stock that may be granted to any single participant under the Stock Plan during
any fiscal year of the Company is 100,000. The purpose of the Stock Plan is to
secure for the Company and its stockholders the benefits arising from stock
ownership by key employees, directors and other service providers selected by
the Compensation Committee.
All options granted under the Stock Plan are non-transferable and
exercisable in installments determined by the Compensation Committee, except
that each option is to be exercisable in minimum annual installments of 20%
commencing with the first anniversary of the option's grant date. Each option
granted has a term specified in the option agreement, but all options expire no
later than ten years from the date of grant. Options under the Stock Plan may be
designated as "incentive stock options" for federal income tax purposes or as
options which are not qualified for such treatment, or "non-qualified stock
options". In the case of incentive stock options, the exercise price must be at
least equal to the fair market value of the stock on the date the option is
granted. The exercise price of a non-qualified option need not be equal to the
fair market value of the stock at the date of grant, but may be granted with any
exercise price which is not less than 85% of the fair
24
market value at the time the option is granted, as the Compensation Committee
may determine. The aggregate fair market value (determined at the time the
options are granted) of the shares covered by incentive stock options granted to
any employee under the Stock Plan (or any other plan of the Company) which may
become exercisable for the first time in any one calendar year may not exceed
$100,000.
Upon exercise of any option, the purchase price must generally be paid in
full either in cash or by certified or cashier's check. However, in the
discretion of the Compensation Committee, the terms of a stock option grant may
permit payment of the purchase price by means of (i) cancellation of
indebtedness owed by the Company, (ii) delivery of shares of Common Stock
already owned by the optionee (valued at fair market value as of the date of
exercise), (iii) delivery of a promissory note secured by the shares issued,
(iv) delivery of a portion of the shares issuable upon exercise (i.e., exercise
for the "spread" on the option payable in shares), or (v) any combination of the
foregoing or any other means permitted by the Compensation Committee.
Any grants of restricted stock will be made pursuant to Restricted Stock
Agreements, which will provide for vesting of shares at a rate to be determined
by the Compensation Committee with respect to each grant of restricted stock.
Until vested, shares of restricted stock are generally non-transferable and are
forfeited upon termination of employment. The Company has not made any grants of
restricted stock.
Options/SAR Grants Table
The following table sets forth the stock options granted to the named
officers for the year ended December 31, 2000.
Potential
% of Total Realized
Number of Options/ Value at
Securities SARs Assumed Annual
Underlying Granted to Exercise Rates of Stock Price
Options/ Employees on Base Appreciation of
SARs in Fiscal Price Expiration Option Term
Name Granted Year 2000 ($/Sh) Date 5% 10%
---- ------- --------- -------- ------ ------- -------
William H. Channell, Sr -- -- $ -- -- $ -- $ --
William H. Channell, Jr -- -- -- -- -- --
Thomas Liguori 25,000 20.5% 13.00 April 2010 204,391 517,966
Edward J. Burke 10,000 8.2% 13.75 July 2010 86,473 219,140
Andrew Zogby 6,750 5.5% 13.75 July 2010 58,369 147,919
Aggregated Option/SAR Exercises in Last Fiscal Year and December 31, 2000
Option/SAR Values
The following table sets forth the number and value of outstanding stock
options at December 31, 2000. No options have been exercised in 2000.
Number of Shares
Shares Underlying Unexercised Value of Unexercised In-
Acquired Options/SARs the-Money Options/SARs
on Value at December 31, 2000 at December 31, 2000
Name Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable
---- -------- -------- ------------------------- -------------------------
William H. Channell, Sr. -- $ -- -- $ -- / $ --
William H. Channell, Jr. -- -- 183,334 / 41,666 -- / --
Thomas Liguori -- -- 0 / 25,000 -- / --
Edward J. Burke -- -- 27,168 / 14,332 -- / --
Andrew Zogby -- -- 29,335 / 12,415 -- / --
25
Profit Sharing and Savings Plans
The Company maintains a plan, established in 1993, in accordance with
Section 401(K) of the Internal Revenue Code. Under the terms of this plan,
eligible employees may make voluntary contributions to the extent allowable by
law. Employees of the Company are eligible to participate in the plan after 90
days of employment. Matching contributions by the Company to this plan are
discretionary and will not exceed that allowable for Federal income tax
purposes. The Company's contributions are vested over five years in annual
increments.
Employment Contracts
The Company has entered into employment agreements with each of William H.
Channell, Sr. and William H. Channell, Jr., engaging them as the Chairman of the
Board and Chief Executive Officer, and President and Chief Operating Officer of
the Company, respectively. For their service, each of Messrs. Channell, Sr. and
Channell, Jr., is entitled to receive an annual salary of $520,000. Mr.
Channell, Sr.'s salary is subject to annual cost of living increases. Mr.
Channell, Sr., during 1999, reduced his hours of contribution to the Company and
he agreed to reduce his compensation proportionally by $100,000 to $420,000. In
addition, each executive is entitled to participate in the Incentive Stock Plan,
the 401(K) Plan and the Incentive Compensation Plan. The employment agreements
provide that each executive is entitled to certain other benefits paid for by
the Company, including an automobile allowance, health insurance and sick leave,
in accordance with the Company's customary practices for senior executive
officers.
In the case of Mr. Channell, Sr., such benefits also include (i) during
the term of the agreement, the payment of premiums for a term disability policy
providing for $250,000 in annual benefits in the case of his temporary or
permanent disability, (ii) during the lifetime of Mr. Channell, Sr. and his
wife, Jacqueline M. Channell, medical insurance for each of Mr. and Mrs.
Channell comparable to that provided to the Company's senior executive officers,
subject to a premium reimbursement obligation in the case of the medical
insurance provided to Mrs. Channell, and (iii) during Mr. Channell, Sr.'s
lifetime, a portion of the premiums on a life insurance policy owned by Mr.
Channell, Sr., under which Mrs. Channell is the beneficiary.
Each of the employment agreements has a term of five years. In the event
either executive is terminated without cause (as defined in the employment
agreements), he is entitled to receive, as a severance benefit, an amount equal
to three times his annual base salary, and any options or Restricted Stock
previously granted to such executive will become immediately vested.
Incentive Compensation Plan
Effective beginning in the Company's 1996 fiscal year, the Board of
Directors adopted the Company's 1996 Performance-Based Annual Incentive
Compensation Plan (the "Incentive Plan"). Eligible participants consist of key
employees of the Company. The Incentive Plan is administered by the Compensation
Committee of the Board of Directors. The amount of awards granted under the
Incentive Plan are determined based on an objective computation of the actual
performance of the Company relative to pre-established performance goals.
Measures of performance may include level of sales, EBITDA, net income, income
from operations, earnings per share, return on sales, expense reductions, return
on capital, stock appreciation, return on equity, invention, design or
development of proprietary products or improvements thereto (patented or
otherwise), or sales of such proprietary products or improvements or
profitability achieved from sales of proprietary products or improvements.
Awards under the Incentive Plan are payable in cash or, at the election of the
Compensation Committee, Common Stock of the Company. Mr. William H. Channell,
Jr., the Company's President, receives a bonus calculated using the factors
above, but such bonus is earned and payable based on continued service in
subsequent years. The Compensation Committee may establish a bonus pool from
which all awards under the Incentive Plan may be granted as well as individual,
non-bonus pool awards. No participant in the Incentive Plan may receive awards
under such plan during any fiscal year of the Company in excess of $1,000,000 or
100,000 shares of Common Stock.
The Company's executive compensation program is administered by the
Compensation Committee of the Board of Directors. During 2000, this Committee
was composed of Mr. Richard A. Cude, Mr. Eugene R. Schutt, Jr. and Mr. Peter J.
Hicks. (See "Certain Relationships and Related Transactions".) It is the
responsibility of the Committee to review and approve the Company's executive
compensation plans and policies and to monitor these compensation programs in
relation to the performance of the particular executive and the overall
performance of the Company.
26
The following is a line graph presentation comparing the Company's cumulative
total return since the Initial Public Offering in July 1996 to December 31, 2000
with the performance of the NASDAQ market, the S & P Industrials and a similar
Industry Index for the same period.
COMPARISON OF 54 MONTH CUMULATIVE TOTAL RETURN*
AMONG CHANNELL COMMERCIAL CORPORATION,
THE NASDAQ STOCK MARKET (U.S.) INDEX,
THE S & P INDUSTRIALS INDEX AND THE S & P COMMUNICATIONS EQUIPMENT INDEX
[GRAPHIC OMITTED]
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information concerning those
persons who are known by management of the Company to be beneficial owners of
more than 5% of the Company's outstanding common stock (as provided to the
Company by such persons or the recordholder of such shares).
Amount and Nature of Beneficial Ownership
-----------------------------------------
Name and Address No. of Shares Exercisable Percent
of Beneficial Owner Owned Options (1) Total of Class
------------------- ------------- ----------- ----- --------
William H. Channell Sr. and 3,250,830 -- 3,250,830 35.8%
Jacqueline M. Channell, as co-trustees
of the Channell Family Trust
26040 Ynez Road
Temecula, CA 92591-9022
William H. Channell, Jr 1,206,850 183,334 1,390,184 14.8%
26040 Ynez Road
Temecula, CA 92591-9022
Wellington Management Company, LLP 642,800 -- 642,800 7.1%
75 State Street
Boston, MA 02109
27
Royce & Associates, Inc. 607,500 -- 607,500 6.7%
1414 Avenue of the Americas
New York, NY 10019
Carrie S. Rouveyrol 450,000 -- 450,000 5.0%
P.O. Box 1080
Stinson Beach, CA 94970
The Taylor Family Trust 469,960 -- 469,960 5.2%
1450 Ravenswood Lane
Riverside, CA 92506
(1) Refers to the number of shares covered by options exercisable within 60
days of March 15, 2001.
Security Ownership of Management
The following table sets forth certain information, as of March 15, 2001,
concerning the beneficial ownership of common stock by the Company's directors
and named executive officers, and all directors and executive officers of the
Company as a group.
Amount and Nature of Beneficial Ownership
-----------------------------------------
Name and Address No. of Shares Exercisable Percent
of Beneficial Owner Owned Options (1) Total of Class
------------------- ------------- ----------- ----- --------
William H. Channell Sr. 3,250,830 -- 3,250,830 35.8%
William H. Channell, Jr. 1,206,850 183,334 1,390,184 14.8%
Thomas Liguori -- 8,334 8,334 0.1%
Edward J. Burke -- 27,834 27,834 0.3%
Andrew Zogby 300 30,667 30,967 0.3%
All present directors and executive
officers as a group (13 in number) 4,461,207 321,343 4,782,550 50.9%
(1) Refers to the number of shares covered by options exercisable within 60
days of March 15, 2001.
Item 13. Certain Relationships and Related Transactions
The Company has two leases for approximately 261,000 square feet of
manufacturing, warehouse and office space in Temecula, California, with William
H. Channell, Sr., a principal stockholder and the Chairman of the Board and
Chief Executive Officer of the Company. The term of the first lease is through
December 31, 2005, with two five-year renewal options. The lease provides for
annual cost of living increases. Additionally, an adjacent 100,000 square foot
building was constructed and completed in 1996. Subsequent to December 31, 1996,
the Company guaranteed debt of Mr. Channell, Sr. of approximately $2.7 million
incurred in connection with construction of the building. This building is also
being leased from Mr. Channell, Sr. through 2005, with two five-year renewal
options. The Company believes that the terms of these leases are no less
favorable to the Company than could be obtained from an independent third party.
In January 2001, the Company guaranteed personal debt of the Company's
President and Chief Operating Officer of $0.6 million. The loan amount subject
to the guarantee is expected to decline during 2001 and management of the
Company plans to terminate the guarantee no later than December 15, 2001. In
connection with this guarantee, the Company's President and Chief Operating
Officer paid the Company a fee equal to 1% of the loan balance and provided as
collateral to the Company 300,000 shares of Company stock. It is not practicable
to estimate the fair value of the guarantee; however, the Company does not
anticipate that it will incur losses as a result of this guarantee. During the
course of the year, the Company paid certain personal expenses on behalf of the
President and COO (in part through a corporate credit card which is reimbursed
pursuant to an agreement between the Company and the President). These amounts
are non interest bearing. The maximum balance outstanding was $271,000 and the
year end balance was $55,000.
28
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following financial statements and schedules are filed as a part of this
report:
(1) Consolidated Financial Statements
See index included in Part II, Item 8.
(2) Consolidated Financial Statement Schedules
All schedules are omitted because they are not applicable, or the
required information is included in the financial statements or
notes thereto.
(a)(3) and (c). The following exhibits are filed herewith:
Exhibit
Number Exhibit Title
- ------ -------------
3.1 Restated Certificate of Incorporation of the Company (1)
3.2 Bylaws of the Company (1)
4 Form of Common Stock Certificate (1)
10.1 Tax Agreement between the Company and the Existing Stockholders (1)
10.2 Channell Commercial Corporation 1996 Incentive Stock Plan (including
form of Stock Option Agreements and Restricted Stock Agreement) (1)
10.3 Senior Revolving Loan Agreement dated as of May 1, 1998, between the
Company and Fleet National Bank (3)
10.4 Second Amendment to Credit Agreement and Consent dated December 29,
1999, between the Company and Fleet National Bank (6)
10.5 Second Amendment to Security Agreement dated February 1, 2000,
between the Company and Fleet National Bank (6)
10.6 Third Amendment to Credit Agreement and accompanying Notes dated
July 20, 2000, between the Company and Fleet National Bank (6)
10.8 Employment Agreement between the Company and William H. Channell,
Sr. (1)
10.9 Employment Agreement between the Company and William H. Channell,
Jr. (1)
10.10 Channell Commercial Corporation 1996 Performance-Based Annual
Incentive Compensation Plan (1)
10.11 Lease dated December 22, 1989 between the Company and William H.
Channell, Sr., as amended (1)
10.12 Lease dated May 29, 1996 between the Company and the Channell Family
Trust (1)
10.14 Lease dated September 24, 1997 between the Company and SCI North
Carolina Limited Partnership (4)
10.15 Lease dated October 26, 2000 between the Company and Belston
Developments Inc. (6)
10.16 Lease Agreement dated as of March 1, 1996 between Winthrop Resources
Corp. and the Company (1)
10.17 Form of Indemnity Agreement (1)
10.18 Form of Agreement Regarding Intellectual Property (1)
10.19 401(k) Plan of the Company (5)
10.22 A.C. Egerton (Holdings) PLC Share Purchase Agreement (3)
10.23 Amendment to Employment Agreement, William H. Channell Jr., dated
December 31, 1998 (5)
11 Computation of Proforma Income per Share (2)
23 Consent of Independent Certified Public Accountant (6)
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended December 31,
2000.
- -------
(1) Incorporated by reference to the indicated exhibits filed in connection with
the Company's Registration Statement on Form S-1 (File No. 333-3621).
(2) Incorporated by reference to the indicated exhibits filed in connection with
the Company's Form 10-K on March 31, 1997.
(3) Incorporated by reference to the indicated exhibits filed in connection with
the Company's Form 8-K on May 18, 1998.
(4) Incorporated by reference to the indicated exhibits filed in connection with
the Company's Form 10-Q on May 6, 1998.
(5) Incorporated by reference to the indicated exhibits filed in connection with
the Company's Form 10-K on March 31, 1999.
(6) Filed herewith.
29
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Channell Commercial Corporation
We have audited the consolidated balance sheets of Channell Commercial
Corporation as of December 31, 1999 and 2000, and the related consolidated
statements of income and comprehensive income, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 2000. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the 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. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Channell
Commercial Corporation as of December 31, 1999 and 2000, and the consolidated
results of its operations and its consolidated cash flows for each of the three
years in the period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States.
/s/ Grant Thornton LLP
Los Angeles, California
February 23, 2001
CHANNELL COMMERCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31,
(amounts in thousands)
ASSETS 1999 2000
-------- --------
CURRENT ASSETS
Cash and cash equivalents $ 2,733 $ 913
Accounts receivable, net 23,235 24,007
Inventories 19,449 21,620
Deferred income taxes 707 1,171
Prepaid expenses and miscellaneous receivables 2,294 1,966
Income taxes receivable 389 1,854
-------- --------
Total current assets 48,807 51,531
PROPERTY AND EQUIPMENT, net 49,452 48,669
DEFERRED INCOME TAXES 124 2,102
INTANGIBLE ASSETS, net of amortization of $1,604
and $2,361 in 1999 and 2000 14,450 13,931
OTHER ASSETS 1,707 515
-------- --------
$114,540 $116,748
======== ========
The accompanying notes are an integral part of these statements.
F-2
CHANNELL COMMERCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS - CONTINUED
December 31,
(amounts in thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 2000
--------- ---------
CURRENT LIABILITIES
Accounts payable $ 11,643 $ 7,998
Short term debt (including current maturities of
long term debt) 4,135 31,086
Current maturities of capital lease obligations 2,608 2,726
Accrued expenses 2,497 4,459
--------- ---------
Total current liabilities 20,883 46,269
LONG-TERM DEBT, less current maturities 26,240 4,092
CAPITAL LEASE OBLIGATIONS, less current maturities 5,078 2,460
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY
Preferred stock, par value $.01 per share, authorized--1,000
shares, none issued and outstanding -- --
Common stock, par value $.01 per share, authorized--19,000
shares; issued - 9,237 in 1999 and 9,269 in 2000; outstanding -
9,076 shares in 1999 and 9,077 shares in 2000 92 93
Additional paid-in capital 27,991 28,334
Treasury stock - 161 and 192 shares in 1999 and 2000 (1,352) (1,576)
Retained earnings 35,252 38,820
Accumulated other comprehensive income -
Foreign currency translation 356 (1,744)
--------- ---------
Total stockholders' equity 62,339 63,927
--------- ---------
$ 114,540 $ 116,748
========= =========
The accompanying notes are an integral part of these statements.
F-3
CHANNELL COMMERCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Year ended December 31,
(amounts in thousands, except per share data)
1998 1999 2000
-------- --------- ---------
Net sales $ 93,002 $ 120,688 $ 128,179
Cost of goods sold 56,578 76,115 81,108
-------- --------- ---------
Gross profit 36,424 44,573 47,071
-------- --------- ---------
Operating expenses
Selling 11,570 14,716 15,484
General and administrative 8,057 9,023 14,231
Research and development 1,863 2,629 2,771
Restructuring charge -- -- 1,513
Asset impairment charge -- -- 4,569
-------- --------- ---------
21,490 26,368 38,568
-------- --------- ---------
Income from operations 14,934 18,205 8,503
Interest income 266 46 222
Interest expense (1,342) (2,696) (3,081)
-------- --------- ---------
Income before income taxes 13,858 15,555 5,644
Income taxes 5,749 6,221 2,076
-------- --------- ---------
Net income $ 8,109 $ 9,334 $ 3,568
======== ========= =========
Net income per share
Basic $ 0.88 $ 1.03 $ 0.39
======== ========= =========
Diluted $ 0.88 $ 1.02 $ 0.39
======== ========= =========
Net income $ 8,109 $ 9,334 $ 3,568
Other comprehensive income, net of tax
Foreign currency translation adjustments (246) 602 (2,100)
-------- --------- ---------
Comprehensive net income $ 7,863 $ 9,936 $ 1,468
======== ========= =========
The accompanying notes are an integral part of this statement.
F-4
CHANNELL COMMERCIAL CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Years ended December 31, 1998, 1999 and 2000
(amounts in thousands)
Accumulated
Common stock Additional Treasury stock other Total
---------------- paid-in ------------------- Retained comprehensive stockholders'
Shares Amount capital Shares Amount earnings income equity
------- ------ ------- ------ ------- -------- ------- --------
Balance, January 1, 1998 9,237 $92 $27,991 -- $ -- $17,809 $ -- $ 45,892
Treasury stock acquired -- -- -- 138 (1,175) -- -- (1,175)
Foreign currency translation -- -- -- -- -- -- (246) (246)
Net income for the year -- -- -- -- -- 8,109 -- 8,109
------- ----- ------- ----- ------- ------- ------- --------
Balance, December 31, 1998 9,237 92 27,991 138 (1,175) 25,918 (246) 52,580
Treasury stock acquired -- -- -- 23 (177) -- -- (177)
Foreign currency translation -- -- -- -- -- -- 602 602
Net income for the year -- -- -- -- -- 9,334 -- 9,334
------- ----- ------- ----- ------- ------- ------- --------
Balance, December 31, 1999 9,237 92 27,991 161 (1,352) 35,252 356 62,339
Exercise of employee stock
options, including tax
benefit of $35 32 1 343 -- -- -- -- 344
Treasury stock acquired -- -- -- 31 (224) -- -- (224)
Foreign currency translation -- -- -- -- -- -- (2,100) (2,100)
Net income for the year -- -- -- -- -- 3,568 -- 3,568
------- ----- ------- ----- ------- ------- ------- --------
Balance, December 31, 2000 9,269 $93 $28,334 192 $(1,576) $38,820 $(1,744) $ 63,927
======= ===== ======= ===== ======= ======= ======= ========
The accompanying notes are an integral part of this statement.
F-5
CHANNELL COMMERCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
(amounts in thousands)
1998 1999 2000
-------- ------- --------
Cash flows from operating activities:
Net income $ 8,109 $ 9,334 $ 3,568
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 4,060 6,538 8,168
Asset impairment charge -- -- 4,569
Deferred income taxes 486 (486) (2,442)
Changes in assets and liabilities, net of
effects of acquisitions:
Accounts receivable (3,453) (5,167) (931)
Inventories (3,289) (4,174) (1,904)
Prepaid expenses and misc. receivables (539) (1,029) 538
Other assets (442) (951) 1,191
Accounts payable 1,003 5,062 (4,654)
Accrued expenses 786 (40) 2,271
Income taxes payable (115) (1,014) (2,022)
-------- ------- --------
Net cash provided by operating activities 6,606 8,073 8,352
-------- ------- --------
Cash flows from investing activities:
Purchase of property and equipment (10,579) (9,148) (11,606)
Proceeds from sale of property and equipment 585 -- 110
Business acquisitions, net of cash acquired (23,965) -- --
Contingent purchase payments related to the
acquisition of Standby Electronics Corp. -- (213) --
Contingent purchase payments related to the
acquisition of A.C. Egerton (Holdings) PLC -- -- (361)
Maturities of investments 11,651 -- --
-------- ------- --------
Net cash used in investing activities (22,308) (9,361) (11,857)
-------- ------- --------
F-6
CHANNELL COMMERCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Year ended December 31,
(amounts in thousands)
1998 1999 2000
-------- ------- --------
Cash flows from financing activities:
Repayment of debt $ (4,712) $(5,744) $(11,025)
Proceeds from issuance of long-term debt 24,661 6,600 15,284
Repayment of capital lease obligations (855) (2,407) (2,503)
Purchase of treasury stock (1,175) (177) (224)
Exercise of employee stock options -- -- 344
-------- ------- --------
Net cash (used in) provided by financing activities 17,919 (1,728) 1,876
-------- ------- --------
Effect of exchange rates on cash (229) (79) (191)
-------- ------- --------
Increase (decrease) in cash and cash equivalents 1,988 (3,095) (1,820)
Cash and cash equivalents, beginning of year 3,840 5,828 2,733
-------- ------- --------
Cash and cash equivalents, end of year $ 5,828 $ 2,733 913
======== ======= ========
Cash paid during the year for:
Interest (net of capitalized interest of $339 in 1998) $ 1,138 $ 2,654 $ 3,081
======== ======= ========
Income taxes $ 4,974 $ 6,840 $ 6,956
======== ======= ========
Noncash investing and financing activities:
Assets acquired under capital lease $ 6,248 $ 3,898 $ --
======== ======= ========
Note received for property and equipment sold $ 166 $ -- $ --
======== ======= ========
Fair value of assets acquired, including goodwill $ 42,675 $ -- $ --
Cash paid (27,900) -- --
-------- ------- --------
Liabilities assumed $ 14,775 $ -- $ --
======== ======= ========
The accompanying notes are an integral part of these statements.
F-7
CHANNELL COMMERCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1999 and 2000
(amounts in thousands, except per share data)
NOTE A--DESCRIPTION OF BUSINESS
The Company is a designer and manufacturer of telecommunications equipment
supplied to telephone, cable television and power utility network providers
worldwide. Major product lines include a complete line of thermoplastic and
metal fabricated enclosures, advanced copper termination and connectorization
products, fiber optic cable management systems, coaxial-based passive RF
electronics and heat shrink products. The Company's enclosure products house,
protect and provide access to advanced telecommunications hardware, including
both radio frequency electronics and photonics, and transmission media,
including coaxial cable, copper wire and optical fibers, used in the delivery of
voice, video and data services. The enclosure products are deployed within the
portion of a local signal delivery network, commonly known as the "outside
plant" or "local loop", that connects the network provider's signal origination
office with residences and businesses.
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Estimates--In preparing financial statements in conformity with generally
accepted accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Basis of Consolidation--The consolidated financial statements include the
accounts of the Company and its subsidiaries. All significant intercompany
transactions and balances have been eliminated.
Foreign Currency Translation--Assets and liabilities of certain foreign
operations are translated into U.S. dollars at current exchange rates. Income
and expenses are translated into U.S. dollars at average rates of exchange
prevailing during the period. Adjustments resulting from translating foreign
functional currency financial statements into U.S. dollars are included in other
comprehensive income. Foreign currency transaction gains and losses are included
in general and administrative expenses. In 2000, foreign currency transaction
gains totaled $328, resulting primarily from borrowings payable in foreign
currencies. Transactions gains and losses were not significant in 1998 or 1999.
Cash and Cash Equivalents--For purposes of reporting cash flows, cash and its
equivalents include cash on hand, cash in banks and short-term investments with
original maturities of 90 days or less.
F-8
CHANNELL COMMERCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1999 and 2000
(amounts in thousands, except per share data)
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
Inventories--Inventories are stated at the lower of cost or market. Cost is
determined by the first-in, first-out method of accounting.
Property and Equipment--Property and equipment are stated at cost. Depreciation
is computed using the straight-line method over the estimated useful lives of
the assets. Capital lease assets are amortized using the straight-line method
over the useful lives of the assets. Expenditures for all maintenance and
repairs are charged against income. Additions, major renewals and replacements
that increase the useful lives of assets are capitalized. Amortization of
leasehold improvements is computed using the straight-line method over the
shorter of the lease term or the estimated useful life of the leasehold
improvements.
Intangible Assets--The excess of cost over net assets acquired (goodwill) is
being amortized on a straight-line basis over periods ranging from 15 to 20
years. Other acquired intangibles are being amortized on a straight-line basis
over their estimated useful lives of 3 years. The Company reviews the carrying
value of intangible assets for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. If an
evaluation is required, the estimated future undiscounted cash flows associated
with the asset would be compared to the asset's carrying amount to determine if
a write-down to market value or discounted cash flow is required. Amortization
expense charged to income amounted to $603, $863 and $876 in 1998, 1999 and
2000, respectively.
Revenue Recognition--The Company recognizes revenue from product sales at the
time of shipment.
Shipping Costs--Shipping and handling costs are charged to expense as incurred.
Total shipping costs of $596, $499 and $1,839 are included in general and
administrative expenses for 1998, 1999 and 2000, respectively.
Income taxes--Deferred income taxes reflect the impact of temporary differences
between the amounts of assets and liabilities recognized for financial reporting
purposes and the amounts recognized for income tax purposes. These deferred
income taxes are measured by applying currently enacted income tax rates. A
valuation allowance reduces deferred income tax assets when it is more likely
than not that some portion or all of the deferred income tax assets will not be
realized.
Income per share--Basic income per share excludes dilution and is computed by
dividing net income available to common stockholders by the weighted average
number of common shares outstanding for the period. Diluted income per share
reflects the potential dilution that could occur if options to acquire common
stock were exercised.
F-9
CHANNELL COMMERCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1999 and 2000
(amounts in thousands, except per share data)
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
The following is a reconciliation of the number of shares (denominator) used in
the basic and diluted income per share computations:
1998 1999 2000
--------------- --------------- ---------------
Per Per Per
Share Share Share
Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------
Basic income per
share 9,199 $0.88 9,094 $1.03 9,091 $0.39
Effect of dilutive
stock options 31 -- 17 (.01) 35 --
----- ----- ----- ----- ----- -----
Diluted income per
share 9,230 $0.88 9,111 $1.02 9,126 $0.39
===== ===== ===== ===== ===== =====
The following options were not included in the computation of diluted income per
share as a result of the options' exercise price exceeding the average market
price of the common shares:
1998 1999 2000
------------------- ------------ -----------
Options to purchase shares of
common stock 626 678 204
Exercise prices $11.00 - $10.06 - $12.00 -
$13.25 $13.25 $13.75
July 2007 - October July 2007 - July 2007 -
Expiration dates 2008 October 2009 July 2010
Fair value of financial instruments--The carrying amount of cash, accounts
receivable, accounts payable, accrued expenses and short-term borrowings
approximates fair value because of the short maturity of these financial
instruments. Long-term obligations are carried at amounts that approximate fair
value. The estimated fair value of the long-term obligations is based on
borrowing rates currently available to the Company for loans with similar terms
and maturities.
F-10
CHANNELL COMMERCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1999 and 2000
(amounts in thousands, except per share data)
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
Reclassifications--Certain reclassifications have been made to the 1998 and 1999
financial statements to conform with the 2000 presentation.
NOTE C--INVENTORIES
Inventories are summarized as follows:
1999 2000
------- -------
Raw materials $ 7,666 $ 6,429
Work-in-process 2,641 3,575
Finished goods 9,142 11,616
------- -------
$19,449 $21,620
======= =======
NOTE D--PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows:
Estimated
1999 2000 useful lives
-------- -------- ------------
Machinery and equipment $ 53,932 $ 61,297 3-10 years
Office furniture and equipment 2,234 3,525 3 -7 years
Leasehold improvements 2,864 3,642 15-20 years
Building and building improvements 7,161 7,025 30 years
Land 1,646 1,574 --
Construction in progress 404 -- --
-------- --------
68,242 77,063
Less accumulated depreciation and amortization (18,790) (28,394)
-------- --------
$ 49,452 $ 48,669
======== ========
Included in machinery and equipment is $10,061 and $10,052 of equipment under
capital lease at December 31, 1999 and 2000, respectively. Accumulated
amortization of assets under capital lease totaled $1,997 and $3,985 at December
31, 1999 and 2000, respectively. See Note G.
F-11
CHANNELL COMMERCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1999 and 2000
(amounts in thousands, except per share data)
NOTE D--PROPERTY AND EQUIPMENT - Continued
Pursuant to its policy, the Company reviews the carrying value of property,
plant and equipment for impairment whenever events and circumstances indicate
that the carrying value of an asset may not be recoverable from the estimated
future cash flows expected to result from its use and eventual disposition. As a
result of lower utilization of certain production equipment in the European
operations, an impairment review was conducted on these assets. A projection of
future cash flows was developed as a basis of measurement of the asset
impairment charge. In the fourth quarter of 2000, the Company adjusted the
carrying value of this machinery and equipment resulting in a non-cash
impairment charge of $4,569 ($2,787 after tax, or $0.31 per share).
NOTE E--ACCRUED EXPENSES
Accrued expenses consist of the following:
1999 2000
------ ------
Accrued restructuring charges $ -- $1,323
Accrued vacation 628 784
Accrued bonus 262 508
Other 1,607 1,844
------ ------
$2,497 $4,459
====== ======
NOTE F--LONG-TERM DEBT
Long-term debt consists of the following:
1999 2000
------- -------
Senior credit facility that provides for
borrowings up to $40,000 ($30,000 at December 31,
1999). The outstanding balance bears interest,
payable monthly, at a variable rate based on
either the bank's base rate or the applicable
LIBOR rate, depending on the nature of the
borrowings. At December 31, 1999 and 2000, the
weighted average interest rate on outstanding
borrowings was 6% and 7%. The loan is
collateralized by substantially all of the
Company's assets and up to 65% of the capital
stock of the Company's subsidiaries. Scheduled
principal payments of $2,000 and $3,000 are due
in 2001 and 2002, respectively, with the
remaining principal balance due on April 30, 2003
(see discussion below regarding covenant
violations.) $21,961 $30,997
F-12
CHANNELL COMMERCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1999 and 2000
(amounts in thousands, except per share data)
NOTE F--LONG-TERM DEBT - Continued
1999 2000
-------- -------
Note payable to financial institution payable in
monthly principal and interest installments of
$30 with the unpaid principal and interest due on
November 1, 2008. The note bears interest at
6.85% and is collateralized by certain land and
buildings. $ 4,221 $ 4,148
Note payable issued to an individual in
connection with the acquisition of RMS
Electronics, Inc. (Note K). Principal is payable
in three installments of $133 beginning January
1, 1999. Interest accrues at a rate equal to the
Company's investment yield (effective rate of
5.75% at December 31, 1999). 267 --
Automobile loan payable in monthly principal and
interest installments of $1 through March 2003
The note bears interest at 8.5% and is
collateralized by the automobile acquired. -- 33
Egerton Credit Facility 3,926 --
-------- -------
30,375 35,178
Less current maturities (4,135) 31,086
-------- -------
$ 26,240 $ 4,092
======== =======
The Company also had a separate credit facility available to its Egerton
subsidiaries that included an overdraft facility totaling approximately $5,000
plus the combined cash balances of those subsidiaries. Also included were
facilities, totaling approximately $2,000, to provide financing for
international letters of credit, forward exchange contracts, and other items.
Outstanding borrowings (net of cash balances) bore interest at the bank's base
rate (5.5% at December 31, 1999) plus a factor ranging from 1.25% to a maximum
of 4% depending on the amount borrowed. The facility was collateralized by the
assets of the subsidiaries. In February 2000, the Egerton credit facility was
repaid using additional borrowings from the senior credit facility.
F-13
CHANNELL COMMERCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1999 and 2000
(amounts in thousands, except per share data)
NOTE F--LONG-TERM DEBT--Continued
The senior credit facility contains various financial and operating covenants
which, among other things, impose limitations on the Company's ability to incur
additional indebtedness, merge or consolidate, acquire fixed assets, sell assets
except in the ordinary course of business, make certain investments, enter into
leases and pay dividends. The Company is also required to comply with convenants
related to minimum net worth and other financial ratios. At December 31, 2000,
the Company exceeded the allowable ratio of debt to EBITDA and fixed coverage
ratio of the senior credit facility.
Management has also determined that it is probable that the Company will not be
in compliance with the ratios of debt to EBITDA and fixed charge coverage at the
next measurement date (March 31, 2001). These violations give the bank the right
to demand repayment of the outstanding borrowings under the senior credit
facility. Management has requested a waiver of the covenants for both
measurement periods. In addition, management is in negotiations with the bank to
revise the financial covenants under the senior credit facility. To date, the
Company has not obtained waivers from the bank for the period ended December 31,
2000 or March 31, 2001. Generally accepted accounting principles required the
obligations under the senior credit facility be classified as a current
obligation if the waivers have not been obtained. The bank may increase the
Company's cost of borrowings as a condition of issuing a waiver. In the event
that the Company is unable to obtain waivers of the covenant violations the bank
may demand repayment of some or all of the outstanding borrowings. Such an
occurrence would require the Company to identify other financing sources to
replace the existing credit facility.
F-14
CHANNELL COMMERCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1999 and 2000
(amounts in thousands, except per share data)
NOTE F--LONG-TERM DEBT--Continued
Based on the original terms of the senior credit facility, long-term debt at
December 31, 2000 is schedule to mature as follows:
Year Amount
---------- -------
2001 $ 2,089
2002 3,098
2003 29,090
2004 95
2005 102
Thereafter 3,704
-------
$35,178
=======
NOTE G--CAPITAL LEASE OBLIGATIONS
The Company leases certain machinery and equipment under various agreements
which are classified as capital leases. The leases expire on various dates
through August 2003. Future minimum payments, by year, are as follows:
Year
2001 $ 3,232
2002 2,043
2003 603
-------
5,878
Less amount representing interest (692)
-------
5,186
Less current maturities (2,726)
-------
$2,460
=======
F-15
CHANNELL COMMERCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1999 and 2000
(amounts in thousands, except per share data)
NOTE H--RESTRUCTURING CHARGE
In the fourth quarter of 2000, in connection with management's plan to reduce
costs and improve operating efficiencies, the Company recorded a restructuring
charge of $1,513. The principal actions in the restructuring plan involve the
closure of facilities and consolidation of support infrastructure. This
restructuring, which will result in the elimination of approximately 90
administration staff and manufacturing positions, will be completed by December
31, 2001. The major components of the restructuring charges are as follows:
Employee severance and related benefit costs $ 621
Costs associated with vacated facilities 819
Legal and professional services 73
-------
$ 1,513
=======
Severance
The Company anticipates a total reduction of approximately 90 employees,
approximately 10% of the total force. The reductions are 55 employees in the
European operations, consisting of factory direct labor, factory support and
administrative positions, and 36 people in North America, consisting of factory
direct labor, factory support and administrative positions. There will be
additional severance costs of approximately $24 in the first quarter 2001
relating to this reduction of employees.
Costs Associated with Vacated Facilities
The Company has accrued $819 as the costs of the remaining payments on leased
facilities to be vacated less anticipated future income from subleases. In the
European operations, two smaller facilities have been vacated as of December 31,
2000, and a third larger facility is expected to be vacated in September 2001.
The Charlotte, North Carolina distribution facility is expected to be vacated
April 30, 2001. The Hong Kong sales office was vacated on February 28th, 2001.
The majority of accrued lease expenses related to the European facilities.
Legal and Professional Services
The Company incurred legal and professional fees in the fourth quarter of 2001
associated with the implementation of the above restructuring activities in the
international operations. These services primarily relate to labor issues.
F-16
CHANNELL COMMERCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1999 and 2000
(amounts in thousands, except per share data)
NOTE I--INCOME TAXES
The components of income taxes are as follows:
1998 1999 2000
------- ------- -------
Current
Federal $ 3,796 $ 5,011 $ 3,247
State 1,123 712 863
Foreign 344 984 408
------- ------- -------
5,263 6,707 4,518
------- ------- -------
Deferred
Federal 357 369 (992)
State 78 (6) (483)
Foreign 51 (849) (967)
------- ------- -------
486 (486) (2,442)
------- ------- -------
$ 5,749 $ 6,221 $ 2,076
======= ======= =======
A reconciliation from the U.S. Federal statutory income tax rate to the
effective income tax rate for the years ended December 31, is as follows:
1998 1999 2000
---- ---- ----
U.S. Federal statutory rate 34% 34% 34%
State income taxes, net of
federal tax benefit 6 5 5
Amortization of intangibles 1 1 --
Nondeductible meals and entertainment 2 2 1
Effect of subsidiaries taxes at other than the
U.S. statutory rate (2) (2) (3)
---- ---- ----
41% 40% 37%
==== ==== ====
F-17
CHANNELL COMMERCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1999 and 2000
(amounts in thousands, except per share data)
NOTE I--INCOME TAXES - Continued
Significant components of the Company's deferred tax assets and liabilities are
as follows:
1999 2000
------ ------
Assets
Patents $ 941 $ 830
Allowance for bad debts 42 25
Inventory capitalization 255 353
Vacation pay 323 336
State taxes 87 --
Restructuring charge -- 524
Impairment charge -- 1,957
Tax credit and loss carryforwards 990 1,773
------ ------
2,638 5,798
------ ------
Liabilities
State taxes -- 67
Amortization of goodwill -- 46
Accelerated depreciation 1,807 2,412
------ ------
1,807 2,525
------ ------
Net deferred tax asset $ 831 $3,273
====== ======
The classification of the net deferred tax asset between current and non-current
is as follows:
1999 2000
------ ------
Net current asset $ 707 $1,171
Net long-term asset 124 2,102
------ ------
Net deferred tax asset $ 831 $3,273
====== ======
At December 31, 2000, the Company had approximately $7,200 of international
operating loss carryforwards with a potential tax benefit of $1,773. These loss
carryforwards do not expire. Realization of the deferred tax asset is dependent
upon generating sufficient taxable income. Management believes that it is more
likely than not that the deferred tax assets will be realized through future
earnings and/or tax planning strategies. The amount of the deferred tax assets
considered realizable, however, could change in the near future if estimates of
future taxable income during the carryforward period are changed.
F-18
CHANNELL COMMERCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1999 and 2000
(amounts in thousands, except per share data)
NOTE J--STOCKHOLDERS' EQUITY
In July 1996, the Company adopted the 1996 Incentive Stock Plan (the Plan),
under which it was authorized to issue non-qualified stock options and incentive
stock options to key employees, directors and consultants to purchase up to an
aggregate of 750 shares of the Company's common stock. The options have a term
of ten years and generally become fully vested by the end of the third year. In
May 1999, the Plan was amended to increase the authorized number of shares
issued to 1,500.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation", encourages, but does not require, companies to record
compensation cost for stock-based employee compensation plans at fair value. The
Company has chosen to continue to account for stock-based compensation using the
intrinsic value method prescribed in previously issued standards. Accordingly,
compensation cost for stock options is measured as the excess, if any, of the
quoted market price of the Company's stock at the date of grant over the amount
an employee must pay to acquire the stock. Compensation cost has not been
significant for 1998, 1999 and 2000.
Plan transactions are as follows:
1998 1999 2000
----------------- ----------------- -----------------
Weighted Weighted Weighted
average average average
exercise exercise exercise
Shares price Shares price Shares price
------ ------ ------ ------ ------ ------
Options outstanding
January 1, 636 $11.49 703 $11.22 768 $10.86
Granted 114 9.83 98 10.17 140 13.29
Exercised -- -- -- -- (32) 10.81
Canceled (47) 11.33 (33) 11.52 (27) 10.26
------ ------ ------
Options outstanding
December 31, 703 $11.22 768 $10.86 849 $11.30
====== ====== ======
Options available for
grant at December 31, 47 732 619
F-19
CHANNELL COMMERCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1999 and 2000
(amounts in thousands, except per share data)
NOTE J--STOCKHOLDERS' EQUITY--Continued
Weighted average fair value of options granted during the year are as follows:
1998 1999 2000
----- ----- -----
Exercise price is below market price at date of grant -- --
Exercise price equals market price at date of grant $3.93 $4.07 $5.88
The range of exercise prices of options outstanding at December 31, 2000 is
$8.38 to $13.75 and the options have a weighted average remaining contractual
life of 7 years. At December 31, 2000, 639 of the 849 options outstanding are
exercisable by the optionee.
The fair value of options at date of grant was estimated using the Black-Scholes
model with the following weighted average assumptions:
1998 1999 2000
------- ------- -------
Expected life (years) 5 years 5 years 5 years
Risk-free interest rate 5.5% 5.5% 6.0%
Expected volatility 35% 35% 40%
Expected dividend yield -- -- --
Had compensation cost for the plan been determined based on the fair value of
the options at the grant dates based on the above method, the Company's net
income and income per share would have been:
Net income per share
Net -------------------
income Basic Diluted
-------- -------- --------
1998
As reported $ 8,109 $ 0.88 $ 0.88
Pro forma 7,286 $ 0.79 $ 0.79
1999
As reported $ 9,334 $ 1.03 $ 1.02
Pro forma 9,001 $ 0.99 $ 0.98
2000
As reported $ 3,568 $ 0.39 $ 0.39
Pro forma 3,210 $ 0.35 $ 0.35
F-20
CHANNELL COMMERCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1999 and 2000
(amounts in thousands, except per share data)
NOTE K--ACQUISITIONS
The Company has acquired the entities described below. The acquisitions were
accounted for by the purchase method of accounting:
RMS Electronics, Inc.--On January 2, 1997, the Company acquired substantially
all of the assets of RMS Electronics, Inc. and an affiliated company, RMS - UK
Limited (collectively referred to as "RMS") for $2,695, including acquisition
costs. The purchase price consisted of $2,295 in cash and the remainder through
the issuance of a promissory note (Note F). RMS is a designer, importer and
distributor of passive electronic products and devices for various segments of
the telecommunications industry. These devices are typically used in conjunction
with the Company's enclosure products. The excess of the purchase price over the
fair values of the net assets acquired was $1,134 and has been recorded as
goodwill, which is being amortized on a straight-line basis over fifteen years.
Other intangible assets acquired in connection with the acquisition totaled $100
and were amortized over three years.
Standby Electronics Corp.--On June 30, 1997, the Company acquired 100% of the
outstanding shares of Standby Electronics Corp. ("Standby"), a designer and
supplier of metal-fabricated enclosures to house advanced electronics fiber
optic cable and power systems for telecommunications networks, for $479. In
addition, the purchase agreement provided for additional consideration of up to
$300 to be paid over three years, contingent upon Standby achieving specified
revenue levels over the three-year period. The excess of the purchase price
(excluding the contingent consideration) over the fair values of the net assets
acquired was $552 and has been recorded as goodwill, which is being amortized on
a straight-line basis over fifteen years. In 1999, a final contingent purchase
payment of $213 was made resulting in an increase in the recorded goodwill.
A.C. Egerton (Holdings) PLC--On May 1, 1998, the Company acquired 100% of the
outstanding common stock of A.C. Egerton (Holdings) PLC ("Egerton"), a public
limited company incorporated in England and Wales. Egerton is a manufacturer of
outside plant splicing and terminating products for both optical fiber and
copper applications used in the telecommunications industry. The purchase price,
after all purchase price adjustments, paid in cash, amounted to $28,261,
including $1,325 of acquisition costs. The fair value of tangible assets
acquired in excess of liabilities assumed amounted to $13,847, which resulted in
goodwill in the amount of $14,414. The final appraisal of the property and
equipment acquired was completed in the forth quarter of 1998, resulting in
adjustments to Egerton's property and equipment and goodwill and the related
depreciation and amortization. The effect of recording these adjustments was to
increase net income for the fourth quarter of 1998 by $435 ($.05 per share).
Goodwill is being amortized on the straight-line basis over twenty years.
F-21
CHANNELL COMMERCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1999 and 2000
(amounts in thousands, except per share data)
NOTE K--ACQUISITIONS--Continued
The operating results of these acquired businesses have been included in the
consolidated statement of income from the dates of acquisition. The following
unaudited pro forma information for the year ended December 31, 1998 presents a
summary of consolidated results of operations of the Company and the acquired
businesses as if the acquisition of Egerton had occurred January 1, 1998.
1998
--------
Net sales $101,798
Net income 6,798
Income per share (basic and diluted) $ .74
The 1998 unaudited pro forma results have been presented for comparative
purposes only and include certain adjustments, such as additional amortization
expense of goodwill and increased interest expense on acquisition debt. They do
not purport to be indicative of the results of operations which actually would
have resulted had the acquisition of Egerton been effective January 1, 1998, or
of future results of operations of the consolidated entities.
NOTE L--RETIREMENT PLAN
The Company established a retirement plan in accordance with section 401(k) of
the Internal Revenue Code. Under the terms of this plan, eligible employees may
make voluntary contributions to the extent allowable by law. Employees of the
Company are eligible after 90 days of employment. Matching contributions by the
Company to this plan are discretionary and will not exceed that allowable for
Federal income tax purposes. The Company's contributions are vested over five
years in equal increments. The accompanying statements of income include
contribution expense of $174, $193 and $212 for the years ended December 31,
1998, 1999 and 2000, respectively.
F-22
CHANNELL COMMERCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1999 and 2000
(amounts in thousands, except per share data)
NOTE M--RELATED PARTY TRANSACTIONS
The Company leases a portion of its facilities in Temecula, California from the
Company's Chairman of the Board and Chief Executive Officer. The lease provides
for payments of insurance, repairs, and maintenance and property taxes, and
extends through 2005. The Company has two five-year renewal options to extend
the terms to 2015. Rent expense paid under the lease was $1,103, $1,127 and
$1,158 for the years ended December 31, 1998, 1999 and 2000, respectively.
In 1997, the Company guaranteed debt of the Company's Chairman of the Board and
Chief Executive Officer of approximately $2,700. The guaranteed debt was
incurred in connection with construction of the facilities leased to the Company
and is collateralized by said facilities. The loan amount subject to the
guarantee is expected to decline over a 20 year period before expiring in 2016.
It is not practicable to estimate the fair value of the guarantee; however, the
Company does not anticipate that it will incur losses as a result of this
guarantee.
In January 2001, the Company guaranteed personal debt of the Company's President
and Chief Operating Officer of $650. The loan amount subject to the guarantee is
expected to decline during 2001 and management of the Company plans to terminate
the guarantee no later than December 15, 2001. In connection with this
guarantee, the Company's President and Chief Operating Officer paid the Company
a fee equal to 1% of the loan balance and provided as collateral to the Company
300,000 shares of Company stock. It is not practicable to estimate the fair
value of the guarantee; however, the Company does not anticipate that it will
incur losses as a result of this guarantee.
NOTE N--COMMITMENTS AND CONTINGENCIES
The Company leases equipment and manufacturing and office space under several
operating leases expiring through 2005. Rent expense under all operating leases
amounted to $1,777, $1,542 and $1,632 for the years ended December 31, 1998,
1999 and 2000, respectively. Total future minimum rental payments under
noncancellable operating leases as of December 31, 2000, including the operating
lease with the related party discussed in Note L, are as follows:
Year Amount
-------- ------
2001 $1,510
2002 1,325
2003 1,255
2004 1,242
2005 1,266
======
$6,598
======
F-23
CHANNELL COMMERCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1999 and 2000
(amounts in thousands, except per share data)
NOTE N--COMMITMENTS AND CONTINGENCIES - Continued
In addition to these minimum rental commitments, certain of these operating
leases provide for payments of insurance, repairs and maintenance and property
taxes.
In September 2000, the Company received notice from the Internal Revenue Service
(IRS) regarding an upcoming examination of the 1997 and 1998 tax returns. At
this time the company is unable to estimate the possible impact, if any, that
may result from this examination. However, the Company believes that the
ultimate outcome of this examination will not result in a material impact on the
Company's consolidated results of operations or financial position.
NOTE O--CREDIT CONCENTRATIONS AND MAJOR CUSTOMERS
The Company maintains cash balances in financial institutions located in the
United States, Canada, Australia and the United Kingdom. Cash balances held in
financial institutions outside of the United States was not significant at
December 31, 1999 and 2000. Cash balances held in financial institutions located
in the United States may, at times, exceed federally insured limits. The Company
has not experienced any losses in such accounts and believes it is not exposed
to any significant credit risk on cash and cash equivalents.
In 2000, one customer accounted for 11.2% of sales and a second customer
accounted for 10.4% of sales. In 1999, one customer accounted for 10.2% of the
Company's sales. In 1998, one customer accounted for 12.5% of sales and a second
customer accounted for 11.7% of sales. Credit risk with respect to accounts
receivable is generally diversified due to the large number of entities
comprising the Company's base and their geographic dispersion. The Company
controls credit risk through credit approvals, credit limits and monitoring
procedures but does not generally require collateral.
F-24
CHANNELL COMMERCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1999 and 2000
(amounts in thousands, except per share data)
NOTE P--SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in one industry segment as a manufacturer and supplier of
telecommunications equipment. Currently, the Company is organized into four
geographic regions: the United States, Europe/Middle East, Canada and
Australia/Asia. The following tables summarize segment information:
1998 1999 2000
-------- -------- ---------
Revenues from unrelated entities(1):
United States(2) $ 65,606 $ 80,028 $ 88,531
Europe/Middle East 16,230 19,030 21,746
Canada 5,136 5,148 7,270
Australia/Asia 6,030 16,482 10,632
-------- -------- ---------
$ 93,002 $120,688 $ 128,179
======== ======== =========
Income (loss) from operations:
United States $ 13,616 $ 18,382 $ 16,212
Europe/Middle East 408 (2,780) (8,684)
Canada 80 413 1,286
Australia/Asia 830 2,190 (1,117)
-------- -------- ---------
$ 14,934 $ 18,205 $ 8,503
======== ======== =========
Interest income:
United States $ 261 $ 38 $ 207
Europe/Middle East 5 -- --
Canada -- 8 15
Australia/Asia -- -- --
-------- -------- ---------
$ 266 $ 46 $ 222
======== ======== =========
Interest expense:
United States $ 875 $ 2,348 $ 2,630
Europe/Middle East 462 338 447
Canada -- -- 4
Australia/Asia 5 10 --
-------- -------- ---------
$ 1,342 $ 2,696 $ 3,081
======== ======== =========
(1) Inter-geographic revenues were not significant.
(2) Includes export sales of approximately $1,700, $1,043 and $1,971 in 1998,
1999 and 2000, respectively.
F-25
CHANNELL COMMERCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1999 and 2000
(amounts in thousands, except per share data)
NOTE P--SEGMENT AND GEOGRAPHIC INFORMATION--Continued
1998 1999 2000
--------- --------- ---------
Income tax expense (benefit):
United States $ 5,354 $ 6,086 $ 2,635
Europe/Middle East (99) (904) (783)
Canada 44 193 474
Australia/Asia 450 846 (250)
--------- --------- ---------
$ 5,749 $ 6,221 $ 2,076
========= ========= =========
Identifiable assets:
United States $ 50,992 $ 60,860 $ 64,868
Europe/Middle East 32,464 35,009 34,827
Canada 2,577 3,508 2,525
Australia/Asia 12,409 15,163 14,528
--------- --------- ---------
$ 98,442 $ 114,540 $ 116,748
========= ========= =========
Depreciation and amortization
United States $ 2,560 $ 4,090 $ 5,296
Europe/Middle East 1,029 1,455 1,932
Canada 78 100 117
Australia/Asia 393 893 823
--------- --------- ---------
$ 4,060 $ 6,538 $ 8,168
========= ========= =========
Capital expenditures:
United States(3) $ 9,513 $ 5,392 $ 5,815
Europe/Middle East 684 3,650 4,996
Canada 90 106 41
Australia/Asia 292 -- 754
--------- --------- ---------
$ 10,579 $ 9,148 $ 11,606
========= ========= =========
(3) Excludes assets acquired under capital leases of $6,248 and $3,898 in 1998
and 1999, respectively.
F-26
CHANNELL COMMERCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1998, 1999 and 2000
(amounts in thousands, except per share data)
NOTE Q--QUARTERLY FINANCIAL DATA (Unaudited)
Summarized quarterly financial data for 1998, 1999 and 2000 follows:
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
1998
Net sales $15,704 $23,108 $27,159 $26,739
Gross profit 6,414 9,621 10,609 9,488
Net income 1,547 2,293 2,335 1,934
Income per share (basic and diluted) 0.17 0.25 0.25 0.21
1999
Net sales 24,698 31,315 32,938 31,729
Gross profit 9,594 12,341 12,375 10,255
Net income 1,710 2,718 2,823 2,083
Income per share
Basic 0.19 0.30 0.31 0.23
Diluted 0.19 0.30 0.31 0.22
2000
Net sales 32,250 35,722 33,182 27,025
Gross profit 11,241 13,884 12,525 9,421
Net income (loss)(1) 1,611 3,132 2,048 (3,223)
Income (loss) per share(1)
Basic 0.18 0.34 0.23 (0.36)
Diluted 0.17 0.34 0.22 (0.36)
(1) In the fourth quarter of 2000, the Company recorded a restructuring charge
of $1,513 ($923 after tax, or $0.10 per share). See Note H. During the fourth
quarter of 2000, the Company also recorded a charge for the impairment of
long-lived assets of $4,569 ($2,787 after tax, or $0.31 per share). See Note D.
F-27
GLOSSARY OF TERMS
ADSL (Asymmetric Digital Subscriber Line): A standard allowing digital
broadband signals and standard telephone service to be transmitted up to 12,000
feet over a twisted copper pair.
Broadband: Transmission rates in excess of 1.544 mega bits per second
typically deployed for delivery of high-speed data, video and voice services.
Cable Modem: Electronic transmission device placed on the CATV network,
located at end user locations, providing two-way, high-speed data service
capability, including internet access for subscribers.
CATV (Community Antenna TV, commonly called cable television): A system
for distributing television programming by a cable network rather than by
broadcasting electromagnetic radiation.
Coaxial Cable: The most commonly used means of transmitting cable
television signals. It consists of a cylindrical outer conductor (shield)
surrounding a center conductor held concentrically in place by an insulating
material.
DLC (Digital Loop Carrier): Telecommunications transmission technology
which multiplexes multiple individual voice circuits onto copper or fiber
cables.
DSL (Digital Subscriber Line): Generic descriptor covering various
versions of DSL services delivered over copper wires. Included are HDSL and ADSL
services.
Fiber Node: Refers to the equipment that terminates the fiber cables
originating from the host digital terminal. This network element converts the
optical signals to their coax electrical, RF equivalents. Synonymous with
optical network interface (ONI).
Fiber Optics: The process of transmitting infrared and visible light
frequencies through a low-loss glass fiber with a transmitting laser or LED and
a photo diode receiver.
FTTC (Fiber-To-The-Curb): In a long distance network consisting of fiber
optics, fiber-to-the-curb refers to the fiber optics running from the
distribution plant to the curb, at which point copper is used for the
curb-to-home connection.
HDSL (High bit rate Digital Subscriber Line): By using sophisticated
coding techniques, a large amount of information may be transmitted over copper.
The HDSL scheme uses such coding over four copper wires and is primarily
intended for high capacity bi-directional business services.
Headend: The primary transmission point in a cable system supplying the
hubs and trunk cables.
HFC (Hybrid Fiber Coax): A type of distribution plant that utilizes fiber
optics to carry service from a CO to the carrier serving area, then coaxial
cable within the CSA to or close to the individual residences.
ONU (Optical Network Unit): The curb mounted electronics device which
converts fiber optic signals to electrical for service delivery or copper wires.
PCS (Personal Communications Services): Any service offered on a personal
communications network. These include basic telephone, voice mail, paging and
others. Personal communications networks operate in the 1800-2000 mHz range,
utilizing low power cells compared to traditional cellular technology.
RBOC (Regional Bell Operating Company): A term for the seven regional
holding companies created when AT&T divested the Bell operating companies.
RF (Radio Frequency): An electromagnetic wave frequency intermediate
between audio frequencies and infrared frequencies used especially in wireless
telecommunications and CATV transmission.
G-1
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Form 10-K Annual Report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Temecula,
State of California, on April 2, 2001.
CHANNELL COMMERCIAL CORPORATION
a Delaware corporation
By /s/ WILLIAM H. CHANNELL, SR.
----------------------------
William H. Channell, Sr.
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Form 10-K Annual Report has been signed by the following persons in the
capacities indicated below as of April 2, 2001.
Signature Capacity in Which Signed
--------- ------------------------
/s/ WILLIAM H. CHANNELL, SR. Chairman of the Board and
- ---------------------------------- Chief Executive Officer
William H. Channell, Sr. (Principal Executive Officer)
/s/ WILLIAM H. CHANNELL, JR . President, Chief Operating Officer
- ---------------------------------- and Director
William H. Channell, Jr.
/s/ THOMAS LIGUORI Chief Financial Officer
- ----------------------------------
Thomas Liguori
/s/ JACQUELINE M. CHANNELL Secretary and Director
- ----------------------------------
Jacqueline M. Channell
/s/ EUGENE R. SCHUTT, JR. Director
- ----------------------------------
Eugene R. Schutt, Jr.
/s/ RICHARD A. CUDE Director
- ----------------------------------
Richard A. Cude
/s/ PETER J. HICKS Director
- ----------------------------------
Peter J. Hicks