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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, 1996 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
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 (Commission File No.) (IRS Employer
of incorporation) 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) 694-9160
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 [ ]
The aggregate market value of the Common Stock held by non-affiliates of the
Registrant, based upon the closing sale price of the Common Stock on the NASDAQ
National Market System on December 31, 1996 was approximately $114,308,000.
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.
As of December 31, 1996, the Registrant had 9,237,000 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
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. [ ]
TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS.............................................................................. 1
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ITEM 2. PROPERTIES............................................................................ 8
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ITEM 3. LEGAL PROCEEDINGS..................................................................... 8
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................................... 8
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS................. 9
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ITEM 6. SELECTED FINANCIAL DATA............................................................... 10
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. 12
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................................... 17
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.. 17
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PART III
ITEM 10. EXECUTIVE OFFICERS AND DIRECTORS...................................................... 18
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ITEM 11. EXECUTIVE COMPENSATION................................................................ 20
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT........................ 24
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................................ 25
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K....................... 26
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FINANCIAL STATEMENTS.................................................................................. F-1
GLOSSARY OF TERMS..................................................................................... G-1
i
PART I
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ITEM 1. BUSINESS
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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) 694-9160.
GENERAL
The Company is a leading designer, manufacturer and marketer of precision-
molded thermoplastic enclosures used by CATV operators and local telephone
companies worldwide. The Company believes it was the first to design,
manufacture and market thermoplastic enclosure products for use in the
communications 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 CATV and telephone company operators. The Company's products house,
protect and provide access to advanced telecommunications electronics and
transmission media, including coaxial cable, copper wire and optical fibers,
used in the delivery of CATV and telephone services. The products are deployed
within the portion of the local signal delivery network, commonly known as the
"outside plant", that connects the network provider's signal origination office
with residences and businesses. With the acquisition of RMS Electronics, Inc.,
the Company also designs and distributes high performance RF passive electronic
devices which are typically used in conjunction with the Company's enclosure
products. The Company also markets a variety of complementary products
manufactured by third parties, including grade level boxes and cable-in-conduit,
in order to provide a full system solution to meet its customer's outside plant
requirements.
INDUSTRY
For a number of years, the communications industry has experienced rapid
expansion, both domestically and internationally, in response to a number of
factors, including developments in high-speed communications technologies, the
convergence occurring within the CATV and telecommunications industries,
consumer demand for enhanced communications services, and a changing regulatory
and competitive environment leading to the deregulation or privatization of
signal delivery operations in many markets. For numerous countries throughout
the world, the implementation or improvement of advanced communications systems
has become a national priority in order to enable such countries to participate
in the information-based global economy.
CATV and local telephone operators are responding to these changes in the
industry by expanding, rebuilding and upgrading their signal delivery networks
in order to deliver enhanced communications services to their customers. These
networks are designed to deliver video, voice and data transmissions and provide
internet access to individual residences and businesses. The networks employ a
variety of signal delivery technologies and architectures, including HFC, DLC,
FTTC and ADSL (see "Glossary of Terms"), which generally carry broadband and
narrowband signals over a combination of electronic hardware, coaxial cable,
copper wire and optical fibers. The outside plants of such networks include
various access devices, fiber optic trunks, nodes and feeders and other signal
transmission electronics. These devices are required to be housed in secure,
protective enclosures, such as those manufactured by the Company.
Enclosure products are critical components of the outside plants of CATV
operators and local telephone companies, providing protection against weather
and vandalism, access for technicians who maintain and manage the outside plant
and, in some cases, dissipation of heat created by active electronic hardware.
CATV operators and local telephone companies rely significantly on manufacturers
of protective enclosures because any material damage to the signal delivery
networks is likely to disrupt communication services.
1
Demand for enclosures in the communications industry depends primarily on the
construction, rebuilding, upgrading and maintenance of signal delivery networks
by CATV operators and local telephone companies. In particular, technological
developments in the communications industry are resulting in significant
increases in system upgrades. For example, within the CATV segment of the
industry, networks are being upgraded to support new advanced two-way services,
including 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 HDSL and ADSL, which utilize
traditional copper wires for broadband services and which are expected to
increase the need for fully sealed outside plant facilities in order to improve
network reliability and longevity. In addition, as local telephone companies
build broadband HFC networks for the delivery of video services competitive with
CATV, they are expected to require products traditionally used by CATV
operators. These and other technological, regulatory and competitive factors are
expected to result in continued growth of the market for enclosure products
designed for the communications industry.
BUSINESS STRATEGY
The Company's strategy is to capitalize on opportunities in the global
communications industry by providing enclosures and complementary products to
meet the 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 CATV BUSINESS. The Company will continue to seek to
capitalize on its position as a leading designer, manufacturer and marketer of
broadband enclosures for the CATV industry 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. The Company has positioned itself to participate in continued
CATV network construction and upgrades that are designed to improve service
quality and expand network capacity in order to prepare CATV operators for new
competition in the broadband services market. These expansions and upgrades are
expected to enable CATV operators to accommodate increased consumer demand for
internet access via cable modem, telephony and enhanced video services. From
1993 to 1996, the Company's net sales to the CATV industry increased from $20.4
million to $41.1 million.
INCREASE SALES TO LOCAL TELEPHONE COMPANIES. The company seeks to leverage its
in-depth knowledge of, and expertise in, the broadband telecommunications and
telephone markets to provide innovative enclosure solutions for the telephone
industry. from 1993 to 1996, the company's net sales to local telephone
companies increased from $3.3 million to $6.2 million. 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 already achieved
significant success in marketing its traditional catv/broadband products to
local telephone companies which have been designing and deploying broadband
networks to deliver competitive video and data services. the company will
continue to target this market for growth.
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, South America, the Pacific Rim, the Middle East and Europe. From 1993 to
1996, the Company's international net sales increased from $3.4 million to $5.6
million. Trends expected to result in international growth opportunities include
the deregulation and privatization of telecommunications in many international
markets, 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 multi-national expansion by many U.S.-based network
carriers. The Company will concentrate on expansion in international markets
that are characterized by deregulation or privatization of telecommunications
and 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 by developing innovative products that meet the
changing needs of its customers. Examples of innovative products developed by
the Company include its low profile (i.e., close to the ground) enclosures that
permit 360 degree access by technicians and pedestals that provide for
mechanical sealing that is maintained without the need for gels, compounds or
heat shrinkage. Such features, in addition to other product improvements
developed by the Company over many years, received U.S. patent protection and
improve the performance and ease of use of the Company's products in 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 differential advantages over other suppliers to the
industry. In addition, the Company will seek 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 manufactures precision-molded, highly engineered thermoplastic
enclosures that are considered state-of-the-industry for many applications,
having received field testing and other approvals and standardization
certifications from major CATV and telephone company operators. The majority of
the Company's products are specifically designed for buried and underground
network architectures, including enclosures that provide technicians with access
to these networks for maintenance, upgrades and installation of new services.
These types of networks and enclosures are generally preferred by the Company's
customers due to increased network reliability, lower maintenance requirements,
improved security, utility right of way issues and aesthetic appeal. Enclosure
products for these networks must be secure, durable and aesthetically pleasing
and often provide advanced heat dissipation characteristics required for active
electronics. The Company also manufactures products that are flush-to-grade and
buried, requiring environmental sealing and load-bearing capabilities. The
majority of the Company's products are constructed of thermoplastic and fitted
with metal frameworks, fasteners and locking mechanisms. The Company also
designs and manufactures a series of termination blocks, brackets and cable
management devices that are mounted inside its enclosure products. The Company
is recognized for its differentiated product designs and the functionality,
field performance and service life of its products as compared with alternative
products.
To support its complete system approach in the "curb to home infrastructure"
portion of broadband telecommunications networks, the Company acquired RMS
Electronics, Inc. RMS is a designer and distributor 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. Such products are
components of the complete systems approach and are typically used in the
Company's enclosure products.
In order to position itself as a full-line product supplier, the Company also
offers a variety of complementary products, including grade level boxes and
cable-in-conduit. These products are typically purchased by customers as part of
a system package and are sold by the Company through marketing arrangements with
original equipment manufacturers ("OEMs"). The Company seeks strategic alliances
with these OEMs that generally include technical information exchanges that are
used by the Company in the development of new products and enhancements to
existing designs. The Company has established additional relationships with
system integrators and innovative end users.
The Company currently markets 35 enclosure product families, with numerous
options that result in several thousand product configurations.
The primary functions of the Company's products designed for the CATV industry
are cable routing and management, equipment access, heat dissipation and
security. The Company believes that it offers the broadest line of enclosure
products for use in the CATV industry. In addition to being widely deployed by
CATV operators, these products are also now being approved for use by a number
of telephone companies that are adding fiber optic and broadband functionality
to their networks. The Company anticipates demands for the CATV product line to
result from continued construction of broadband networks and upgrades of
existing CATV networks to accommodate enhanced video services, internet access
via cable modems and wireless PCS transport.
3
The Company also specializes in the manufacture of products designed to meet
the needs of its local telephone company customers, including sealed plant
products. These products include a sealed chamber to provide environmental
protection for copper wires, coaxial cable and optical fibers that have been
exposed for purposes of splicing and termination. The Company's sealed plant
products feature a mechanical sealing system which, unlike many competitors'
products, does not require gels, compounds or heat shrink to create and maintain
the required seal. This system provides significant value to users in terms of
faster installations, repeat access and elimination of excessive components and
the need for special tools.
Historically, the Company's sealed plant products have been deployed in areas
characterized by severe flooding, moisture and corrosion problems. Recently,
some telephone companies have adopted a complete sealed plant strategy designed
to enhance the reliability of their networks, reduce maintenance costs and
extend the service life of their copper-based systems. In addition, management
expects that demand for sealed plant products may result from new transmission
technologies that enhance the capabilities and capacity of existing copper
networks, such as HDSL and ADSL, which support high-speed data, video and
internet access over existing copper wires. As a result of these technologies,
it is anticipated that network operators may seek to upgrade their copper wire
facilities in order to improve reliability and performance. The Company's sealed
plant products are well suited for such applications.
The Company continues to review new products to complement its existing
product line and marketing strengths. New product development initiatives being
studied by the Company include additional products for the CATV and local
telephone markets as well as new products for customers in industries outside of
the communications industry, such as the utility industry.
MARKETING AND SALES
The Company markets its products primarily through a direct sales force of 24
technically trained salespeople and over 28 independent sales distributors and
manufacturers representatives as of December 31, 1996. The Company's sales force
is based in North America and select international markets and is divided into
three groups covering domestic CATV customers, domestic telecommunications
customers and international customers. The Company employs an application-based,
system 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 assisted by the Company's
engineering and technical marketing specialists in designing these system
solutions.
The Company's direct sales force is supported by a sales/customer service
department that administers and schedules incoming orders, requests for product
enhancements and service inquiries. This department has locations in Temecula,
California, Canada and the United Kingdom, and maintains direct communications
with customers and the Company's field sales and operations personnel. As of
December 31, 1996, the Company employed eight people in its sales/customer
service department.
The sales force receives additional support from the Company's technical and
product marketing department. The field technical service personnel within this
department work closely with the 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. The product marketing
personnel within this department perform a variety of functions, including
product line management and general marketing services. These individuals also
provide the Company with strategic plans for product development, new market
access, acquisitions and strategic alliances and work closely with the Company's
sales, engineering and manufacturing departments to implement such strategic
plans. As of December 31, 1996, the Company employed ten people in its technical
and product marketing department.
The marketing department also promotes and positions the Company both
domestically and internationally by performing functions relating to public
relations, product literature, market research and advertising. The Company
participates regularly in industry trade shows and exhibits for the CATV and
local telephone markets.
4
MANUFACTURING OPERATIONS
The Company's products are manufactured at its facility in Temecula,
California. The Company's vertically integrated and modern manufacturing
processes enable 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 tailor its products to satisfy customer
demands, rapidly and efficiently produce large volumes of products, control
expenses and ensure product quality. Management considers the Company's
manufacturing expertise a significant competitive advantage, providing it with
the ability to satisfy the requirements of major customers with relatively short
lead-times and reduce backlog by promptly booking and shipping orders.
The Company's Temecula facility contains approximately 260,000 square feet of
manufacturing, warehouse and office space designed and constructed specifically
to the Company's requirements, including an adjacent 100,000 square foot
building completed in July 1996. The newly constructed building is intended to
enhance manufacturing efficiency, increase warehouse space and enable the
Company to increase manufacturing capacity as required. In the second quarter of
1997, the Company is expected to be awarded ISO 9000 certification, a worldwide
industry standards certification, with respect to its manufacturing facility.
Management has followed a long-term capacity plan, adding the equipment,
facilities and trained personnel required to support anticipated growth of the
Company's business. As a result, management believes the Company's manufacturing
facility is adequate to meet anticipated product demand for the foreseeable
future.
The Company owns its manufacturing equipment, which is generally state-of-the-
industry, and all manufacturing processes are performed by trained Company
personnel. The Company's broad range of manufacturing processes includes
injection molding, structural foam molding, rotational molding, metal
fabrication, rubber injection, transfer and compression molding, and termination
block fabrication. The Company has implemented several quality and process
assurance programs, including continuous monitoring of key processes and regular
product inspection and testing.
PRODUCT DEVELOPMENT AND ENGINEERING
The Company believes it was the first to design, manufacture and market
thermoplastic enclosure products for use in the communications industry on a
wide scale. Since the original introduction of its products, the Company has
continued to design all of its own products and develop core capabilities in
product engineering and development. As a result, in response to demands of the
communications industry for increasingly sophisticated enclosure products, the
Company has been able to develop a series of products with effective heat
dissipation qualities; a superior environmental sealing and protection system
that, unlike many competitors' products, does not require gels, compounds or
heat shrink to maintain the required seal; easy access for technicians through
circular covers that can be removed to fully expose the enclosed electronics;
compatibility with a variety of signal delivery network architectures; and
versatility to accommodate network growth through custom hardware and universal
mounting systems that adapt to a variety of new electronic hardware. Many of the
Company's thermoplastic enclosure products are now considered state-of-the-
industry, having received field testing and other approvals and standardization
certifications from major CATV and telephone company operators.
The Company's new product development philosophy is applications based and
customer driven, focusing on the complete design cycle from product concept
through tooling and high-volume manufacturing. A team comprised of engineering,
marketing, manufacturing and direct sales personnel work together to define,
develop and deliver complete system solutions to customers. The Company is
equipped to conduct many of its own product testing procedures for performance
qualification purposes, enabling it to accelerate the product development
process.
As of December 31, 1996, the Company employed 13 people in its product
development and engineering department. In each of 1994, 1995 and 1996, the
Company spent approximately $0.5 million 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 developed nations. During 1996, the Company shipped
products to more than 4,000 customer locations, and its five largest customers
accounted for 54.6% of total net sales. In 1996, the Company's five largest
customers (by sales volume) were, in the United States, Adelphia, Cox,
Continental Cablevision, TCI and Time Warner. In international markets, the
Company's five largest customers (by sales volume) were Cablenet (Canada),
Rogers Communications (Canada), Shaw Cable (Canada), Videotron (Canada), and New
Zealand Amp (New Zealand). Two customers, TCI and Time Warner, accounted for
14.9% and 17.3%, respectively, of the Company's net sales in 1996.
The Company's customers generally do not enter into long-term supply contracts
providing for future purchase commitments for the Company's products. Further,
the Company believes that many of its customers periodically review their supply
relationships and alter buying patterns based upon their current assessment of
the products and pricing available in the marketplace. This periodic review can
and does result in significant changes from fiscal period to fiscal period in
the level of purchases of the Company's products by specific customers.
INTELLECTUAL PROPERTY
Following 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, direct sales force, focus on
enclosure products, specialized engineering resources and vertically integrated
manufacturing operations, provide the Company with a competitive advantage.
Management believes the principal competitive factors in the communications
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 to these
pressures effectively with cost control through vertical integration utilizing
advanced manufacturing techniques, cost-effective product designs and material
selection and an aggressive procurement philosophy. In addition, 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. In connection with the deregulation of the telecommunications segment
and the related convergence occurring within the CATV and telecommunications
industries, it is uncertain whether and the extent to which such field testing
will continue to be required. While field testing can delay the introduction of
new products, it can also act as a competitive advantage in that it makes new
product introduction and sales by competitors more difficult.
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
attempts to develop and maintain multiple sources of supply for raw materials in
order to help ensure the availability and competitive pricing of these
materials.
6
Most plastic resins are purchased under annual and multi-year contracts to
help stabilize cost 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. All hot and cold rolled steels are either hot dipped galvanized or
zinc or cadmium electro-plated. The coating operations are conducted by local
outside processors.
In addition, in order to position itself as a full-line product supplier, the
Company also relies on certain 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, 1996, the Company employed 276 people (including 53
temporary employees), of whom 43 were in sales, 213 were in manufacturing
operations (including the 53 temporary employees) and 20 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 material business interruption as a result of labor disputes
within the past five years.
REGULATION
The communications 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, which 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 which are classified as hazardous or similar substances. 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 incurrence of
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, 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 for
personal injury actions) at properties it owns or utilizes in its operations,
even if the contamination was not caused by the Company's operations.
7
ITEM 2. PROPERTIES
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The Company occupies approximately 260,000 square feet of space in Temecula,
California, of which approximately 54%, 38% and 8% is used for manufacturing,
warehouse and office space, respectively. These facilities are leased from
William H. Channell, Sr., the Company's Chairman of the Board and Chief
Executive Officer. The lease term for these facilities extends through 2005, and
the Company has two five-year renewal options to extend the term to 2015. Rental
expense in 1997 under the Company's existing facilities in Temecula, California
is expected to be $1.1 million. The Company also leases an aggregate of
approximately 40,000 square feet of warehouse and regional sales office space in
North Carolina, Canada and the United Kingdom. The Company considers its current
facilities to be adequate for its operations.
ITEM 3. LEGAL PROCEEDINGS
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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 it's
business or on it's results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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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
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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) for the
third and fourth quarters of 1996. 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
The Company has not declared any dividends since termination of the S
corporation election in connection with its Initial Public Offering in July
1996. During the years ended December 31, 1994, 1995 and 1996, while an S
corporation, the Company declared dividends on its common stock in the amounts
of $3.8 million, $5.4 million and $14.2 million, respectively.
The Company currently anticipates it will retain all available funds to
finance its future growth and business expansion. The Company does not presently
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, 1996, the Company had 9,237,000 shares of its Common Stock
outstanding, held by 971 shareholders of record, which does not include
shareholders whose shares are held in securities position listings.
9
ITEM 6. SELECTED FINANCIAL DATA
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The following table sets forth financial data of the Company. The summary
financial data in the table is derived from the financial statements of the
Company. The data should be read in conjunction with the financial statements,
related notes and other financial information included therein (in thousands,
except per share data).
YEAR ENDED DECEMBER 31,
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1992 1993 1994 1995 1996
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OPERATING DATA:
Net sales.............................. $19,006 $23,713 $34,504 $40,972 $47,282
Cost of goods sold..................... 12,541 14,834 19,750 23,059 25,447
------- ------- ------- ------- -------
Gross profit........................... 6,465 8,879 14,754 17,913 21,835
Commission income (1).................. 591 686 904 1,098 985
------- ------- ------- ------- -------
7,056 9,565 15,658 19,011 22,820
Operating expenses
Selling............................. 3,061 3,767 4,952 5,600 6,559
General and administrative.......... 1,095 1,100 1,445 1,707 2,021
License fees(2)..................... 690 1,039 1,560 2,035 531
Research and development............ 80 486 518 498 531
------- ------- ------- ------- -------
4,926 6,392 8,475 9,840 9,642
------- ------- ------- ------- -------
Income from operations................. 2,130 3,173 7,183 9,171 13,178
Interest income (expense), net......... (240) (166) (156) (339) 291
------- ------- ------- ------- -------
Income before income taxes 1,890 3,007 7,027 8,832 13,469
Income taxes 124 69 429 349 2,359
------- ------- ------- ------- -------
Net income $ 1,766 $ 2,938 $ 6,598 $ 8,483 $11,110
======= ======= ======= ======= =======
Pro forma net income(3)................ $ 1,099 $ 1,816 $ 4,129 $ 5,377 $ 8,921
Pro forma net income per share(4)...... $0.70 $1.06
Pro forma weighted average shares
outstanding(4)..................... 7,695 8,403
OTHER DATA:
Gross margin(5)........................ 34.0% 37.4% 42.8% 43.7% 46.2%
Operating margin(6).................... 11.2 13.4 20.8 22.4 27.9
EBITDA(7).............................. $ 2,785 $ 3,949 $ 8,255 $10,583 $14,729
Capital expenditures................... 1,172 1,480 5,880 2,161 1,554
S Corporation dividends declared....... 556 1,048 3,764 5,427 14,157
Cash provided by (used in):
Operating activities................. 2,343 4,181 6,201 9,758 11,424
Investing activities................. (1,164) (1,475) (5,880) (2,161) (2,960)
Financing activities................. (877) (3,101) 398 (7,019) 9,351
ADJUSTED FINANCIAL DATA(8):
Net sales (as historically reported)... $19,006 $23,713 $34,504 $40,972 $47,282
Adjusted EBITDA(9)..................... 3,200 4,713 9,540 12,343 15,122
Adjusted income from operations........ 2,545 3,937 8,468 10,931 13,571
Adjusted operating margin(10).......... 13.4% 16.6% 24.5% 26.7% 28.7%
Adjusted net income.................... $ 1,349 $ 2,274 $ 4,899 $ 6,431 $ 8,179
Adjusted net income per share(11)...... 0.84 0.97
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1992 1993 1994 1995 1996
-------- -------- -------- -------- ---------
BALANCE SHEET DATA:
Current assets......................... $ 4,695 $ 5,068 $ 8,093 $ 8,502 $31,274
Total assets........................... 9,152 10,189 17,951 19,103 42,658
Long-term obligations
(including current maturities)........ 2,415 1,018 3,684 3,213 -
Stockholders' equity................... 4,785 6,881 9,417 12,473 37,422
10
NOTES TO SELECTED FINANCIAL DATA
(amounts in thousands, except per share data)
(1) Commission income represents 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 offers 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 the Channell Patents. Prior to the consummation of
the Initial Public Offering, these patents were sold to the Company, the
license fee arrangement 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 the 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.
(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. Upon
consummation of 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 7,695 pro
forma weighted average shares outstanding for 1995 and 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 leading designer, manufacturer and marketer of precision-
molded thermoplastic enclosures used by CATV operators and local telephone
companies worldwide. The Company believes it currently supplies a substantial
portion of the enclosure product requirements of a number of major CATV and
telephone company operators. The Company was incorporated on April 23, 1996 as
the successor to the Predecessor, which has been merged into the Company in
connection with the Initial Public Offering. All financial data contained herein
with respect to the Company include the financial data of the Predecessor.
Since 1990, the Company was an S corporation for federal and state income tax
purposes. During 1996, due to the Company's Initial Public Offering, the Company
changed in form from an S corporation to a C corporation. As an S corporation,
the Company's income, whether or not distributed, was taxed at the stockholder
level for federal income tax purposes. For California franchise tax purposes, S
corporations were taxed at 2.5% of taxable income in 1993 and 1.5% of taxable
income in 1994, 1995 and the first six months of 1996. During 1996, the top
federal tax rate for C corporations was 35% and the corporate tax rate in
California was 9.3%. As a result, the change in form affected the earnings and
the cash flows of the Company by increasing the level of federal and state
income tax. The pro forma provision for income taxes in the accompanying
statements of income reflects the income tax provision of the Company as
recorded in its income statement plus the additional tax on S Corporation income
at C Corporation rates.
Prior to the Initial Public Offering, the Company had obtained the exclusive
rights to certain patents owned by Mr. Channell, Sr. and paid him license fees
based on the sale of the patented products. In connection with the Initial
Public Offering, the Company purchased the Channell Patents and, accordingly,
the license fee arrangement between the Company and Mr. Channell, Sr. with
respect to such patents was terminated and, thereafter, no license fees were
paid to Mr. Channell, Sr. or any other party with respect to the Channell
Patents. In addition, any patents obtained in the future with respect to new
technology developed by Mr. Channell, Sr. will be owned by the Company. Prior to
the termination, a 10% license fee on the sale of certain products utilizing the
Channell Patents was payable to Mr. Channell, Sr. (See Item 13.) During 1993,
1994, 1995 and the first quarter of 1996, the license fees payable to Mr.
Channell, Sr. were $1.0 million, $1.6 million, $2.0 million and $0.5 million,
respectively. In connection with the consummation of the Initial Public
Offering, no license fees were incurred with respect to product sales subsequent
to the first quarter of 1996.
In connection with the Initial Public Offering, the annual base salary of Mr.
Channell, Sr. was increased from $225,000 to $500,000, and the annual base
salary of William H. Channell, Jr., the Company's President, was increased from
$350,000 to $500,000, which amounts do not include any bonuses that may be
payable to such executive officers. Upon consummation of the Initial Public
Offering, Mr. Channell, Jr. received options to acquire 100,000 shares of Common
Stock with an exercise price equal to the Initial Public Offering price per
share, which options will become exercisable in three equal annual installments
beginning on the first anniversary of the date of issuance. In addition, the
Company incurred additional rent expense in 1996 when compared to prior periods
due to an addition to its facilities and additional increases in compensation
expense in 1996 when compared with prior periods due to increased personnel,
customary wage increases and the implementation of certain management incentive
programs.
The Company's core business consists of enclosure product sales to the CATV
market, which comprised approximately 86% of the Company's total net sales
during 1994 and 1995, and 87% during 1996, with two customers, TCI and Time
Warner, accounting for 14.9% and 17.3%, respectively, of the Company's total net
sales during 1996. 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. In
particular, TCI, the Company's largest customer by sales volume in 1995 is
currently placing orders for enclosure products, including orders for the
Company's products, solely on an as-needed basis and is not currently placing
orders to replenish inventory stocking levels. TCI, the Company's largest
customer (by sales volume) in 1995, is currently conducting such a review. 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
12
expenditures and expenses in part based upon the expectation of future sales,
results in the Company's operating results being 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
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 receives a commission upon the
sale of such products. Pursuant to the agreements under which the Company
markets such products, during the terms thereof and for a period of two years
thereafter, each of 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 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 CATV market and international customers.
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,
--------------------------
1994 1995 1996
------ -------- ------
Net sales............................ 100.0% 100.0% 100.0%
Cost of goods sold................... 57.2 56.3 53.8
----- ------ -----
Gross profit......................... 42.8 43.7 46.2
Commission income.................... 2.6 2.7 2.1
----- ------ -----
45.4 46.4 48.3
Selling.............................. 14.4 13.7 13.9
General and administrative........... 4.2 4.2 4.3
License fees......................... 4.5 5.0 1.1
Research and development............. 1.5 1.2 1.1
----- ------ -----
Income from operations............... 20.8 22.3 27.9
Interest income (expense), net....... (0.4) (0.8) 0.6
----- ------ -----
Income before income taxes........... 20.4 21.5 28.5
Pro forma income taxes(1)............ 8.4 8.4 9.6
----- ------ -----
Pro forma net income(1).............. 12.0% 13.1% 18.9%
===== ====== =====
Adjusted income from operations(2)... 24.5% 26.7% 28.7%
- ---------
(1) Pro forma income taxes and pro forma net income have been determined giving
effect to the termination of the Company's S Corporation Status in July
1996. Actual income tax expense has been reflected for the last six months
of 1996. See note (3) to "Selected Financial Data".
(2) Adjusted income from operations has been determined giving effect to the
transactions described in notes (3) and (8) to "Selected Financial Data".
13
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1996 WITH THE YEAR ENDED DECEMBER 31,
1995
Net Sales. Net sales increased $6.3 million or 15.4% from $41.0 million in
1995 to $47.3 million in 1996. CATV net sales increased $5.7 million or 16.1%
from $35.4 million in 1995 to $41.1 million in 1996 as a result of new account
development during the period and a continued moderate growth from rebuild and
new network construction projects. Telecommunications net sales increased $0.6
million or 10.7% from $5.6 million in 1995 to $6.2 million in 1996. This sales
increase was due to the introduction of new sealed products during the period
and an increased activity in conventional copper-based telephone products.
Domestic net sales increased $6.8 million or 19.5% from $34.9 million in 1995
to $41.7 million in 1996. This increase is a result of the items discussed
above, in the CATV and telecommunications sections. International net sales
decreased $0.5 million or 8.2% from $6.1 million in 1995 to $5.6 million in
1996, mainly due to a slowdown in broadband network construction by certain
Pacific Rim and European customers.
Gross Profit. Gross profit increased $3.9 million or 21.8% from $17.9 million
in 1995 to $21.8 million in 1996. Gross margin increased from 43.7% in 1995 to
46.2% in 1996. The improvement in gross profit and gross margin was primarily
due to an increase in the sales mix of products with a higher margin as well as
an overall increase in sales volume, which resulted in higher operating leverage
(i.e., a higher percentage of sales relative to fixed costs).
Commission Income. Commission income decreased $0.1 million or 9.1% from $1.1
million in 1995 to $1.0 million in 1996, due to lower sales volume of cable-in-
conduit products.
Selling. Selling expense increased $1.0 million or 17.9% from $5.6 million in
1995 to $6.6 million in 1996, primarily as a result of increased payroll and
related expense in the amount of $0.8 million in connection with expanded
staffing to support increased sales and marketing activities, and increased
outbound freight expense in the amount of $0.3 million resulting from higher net
sales during the 1996 period. As a percentage of net sales, selling expense
increased from 13.7% in 1995 to 13.9% in 1996.
General and Administrative. General and administrative expenses increased
$0.3 million or 17.7% from $1.7 million in 1995 to $2.0 million in 1996,
primarily as a result of increased payroll in the amount of $0.4 million due to
increased staffing in the administrative and information systems departments.
Legal, auditing and professional services increased $0.2 million as a result of
becoming a publicly traded company. As a percentage of net sales, general and
administrative expense was 4.3% during 1995 and 1996.
License Fees. License fees declined $1.5 million or 75.0% from $2.0 million
in 1995 to $0.5 million in 1996 as a result of the termination of the Channell
patents during 1996.
Research and Development. Research and development expenses were $0.5 million
in both 1995 and 1996, but declined as a percentage of net sales from 1.2% in
1995 to 1.1% in 1996. Research and development expense is expected to be higher
in the future in light of the Company's plans for new product development.
Income from Operations. As a result of the items discussed above, income from
operations increased $4.0 million or 43.5% from $9.2 million in 1995 to $13.2
million in 1996 and operating margin increased from 22.3% to 27.9%.
Income Taxes. Income taxes increased $2.1 million from $0.3 million in 1995
to $2.4 million in 1996 due to the termination of the S corporation status at
the time of the Initial Public Offering. After the Initial Public Offering, the
Company pays federal and state income taxes as a regular corporation, offset by
the recording of deferred tax assets.
14
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1994 WITH THE YEAR ENDED DECEMBER 31,
1995
Net Sales. Net sales increased $6.5 million or 18.7% from $34.5 million in
1994 to $41.0 million in 1995. CATV net sales increased $5.7 million or 19.2%
from $29.7 million in 1994 to $35.4 million in 1995, principally due to
continued demand for CATV outside plant products for network rebuild
construction, upgrades and expansion, as well as new product introductions to
meet higher performance requirements of certain CATV customers.
Telecommunications net sales increased $0.8 million or 16.7% from $4.8 million
in 1994 to $5.6 million in 1995, due to the completion of field testing of
products for sale to certain telecommunications customers permitting sales of
products in quantity to those customers. Telecommunications net sales also
benefited from the trend toward convergence of the CATV and telecommunications
markets, as local telephone company customers increased services relating to
video and data transmission and internet access.
Domestic net sales increased $5.0 million or 16.5% from $29.9 million in 1994
to $34.9 million in 1995, principally due to the factors affecting CATV sales
summarized above. International net sales increased $1.5 million or 33.2% from
$4.6 million in 1994 to $6.1 million in 1995, mainly due to new CATV network
construction by certain Pacific Rim and European customers.
Gross Profit. Gross profit increased $3.1 million or 21.4% from $14.8 million
in 1994 to $17.9 million in 1995. Gross margin increased from 42.8% in 1994 to
43.7% in 1995. The Company's improvement in gross profit and gross margin was
primarily due to a higher margin mix of products sold as well as an overall
increase in sales volume, which resulted in higher operating leverage.
Commission Income. Commission income increased $0.2 million or 21.5% from $0.9
million in 1994 to $1.1 million in 1995, due to higher sales of cable-in-conduit
products.
Selling. Selling expense increased $0.6 million or 13.1% from $5.0 million in
1994 to $5.6 million in 1995, primarily as a result of higher payroll and
related expense in the amount of $0.4 million and higher marketing related
expense in the amount of $0.1 million. These increases were due primarily to
increased sales and marketing efforts during the 1995 period. As a percentage of
net sales, selling expense declined from 14.4% in 1994 to 13.7% in 1995 as a
result of spreading certain fixed selling expenses over a larger sales base.
General and Administrative. General and administrative expenses increased $0.3
million or 18.1% from $1.4 million in 1994 to $1.7 million in 1995, primarily as
a result of higher compensation expense in connection with staff increases. As a
percentage of net sales, general and administrative expense was 4.2% during 1994
and 1995.
License Fees. License fees increased $0.4 million or 30.4% from $1.6 million
in 1994 to $2.0 million in 1995 as a result of an increase in sales of products
subject to patent license fee arrangements relating to the Channell Patents.
Research and Development. Research and development expenses were $0.5 million
in both 1994 and 1995, but declined as a percentage of net sales from 1.5% in
1994 to 1.2% in 1995.
Income From Operations. As a result of the items discussed above, income from
operations increased $2.0 million or 27.7% from $7.2 million in 1994 to $9.2
million in 1995, and operating margin increased from 20.8% to 22.3%. Adjusted
income from operations increased $2.5 million or 29.1% from $8.5 million in 1994
to $10.9 million in 1995. As a percentage of net sales, adjusted income from
operations increased from 24.5% in 1994 to 26.7% in 1995.
15
LIQUIDITY AND CAPITAL RESOURCES
Upon the termination of the S corporation status and prior to the Initial
Public Offering in July 1996, the Company declared a dividend to its then
existing stockholders representing all of the Company's S corporation
"accumulated adjustment account" remaining at the time. The S corporation
distribution totalled $11.7 million and was paid out of the net proceeds of the
Initial Public Offering.
Prior to the Initial Public Offering, the Company's Chairman of the Board and
Chief Executive Officer owned six patents utilized by the Company in its
business (the "Channell Patents"), and was entitled to receive license fees
based upon the sale of certain products embodying the Channell Patents. Prior
to the Initial Public Offering, the Channell Patents were sold to the Company
for the aggregate consideration of $3.1 million, which was initially funded
through borrowings under the Company's bank line and then repaid from the net
proceeds of the Initial Public Offering.
Upon the closing of the Initial Public Offering, the Company used $2.7 million
from the net proceeds to repay the Company's bank indebtedness.
Upon the closing of the Initial Public Offering in July 1996 and the exercise
of the underwriter's over-allotment in August 1996, the Company received net
proceeds from the issuance of stock of $30.6 million. As of December 31, 1996,
the Company has invested $20.2 million, which includes the remaining proceeds
from the Initial Public Offering, in marketable securities and cash equivalents.
Interest income earned on these securities for the year ended December 31, 1996
was $0.5 million.
Net cash provided by operating activities was $9.8 million and $11.4 million
in 1995 and 1996, respectively. Net cash used in financing activities was $7.0
million in 1995 and net cash provided by financing activities was $9.4 million
in 1996. Net cash used in investing activities was $2.2 million and $12.9
million in 1995 and 1996, respectively. The acquisition of $11.4 million in
short-term securities was included in investing activities for the year ended
December 31, 1996.
Accounts receivable increased from $4.1 million for the year ended December
31, 1995 to $6.7 million for the year ended December 31, 1996, as a result of
higher sales during the fourth quarter of 1996 as compared to the same period in
1995.
The Company made capital expenditures of $2.2 million and $1.6 million in 1995
and 1996, respectively, and anticipates increased capital spending for product
tooling, test equipment and computer hardware and software as it implements its
new product development plans. The Company's material commitments consist of a
capital lease for certain computer equipment in connection with the Company's
new management information system. Such lease will require aggregate payments
of approximately $0.6 million through December 1999. The Company also leases
its manufacturing and warehouse facility in Temecula, California consisting of
two buildings totalling approximately 260,000 square feet which require annual
lease payments of approximately $1.1 million.
The Company currently maintains a revolving credit facility (as amended to
date, the "Revolving Credit Facility") with the Bank of America National Trust
and Savings Association ("Bank of America"), consisting of (i) a $3.5 million
working capital revolving line of credit, which had no outstanding balance at
December 31, 1996, and (ii) a $4.8 million equipment revolving line of credit
and a standby letter of credit facility, which had no outstanding balance at
December 31, 1996. Loans under the working capital line bear interest at the
Bank of America's reference rate and mature on May 1, 1997, while loans under
the equipment line bear interest at the Bank of America's reference rate, plus
0.25% and are repayable in sixty equal monthly installments of principal and
interest commencing in the first month after issuance of each advance.
Availability of advances under the Revolving Credit Facility expires on May 1,
1997. The Revolving Credit Facility contains various covenants that are
customary in agreements of this nature, including certain financial ratios and
covenants, and are collateralized by the equipment financed by the Bank of
America. Under certain circumstances, covenants contained in such facilities
may limit the Company's ability to pay dividends.
The Company believes that income from operations, the remaining proceeds from
the Initial Public Offering and the Revolving Credit Facilities will be
sufficient to fund its capital expenditures and working capital requirements
through 1997.
16
FORWARD-LOOKING STATEMENTS
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. Investors are
cautioned that all forward-looking statements concerning the Company and its
markets involve risks and uncertainties including, without limitation, risks
related to the Company's ability to continue to develop new products to meet the
needs of its CATV and telecommunications customers, the reliance of the Company
on certain large customers in both CATV and telecommunications, the impact of
ongoing regulatory developments affecting the CATV and telecommunications
industries, as well as other factors. Investors are directed to the Risk Factors
section and other information contained in the Company's filings with the
Securities and Exchange Commission, including the Company's Registration
Statement on Form S-1 filed in 1996, as well as more recent filings, for a more
complete description of the risks and uncertainties relating to the Company's
business.
SELECTED QUARTERLY FINANCIAL DATA
Set forth below is certain unaudited quarterly financial information. 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 included elsewhere herein.
YEAR ENDED YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1996
------------------------------------------ ------------------------------------------
(amounts in thousands) (amounts in thousands)
1st 2nd 3rd 4th 1st 2nd 3rd 4th
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ---------- --------- ------- ------- ---------- --------- -------
Net sales.............. $9,225 $11,784 $10,758 $9,205 $10,279 $12,961 $11,954 $12,088
Gross profit........... 3,738 5,387 4,534 4,254 4,541 5,986 5,531 5,777
Income from
operations............. 1,633 3,005 2,577 1,956 2,189 3,814 3,802 3,373
Income before income
taxes.................. 1,543 2,887 2,486 1,916 2,124 3,751 3,994 3,600
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
Financial statements of Channell Commercial Corporation are as follows:
Report of Independent Certified Public Accountants............................................. F-1
Balance Sheets as of December 31, 1995 and December 31, 1996................................... F-2
Statements of Income for the years ended December 31, 1994, December 31, 1995,
and December 31, 1996....................................................................... F-3
Statements of Stockholders' Equity for the years ended December 31, 1994,
December 31, 1995 and December 31, 1996..................................................... F-4
Statements of Cash Flows for the years ended December 31, 1994, December 31, 1995,
and December 31, 1996....................................................................... F-5
Notes to Financial Statements.................................................................. F-6
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.
17
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, 1996.
NAME AGE POSITIONS
---- --- ---------
William H. Channell, Sr... 68 Chairman of the Board and
Chief Executive Officer
William H. Channell, Jr... 39 President and Director
Gary W. Baker............. 53 Chief Financial Officer
Andrew M. Zogby........... 36 Vice President, Marketing
Edward J. Burke........... 41 Vice President, Engineering
Dale C. Wooding........... 46 Vice President, Manufacturing
John B. Kaiser............ 44 Vice President, Broadband Sales
Gary M. Napolitano........ 41 Vice President, General Manager RMS
Jacqueline M. Channell.... 65 Secretary and Director
Eugene R. Schutt, Jr...... 43 Director
Richard A. Cude........... 63 Director
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. In 1996, Arthur Addis resigned as a member of the board.
The Company is currently evaluating other director candidates and anticipates
adding two directors to the board in the near future.
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 initial term as a director expires in 1999.
William H. Channell, Jr. has been President 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 initial term as a director expires in 1997.
Gary W. Baker has been the Company's Chief Financial Officer since 1985. From
1983 to 1985, Mr. Baker was the Corporate Controller of Symbolics, Inc., a
publicly traded manufacturer of computer products.
Andrew M. Zogby has been the Company's Vice President, 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.
18
Edward J. Burke has been the Company's Vice President, 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.
Dale C. Wooding has been the Company's Vice President, Manufacturing since May
1996 and has served in various similar capacities with the Company since 1985.
Mr. Wooding has held various positions in the manufacturing management field
since 1976.
John B. Kaiser has been the Company's Vice President, Broadband Sales since
May, 1996. He held the position of Director of Marketing for the Company from
1987 to 1991. Between 1991 and his return to the Company, Mr. Kaiser held the
position of District Manager, Southern California, for the General Polymers
Division of Ashland Chemical, a thermoplastics distributor, where his
responsibilities included general management of district operations, including
sales, warehousing, procurement and logistics.
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
1998.
Eugene R. Schutt, Jr. has been a Director of the Company since July 1996. Mr.
Schutt's initial term expires in 1999. Since January 1992, Mr. Schutt has been
the President of Avco International, a division of Avco Financial Services,
Inc., an international financial services company. From 1984 to 1992, he served
as President of Pratt Industries, Inc., a manufacturer of paper and related
products.
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's initial term as director expires in 1997.
In January 1997, in connection with the acquisition of RMS Electronics, Inc.,
Mr. Gary M. Napolitano joined the Company as a Vice President and General
Manager of the RMS division. Mr. Napolitano was President of RMS Electronics,
Inc. for the past five years.
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 will 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. DISCLOSURE
Information required by Item 405 of Regulation S-K is incorporated by
reference to the Company's Proxy Statement relating to its 1997 annual meeting
of stockholders.
19
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, 1996 (collectively, the "Named Officers").
LONG-TERM COMPENSATION
--------------------------------------------------------------------------------------------------
AWARDS PAYOUTS
------------------------------------------- -------------
SECURITIES
OTHER ANNUAL RESTRICTED UNDERLYING ALL OTHER
NAME AND POSITIONS ANNUAL COMPENSATION COMPENSATION STOCK OPTIONS/ LTIP COMPENSATION
HELD WITH THE COMPANY SALARY($) $BONUS($) ($)(1) AWARDS($) $SARS(#) PAYOUTS($) ($)(2)
--------------------- -------- -------- ------------ --------- ---------- ---------- ------------
William H. Channell, Sr......
Chairman of the Board and
Chief Executive Officer $362,500 $ - $ - $ - $ - $ - $4,000
William H. Channell, Jr......
President 500,000 - - - 100,000 - 4,000
Gary W. Baker................
Chief Financial Officer 135,000 64,350 - - 18,000 - 4,000
Andrew M. Zogby..............
Vice President, Marketing 118,269 58,658 167,092(3) - 18,000 - 4,000
John B. Kaiser...............
Vice President, Broadband
Sales 113,747 56,925 37,000(3) - 18,000 - 4,000
(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) Amounts include payments to the Company's Profit Sharing Plan.
(3) Messrs. Kaiser and Zogby commenced employment with the Company during 1996
and, as part of their compensation packages for 1996, they earned an initial
bonus. These bonuses were a one-time incentive for these employees to join
the Company and it is not anticipated that such amounts will be paid in the
future. (See Employment Contracts)
(4) As an incentive for continued services, the Company granted a cash bonus of
$200,000 to Mr. Baker, which bonus will be earned and payable in three equal
installments on each of December 31, 1997, 1998, and 1999, provided Mr.
Baker remains employed by the Company and subject to continued payment in
the event of his death.
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"). A maximum of 750,000 shares of
Common Stock have been reserved for issuance under the Stock Plan. The Company
granted "non-qualified" options to acquire 512,700 shares of Common Stock to 92
of the Company's employees and directors (including 100,000 stock options being
issued to William H. Channell, Jr., the Company's President) at the time of the
Initial Public Offering with an exercise price equal to the public offering
price. These options will vest at a rate of 33 1/3% per year beginning on the
first anniversary of the date of issuance and will 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
20
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 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 $100,000.
Upon exercise of any option, the purchase price must generally be paid in full
either in cash or by certified or cashier's check. However, in the discretion of
the Compensation Committee, the terms of a stock option grant may permit payment
of the purchase price by means of (i) cancellation of indebtedness owed by the
Company, (ii) delivery of shares of Common Stock already owned by the optionee
(valued at fair market value as of the date of exercise), (iii) delivery of a
promissory note secured by the shares issued, (iv) delivery of a portion of the
shares issuable upon exercise (i.e., exercise for the "spread" on the option
payable in shares), or (v) any combination of the foregoing or any other means
permitted by the Compensation Committee.
Any grants of Restricted Stock will be made pursuant to Restricted Stock
Agreements, which will provide for vesting of shares at a rate to be determined
by the Compensation Committee with respect to each grant of Restricted Stock.
Until vested, shares of Restricted Stock are generally non-transferable and are
forfeited upon termination of employment.
OPTIONS/SAR GRANTS TABLE
The following table sets forth the stock options granted to the named officers
for the year ended December 31, 1996.
POTENTIAL
% OF TOTAL REALIZED
NUMBER OF OPTIONS/ VALUE AT
SECURITIES SARS ASSUMED ANNUAL
UNDERLYING GRANTED TO EXERCISE RATES OF STOCK PRICE
OPTIONS/ EMPLOYEES ON BASE APPRECIATION OF
SARS IN FISCAL PRICE EXPIRATION OPTIONTERM
NAME GRANTED YEAR 1996 ($/SH) DATE 5% 10%
---- ------- --------- ---- ---------- ------ ----
William H. Channell, Sr. - - $ - - $ - $ -
William H. Channell, Jr. 100,000 19.5% $11.00 July 2006 692,000 1,752,000
Gary W. Baker 18,000 3.5% $11.00 July 2006 124,560 315,360
Andrew M. Zogby 18,000 3.5% $11.00 July 2006 124,560 315,360
John B. Kaiser 18,000 3.5% $11.00 July 2006 124,560 315,360
PROFIT SHARING AND SAVINGS PLANS
The Company maintains a qualified Profit Sharing Plan. Any employee who has
completed two years of employment with the Company is eligible to participate in
such plan. A participating employee is fully vested at all times in his or her
account, including any interest credited to the account. However, a
participating employee may not withdraw all of any portion of his or her account
prior to the date that he or she either (i) incurs total and permanent
disability or (ii) terminates employment with the Company. Annual contributions
by the Company to the Profit Sharing Plan are discretionary and do not exceed
the amount allowable for federal income tax purposes.
21
The Company also maintains a qualified "savings plan" pursuant to Section
401(k) of the Code. This plan allows any employee who has completed three months
of employment with the Company to contribute each pay period up to 15% of his or
her earnings (but not more than $9,500 annually) for investment in annuity
contracts and mutual funds. A participating employee is fully vested at all
times in his or her account, including any interest credited to the account.
However, a participating employee may not withdraw all of any portion of his or
her account prior to the date that he or she either (i) incurs total and
permanent disability or (ii) terminates employment with the Company. The Company
is under no obligation to make, and has not made, any contributions on behalf of
employees participating in this plan.
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 of the Company, respectively.
For their service, each of Messrs. Channell, Sr. and Channell, Jr. is entitled
to receive an annual salary of $500,000, subject to cost of living increases.
In addition, each executive is entitled to participate in the Incentive Stock
Plan, the Profit Sharing and Savings Plans 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. 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.
During 1996, the Company entered into employment agreements with Mr. Andrew
Zogby and Mr. John Kaiser engaging them as Vice President, Marketing and Vice
President, Broadband Sales, respectively. Each are entitled to receive benefits
in accordance with the Company's customary practices for senior executive
officers and to participate in the Incentive Stock Plan, the Profit Sharing and
Savings Plans and the Incentive Compensation Plan.
In the case of Mr. Zogby, he received a one time recruitment and relocation
bonus of $167,092 and was reimbursed for all relocation and house sale costs.
The agreement provides that should Mr. Zogby leave the Company for any reason,
other than an illegal act on his part involving the Company, within the first
twenty four months of employment, the Company would continue his base salary and
medical benefits for one year or until he accepts another position, whichever is
earlier. Under certain circumstances, if he were to leave the Company in the
first thirty six months of employment, Mr. Zogby would be required to reimburse
the Company for his relocation and house sale costs and for $92,592 of his
recruitment and relocation bonus.
In the case of Mr. Kaiser, he received a one time recruitment and relocation
bonus of $37,000 and was reimbursed for all relocation and house sale costs. The
agreement provides that should Mr. Kaiser leave the Company for any reason,
other than an illegal act on his part involving the Company, within the first
thirty months of employment, the Company would continue his base salary and
medical benefits for one year or until he accepts another position, whichever is
earlier.
22
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. 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. This committee is composed of
Mr. William H. Channell, Sr., Mr. Eugene R. Schutt, Jr., and Mr. Richard A.
Cude. 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.
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, 1996
with the performance of the NASDAQ market, the S & P Industrials and a similar
Industry Index for the same period.
CHANNELL COMMERCIAL CORPORATION
COMPARISOM OF CUMULATIVE TOTAL RETURNS
ASSUMES DIVIDENTS, IF ANY ARE REINVESTED
DATE CHNL S&P INDUSTRIAL NASDAQ INDUSTRY INDEX
---- ---- -------------- ------ --------------
7/02/96 100.000 100.000 100.000 100.000
12/31/96 99.000 108.810 108.385 86.843
23
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).
Name and Address Amount and Nature of Percent
of Beneficial Owner Beneficial Ownership of Class
------------------- -------------------- --------
William H. Channell Sr. and 3,420,830 37.0%
Jacqueline M. Channell, as
co-trustees of the Channell
Family Trust
26040 Ynez Road
Temecula, CA 92591-9022
William H. Channell, Jr. 1,534,250 16.6%
26040 Ynez Road
Temecula, CA 92591-9022
Dresdner Bank AG 923,600 10.0%
Jurgen - Ponto - Platz 1
60301 Frankfurt, Germany
Carrie S. Rouveyrol 490,960 5.3%
400 South Madison Avenue
Pasadena, CA 91107
The Taylor Family Trust 490,960 5.3%
1450 Ravenswood Lane
Riverside, CA 92506
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth certain information, as of March 31, 1997,
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 Percent
Beneficial Ownership of Class
-------------------- --------
William H. Channell, Sr. 3,420,830 37.0%
William H. Channell, Jr. 1,534,250 16.6%
Gary W. Baker 400 -
Andrew M. Zogby 700 -
Edward J. Burke - -
Dale C. Wooding 300 -
John B. Kaiser - -
Gary M. Napolitano - -
Jacqueline M. Channell - -
Eugene R. Schutt, Jr. 1,000 -
Richard A. Cude - -
All present directors and executive officers
as a group (11 in number) 4,957,480 shares 53.6%
24
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
The Company has two leases for approximately 260,000 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 monthly rental
payment is $54,182, and the lease provides for annual cost of living increases.
For the 1993-1996 period, the lease was amended to waive the cost of living
increases. Additionally, an adjacent 100,000 square foot building was
constructed and completed in 1996. In 1996, the Company advanced $3,119 to Mr.
Channell, Sr. for the construction of this building. The advances were repaid in
full as of December 31, 1996. Subsequent to December 31, 1996, the Company
guaranteed debt of Mr. Channell, Sr. of approximately $2,700 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,
requiring monthly rental payments of $35,000. 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.
Prior to the Initial Public Offering, Mr. Channell, Sr. received from the
Company a 10% license fee on the sale of certain products utilizing the Channell
Patents. For 1994, 1995 and 1996, the expense for these license fees was $1.6
million, $2.0 million and $0.5 million, respectively. Prior to the consummation
of the Initial Public Offering, the Channell Patents were sold to the Company,
the license fee arrangement between the Company and Mr. Channell, Sr. was
terminated in April 1996, thereafter, no license fees are be paid to Mr.
Channell, Sr. or any other person with respect to the Channell Patents.
Prior to the consummation of the Initial Public Offering, the Company
maintained and paid the premiums with respect to a $1.5 million whole life
insurance policy for Mr. Channell, Sr., under which the Company was named as the
beneficiary. In connection with the Initial Public Offering, this policy was
transferred to Mr. Channell, Sr. in consideration of the payment by Mr.
Channell, Sr. to the Company of an amount equal to the estimated $0.3 million
cash surrender value of this policy as of the closing of the Initial Public
Offering, and the beneficiary under this policy was redesignated as Mr.
Channell, Sr.'s wife, Jacqueline M. Channell. The Company continues to pay a
portion of the premiums with respect to this policy during Mr. Channell, Sr.'s
lifetime.
During 1994, Mr. Channell, Sr. made a non-interest bearing loan of $0.1
million to the Company, which loan was repaid in full as of March 31, 1996.
The Company engaged Arthur Addis & Associates, the President of which is
Arthur L. Addis, a former director of the Company, to provide management
consulting services to the Company. For these services, the Company paid this
firm a fee of $92,000, $60,000, and $55,000 in 1994, 1995 and 1996,
respectively. The Company believes that the fees paid to Arthur Addis &
Associates were fair and reasonable to the Company.
25
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) Financial Statements
See index included in Part II, Item 8.
(2) 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 Business Loan Agreement dated as of January 21, 1994 between the
Company and Bank of America National Trust and Savings Association, as amended ("Bank of America") (1)
10.5 The Company's Profit Sharing Plan (1)
10.6 Agreement dated as of September 30, 1982 between the Company and Integral Corporation, as amended (1)
10.7 Telephone Sales Agreement dated as of January 23, 1991 between the Company and Integral Corporation (1)
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)
10.13 Lease dated May 17, 1994 between the Company and the Z. Paul Akian and Sonia Akian Family Trust (1)
10.14 Lease dated March 1, 1994 between the Company and Allstate Life Insurance Company (1)
10.15 Lease dated November 2, 1989 between the Company and Meadowvale Court Property Management Ltd.,
as amended (1)
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 (1)
10.20 Letter agreement regarding employment, Andrew M. Zogby (2)
10.21 Letter agreement regarding employment, John B. Kaiser (2)
11 Computation of Proforma Income per share (2)
27 Financial Data Schedule (2)
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended December 31,
1996.
______________
(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) Filed herewith.
26
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Channell Commercial Corporation
We have audited the accompanying balance sheets of Channell Commercial
Corporation as of December 31, 1995 and 1996, and the related statements of
income, stockholders' equity, and cash flows for each of the three years in the
period ended December 31, 1996. 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 generally accepted auditing
standards. 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 financial position of Channell Commercial Corporation
as of December 31, 1995 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
Los Angeles, California
January 30, 1997
F-1
CHANNELL COMMERCIAL CORPORATION
BALANCE SHEETS
DECEMBER 31,
(amounts in thousands, except per share data)
1995 1996
------ -------
ASSETS
CURRENT ASSETS
Cash.................................. $ 1,375 $ 9,190
Investments........................... -- 11,406
Accounts receivable................... 4,122 6,685
Inventories........................... 2,609 2,908
Deferred income taxes................. -- 321
Prepaid expenses...................... 396 764
------- -------
Total current assets............... 8,502 31,274
PROPERTY AND EQUIPMENT at cost, net..... 10,062 10,608
DEFERRED INCOME TAXES................... -- 559
OTHER ASSETS............................ 539 217
------- -------
$19,103 $42,658
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable...................... $ 1,251 $ 2,048
Current maturities of capital lease -- 135
obligations..........................
Accrued expenses...................... 972 1,167
Accrued license fees--related party... 471 --
Current maturities of long-term 860 --
obligations..........................
Distributions payable to stockholders. 674 --
Income taxes payable.................. 49 1,548
------- -------
Total current liabilities.......... 4,277 4,898
LONG-TERM OBLIGATIONS................... 2,353 --
CAPITAL LEASE OBLIGATIONS............... -- 338
COMMITMENTS -- --
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 and --
outstanding--6,137 shares and
9,237 shares at December 31, 1995
and 1996............................. 61 92
Additional paid-in capital............ 26 27,991
Retained earnings..................... 12,386 9,339
------- -------
Total stockholders' equity......... 12,473 37,422
------- -------
$19,103 $42,658
======= =======
The accompanying notes are an integral part of these financial statements.
F-2
CHANNELL COMMERCIAL CORPORATION
STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
(amounts in thousands, except per share data)
1994 1995 1996
------- ------- -------
Net sales............................... $34,504 $40,972 $47,282
Cost of goods sold...................... 19,750 23,059 25,447
------- ------- -------
Gross profit....................... 14,754 17,913 21,835
Commission income....................... 904 1,098 985
15,658 19,011 22,820
------- ------- -------
Operating expenses
Selling................................ 4,952 5,600 6,559
General and administrative............. 1,445 1,707 2,021
License fees--related party............ 1,560 2,035 531
Research and development............... 518 498 531
------- ------- -------
8,475 9,840 9,642
------- ------- -------
Income from operations............. 7,183 9,171 13,178
Interest income (expense), net.......... (156) (339) 291
------- ------- -------
Income before income taxes......... 7,027 8,832 13,469
Income taxes............................ 429 349 2,359
------- ------- -------
Net income......................... $ 6,598 $ 8,483 $11,110
======= ======= =======
PRO FORMA INFORMATION (UNAUDITED):
Historical income before income taxes.. $ 8,832 $13,469
Pro forma income taxes................. 3,455 4,548
------- -------
Pro forma net income................... $ 5,377 $ 8,921
======= =======
Pro forma net income per share......... $ 0.70 $ 1.06
======= =======
Pro forma weighted average shares
outstanding........................... 7,695 8,403
======= =======
The accompanying notes are an integral part of these financial statements.
CHANNELL COMMERCIAL CORPORATION
STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(amounts in thousands, except per share data)
COMMON STOCK ADDITIONAL TOTAL
------------ PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------ ------- -------- -------------
Balance, January 1, 1994................ 6,137 $61 $ 26 $ 6,794 $ 6,881
Net income for the year................. -- -- -- 6,598 6,598
Dividends declared ($0.61 per share).... -- -- -- (3,764) (3,764)
Liquidating dividend - Canadian Corporation -- -- -- (298) (298)
----- --- ------- -------- -------
Balance, December 31, 1994.............. 6,137 61 26 9,330 9,417
Net income for the year................. -- -- -- 8,483 8,483
Dividends declared ($0.88 per share).... -- -- -- (5,427) (5,427)
----- --- ------- -------- -------
Balance, December 31, 1995.............. 6,137 61 26 12,386 12,473
Proceeds from initial public offering of
common stock, net of expenses.......... 3,100 31 30,534 -- 30,565
Reorganization distribution............. -- -- -- (11,665) (11,665)
Dividends declared ($0.41 per share) -- -- -- (2,492) (2,492)
Acquisition of patents from stockholders -- -- (3,100) -- (3,100)
Contribution of accrued license fees
previously owed to stockholder......... -- -- 531 -- 531
Net income for the year................. -- -- -- 11,110 11,110
----- --- ------- -------- -------
Balance, December 31, 1996.............. 9,237 $92 $27,991 $ 9,339 $37,422
===== === ======= ======== =======
The accompanying notes are an integral part of these financial statements.
F-4
CHANNELL COMMERCIAL CORPORATION
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
(amounts in thousands)
1994 1995 1996
---------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................ $ 6,598 $ 8,483 $ 11,110
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation and amortization...... 1,072 1,412 1,551
Deferred income taxes.............. -- -- (880)
Disposal of unproductive assets.... 80 -- --
(Increase) decrease in assets:
Accounts receivable................ (1,527) 236 (2,563)
Inventories........................ (709) (4) (299)
Prepaid expenses................... (70) (63) (368)
Other.............................. (8) 6 322
Increase (decrease) in liabilities:
Accounts payable................... 25 (52) 797
Accrued expenses................... 436 3 255
Income taxes payable............... 304 (263) 1,499
------- ------- --------
Net cash provided by operating
activities............................. 6,201 9,758 11,424
------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment.. (5,880) (2,161) (1,554)
Advances to stockholder for building
construction.......................... -- -- (3,119)
Collection of advances to stockholder.. -- -- 3,119
Purchases of investments............... -- -- (11,406)
------- ------- --------
Net cash used in investing activities... (5,880) (2,161) (12,960)
------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Liquidating dividend--Canadian
corporation........................... (298) -- --
Repayment of debt...................... (614) (877) (3,213)
Repayment of obligations under capital
lease................................. -- -- (70)
Proceeds from initial public offering.. -- -- 30,565
Acquisition of patents from
stockholders.......................... -- -- (3,100)
Dividends paid......................... (1,969) (6,547) (3,166)
Reorganization distribution............ -- -- (11,665)
Proceeds from issuance of long-term
debt.................................. 3,279 405 --
------- ------- --------
Net cash provided by (used in)
financing activities................... 398 (7,019) 9,351
------- ------- --------
Increase in cash........................ 719 578 7,815
Cash, beginning of year................. 78 797 1,375
------- ------- --------
Cash, end of year....................... $ 797 $ 1,375 $ 9,190
======= ======= ========
Cash paid during the year for:
Interest............................... $ 191 $ 351 $ 185
======= ======= ========
Income taxes........................... $ 100 $ 957 $ 1,967
======= ======= ========
Noncash investing and financing
activities:
Assets acquired under capital lease.... $ -- $ -- $ 543
======= ======= ========
Contribution of accrued license fees
to paid-in capital.................... $ -- $ -- $ 531
======= ======= ========
The accompanying notes are an integral part of these financial statements.
F-5
CHANNELL COMMERCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996
(amounts in thousands, except per share data)
NOTE A--DESCRIPTION OF BUSINESS
The Company is a designer, manufacturer and marketer of precision-molded
thermoplastic enclosures used by cable television operators and local telephone
companies.
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition--The Company recognizes revenue from product sales and
commission income at the time of shipment.
Cash--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.
Combination--The Company purchased substantially all of the assets of Channell
Commercial Canada Ltd. (CCCL) as of December 31, 1993. CCCL was liquidated in
1994. The Canadian operations are continued by the Company as a separate
division. Prior to the combination, CCCL was owned by the majority stockholder
of the Company. For periods prior to the combination, the accounts of CCCL have
been included in the accompanying financial statements in a manner similar to a
pooling of interests.
Inventories--Inventories are stated at the lower of cost or market. Cost is
determined by the first-in, first-out method of accounting.
Investments--The Company has invested in certain U.S. Government issued debt
instruments and other taxable securities. These investments are classified as
"available for sale." The investment in these securities is therefore recorded
at fair value with any differences between fair value and cost recorded as a
separate component of stockholder's equity. At December 31, 1996, there were no
material differences between the fair value and cost of these marketable
securities. Investments mature as follows: $2,983 in 1997; $7,421 in 1998 and
$1,002 in 2,004. Interest income for the year ended December 31, 1996 totaled
$452, and has been reflected net of interest expense in the accompanying
statement of income. Interest income was not significant in 1994 and 1995.
Depreciation and amortization--Property, equipment and improvements 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 life of the asset. 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.
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.
F-6
CHANNELL COMMERCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS --(CONTINUED)
DECEMBER 31, 1994, 1995 AND 1996
(amounts in thousands, except per share data)
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
Fair value of financial instruments--The carrying amount of cash, accounts
receivable, accounts payable, accrued expenses and long-term obligations
approximates fair value because of the short maturity of these financial
instruments. The carrying amount of investments, which is the fair value, is
based upon values provided by external investment managers or quoted market
values.
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.
Pro forma financial information (unaudited)--Prior to the Company's initial
public offering of common stock in July 1996 (the "IPO"), it was an S
Corporation for federal and state income tax purposes. The pro forma provision
for income taxes reflects the income tax provision of the Company as recorded in
its income statement plus the additional tax on S Corporation income at C
Corporation rates.
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 includes 1,558 shares for the year ended December 31,
1995, and 779 shares for the year ended December 31, 1996, assumed to have been
sold by the Company at a price of $11.00 per share, the net proceeds of which
were used to fund the reorganization distribution. The effect of the Company's
use of a portion of the net proceeds of the IPO to repay approximately $2.7
million of bank indebtedness outstanding as of June 30, 1996, has not been
reflected in pro forma net income or pro forma net income per share because the
impact is not material.
A reconciliation of pro forma income taxes to the Federal statutory rate is as
follows:
1995 1996
------- -------
Federal statutory rate............. 34% 34%
State income taxes, net of Federal 6 6
tax benefit.......................
Deferred income tax benefit
recorded upon - (5)
termination of S Corporation
status..........................
Other.............................. (1) (1)
--- ---
39% 34%
=== ===
NOTE C--INVENTORIES
Inventories are summarized as follows:
1995 1996
------- -------
Raw materials...................... $1,111 $1,508
Work-in-process.................... 744 549
Finished goods..................... 754 851
------ ------
$2,609 $2,908
====== ======
F-7
CHANNELL COMMERCIAL CORPORATION
--------------------------------
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994, 1995 AND 1996
(amounts in thousands, except per share data)
NOTE D--PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows:
ESTIMATED
1995 1996 USEFUL LIVES
------- ------- ------------
Machinery and equipment............ $12,889 $14,739 3-10 year
Office furniture and equipment..... 1,059 1,042 3- 7 year
Leasehold improvements............. 1,893 2,196 15-20 year
Construction in progress........... 930 891
------- -------
16,771 18,868
Less accumulated depreciation and
amortization...................... (6,709) (8,260)
------- -------
$10,062 $10,608
======= =======
Included in the $14,739 of machinery and equipment is $543 of computer
equipment acquired under a capital lease. See Note I.
NOTE E-- ACCRUED EXPENSES
Accrued expenses consist of the following:
1995 1996
-----------------
Accrued vacation... $436 $ 448
Other.............. 536 719
---- ------
$972 $1,167
==== ======
NOTE F-- LINE OF CREDIT
The Company has in place a $3,500 line of credit with a bank for working
capital purposes. This line of credit bears interest at the bank's reference
rate, payable monthly. In addition, the Company has a $4,800 equipment line of
credit, including standby letters of credit up to $500. The equipment line of
credit bears interest at the bank's reference rate plus .25%. The lines of
credit expire on May 1, 1997. The Company is subject to various covenants
identical to those described in Note G. The lines of credit are collateralized
by the equipment financed by the bank.
F-8
CHANNELL COMMERCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994, 1995 AND 1996
(amounts in thousands, except per share data)
NOTE G--LONG-TERM OBLIGATIONS
Long-term debt consists of the following:
1995 1996
------ -----
Equipment line of credit with a bank, for equipment acquisitions,
collateralized by accounts receivable, inventory, the equipment
financed by the bank and certain other items of personal
property, with interest at the bank's reference rate plus .25%
(effective rate at December 31, 1996 of 8.5%)...................... $2,282 $ --
Non-revolving line of credit with a bank, allowing borrowings up to
$1,000, collateralized by accounts receivable, inventory, the
equipment financed by the bank and certain other items of personal
property, with interest at the bank's reference rate plus 0.50%
(effective rate at December 31, 1995 of 9.0%)...................... 806 --
Notes payable to stockholder, due on demand........................ 120 --
Other.............................................................. 5 --
------ -----
3,213 --
Less current maturities............................................ (860) --
------ -----
$2,353 $ --
====== =====
The lines of credit contain various financial and operating covenants which,
among other things, impose certain limitations on the Company's ability to incur
additional indebtedness, merge or consolidate, sell its assets, make certain
investments or, under certain circumstances, pay dividends. The Company is also
required to comply with covenants related to tangible net worth and other
financial ratios.
NOTE H--INCOME TAXES
In July 1996, the Company terminated its election to be taxed as an S
Corporation. As a result of this termination, the Company became liable for
income taxes. Accordingly, as required by generally accepted accounting
principles, the Company recorded deferred tax assets and liabilities on
temporary differences between the income tax basis and book basis of certain
assets and liabilities. The effect of recording these net deferred tax assets
upon the results of operations for the year ended December 31, 1996, was $1.063
million ($0.13 per share). It is not expected that future operations will have
similar increases to income as the result of recording deferred income taxes.
F-9
CHANNELL COMMERCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994, 1995 AND 1996
(amounts in thousands, except per share data)
NOTE H--INCOME TAXES--CONTINUED
The components of income taxes are as follows:
1994 1995 1996
--------------------------
Current
Federal... $ -- $ -- $2,104
State..... 107 36 743
Foreign... 322 313 392
---- ---- ------
$429 $349 $3,239
---- ---- ------
Deferred
Federal... -- -- (669)
State..... -- -- (211)
---- ---- ------
-- -- (880)
---- ---- ------
$429 $349 $2,359
==== ==== ======
Prior to July 1996, The Company was taxed as an S Corporation. Accordingly,
all Federal taxable earnings of the Company through July 1996 were taxed at the
individual stockholder level and the Company incurred no Federal income tax
liability. The Company was, however, subject to California's Corporation tax.
Income taxes for 1994 and 1995 consist primarily of the state corporate
franchise tax for California and the Canadian tax imposed on the taxable income
of the Company's Canadian operations. In 1995 and 1994, the actual state tax
provision differs from the expected statutory tax due to non-deductible
entertainment expense and officers'life insurance premiums.
As of December 31, 1996, significant components of the Company's deferred tax
assets and liabilities are as follows:
Assets
Patents.................... $1,286
Allowance for bad debts.... 32
Inventory capitalization... 59
Vacation pay............... 190
------
1,567
------
Liabilities
Accelerated depreciation... 615
State taxes................ 72
------
687
------
Net deferred tax asset... $ 880
======
F-10
CHANNELL COMMERCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994, 1995 AND 1996
(amounts in thousands, except per share data)
NOTE H--INCOME TAXES--CONTINUED
The classification of the net deferred tax assets between current and non-
current is as follows:
Current................................... $321
Non-current............................... 559
----
$880
====
NOTE I--CAPITAL LEASE OBLIGATION
The Company leases certain computer equipment under an agreement which is
classified as a capital lease. The equipment is under lease through December
1999. Monthly payments are approximately $16. Future minimum payments, by year,
are as follows:
1997 $197
1998 197
1999 197
----
591
Less amount representing interest 118
----
473
Less current maturities 135
----
$338
====
NOTE J--STOCKHOLDERS' EQUITY
In 1996, 3,100 shares of the Company's common stock were sold in a public
offering. Proceeds of approximately $30,565, net of issuance expenses, were used
to fund the distribution to stockholders, fund the acquisition of certain
patents from stockholders and to repay outstanding borrowings on the bank lines
of credit.
The Company had been an S Corporation for both federal and state tax income
tax purposes since 1990. As discussed in Note H, the Company terminated its S
Corporation status effective July 6, 1996 in connection with the initial public
offering of its common stock. Upon the termination of the S Corporation status
and prior to the initial public offering, the Company declared a dividend to its
then existing stockholders representing all of the Company's S Corporation
"accumulated adjustments account" remaining at the time. The S Corporation
distribution totaled $11,665 and was paid out of the net proceeds of the initial
public offering.
F-11
CHANNELL COMMERCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994, 1995 AND 1996
(amounts in thousands, except per share data)
NOTE J--STOCKHOLDERS' EQUITY--CONTINUED
In July 1996, the Company adopted the 1996 Incentive Stock 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. The
exercise price of each option equals the market price of the Company's stock on
the date of grant. Accordingly, no compensation cost has been recognized for the
plan.
A recently issued accounting standard 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.
Plan transactions for 1996 are as follows:
Options granted during the year
and outstanding at December 31 513
======
Option price range at December 31 $11.00
======
Options exercisable at December 31 --
======
Options available for grant at 237
December 31
======
Weighted average fair value of $ 5.47
options granted during the year
======
The fair value of options at date of grant was estimated using the Black-
Scholes model with the following weighted average assumptions for 1996:
Expected life (years) 5 years
Risk-free interest rate... 5.5%
Volatility................ 50%
Dividend yield............ --
-------
F-12
CHANNELL COMMERCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994, 1995 AND 1996
(amounts in thousands, except per share data)
NOTE J--STOCKHOLDERS' EQUITY--CONTINUED
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 adjusted
pro forma net income and adjusted pro forma net income per share for 1996 would
have been $8,351 and $.99, respectively.
NOTE K--REORGANIZATION
Effective June 14, 1996, as part of the initial public offering of the
Company's common stock, the Company was merged into a newly formed corporation,
with the newly formed corporation being the surviving entity while retaining the
same name as the predecessor. As part of the merger, the predecessor's existing
stockholders were issued 12.274 shares of the newly formed corporation's common
stock in exchange for each outstanding share of the predecessor's common stock.
This exchange has been accounted for as a reorganization and the number of
outstanding shares has been restated on a retroactive basis similar to a stock
split.
NOTE L--RETIREMENT PLANS
Eligible employees of the Company are included in a profit-sharing plan.
Annual contributions by the Company to this plan are discretionary and will not
exceed that allowable for Federal income tax purposes. The accompanying
statements of income include expenses of $150, $198 and $200 which have been
accrued for the plan for the years ended December 31, 1994, 1995 and 1996,
respectively.
During 1993, the Company established an additional 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. The Company is under no obligation and has not made
contributions on behalf of employees to this plan.
F-13
CHANNELL COMMERCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994, 1995 AND 1996
(amounts in thousands, except per share data)
NOTE M--RELATED PARTY TRANSACTIONS
Prior to the initial public offering, the Company's Chairman of the Board and
Chief Executive Officer, William H. Channell, Sr. (Mr. Channell, Sr.) owned six
patents utilized by the Company in its business. Under the terms of exclusive
licensing agreements, the Company made payments to Mr. Channell, Sr. for the use
of these patents. These payments were based on the sale of products. Operations
have been charged with $1,560, $2,035 and $531 for the years ended December 31,
1994, 1995 and 1996, respectively. In connection with the initial public
offering of the Company's common stock, the Company acquired these patents from
Mr. Channell, Sr. and certain members of the Channell family for $3,100. The
aggregate consideration of $3,100 has been reflected as a reduction of
additional paid-in capital in 1996. The licensing agreements with Mr. Channell,
Sr. were terminated in April 1996 and, accordingly, no license fee expense has
been reflected in the accompanying statement of income since March 31, 1996.
In July 1996, Mr. Channell, Sr., contributed $531 of accrued license fees owed
to him to additional paid-in capital.
The Company leases its facilities in Temecula, California from Mr. Channell,
Sr. The leases provide for payments of insurance, repairs, and maintenance and
property taxes, and extend through 2005. The Company has two five-year renewal
options to extend the terms to 2015. Rent expense was $650, $650 and $755 for
the years ended December 31, 1994, 1995 and 1996, respectively. The following is
a schedule of future minimum rental payments, exclusive of property taxes and
insurance:
1997 $1,070
1998 1,070
1999 1,070
2000 1,070
2001 1,070
Thereafter 4,280
------
$9,630
======
Subsequent to December 31, 1996, the Company guaranteed debt of Mr.
Channell, Sr. of approximately $2,700. The guaranteed debt was incurred in
connection with construction of the facilities leased to the Company and 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.
F-14
CHANNELL COMMERCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1994, 1995 AND 1996
(amounts in thousands, except per share data)
NOTE N--CREDIT CONCENTRATIONS AND MAJOR CUSTOMERS
The Company maintains the majority of its cash balances in one financial
institution located in California which, at times, may 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.
One customer made up 18.1%, 17.5% and 17.3% of sales in 1994, 1995 and 1996,
respectively. In 1995 and 1996, a second customer made up 15.6% and 14.9% of
sales, respectively. 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.
NOTE O--EXPORT NET SALES
The Company's export net sales are as follows:
1994 1995 1996
------ ------ ------
Canada $3,799 $3,717 $3,989
Other 758 2,354 1,563
------ ------ ------
$4,557 $6,071 $5,552
====== ====== ======
NOTE P--QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for 1995 and 1996 follows:
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------------------------------------
1995
Net sales $ 9,225 $11,784 $10,758 $ 9,205
Gross profit 3,738 5,387 4,534 4,254
Net income 1,482 2,769 2,392 1,840
Pro forma net income 927 1,687 1,466 1,297
Pro forma net income per share $ .12 $ .22 $ .19 $ .17
1996
Net sales $10,279 $12,961 $11,954 $12,088
Gross profit 4,541 5,986 5,531 5,777
Net income 2,002 3,653 3,640 1,815
Income per share N/A N/A .41 .20
Pro forma net income 1,279 2,187 N/A N/A
Pro forma net income per share $ .17 $ .28 N/A N/A
F-15
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.
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
telecommunication and CATV transmission.
Sealed Plant: An industry term referring to the environmental protection
devices built into access and termination products deployed in the outside plant
portion of the telecommunications network.
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 March 24, 1997.
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 March 24, 1997.
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 and Director
- -----------------------------
William H. Channell, Jr.
/s/ GARY W. BAKER Chief Financial Officer
- ----------------------------- (Principal Financial and
Gary W. Baker Accounting Officer)
/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