Item 1. Business --------
Background
Channell Commercial Corporation (the "Company") was incorporated in Delaware on April 23, 1996, as the successor to Channell Commercial Corporation, a California corporation. The Company's executive offices are located at 26040 Ynez Road, Temecula, California 92591, and its telephone number at that address is (909) 719-2600.
General
The Company is a designer and manufacturer of telecommunications equipment supplied to telephone, cable television and power utility network providers worldwide. Major product lines include a complete line of thermoplastic and metal fabricated enclosures, advanced copper termination and connectorization products, fiber optic cable management systems, coaxial-based passive RF electronics and heat shrink products. The Company believes it was the first to design, manufacture and market thermoplastic enclosure products for use in the telecommunications industry on a wide scale, and the Company believes it currently supplies a substantial portion of the enclosure product requirements of a number of major community antenna television ("CATV") and telephone service providers. The Company's enclosure products house, protect and provide access to advanced telecommunications hardware, including both radio frequency ("RF") electronics and photonics, and transmission media, including coaxial cable, copper wire and optical fibers, used in the delivery of voice, video and data services. The enclosure products are deployed within the portion of the local signal delivery network, commonly known as the "outside plant", "local loop" or "last mile", that connects the network provider's signal origination point or local office with its residential and business customers.
As a result of the acquisitions of RMS Electronics, Inc. ("RMS") and Standby Electronics Corp. ("Standby Electronics") in 1997, and A.C. Egerton (Holdings) PLC ("Egerton") in 1998, the Company is also a supplier of passive RF electronics and a manufacturer of metal fabricated enclosures in addition to designing and manufacturing a full range of copper and fiber optic connectivity products. The Company also supplies enclosures for the power utility industry and markets a complete line of grade level boxes for buried and underground network applications, thus offering network operators a full system solution to their outside plant requirements.
Industry
CATV, local telephone operators and power utilities are building, rebuilding or upgrading signal delivery networks around the world. These networks are designed to deliver video, voice, data or power transmissions and provide Internet connectivity to individual residences and businesses. Operators deploy a variety of network technologies and architectures, such as HFC, FTTC, DLC and ADSL (see "Glossary of Terms") to carry broadband and narrowband signals. These architectures are constructed of electronic hardware connected via coaxial cables, copper wires and/or optical fibers, including various access devices, amplifiers, nodes, hubs and other signal transmission and powering electronics. Many of these devices in the outside plant require housing in secure, protective enclosures and cable management connectivity systems, such as those manufactured by the Company.
As critical components of the outside plant, enclosure products provide protection against weather and vandalism, ready access to devices for technicians who maintain and manage the outside plant and, in some cases, provide dissipation of heat generated by the active electronic hardware. CATV and local telephone network operators place great reliance on manufacturers of protective enclosures because any material damage to the signal delivery networks is likely to disrupt communications services.
The primary drivers of demand for enclosures in the communications industry is the construction, rebuilding, upgrading and maintenance of signal delivery networks by CATV operators and local telephone companies. Particular technological developments in the communications industry are resulting in significant increases in system upgrades. For example, CATV networks are being upgraded and prepared for advanced two-way services such as high-speed Internet access via cable modems, telephony and PCS transport.
Within the local telephone company segment of the industry, local telephone operators are employing new advanced technologies, such as a variety of digital subscriber line ("DSL") technologies, which utilize installed copper wires for broadband services. These "local loop" copper wire systems often require significant upgrading and maintenance to
provide the optimal throughput necessary to carry high-speed broadband signals, increasing the need for fully sealed outside plant facilities in order to sustain network reliability and longevity. In addition, as local telephone companies build broadband networks for the delivery of integrated voice, video and data services competitive with CATV, they are expected to require new enclosure products designed for optical fiber-based networks.
Business Strategy
The Company's strategy is to capitalize on opportunities in the global communications industry by providing enclosures, connectivity products and other complementary components to meet the evolving needs of its customers' communications networks. The Company's wide range of products, manufacturing expertise, application-based sales and marketing approach and reputation for high quality products address key requirements of its customers. Principal elements of the Company's strategy include the following:
Focus on Core Telecommunications Business. The Company will continue to seek to capitalize on its position as a leading designer, manufacturer and marketer of enclosures for the CATV and local telephone industries in the United States and Canada through new product development for both domestic and international market applications. The Company believes it currently supplies a substantial portion of the enclosure product requirements of a number of major CATV and telephone company operators.
In addition to its core thermoplastic enclosure products for the CATV and telephone industries, the Company has positioned itself to increase its participation in the large scale broadband network construction and upgrade programs anticipated over the next several years. The Company is able to offer a complete package of products used by all telecommunications network operators as they upgrade their networks in order to provide additional services and expand network capacity. These expansions and upgrades are expected to enable telecommunications network operators to increase network bandwidth to accommodate increased demand for faster and larger throughput of signal transmissions and greater reliability of network performance.
The Company has invested in the development of a broad range of products designed specifically for telephone market applications. The Company has achieved significant success in marketing its traditional CATV/broadband products to local telephone companies that have been designing and deploying broadband networks to deliver competitive video and data services. The Company will continue to target this market for growth, both with telephone network operators and with major system OEMs.
Expand International Presence. Management believes international markets offer significant opportunities for increased sales in both the CATV and telephone segments. The Company's principal international markets currently consist of Canada, Mexico, Asia, the Pacific Rim, the Middle East and Europe. Trends expected to result in international growth opportunities include the on-going deregulation and privatization of telecommunications in many nations around the world, the focus of numerous countries on building, expanding and enhancing their communications systems in order to participate fully in the information-based global economy, and multinational expansion by many U.S. based network carriers. The Company currently operates overseas manufacturing operations in Australia, Malaysia and the UK. The Company will concentrate on expansion in international markets that are characterized by deregulation or privatization of telecommunications and by the availability of capital for the construction of signal delivery networks.
Develop New Products and Enter New Business Segments. The Company continues to leverage its core capabilities in developing innovative products that meet the evolving needs of its customers. Innovative products offered by the Company include its new DSLink(TM) modular terminal block, its FlexPed(TM) free breathing telephony enclosures, the Mini-Rocker(TM) insulation displacement copper connectivity products, and a range of Rhino(TM) metal fabricated enclosures. The Company continually invests in ongoing improvement and enhancement projects for the existing products developed by the Company, several of which have received U.S. patent protection. The Company's products are designed to improve the performance of its customers' outside plant systems. The Company has a proven record in designing, developing and manufacturing "next generation" products that provide solutions for its customers and offer advantages over those offered by other suppliers to the industry.
Products
The Company currently markets over 50 product families, with several thousand optional product configurations. The primary functions of the Company's products designed for the telecommunications industry are cable routing and
management, equipment access, heat dissipation and security. The Company believes that it offers one of the most complete lines of outside plant infrastructure products in the telecommunications industry.
Enclosures. The Company manufactures precision-molded, highly engineered and application-specific thermoplastic and metal fabricated enclosures that are considered state-of-the-industry for many applications, having been field tested and received approvals and standardization certifications from major CATV and telephone company operators. Most of the Company's products are designed for buried and underground network applications. The Company's enclosure products provide technicians access to these networks and equipment for maintenance, upgrades and installation of new services. Buried and underground networks and enclosures are generally preferred by CATV operators for increased network reliability, lower maintenance, improved security, reduced utility right-of-way conflicts, and aesthetic appeal. The enclosure products, particularly the thermoplastic versions, must provide advanced heat dissipation characteristics increasingly required for the protection of active electronics in many network installations. The Company is also a designer and manufacturer of metal fabricated enclosures that house advanced electronics, fiber optic cable and power systems for broadband telecommunications networks (branded as "Rhino Enclosures(TM)"). The Company designs and manufactures a series of termination blocks, brackets and cable management devices for mounting inside its enclosure products. To position itself as a full-line product supplier, the Company also offers a variety of complementary products, including thermoplastic and concrete grade level boxes. These products are typically purchased by customers as part of a system package and are marketed by the Company through its direct sales force to its customer base. The Company is recognized in the industry for its differentiated product designs and the functionality, field performance and service life of its products.
RF Electronics. The Company is a designer and supplier of high performance RF passive electronic devices, such as outdoor and indoor taps, signal splitters/combiners and power inserters, all standard components deployed in CATV systems and broadband telecommunications networks. The Company's electronic devices and metal enclosures are complementary with the Company's core broadband enclosure products and are important components of the Company's complete systems approach to the outside plant requirements of CATV and telephone service providers. New network applications, such as cable modem deployment for Internet access, have created new technical challenges for service providers. Several new products, including the DigiTap(TM) low intermodulation line of passive RF devices, provide solutions to such challenges.
Copper Connectivity. The Company is a designer and manufacturer of innovative telephone connectivity devices. The Company's Insulation Displacement Connector ("IDC") technology provides advanced "tool-less" termination systems for copper wires, the predominant medium used in the "Last Mile" for telephone services worldwide. These proprietary IDC products environmentally seal network termination points with a high level of reliability. The Company's DSLink modular terminal block offers telephone service providers a CAT5 solution to the rising costs of DSL deployment in the local loop. The Company's Mini-Rocker(TM) line of copper connectivity modules, blocks and accessories offer tool-less installation, hinged wire-entry parts and transparent wire receivers.
Fiber Optic Products. The Company offers a range of fiber optic cable management products designed for use in telephone, broadband and power utility telecommunications networks. The Company's fiber optic splice cases are used for organizing, managing and protecting the connection points between separate lengths of fiber optic cable in the outside plant network. Fiber optic cable assemblies and interconnect hardware are used to connect fiber optic electronics and fiber optic cables primarily for in-building applications. Fiber optic electronic enclosures house optical electronics, power supplies and cables. All of these products are designed and manufactured by the Company and marketed worldwide.
Sealing Systems. The Company also specializes in the manufacture of high performance products designed to meet or exceed the requirements of local telephone company networks, including sealed plant products. These products are designed with environmentally sealed specifications to provide exceptional long-term protection for copper wires, coaxial cable and optical fibers exposed for the purposes of splicing and termination. The sealing systems of the Company's sealed plant products are available in several styles and specifications which can be configured to individual customer requirements. This provides significant value to customers in terms of faster installations, re-entry and access, and cost management.
OEM Programs. Over the past several years, the Company has developed OEM marketing programs through which other manufacturers incorporate the Company's products as components of their telecommunications systems. These OEM programs generally include exchanges of technical information that the Company can use in developing new products and improvements and enhancements to existing designs. The Company has established additional relationships with systems integrators and innovative end users that provide valuable product improvement information.
The Company continues to develop new product innovations to complement its existing product line and marketing strengths. The Company anticipates the demand for its product line to be sustained by the continued construction of broadband networks, both CATV and telephone, and upgrades of both existing CATV and telephone networks to accommodate expanded video services, high-speed Internet access and wireless PCS transport.
Marketing and Sales
The Company markets its products primarily through a direct sales force of technically trained salespeople. The Company's sales force is deployed worldwide and divided into major market groups as follows: US; Canada; South/Central America; Australia; Asia; and Europe/Middle East. The Company employs an application-specific, systems approach to marketing its products, offering the customer, where appropriate, a complete, cost-effective system solution to meet its enclosure and other outside plant requirements. All sales personnel have technical expertise in the products they market and are supported by the Company's engineering and technical marketing staff.
The Company's technical and product marketing department provides its sales force with extensive support. The field technical service personnel within this department work closely with the outside sales staff and customers to develop system solutions and provide a full range of technical support and certification for users of the Company's products. Product marketing personnel perform a variety of functions, including product line management and general marketing services. These individuals also provide strategic plans for product development, new market entry, acquisitions and strategic alliances, and work closely with the Company's sales, engineering and manufacturing departments to implement such strategic plans.
An internal sales/customer service department that administers and schedules incoming orders, handles requests for product enhancements and service inquiries also supports the Company's direct sales force. With locations in California, Canada, the United Kingdom and Australia, this department maintains direct communications with customers and the Company's field sales and operations personnel.
By engaging in public relations activities, product literature development, market research and advertising, the marketing department also promotes and positions the Company within both domestic and international markets. The Company regularly attends, participates and exhibits its products at industry trade shows and conferences within domestic and international telecommunications markets throughout the year.
Manufacturing Operations
The Company's vertically integrated manufacturing operations enables the Company to control each step in the manufacturing process, including product design and engineering; design and development of its own dies, tools and molds; and wiring, assembly and packaging.
The Company's manufacturing expertise enables it to modify its product lines to meet changing market demands, rapidly and efficiently produce large volumes of products, control expenses and ensure product quality. Management considers the Company's manufacturing expertise a distinct and significant competitive advantage, providing it with the ability to satisfy the requirements of major customers with relatively short lead-times by promptly booking and shipping orders.
The Company owns a majority of its manufacturing equipment, which is generally state-of-the-art, and manufacturing processes are performed by trained Company personnel. These manufacturing processes include injection molding, structural foam molding, rotational molding, metal fabrication, rubber injection, transfer and compression molding, and termination block fabrication. The Company has implemented several comprehensive process and quality assurance programs, including continuous monitoring of key processes, regular product inspections and comprehensive testing. The Company's Temecula, California manufacturing facility has received ISO-9001 certification, a worldwide industry standards certification.
The Company's manufacturing and distribution facilities include approximately 364,000 square feet in Temecula, California; 7,000 square feet in Mississauga, Ontario, Canada; 117,000 square feet in Orpington and Warrington, United Kingdom; 99,000 square feet in Sydney, Australia; and 16,000 square feet in Selangor Darul Ehsan, Malaysia. In November, 2001, the Company announced a restructuring plan (see Financial Statement Footnote H, Restructuring Charge) that would, among other things, reduce its facilities utilization in the U.S., U.K. and Australia operations to improve operating efficiencies and reduce facilities expense. In connection with the Company's restructuring plan, the Company
expects to reduce the amount of leased manufacturing, warehouse and office space by approximately 200,000 square feet.
Product Development and Engineering
The Company believes it was the first to design, manufacture and market thermoplastic enclosure products for use in the telecommunications industry on a wide scale. The Company's product development and engineering staff has designed and tested the Company's products and has developed core competencies in product development and engineering.
As a direct result, the Company has been able to develop a broad series of superior products. Distinguishing characteristics of the Company's products include:
. Effective heat dissipation qualities; . Advanced copper IDC connectivity products; . A superior environmental sealing and protection system that, unlike many competitors' products, does not require gels, compounds or other methods to maintain the required seal; . Sub-surface network access systems; . Product designs allowing technicians easy access through circular covers that can be removed to fully expose the enclosed electronics; . Compatibility with a variety of signal delivery network architectures; . Modular metal fabricated enclosure product line covering multiple network applications; . Versatility of design to accommodate network growth through custom hardware and universal mounting systems that adapt to a variety of new electronic hardware; . Excellent protection and management of optical fibers and cables; and . Thermoplastic Laminated Coating (TLC(R)) bonds directly to metal hardware and protects against rust and deterioration.
The Company's product development and engineering processes enable the Company to respond to demands of the communications industry for increasingly sophisticated enclosure products. Many of the Company's thermoplastic enclosure products are now considered state-of-the-industry, having been field tested and received approvals and standardization certifications from major CATV and telephone company operators.
The Company's product development approach is applications-based and customer driven. A team comprised of engineering, marketing, manufacturing and direct sales personnel work together to define, develop and deliver comprehensive systems solutions to customers, focusing on the complete design cycle from product concept through tooling and high-volume manufacturing. The Company is equipped to conduct many of its own product testing requirements for performance qualification purposes, enabling it to accelerate the product development process. The Company spent $1.0 million in 1997, $1.9 million in 1998, $2.6 million in 1999, $2.8 million in 2000 and $2.3 million in 2001 on research and development.
Customers
The Company sells its products directly to CATV operators and telephone companies throughout the United States, Canada and certain other international markets, principally within developed nations. The Company also sells its products to OEMs in the United States and international markets. During 2001, the Company's five largest customers accounted for 44.1% of total net sales. In 2001, the Company's five largest customers by sales in the United States were Adelphia, AOL/Time Warner, Comcast, Cox and Verizon. One customer, AOL/Time Warner, accounted for 11.2% of the Company's net sales in 2001. In international markets, the Company's five largest customers in 2001 by sales were Rogers (Canada), Telstra (Australia), Nexans Iberica (Spain), Unitelco (Malaysia) and Alcatel Italia (Italy).
The Company has historically operated with a relatively small backlog, and sales and operating results in any quarter are principally dependent upon orders booked and products shipped in that quarter. The Company's customers generally do not enter into long-term supply contracts providing for future purchase commitments of the Company's products. Rather, the Company believes that many of its customers periodically review their supply relationships and adjust buying patterns based upon their current assessment of the products and pricing available in the marketplace. From fiscal period to fiscal period, significant changes in the level of purchases of the Company's products by specific customers can and do result from this periodic assessment.
Intellectual Property
Upon the consummation of its initial public offering (the "Initial Public Offering") in 1996, the Company became the owner of all of the patents and other technology employed by it in the manufacture and design of its products. The Company's patents, which expire through the year 2010, cover various aspects of the Company's products. In addition, the Company has certain trade secrets, know-how and trademarks related to its technology and products.
Management does not believe any single patent or other intellectual property right is material to the Company's success as a whole. The Company intends to maintain an intellectual property protection program designed to preserve its intellectual property assets.
Competition
The industries in which the Company operates are highly competitive. The Company believes, however, that several factors, including its ability to service national and multi-national customers, its direct sales force, its specialized engineering resources and its vertically integrated manufacturing operations provide the Company with significant competitive advantages.
Management believes the principal competitive factors in the telecommunications equipment market are customer service, new product capabilities, price, product availability, and product performance.
Competitive price pressures are common in the industry. In the past, the Company has responded effectively to competition with cost controls through vertical integration utilizing advanced manufacturing techniques, cost-effective product designs and material selection, and an aggressive procurement approach.
In the past, certain of the Company's telecommunications customers have required relatively lengthy field testing of new products prior to purchasing such products in quantity. While field testing can delay the introduction of new products, it can also act as a competitive advantage for those products tested and approved because to a certain extent it creates a barrier to new product introduction and sales by competitors.
Raw Materials; Availability of Complementary Products
The principal raw materials used by the Company are thermoplastic resins, neoprene rubbers, hot and cold rolled steel, stainless steel and copper. The Company also uses certain other raw materials, such as fasteners, packaging materials and communications cable. Management believes the Company has adequate sources of supply for the raw materials used in its manufacturing processes and it attempts to develop and maintain multiple sources of supply in order to extend the availability and encourage competitive pricing of these materials.
Most plastic resins are purchased under annual and multi-year contracts to stabilize costs and improve supplier delivery performance. Neoprene rubbers are manufactured by multiple custom compounders using the Company's proprietary formulas. Metal products are supplied in standard stock shapes, coils and custom rollforms.
Positioning itself as a full-line product supplier, the Company also relies on certain other manufacturers to supply products that complement the Company's own product line, such as grade level boxes and cable-in-conduit. The Company believes there are multiple sources of supply for these products.
Employees
As of December 31, 2001, the Company employed 473 people, of whom 48 were in sales, 354 were in manufacturing operations, 32 were in research and development and 39 were in finance and administration. The Company considers its employee relations to be good, and it recognizes that its ability to attract and retain qualified employees is an important factor in its growth and development. None of the Company's employees is subject to a collective bargaining agreement, and the Company has not experienced any business interruption as a result of labor disputes within the past five years.
Regulation
The telecommunications industry is subject to regulations in the United States and other countries. Federal and state regulatory agencies regulate most of the Company's domestic customers. On February 1, 1996, the United States Congress passed the Telecommunications Act of 1996 that the President signed into law on February 8, 1996. The Telecommunications Act lifted certain restrictions on the ability of companies, including RBOCs and other customers of the Company, to compete with one another and generally reduced the regulation of the communications industry.
The Company is also subject to a wide variety of federal, state and local environmental laws and regulations. The Company utilizes, principally in connection with its thermoplastic manufacturing processes, a limited number of chemicals or similar substances that are classified as hazardous. It is difficult to predict what impact these environmental laws and regulations may have on the Company in the future. Restrictions on chemical uses or certain manufacturing processes could restrict the ability of the Company to operate in the manner that it currently operates or is permitted to operate. Management believes that the Company's operations are in compliance in all material respects with current environmental laws and regulations. Nevertheless, it is possible that the Company may experience releases of certain chemicals to environmental media which could constitute violations of environmental law (and have an impact on its operations) or which could cause the Company to incur material cleanup costs or other damages. For these reasons, the Company might become involved in legal proceedings involving exposure to chemicals or the remediation of environmental contamination from past or present operations. Because certain environmental laws impose joint and several, strict and retrospective liability upon current owners or operators of facilities from which there have been releases of hazardous substances, the Company could be held liable for remedial measures or other damages (such as liability in personal injury actions) at properties it owns or utilizes in its operations, even if the contamination was not caused by the Company's operations.
Item 2.
Item 2. Properties ----------
The Company's facilities approximate 603,000 square feet, of which approximately 55%, 30% and 15% was used for manufacturing, warehouse and office space, respectively. In Temecula, California, 261,000 square feet of the total 364,000 square feet are leased from William H. Channell, Sr., the Company's Chairman of the Board. (See "Certain Relationships and Related Transactions", Item 13.) The Company also leases an aggregate of approximately 217,000 square feet of manufacturing, warehouse and office space in Canada, Australia, Malaysia, United Kingdom and North Carolina. In November, 2001, the Company announced a restructuring plan (see Financial Statement Footnote H, Restructuring Charge) that would, among other things, reduce its facilities utilization in the U.S., U.K. and Australia operations to improve operating efficiencies and reduce facilities expense The Company expects to reduce the amount of leased manufacturing, warehouse and office space by approximately 200,000 square feet. The Company owns approximately 103,000 square feet of manufacturing, warehouse and office space in Temecula, California and approximately 53,000 square feet of manufacturing, warehouse and office space in the United Kingdom. The Company intends to sell and leaseback the Temecula, California property in 2002. The Company considers its current facilities to be adequate for its operations.
Item 3.
Item 3. Legal Proceedings -----------------
The Company is from time to time involved in ordinary routine litigation incidental to the conduct of its business. The Company regularly reviews all pending litigation matters in which it is involved and establishes reserves deemed appropriate for such litigation matters. Management believes that no presently pending litigation matters will have a material adverse effect on its business or on its results of operations.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders ---------------------------------------------------
No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters ---------------------------------------------------------------------
The Company's Common Stock began trading on July 2, 1996 on the National Market System maintained by the National Association of Securities Dealers (now the NASDAQ National Market) upon completion of the Company's initial public offering. 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 National Market.
Year Ended December 31, 2000: First Quarter $ 20.25 $ 10.50 Second Quarter 15.00 10.50 Third Quarter 14.94 12.00 Fourth Quarter 12.63 6.50
High Low ------- ------- Year Ended December 31, 2001: First Quarter $ 8.50 $ 6.75 Second Quarter 7.25 5.44 Third Quarter 6.65 3.10 Fourth Quarter 3.80 2.80
The Company has not declared any dividends subsequent to its initial public offering in July 1996.
The Company currently anticipates it will retain all available funds to finance its business. The Company does not intend to pay cash dividends in the foreseeable future. Under the terms of the Company's credit agreement, the Company has agreed not to pay any dividends during the term of this agreement.
As of December 31, 2001, the Company had 9,024,993 shares of its Common Stock outstanding, held by approximately 1,049 shareholders of record.
Item 6.
Item 6. Selected Financial Data -----------------------
The selected consolidated financial data presented below for each of the five years in the period ended December 31, 2001, have been derived from audited consolidated financial statements which for the most recent three years appear elsewhere herein. The data should be read in conjunction with the financial statements, related notes and other financial information included therein (amounts in thousands, except per share data).
Notes to Selected Financial Data (amounts in thousands, except per share data)
(1) Gross margin is gross profit as a percentage of net sales.
(2) Operating margin is income (loss) from operations as a percentage of net sales.
(3) EBITDA represents income (loss) 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.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results ------------------------------------------------------------------------ of Operations -------------
General
The Company is a designer and manufacturer of telecommunications equipment supplied to telephone, cable television and power utility network providers worldwide. In addition to Company manufactured products, the Company markets complementary products manufactured by third parties. The Company sells products directly to CATV operators and telephone companies throughout the United States, Canada, Australia, United Kingdom and certain other international markets, principally within developed nations. The Company believes that many of its customers periodically review their supply relationships, and the Company can experience significant changes in buying patterns from specific customers between fiscal periods. The Company has historically operated with a relatively small backlog, and sales and operating results in any quarter are principally dependent upon orders booked and products shipped in that quarter. Further, the Company's customers generally do not enter into long-term supply contracts providing for future purchase commitments for the Company's products. These factors, when combined with the Company's operating leverage and the need to incur certain capital expenditures and expenses in part based upon the expectation of future sales, causes the Company's operating results to be at risk to changing customer buying patterns. If sales levels in a particular period do not meet the Company's expectations, operating results for that period may be materially and adversely affected.
The Company uses numerous raw materials in its manufacturing processes. Although management believes that the Company has adequate sources of supply for such raw materials, increases in the market prices of the Company's raw materials could significantly increase the Company's cost of goods sold and materially adversely affect the Company's profitability. The Company's profitability may also be materially adversely affected by decreases in its sales volume because many of the costs associated with the Company's facilities, product development, engineering, tooling and other manufacturing processes are essentially fixed in nature and must be spread over its sales base in order to maintain historic levels of profitability.
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, ------------------------------- 1999 2000 2001 ----- ----- -----
Net Sales .............................. 100.0% 100.0% 100.0% Cost of Sales .......................... 63.1 63.3 78.8 ----- ----- ----- Gross Profit ........................... 36.9 36.7 21.2
Selling ................................ 12.2 12.1 14.4 General and administrative ............. 7.5 11.1 15.9 Research and development ............... 2.1 2.2 2.6 Restructuring charge ................... -- 1.2 3.4 Asset impairment charge ................ -- 3.5 4.9 Goodwill impairment charge ............. -- -- 13.3 ----- ----- ----- Income (loss) from operations .......... 15.1 6.6 (33.3)
Interest income (expense), net ......... (2.2) (2.2) (4.4) ----- ----- ----- Income (loss) before income tax expense (benefit) .............. 12.9 4.4 (37.7) Income tax expense (benefit) ........... 5.2 1.6 (9.3) ----- ----- ----- Net income (loss) ...................... 7.7% 2.8% (28.4)% ===== ===== =====
New Accounting Pronouncements
On July 20, 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) 141, Business Combinations, and SFAS 142, Goodwill and Intangible Assets. SFAS 141 is effective for all business combinations completed after June 30, 2001. SFAS 142 is effective for fiscal years beginning after December 15, 2001; however, certain provisions of this Statement apply to goodwill and other intangible assets acquired between July 1, 2001 and the effective date of SFAS 142. Major provisions of these Statements and their effective dates for the Company are as follows:
. All business combinations initiated after June 30, 2001 must use the purchase method of accounting.
. Intangible assets acquired in a business combination must be recorded separately from goodwill if they arise from contractual or other legal rights or are separable from the acquired entity and can be sold, transferred, licensed, rented or changed, either individually or as part of a related contract, asset or liability.
. Goodwill, as well as intangible assets with indefinite lives, acquired after June 30, 2001, will not be amortized. Effective January 1, 2002, all previously recognized goodwill and intangible assets with indefinite lives will no longer be subject to amortization.
. Effective January 1, 2002, goodwill and intangible assets with indefinite lives will be tested for impairment annually and whenever there is an impairment indicator.
. All acquired goodwill must be assigned to reporting units for purposes of impairment testing and segment reporting.
The Company will continue to amortize goodwill under its current method until January 1, 2002, at which time annual and quarterly goodwill amortization of $135 and $34 will no longer be recognized. By June 30, 2002 the Company will have completed a transitional fair value based impairment test of goodwill as of January 1, 2002. Impairment losses, if any, resulting from the transitional testing will be recognized in the quarter ending March 31, 2002, as a cumulative effect of a change in accounting principle. The Company believes the adoption of SFAS 142 will not have a material impact on its consolidated financial position or results of operations.
In June 2001, the FASB issued Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations" (SFAS 143), which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and associated asset retirement costs. The new rules apply to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and (or) normal operation of a long-lived asset. SFAS 143 is effective for the Company at the beginning of fiscal 2003. The Company believes the adoption of SFAS 143 will not have a material impact on its consolidated financial position or results of operations.
In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS 144). SFAS 144 establishes a single accounting model for the Impairment or disposal of long-lived assets, including discontinued operations. SFAS 144 superseded Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (SFAS 121), and APB Opinion No. 30, Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. The provisions of SFAS 144 are effective in fiscal years beginning after December 15, 2001, with early adoption permitted, and in general are to be applied prospectively. The Company believes the adoption of SFAS 144 will not have a material impact on its consolidated financial position or results of operations.
Comparison of Year Ended December 31, 2001 with Year Ended December 31, 2000
As a result of the prolonged downturn in the telecommunications industry, the Company developed and began the implementation of a restructuring plan in the third quarter of 2001. The objectives of the restructuring plan were to: 1) downsize the Company's cost structure to anticipated levels of business activity, 2) reduce debt to lower interest expense and afford greater flexibility in capital management, and, 3) realign asset valuations based on current economic conditions.
Cost reductions include reducing head count to a level 42% below December 31, 2000 and facilities square footage to a level 31% lower. The reductions affected all geographic segments although more significantly impacted international operations. Cost reduction measures were substantially completed by December 31, 2001.
The debt reduction plan includes the selling of obsolete inventory, the sale/leaseback of a building as well as reductions in working capital. These activities occurred in the fourth quarter and are expected to continue through the first half of 2002.
The review of asset valuations addressed the collectibility of receivables given the industry downturn, slow moving or obsolete inventory in light of reduced customer demand and the impairment of goodwill given the reduced level of foreign operations going forward. These measures resulted in the recording of $33.1 million of special charges in the third quarter of 2001 for restructuring costs, impairment of assets, impairment of goodwill and other non-recurring charges. The effects of these charges on each line item in the Consolidated Statement of Operations are included in the following analysis.
Net Sales. Net sales decreased $39.5 million or 30.8% from $128.2 million in 2000 to $88.7 million in 2001. The decrease resulted from a slowdown in equipment purchases by telecommunications service providers in the U.S., Europe, Australia and Canada.
Domestic net sales decreased $22.7 million or 25.6% from $88.5 million to $65.8 million. The decrease is due to customer efforts to reduce inventories of outside plant equipment, as well as a slowdown in the pace of telecommunications network upgrades. One customer accounted for approximately $10.7 million of the $22.7 million decrease in sales. This customer informed its suppliers in the fourth quarter of 2000 that it was curtailing equipment purchases in order to reduce its investment in fixed assets.
International net sales decreased $16.8 million or 42.3% from $39.7 million to $22.9 million. Sales in Europe / Middle East decreased 49.3% to $11.0 million due to the industry slow down and the exiting of unprofitable product lines. Australia / Asia sales declined 29.2% to $7.5 million due to lower equipment purchases from a major telecommunications customer. Sales in Canada decreased 39.7% to $4.4 million due to reduced sales primarily in thermoplastic and metal enclosures.
Gross Profit. Gross profit decreased $28.3 million from $47.1 million in 2000 to $18.8 million in 2001. Of the $28.3 million decrease, $8.5 million was due to special charges recorded in the third quarter consisting of: 1) write-offs and additions to inventory reserves of $8.3 million to reflect the accumulation of excess inventory levels brought about by the industry slowdown and the decision to exit certain product lines, and 2) $0.2 million of costs to exit certain product lines. The remainder of the decline is due to the lower level of sales and unfavorable manufacturing cost variances that resulted from unabsorbed labor and overhead costs due to lower production build rates.
As a percentage of net sales, gross profits decreased from 36.7% in 2000 to 21.2% in 2001. The reasons given above for the changes in gross margin dollars also apply to these percentage changes. The 2001 gross profit percentage excluding the inventory write-offs, additional reserves and costs to exit certain product lines was 30.8%.
Selling. Selling expenses decreased $2.7 million or 17.4% from $15.5 million in 2000 to $12.8 million in 2001. The decrease is the result of cost reductions in selling administration functions as well as due to a lower sales volume.
As a percentage of net sales, selling expense increased from 12.1% in 2000 to 14.4% in 2001.
General and Administrative. General and administrative expenses decreased $0.1 million or 0.7% from $14.2 million in 2000 to $14.1 million in 2001. The 2001 expense includes non-recurring charges of $3.5 million recorded in the third quarter for additions to trade accounts receivable reserves and the write-off of delinquent accounts, costs to exit certain product lines and the write down of prepaid expenses to reflect the shorter life of the assets during a continuing industry downturn. The receivables related charge is $1.4 million and is primarily for customers in Central America and Eastern Europe that were affected by telecommunications projects that were either being scaled back or delayed.
Excluding the non-recurring charges, general and administrative expenses declined $3.6 million or 25.3%. The decrease is due mainly to reductions in administrative head count and spending levels.
As a percentage of net sales, general and administrative expenses increased from 11.1% in 2000 to 15.9% in 2001. Excluding the nonrecurring charges mentioned above, the percentage increased from 11.1% in 2000 to 12.0% in 2001.
Research and Development. Research and development expenses decreased $0.5 million or 17.9% from $2.8 million in of 2000 to $2.3 million in 2001. As a percentage of net sales, research and development expenses increased from 2.2% in 2000 to 2.6% in 2001.
Restructuring charge. In the fourth quarter of 2000, the Company recorded a restructuring charge of $1.5 million associated with activities to improve efficiency, align production costs with anticipated revenues and reduce selling, general and administrative costs. As a result of these actions, global head count was reduced by approximately 90 positions and several facilities consolidated. The Charlotte, North Carolina distribution facility was integrated into the Temecula, California operations. Leased manufacturing space in Europe was reduced and the Hong Kong sales office was closed with the selling functions integrated into the Asian sales operations in Malaysia
Due to the prolonged slowdown in the telecommunications industry, the Company further reduced head count and closed additional facilities in the third quarter of 2001 and recorded a restructuring charge of $3.0 million. The restructuring plan resulted in the elimination of approximately 116 management, administrative, sales and manufacturing positions. Facilities vacated include: 1) a manufacturing and distribution facility in Warrington, United Kingdom, 2) one half of the manufacturing and distribution facility in Sydney, Australia and, 3) leased warehouse space in the U.S.
Impairment of Fixed Assets. In the fourth quarter of 2000, the Company recorded an impairment of asset charge of $4.6 million. The charge related to certain production equipment in the European operations. Utilization of this production equipment declined as newer, more automated equipment was purchased as part of the company's capital expenditure program to automate production and reduce costs. As a result, the equipment was written down by $4.6 million to reflect a reduction in the fair value of this equipment.
In the third quarter of 2001, the Company recorded an asset impairment charge of $4.3 million as a result of restructuring activities intended to reduce manufacturing costs worldwide. Certain production equipment, tooling and leasehold improvements were idled or sold as a result of these measures. This included production equipment in the European operations that was idled as several products previously manufactured in the region were either transferred to other facilities, outsourced or discontinued. In both the U.S. and Australia, an impairment charge was recorded for production equipment and tooling no longer productive as a result of the restructuring.
Impairment of Goodwill. In the third quarter of 2001 , an impairment of Goodwill was recorded for $11.8 million as a result of restructuring activities that reduce the level of foreign operations and the decision to exit certain product lines in 2001.
Income (Loss) from Operations. As a result of the items discussed above, income from operations decreased $38.0 million from $8.5 million in 2000 to a loss of ($29.5) million in 2001. Operating margin as a percent of sales decreased from 6.6% to (33.3%).
Interest Expense, Net. Net interest expense increased from $2.9 million in 2000 to $3.9 million in 2001. The increase was attributable primarily to: 1) a higher average debt level, 2) a higher interest rate on the Company's bank debt and 3) accrued fees associated with revisions to the Credit Agreement.
Income Taxes. Income tax expense decreased from $2.1 million in 2000 to a tax benefit of ($8.2) million in 2001. The effective tax rates were 36.8% in 2000 and 24.6% in 2001. The decrease in effective tax rates was due to foreign operating losses in 2001 with no benefit provided and an increase in the valuation allowance on the deferred tax asset of $2.8 million associated with tax loss carry forwards in international operations. The ability to use the tax loss carry forward was reduced due to restructuring activities which significantly decreased the level of international business activities.
Comparison of the Year Ended December 31, 2000 with Year Ended December 31, 1999
Net Sales. Net sales increased $7.5 million or 6.2% from $120.7 million in 1999 to $128.2 million in 2000. The increase resulted from higher sales volume in the U.S., Europe / Middle East and Canada, partially offset by a decline in sales in Australia / Asia and an unfavorable foreign exchange rate caused by a strengthening U.S. dollar compared to currencies in Europe and Australia.
Domestic sales increased $8.5 million or 10.6% from $80.0 million to $88.5 million as a result of continued growth in both network upgrade and rebuild construction in the first half of the year. International sales decreased $1.1 million or 2.5% from $40.7 million to $39.6 million. An unfavorable change in currency exchange rates decreased international sales reported in U.S. dollars by $2.8 million for the year 2000. Sales in Europe/Middle East increased 14.3% to $21.7 million due to growth in sales of fiber optic products in the U.K. and continental Europe and growth in RF electronic products sold in Spain, Eastern Europe and Israel. Sales in Canada increased 41.2% to $7.3 million due to growth in sales of metal enclosures. These international sales increases were offset by decreased sales in Australia / Asia which declined 35.5% to $10.6 million. The decline in Australia / Asia is due to lower spending on telecommunications network upgrades and maintenance in Australia. Sales increased in the Asian operations of this region.
Gross Profit. Gross profit increased $2.5 million from $44.6 million in 1999 to $47.1 million in 2000 due to the increased sales level. As a percentage of sales, gross profit was 36.9% in 1999 and 36.7% in 2000.
Selling. Selling expense increased $0.8 million or 5.2% from $14.7 million in 1999 to $15.5 million in 2000. The increase is due to additional sales personnel hired for eastern and southern Europe, Asia and domestic telco products. As a percentage of net sales, selling expense decreased from 12.2% in 1999 to 12.1% in 2000.
General and Administrative. General and administrative expenses increased $5.2 million or 57.7% from $9.0 million in 1999 to $14.2 million in 2000. The increase is due to: 1) depreciation, telecommunications, computer equipment and staffing costs associated with implementing the Oracle global systems platform of approximately $2.6 million, 2) in 1999, approximately $1.1 million of internal costs were capitalized as part of implementing Oracle which lowered general and administrative costs reported in 1999, 3) higher administrative costs in Canada of $0.4 million to process the higher sales volume, 4) salary, recruiting and relocation costs of approximately $0.3 million to implement global Finance and Human
Resource functions, and, 5) higher travel costs of $0.1 million to integrate global operations. As a percentage of net sales, general and administrative expenses increased from 7.5% in 1999 to 11.1% in 2000.
Research and Development. Research and development expenses increased $0.2 million or 5.4% from $2.6 million in 1999 to $2.8 million in 2000 due to increased development spending for new connector products. As a percentage of net sales, research and development expenses increased from 2.1% in 1999 to 2.2% in 2000.
Restructuring Charge. In the fourth quarter of 2000, the Company recorded a restructuring charge of $1.5 million associated with activities to improve efficiency, align production costs with anticipated revenues and reduce selling, general and administrative costs. As a result of these actions, global head count was reduced by approximately 10% and several facilities were consolidated. The Charlotte, North Carolina distribution facility was integrated into the Temecula, California operations, leased manufacturing space in Europe was reduced and the Hong Kong sales office was closed with the selling functions integrated into the Asian sales operations in Malaysia.
Asset Impairment Charge. In the fourth quarter of 2000, the Company recorded an impairment of asset charge of $4.6 million. The charge is related to certain production equipment in the European operations. Utilization of this production equipment declined as newer, more automated equipment was purchased as part of the company's capital expenditure program. As a result, the equipment was written down by $4.6 million to reflect a reduction in the fair value of this equipment.
Income from Operations. As a result of the items discussed above, income from operations decreased $9.7 million or 53.3% from $18.2 million in 1999 to $8.5 million in 2000. As a percentage of sales, income from operations decreased from 15.1% in 1999 to 6.6% in 2000.
Interest Income (Expense). Net interest expense increased from $2.7 million in 1999 to $2.9 million in 2000. The increase is due to a higher debt level to fund working capital and capital expenditures and a higher interest rate in 2000.
Income Taxes. Income taxes were $6.2 million in 1999 and $2.1 million in 2000, with effective tax rates of 40.0% and 36.8% respectively. The decrease in the effective tax rate is due to tax planning strategies associated with international operations that were implemented in 2000.
Liquidity and Capital Resources
Cash and cash equivalents on December 31, 2001 was $8.8 million, an increase of $7.9 million from the December 31, 2000 balance of $0.9 million. Although the Company operated in an industry downturn during 2001 and experienced significant restructuring costs during the year, most of the charges were non-cash and the Company implemented measures to reduce the level of working capital required to operate the business. Of the $33.1 million of special charges recorded in the third quarter of 2001, $28.9 million were non-cash charges. As a result, cash generated from operating activities was $14.0 million in 2001 compared to $8.4 million in 2000.
Net cash used in investing activities was $3.2 million in 2001, a reduction of $8.7 million or 73.1% from the $11.9 million used in 2000. The decline is primarily attributable to Company's actions to reduce capital expenditure projects. Capital expenditures in 1999 and 2000 included major projects for business information systems and factory equipment to automate manual processes and reduce costs. The Company believes it can operate at a substantially lower level of capital expenditures in the near term as these major projects are now essentially complete.
Net cash used in financing activities in 2001 was ($2.9) million primarily due to the repayment of debt. Net cash used in financing activities in 2000 was $1.9 million reflecting drawdowns under the bank Credit Agreement.
The Company anticipates receiving a tax refund in excess of $4.0 million during 2002 as a result of applying 2001 losses to prior years' tax filings.
Accounts receivable decreased from $24.0 million at December 31, 2000 to $13.3 million at December 31, 2001 as a result of lower sales volume, improved collection activity and write offs of delinquent accounts of $1.4 million. In terms of days sales outstanding, receivables decreased from 80 days at December 31, 2000 to 64 days as of December 31, 2001.
Inventories decreased from $21.6 million at December 31, 2000, to $9.8 million at December 31, 2001. An inventory write-off and additional reserves accounted for $8.3 million of the decline. Excluding the inventory write off and additional
reserves, inventory decreased $3.5 million during the period. The reduction was due to efforts to reduce stock levels of finished goods, minimize purchases of raw materials and sell slow moving items.
Accounts payable decreased from $8.0 million at December 31, 2000 to $5.1 million at December 31, 2001 primarily due to lower raw material purchases resulting from lower sales volume.
The Board of Directors, on April 1, 1998, having determined such action to be in the best interest of the Company, authorized a stock repurchase plan of up to $2.0 million worth of Company stock. The plan was subsequently increased to $2.75 million by the Board on December 1, 2000. The Company repurchased 22,985 shares at a cost of approximately $0.2 million in 1999; 30,900 shares of its common stock at a cost of approximately $0.2 million in 2000; and 52,300 shares of its common stock at a cost of $0.3 million in 2001.
The Company has a Credit Agreement with two banks. The outstanding balance bears interest, payable quarterly, at a variable rate based on the Administrative Agent bank's base rate. At December 31, 2001, the Credit Agreement's weighted average interest rate was 7.25%, the outstanding balance was $30.1 million and there was no unused availability under the Credit Agreement. The outstanding balance under the Credit Agreement is due and payable in full on December 31, 2002. In the fourth quarter of 2001 the banks extended the maturity of the Credit Agreement to June 30, 2002. In the first quarter of 2002 the banks extended the maturity of the Credit Agreement to December 31, 2002. The Company will pay an extension fee to the banks on each of June 30, 2002 and September 30, 2002 in the event there is an outstanding balance under the Credit Agreement. The Company is involved in discussions with several financial institutions and believes it should be able to obtain financing to repay in full the outstanding balance under the Credit Agreement on or before December 31, 2002. In the event the Company obtains financing to repay the outstanding balance under the Credit Agreement, it expects to incur refinancing closing costs of no less than $250,000 but does not expect at this time any material increase in the interest rate. In the event the Company does not obtain refinancing of the Credit Agreement by December 31, 2002, and if the banks were to agree to extend the maturity date of the Credit Agreement, the Company would expect the banks to impose requirements such as an extension fee and additional principal payments.
The Credit Agreement contains various financial and operating covenants which, among other things, imposes limitations on the Company's ability to incur additional indebtedness, merge or consolidate, sell assets except in the ordinary course of business, make certain investments, enter into leases and pay dividends. The Company is also required to comply with covenants related to minimum net worth and other financial ratios. The Company was in compliance as of December 31, 2001 with the covenants of the Credit Agreement.
The Company believes that cash flow from operations should be sufficient to fund the Company's capital expenditure and working capital requirements through 2002.
Forward-Looking Statement
This Report on Form 10-K contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are being provided pursuant to that legislation. In addition to the other information contained in this Form 10-K, the following risk factors should be carefully considered in evaluating the Company and its business. The following is not intended as, and should not be considered, an exhaustive list of relevant factors.
Obsolescence and Technological Change
The communications industry is in a state of rapid technological change. The introduction of new technologies, network architectures or changes in industry standards can render the Company's existing products or products under development obsolete or unmarketable. For example, satellite, wireless and other communication technologies under development or currently being deployed may represent a threat to copper, coaxial and fiber optic-based systems by reducing the need for wire-line networks. Further, management anticipates that a number of factors, including network capacity requirements, existing investments in wire-line networks, security and long-term cost effectiveness, will result in growth of wire-line networks. However, there can be no assurance that future advances or further development of these or other new technologies will not have a material adverse effect on the Company's business. The Company's growth strategies are designed, in part, to take advantage of opportunities that the Company believes are emerging as a result of the development of enhanced voice, video, data and other transmission networks, and high-speed Internet access in the telecommunications industry. There can be no assurance that demand resulting from these emerging trends will continue or that the Company's products will be met with market acceptance.
Importance of New Product Development to Growth
A significant factor in the Company's ability to grow and remain competitive will be its ability to anticipate changes in technology and industry standards, and to successfully develop and introduce new products on a timely basis. New product development often requires long-term forecasting of market trends, development and implementation of new designs and processes, and substantial capital commitment. Trends toward consolidation of the communications industry and convergence of technologies may require the Company to quickly adapt to rapidly changing market conditions and customer requirements.
The Company's manufacturing and marketing expertise has enabled it to successfully develop and market new products in the past. However, any failure by the Company to anticipate or respond in a cost-effective and timely manner to technological developments or changes in industry standards or customer requirements, or any significant delays in product development or introduction, could have a material adverse effect on the Company's business, operating results and financial condition.
Concentration of Customers; Limited Backlog
The telecommunications industry is concentrated, with a relatively small number of service providers accounting for a large percentage of the Company's available market. Consequently, the Company's five largest customers accounted for 40.4% and 44.1% of the Company's total net sales in 2000 and 2001, respectively. Two customers, AT&T Broadband and AOL/Time Warner, accounted for 11.2% and 10.4%, respectively, of the Company's total net sales in 2000. One customer, AOL/Time Warner, accounted for 11.2% of the Company's total net sales in 2001. Mergers and acquisitions in the telecommunications industry, which are expected to continue, not only increase the concentration of the industry and of the Company's customer base, but also from time to time delay customers' capital expenditures as newly merged service providers consolidate their operations.
The Company's customers typically require prompt shipment of the Company's products within a narrow timeframe. As a result, the Company has historically operated with a relatively small backlog. Sales and operating results in any quarter are principally dependent upon orders booked and products shipped in that quarter. Further, the Company's customers generally do not enter into long-term supply contracts providing for future purchase commitments for the Company's products. These factors, when combined with the Company's operating leverage (see "Operating Leverage" below) and the need to incur certain capital expenditures and expenses in part based upon the expectation of future sales, may place the Company's operating results at risk to changing customer buying patterns. If sales levels in a particular period do not coincide with the Company's expectations, operating results for that period may be materially and adversely affected.
Dependence on the Telecommunications Industry
The Company expects that sales to the telecommunications industry will continue to represent a substantial portion of its total sales. Demand for products within this industry depends primarily on capital spending by service providers for constructing, rebuilding, maintaining or upgrading their systems. The amount of capital spending and, therefore, the Company's sales and profitability, are affected by a variety of factors, including general economic conditions, access by service providers to financing, government regulation of service providers, demand for services and technological
developments in the telecommunications technology. While the industry generally experienced above average growth in the late 1990's, in 2000 and 2001 the industry was adversely affected by service providers' reductions of their capital expenditures.
The Company's success is dependent upon continued demand for products used in signal transmission systems from the communications industry generally, including both CATV and telephone, which may be affected by factors beyond the Company's control, including the convergence of video, voice, and data transmission systems occurring within the CATV and telephone markets, continuing consolidation of companies within those markets and the provision of Internet access by cable operators and local telephone companies.
Price Fluctuations of Raw Materials; Availability of Complementary Products
The Company's cost of sales may be materially affected by increases in the market prices of the raw materials, including resins, used in the Company's manufacturing processes. The Company does not engage in hedging transactions for such materials, although it periodically enters into contracts for certain raw materials for as much as one year or more. There can be no assurance that price increases in raw materials can be passed on to the Company's customers through increases in product prices. In addition, in order to position itself as a full- line product supplier, the Company relies on certain manufacturers to supply products, including grade level boxes, that complement the Company's own product line. Although the Company believes there are multiple sources of supply for these products, disruptions or delays in the supply of such products could have a material adverse effect on sales of the Company's own products.
Energy Costs and Availability
The Company's cost of sales may be materially affected by increases in the market prices of electricity, natural gas and water used in the Company's manufacturing processes. Recent developments in the State of California, the site of the Company's largest manufacturing operation, not only suggest the energy costs of California manufacturing firms are likely to increase, but also raise the possibility of interruptions in the supply of energy to California's manufacturing firms. There can be no assurance that the Company's energy costs can be passed on to the Company's customers through increases in product prices. Further, disruptions or delays in the supply of electricity, natural gas and water to the Company could have a material adverse effect on sales of the Company's products.
Acquisitions and Failure to Integrate Acquired Businesses
There can be no assurance that the Company will be able to identify and acquire attractive acquisition candidates, profitably manage any such acquired businesses or successfully integrate such acquired businesses into the Company without substantial costs, delays or other problems. Acquisitions involve a number of special risks, including, but not limited to, adverse short-term effects on the Company's reported financial condition or results of operations, diversion of management's attention, dependence on retention, hiring and training of key personnel, risks associated with unanticipated problems or liabilities and amortization of acquired intangible assets, some or all of which could have a material adverse effect on the Company's business, financial condition or results of operations.
In addition, there can be no assurance that any businesses acquired in the future will be profitable at the time of acquisition or will achieve sales and profitability justifying the Company's investment therein or that the Company will realize the synergies expected from such acquisitions.
The failure to obtain any or all of the desired results from acquisitions could have a material adverse effect on the Company's business, financial condition or results of operations.
Operating Leverage
Because the related fixed costs for facilities, product development, engineering, tooling and manufacturing are a relatively high percentage of total costs, the Company's ability to operate profitably is dependent on generating a sufficient volume of product sales, thereby spreading fixed costs over the sales base. Due to this "operating leverage", a reduction in sales or the rate of sales growth has had in the past and could have in the future a disproportionately adverse effect on the Company's financial results.
Seasonality and Fluctuations in Operating Results
The Company's business is seasonal in nature, with the first and fourth quarters generally reflecting lower sales due to the impact of adverse weather conditions on construction projects that may alter or postpone the needs of customers for delivery of the Company's products. In addition, first quarter sales also typically reflect customer delays in implementation of their annual capital expenditure plans. The Company's operating results may also fluctuate significantly from quarter to quarter due to several other factors, including the volume and timing of orders from, and shipments to, major customers, the timing of new product introductions and deployment as well as the availability of products by the Company or its competitors, the overall level of capital expenditures by CATV operators and telephone companies, market acceptance of new and enhanced versions of the Company's products, variations in the mix of products the Company sells, and the availability and costs of raw materials.
Risks Associated with International Operations
International sales, including export sales from U.S. operations, accounted for 34.5%, 32.5% and 27.2% of the Company's net sales in 1999, 2000 and 2001 respectively, and the Company expects that international sales may increase as a percentage of sales in the future. Due to its international sales, the Company is subject to the risks of conducting business internationally, including unexpected changes in or impositions of legislative or regulatory requirements, fluctuations in the U.S. dollar which could materially adversely affect U.S. dollar revenues or operating expenses, tariffs and other barriers and restrictions, longer collection cycles, greater difficulty in accounts receivable collection, potentially adverse taxes and the burdens of complying with a variety of international laws and communications standards. The Company is also subject to general geopolitical risks, such as political and economic instability and changes in diplomatic and trade relationships, in connection with its international operations. There can be no assurance that these risks of conducting business internationally will not have a material adverse effect on the Company's business.
Competition
The industries in which the Company operates are highly competitive. The level and intensity of competition may increase in the future. The Company's competition includes a company that has a significant market share in telephone connectivity. The Company's business strategy includes continued focus on telephone connectivity. There can be no assurance that the Company will be able to compete successfully against its competitors, many of whom have access to greater financial resources than the Company.
Disruptions at the Company's Manufacturing Facility; Lease with Related Party
The majority of the Company's manufacturing operations are currently located at the Company's facilities in Temecula, California, which also includes the Company's principal warehouse and corporate office operations. The Company's success depends in large part on the orderly operation of these facilities. Because the Company's manufacturing operations and administrative departments are concentrated at this facility, a fire, earthquake, power interruption or other disaster at this facility could materially and adversely affect its business and results of operations. The Company maintains standard property and earthquake insurance on this facility as well as business interruption insurance and back-up data systems.
The Company currently leases a portion of its Temecula facilities from William H. Channell, Sr., a principal stockholder and Chairman of the Board of the Company. The Company believes the terms of these leases are no less favorable than would be available from an unrelated third party after arm's length negotiations. Although the Company has renewal options through the year 2015 under these leases, there can be no assurance that the Company and Mr. Channell, Sr. will be able to agree on additional renewal terms for the properties currently leased by the Company. The failure of the Company to renew the leases would require the Company to relocate its existing facilities, which could have a material adverse affect on the Company's business, financial condition or results of operations.
Dependence on Key Personnel
The future success of the Company depends in part on its ability to attract and retain key executive, engineering, marketing and sales personnel. Key personnel of the Company include Richard A. Cude, Chief Executive Officer, William H. Channell, Jr., the President and Chief Operating Officer, and the other executive officers of the Company. The market for qualified personnel in the communications industry is competitive, and the loss of certain key personnel could have a material adverse affect on the Company. The Company has entered into employment contracts with Mr. Cude and Mr. Channell, Jr.
Changing Regulatory Environment
The communications industry is subject to regulation in the United States and other countries. Federal and state agencies regulate most of the Company's domestic customers. Changes in current or future laws or regulations, in the United States or elsewhere, could materially adversely affect the Company's business.
Uncertain Ability to Manage Industry Volatility
The Company's business has required, and is expected to continue to require, significant Company resources in terms of personnel, management and other infrastructure. The Company's ability to manage effectively the volatility of the telecommunications industry requires it to attract, train, motivate and manage new employees successfully, to integrate new employees into its overall operations and to continue to improve its operational, financial and management information systems.
Environmental Matters
The Company is subject to a wide variety of federal, state and local environmental laws and regulations and uses a limited number of chemicals that are classified or could be classified as hazardous or similar substances. Although management believes that the Company's operations are in compliance in all material respects with current environmental laws and regulations, the Company's failure to comply with such laws and regulations could have a material adverse effect on the Company.
Selected Quarterly Financial Data
Set forth below is certain unaudited quarterly financial information. (See also Footnote Q to the Financial Statements included elsewhere herein.) The Company believes that all necessary adjustments, consisting only of normal recurring adjustments, have been included in the amounts stated below to present fairly, and in accordance with generally accepted accounting principles, the selected quarterly information when read in conjunction with the Financial Statements.
Item 7a.
Item 7a. Quantitative and Qualitative Disclosures about Market Risk ----------------------------------------------------------
The market risk inherent in the Company's market risk sensitivity instruments is the potential loss arising from adverse changes in interest rates and foreign currency exchange rates. All financial instruments held by the Company and described below are held for purposes other than trading.
Market Risk
The Company's credit facility allows the outstanding balance to bear interest at a variable rate based on the Administrative Agent bank's base rate. The credit facility exposes operations to changes in short-term interest rates since the interest rates on the credit facility are variable.
If the variable rates on the Company's credit facility were to increase by 1% from the rate at December 31, 2001, and if the Company had borrowed during all of fiscal 2001 the maximum amount ($40.0 million) available at any time in 2001 under its credit facility at the increased interest rate, the Company's interest expense would have increased, and net loss would have increased by $0.2 million. A marginal income tax rate of 38.0% was used. This analysis does not consider the effects of economic activity on the Company's sales and profitability in such an environment.
Foreign Exchange Risk
The Company has assets and liabilities outside the United States that are subject to fluctuations in foreign currency exchange rates. Assets and liabilities outside the United States are primarily located in the United Kingdom, Australia and Canada. The Company's investment in foreign subsidiaries with a functional currency other than the U.S. dollar are generally considered long-term. Accordingly, the Company does not hedge these net investments. The Company also purchases a limited portion of its raw materials from foreign countries. These purchases are generally denominated in U.S. dollars and are accordingly not subject to exchange rate fluctuations. The Company has not engaged in forward foreign exchange and other similar contracts to reduce its economic exposure to changes in exchange rates because the associated risk is not considered significant.
Item 8.
Item 8. Financial Statements and Supplementary Data -------------------------------------------
Consolidated Financial Statements of Channell Commercial Corporation are as follows:
Financial statement schedules are as follows:
Schedule II - Valuation and Qualifying Accounts
All remaining schedules are omitted because they are not applicable, or the required information is included in the financial statements or the notes thereto.
Item 9.
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.
PART III
Item 10.
Item 10. Executive Officers and Directors --------------------------------
The following table sets forth information with respect to the Company's executive officers and directors and their ages as of December 31, 2001.
The Company's Board of Directors was comprised of six members at December 31, 2001. The directors of the Company are staggered into three classes, with the directors in a single class elected at each annual meeting of stockholders to serve for a term of three years or until their successors have been elected and qualified. The authorized number of members of the Board of Directors is currently seven. The executive officers of the Company serve at the pleasure of the Board of Directors.
William H. Channell, Sr., the son of the Company's founder, James W. Channell, has been the Chairman of the Board since July, 1996. From 1966 to November, 2001, Mr. Channell, Sr. was Chief Executive Officer. Mr. Channell, Sr. is a co-trustee of the Channell Family Trust, which is a principal stockholder of the Company, and is the husband of Jacqueline M. Channell and the father of William H. Channell, Jr. His term as a Director expires in 2002.
Richard A. Cude became a Director of the Company during 1996 and became Chief Executive Officer in November, 2001. Mr. Cude was the General Manager of the Los Angeles Support Center for Courtaulds PLC London, England and served in various capacities with Courtaulds from 1988 until his retirement in 1998. Prior to 1998, Mr. Cude had been with various companies involved in the manufacturing and marketing of products to the aerospace and telecommunications industries. Mr. Cude's term as a Director expires in 2003.
William H. Channell, Jr. has been President and Chief Operating Officer of the Company since 1996. He has been a Director of the Company since 1984. Since joining the Company in 1979, Mr. Channell, Jr. has held the positions of Executive Vice President, Director of Marketing and National Sales Manager. Mr. Channell, Jr. is a principal stockholder of the Company and is the son of William H. Channell, Sr. and Jacqueline M. Channell. His term as a Director expires in 2003.
Jacqueline M. Channell has been 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 2004.
Eugene R. Schutt, Jr. has been a Director of the Company since 1996. Mr. Schutt is the President and CEO of FirstDoor.com, Inc. Prior to joining FirstDoor.com, he served as CEO of CD1Financial.com, an automotive finance and leasing company owned by CarsDirect.com. Mr. Schutt has also served as President of Avco Financial Services and Pratt Industries, Inc. Mr. Schutt has over 26 years of experience in executive management positions and has served on the board of directors of numerous companies. Mr. Schutt's term as a Director expires in 2002.
Peter J. Hicks became a Director of the Company in March, 2000 and became Secretary in November of 2001. Mr. Hicks is a managing director of Linx Partners, an investment firm specializing in private industrial equity investments. From 1987 to 1999, Mr. Hicks was a managing director of Schroder and Company. Mr. Hicks has more than 23 years of investment banking and corporate finance experience and has served on the board of directors of numerous companies. Mr. Hicks' term as a Director expires in 2004.
Edward J. Burke has been the Company's Vice President, Corporate Engineering since May 1996 and has served in various similar capacities with the Company since 1984. Mr. Burke has held various technical positions in the thermoplastic product engineering and tooling design field since 1978.
Graham Gardner joined the Company in 1998 as Managing Director, Europe as a result of the acquisition of Egerton. Mr. Gardner had been Managing Director of Egerton since 1986. Mr. Gardner has been in the telecommunications equipment industry since 1971.
Timothy Hankinson joined the Company in 1998 as Managing Director, Australia and Asia as a result of the acquisition of Egerton. Mr. Hankinson had been Managing Director of Egerton since 1991. Prior to 1991, Mr. Hankinson had served as General Manager of an Australian aircraft manufacturer.
John B. Kaiser has been the Company's Vice President, North American Sales since 1999. He held the position of Director of Marketing for the Company from 1987 to 1991 and he was Vice President, Broadband Division from 1995 through 1998. Between 1991 and 1995, 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.
Thomas Liguori has been the Company's Chief Financial Officer since April 2000. Mr. Liguori joined the Company from Dole Food Company, where he served as Chief Financial Officer of Dole Europe in Paris, France. From 1992 to 1996 he held various financial positions with Teledyne Inc., including Vice President, Finance for a manufacturer of consumer and industrial products. From 1986 to 1992 Mr. Liguori was a management consultant with Deloitte & Touche. He has 20 years of financial, accounting and management experience.
Gary M. Napolitano joined the Company in January 1997 as Vice President and General Manager of RF Products as a result of the acquisition of RMS. Mr. Napolitano had been President of RMS since 1992 and was the Vice President, Finance prior to becoming President.
Andrew M. Zogby has been the Company's Vice President, Corporate Marketing since March 1996. Prior to joining the Company, Mr. Zogby was Director of Strategic Marketing, Broadband Connectivity Group for ADC Telecommunications, a publicly traded, telecommunications equipment supplier to both telephone and CATV network providers worldwide. He had been with ADC Telecommunications since 1990. Mr. Zogby has held various technical marketing positions in the telecommunications equipment industry since 1984.
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. Upon the retirement of William H. Channell, Sr. as Chief Executive Officer, Mr. Channell, Sr. also receives a non-management retainer and attendance fee. In addition, pursuant to the Company's 1996 Incentive Stock Plan (as described below), each non-management director (including Mrs. Channell) received options to acquire 1,000 shares of the Company's Common Stock with an exercise price equal to the Initial Public Offering price, and on the date of each of the Company's annual stockholder meetings after the Initial Public Offering, each non-management director (including non-executive officers who serve as directors) serving on the Board of Directors immediately following such meeting are to receive options to acquire an additional 1,000 shares of the Company's Common Stock with an exercise price equal to the market value of the Common Stock on the date such options are granted. These options will become exercisable at a rate of 33 1/3% per year commencing on the first anniversary of the date of issuance and will have a term of 10 years.
Section 16(a) Beneficial Ownership Reporting Compliance
Information required by Item 405 of Regulation S-K is incorporated by reference to the Company's Proxy Statement relating to its 2002 annual meeting of stockholders.
Item 11.
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 five additional most highly compensated executive officers for the years ended December 31, 1999, 2000 and 2001 (collectively, the "Named Officers").
(1) For each individual named, compensation excludes perquisites and other personal benefits that did not exceed the lesser of $50,000 or 10% of the total annual salary and bonus reported for such individual.
(2) Payments to the Company's 401K plan. (3) Richard A. Cude became Chief Executive Officer in November, 2001. (4) Richard A. Cude's Other Annual Compensation in 1999, 2000 and 2001 was for his services as a Company Director. (5) The bonus of William H. Channell, Jr. shown in 2001 is based on Company performance in 2000. (See "Incentive Compensation Plan".) (6) The bonus of William H. Channell, Jr. shown in 2000 is based on Company performance in 1999. (See "Incentive Compensation Plan".)
1996 Incentive Stock Plan
The Company's 1996 Incentive Stock Plan (the "Stock Plan") currently permits the granting to the Company's key employees, directors and other service providers of (i) options to purchase shares of the Company's Common Stock and (ii) shares of the Company's Common Stock that are subject to certain vesting and other restrictions ("Restricted Stock"). Initially, a maximum of 750,000 shares of Common Stock were reserved for issuance under the Stock Plan. In 1999, the Stock Plan was amended to allow a maximum of 1,500,000 shares to be issued under the Plan.
During 2001, the Company granted 274,330 "non-qualified" options to 18 employees and directors. After cancellation of options previously issued to terminated employees, there were options to acquire 1,090,383 shares of Common Stock outstanding at December 31, 2001. These options vest at a rate of 33 1/3% per year beginning on the first anniversary of the date of issuance and have a term of 10 years.
The Stock Plan is administered by the Compensation Committee of the Board of Directors. The aggregate number of stock options or shares of Restricted Stock that may be granted to any single participant under the Stock Plan during any fiscal year of the Company is 100,000. The purpose of the Stock Plan is to secure for the Company and its stockholders the benefits arising from stock ownership by key employees, directors and other service providers selected by the Compensation Committee.
All options granted under the Stock Plan are non-transferable and exercisable in installments determined by the Compensation Committee, except that each option is to be exercisable in minimum annual installments of 20% commencing with the first anniversary of the option's grant date. Each option granted has a term specified in the option agreement, but all options expire no later than ten years from the date of grant. Options under the Stock Plan may be designated as "incentive stock options" for federal income tax purposes or as options which are not qualified for such treatment, or "non-qualified stock options". In the case of incentive stock options, the exercise price must be at least equal to the fair market value of the stock on the date the option is granted. The exercise price of a non-qualified option need not be equal to the fair market value of the stock at the date of grant, but may be granted with any exercise price which is not less than 85% of the fair market value at the time the option is granted, as the Compensation Committee may determine. The aggregate fair market value (determined at the time the options are granted) of the shares covered by incentive stock options granted to any employee under the Stock Plan (or any other plan of the Company) which may become exercisable for the first time in any one calendar year may not exceed $100,000.
Upon exercise of any option, the purchase price must generally be paid in full either in cash or by certified or cashier's check. However, in the discretion of the Compensation Committee, the terms of a stock option grant may permit payment of the purchase price by means of (i) cancellation of indebtedness owed by the Company, (ii) delivery of shares of Common Stock already owned by the optionee (valued at fair market value as of the date of exercise), (iii) delivery of a promissory note secured by the shares issued, (iv) delivery of a portion of the shares issuable upon exercise (i.e., exercise for the "spread" on the option payable in shares), or (v) any combination of the foregoing or any other means permitted by the Compensation Committee.
Any grants of restricted stock will be made pursuant to Restricted Stock Agreements, which will provide for vesting of shares at a rate to be determined by the Compensation Committee with respect to each grant of restricted stock. Until vested, shares of restricted stock are generally non-transferable and are forfeited upon termination of employment. The Company has not made any grants of restricted stock.
Options/SAR Grants Table
The following table sets forth the stock options granted to the named officers for the year ended December 31, 2001.
Aggregated Option/SAR Exercises in Last Fiscal Year and December 31, 2001 Option/SAR Values
The following table sets forth the number and value of outstanding stock options at December 31, 2001. No options have been exercised in 2001.
Profit Sharing and Savings Plans
The Company maintains a plan, established in 1993, in accordance with Section 401(K) of the Internal Revenue Code. Under the terms of this plan, eligible employees may make voluntary contributions to the extent allowable by law. Employees of the Company are eligible to participate in the plan after 90 days of employment. Matching contributions by the Company to this plan are discretionary and will not exceed that allowable for Federal income tax purposes. The Company's contributions are vested over five years in annual increments.
Employment Contracts
The Company entered into a one-year employment agreement, renewable annually, with Richard A. Cude in November, 2001, when he became Chief Executive Officer. Mr. Cude's annual salary is $250,000. Mr. Cude is entitled to participate in the Incentive Stock Plan, the 401(k) Plan and the Incentive Compensation Plan. Mr. Cude is also 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.
The Company entered in July, 1996 into a five year employment agreement, renewable every five years, with William H. Channell, Jr. Mr. Channell, Jr.'s annual salary is $598,000. Mr. Channell, Jr. is entitled to participate in the Incentive Stock Plan, the 401(k) Plan and the Incentive Compensation Plan. Mr. Channell, Jr. is also 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.
The Company had an employment agreement with Mr. William H. Channell, Sr. when he served as Chief Executive Officer, the position he held at the time of his retirement as an employee in November, 2001. His initial salary under the agreement was $520,000. Mr. Channell, Sr.'s salary was subject to annual cost of living increases. In 1999, Mr. Channell, Sr. reduced his hours of contribution to the Company. He agreed to reduce his compensation proportionally by $100,000 to $420,000. In 2001, Mr. Channell, Sr. further reduced his hours with the Company and agreed to reduce his compensation to $250,000. In November 2001, Mr. Channell, Sr. resigned as an employee of the Company. Mr. Channell, Sr.'s benefits included (i) during the term of the agreement, the payment of premiums for a term disability policy providing for $250,000 in annual benefits in the case of his temporary or permanent disability, (ii) during the lifetime of Mr. Channell, Sr. and his wife, Jacqueline M. Channell, medical insurance for each of Mr. and Mrs. Channell comparable to that provided to the Company's senior executive officers, subject to a premium reimbursement obligation in the case of the medical insurance provided to Mrs. Channell, and (iii) during Mr. Channell, Sr.'s lifetime, a portion of the premiums on a life insurance policy owned by Mr. Channell, Sr., under which Mrs. Channell is the beneficiary.
Incentive Compensation Plan
Effective beginning in the Company's 1996 fiscal year, the Board of Directors adopted the Company's 1996 Performance-Based Annual Incentive Compensation Plan (the "Incentive Plan"). Eligible participants consist of key employees of the Company. The Incentive Plan is administered by the Compensation Committee of the Board of Directors. The amount of awards granted under the Incentive Plan are determined based on an objective computation of the actual performance of the Company relative to pre-established performance goals. Measures of performance may include level of sales, EBITDA, net income, income from operations, earnings per share, return on sales, expense reductions, return on capital, stock appreciation, return on equity, invention, design or development of proprietary products or improvements thereto (patented or otherwise), or sales of such proprietary products or improvements or profitability achieved from sales of proprietary products or improvements. Awards under the Incentive Plan are payable in cash or, at the election of the Compensation Committee, Common Stock of the Company. Mr. William H. Channell, Jr., the Company's President, receives a bonus calculated using the factors above, but such bonus is earned and payable based on continued service in subsequent years. The Compensation Committee may establish a bonus pool from which all awards under the Incentive Plan may be granted as well as individual, non-bonus pool awards. No participant in the Incentive Plan may receive awards under such plan during any fiscal year of the Company in excess of $1,000,000 or 100,000 shares of Common Stock.
The Company's executive compensation program is administered by the Compensation Committee of the Board of Directors. During 2001, this Committee was composed of Mr. Richard A. Cude, Mr. Eugene R. Schutt, Jr. and Mr. Peter J. Hicks. 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, 2001 with the performance of the NASDAQ market, the S & P Industrials and a similar Industry Index for the same period.
[CHART]
Line Chart
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN* AMONG CHANNELL COMMERCIAL CORPORATION, THE NASDAQ STOCK MARKET (U.S.) INDEX,THE S & P INDUSTRIALS INDEX AND THE S & P COMMUNICATIONS EQUIPMENT INDEX
*$100 invested on 12/31/96 in stock or index-including reinvestment of dividends. Fiscal year ending December 31.
Item 12.
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 record holder of such shares).
(1) Refers to the number of shares covered by options exercisable within 60 days of March 15, 2002.
Security Ownership of Management
The following table sets forth certain information, as of March 15, 2002, 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.
(1) Refers to the number of shares covered by options exercisable within 60 days of March 15, 2002.
Item 13.
Item 13. Certain Relationships and Related Transactions ----------------------------------------------
The Company has two leases for approximately 261,000 square feet of manufacturing, warehouse and office space in Temecula, California, with William H. Channell, Sr., a principal stockholder and the Chairman of the Board of the Company. The term of the first lease is through December 31, 2005, with two five-year renewal options. Additionally, an adjacent 100,000 square foot building was constructed and completed in 1996. Subsequent to December 31, 1996, the Company guaranteed debt of Mr. Channell, Sr. of approximately $2.7 million incurred in connection with construction of the building. The loan amount subject to the guarantee is expected to decline before expiring in 2016. At December 31, 2001, the outstanding loan balance subject to the guarantee totaled $1.9 million. 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. This building is also being leased from Mr. Channell, Sr. through 2005, with two five-year renewal options. Both leases provide for payments of insurance, repairs, maintenance and property taxes. Rent expense paid under the leases was $1.1 million, $1.2 million and $1.1 million for the years ended December 31, 1999, 2000 and 2001, respectively. 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. As part of the restructuring plan announced in the third quarter of 2001, the Company has vacated warehouse space in one of the facilities. The Company intends to sublease the vacated warehouse space.
In January 2001, the Company guaranteed personal debt of the Company's President and Chief Operating Officer of $0.6 million. The guarantee was canceled by the lender in March 2002. In connection with this guarantee, the Company's President and Chief Operating Officer paid the Company a fee equal to 1% of the loan balance and provided as collateral to the Company 300,000 shares of Company stock. It is not practicable to estimate the fair value of the guarantee.
During 2001 the Company paid certain personal expenses on behalf of the President and Chief Operating Officer (in part through a corporate credit card which is reimbursed pursuant to an agreement between the Company and the President). These amounts are non-interest bearing. The maximum balance outstanding was $105,116 and the balance at December 31, 2001 was $48,166.
The Company purchased insurance through Talbot Agency Inc. in 1999, 2000 and 2001. Roy H. Taylor, President of Talbot Agency Inc. is a co-trustee of the Taylor Family Trust, a beneficial owner of more than 5% of the Company's outstanding stock. The total premiums and fees paid for insurance obtained through Talbot Agency Inc. for the years ended December 31, 1999, 2000 and 2001 was $1.6 million, $1.4 million and $1.3 million respectively, which included commissions earned.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K --------------------------------------------------------------- (a) The following financial statements and schedules are filed as a part of this report: (1) Consolidated Financial Statements See index included in Part II, Item 8. (2) Consolidated Financial Statement Schedules Schedule II - Valuation and Qualifying Accounts All remaining 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: (5) Filed herewith.
Exhibit Number Description - ------- ----------- 3.1 Restated Certificate of Incorporation of the Company (1) 3.2 Bylaws of the Company (1) 4 Form of Common Stock Certificate (1) 10.1 Tax Agreement between the Company and the Existing Stockholders (1) 10.2 Channell Commercial Corporation 1996 Incentive Stock Plan (including form of Stock Option Agreements and Restricted Stock Agreement) (1) 10.3 Senior Revolving Loan Agreement dated as of May 1, 1998, between the Company and Fleet National Bank (3) 10.4 Second Amendment to Credit Agreement and Consent dated December 29, 1999, between the Company and Fleet National Bank (6) 10.5 Second Amendment to Security Agreement dated February 1, 2000, between the Company and Fleet National Bank (6) 10.6 Third Amendment to Credit Agreement and accompanying Notes dated July 20, 2000, between the Company and Fleet National Bank (6) 10.7 Fourth Amendment to Credit Agreement dated May 31, 2001, between the Company and Fleet National Bank (7) 10.8 Employment Agreement between the Company and William H. Channell, Sr. (1) 10.9 Employment Agreement between the Company and William H. Channell, Jr. (1) 10.10 Channell Commercial Corporation 1996 Performance-Based Annual Incentive Compensation Plan (1) 10.11 Lease dated December 22, 1989 between the Company and William H. Channell, Sr., as amended (1) 10.12 Lease dated May 29, 1996 between the Company and the Channell Family Trust (1) 10.14 Lease dated September 24, 1997 between the Company and SCI North Carolina Limited Partnership (4) 10.15 Lease dated October 26, 2000 between the Company and Belston Developments Inc. (6) 10.16 Lease Agreement dated as of March 1, 1996 between Winthrop Resources Corp. and the Company (1) 10.17 Form of Indemnity Agreement (1) 10.18 Form of Agreement Regarding Intellectual Property (1) 10.19 401(k) Plan of the Company (5) 10.22 A.C. Egerton (Holdings) PLC Share Purchase Agreement (3) 10.23 Amendment to Employment Agreement, William H. Channell Jr., dated December 31, 1998 (5) 10.24 Agreement dated November 7, 2001 between the Company and Fleet Bank, as Administrative Agent (8) 10.25 Employment Agreement between the Company and Richard A. Cude. (9) 10.26 Fifth Amendment, dated December 17, 2001, to the Credit Agreement between the Company and Fleet National Bank, as Administrative Agent for the lenders. (9) 10.27 Sixth Amendment, dated March 21, 2002, to the Credit Agreement between the Company and Fleet National Bank, as Administrative Agent for the lenders. (9)
11 Computation of Proforma Income per Share (2) 23 Consent of Independent Certified Public Accountants (9) (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended September 30, 2001.
(1) Incorporated by reference to the indicated exhibits filed in connection with the Company's Registration Statement on Form S-1 (File No. 333-3621). (2) Incorporated by reference to the indicated exhibits filed in connection with the Company's Form 10-K on March 31, 1997. (3) Incorporated by reference to the indicated exhibits filed in connection with the Company's Form 8-K on May 18, 1998. (4) Incorporated by reference to the indicated exhibits filed in connection with the Company's Form 10-Q on May 6, 1998. (5) Incorporated by reference to the indicated exhibits filed in connection with the Company's Form 10-K on March 31, 1999. (6) Incorporated by reference to the indicated exhibits filed in connection with the Company's Form 10-K on April 2, 2001. (7) Incorporated by reference to the indicated exhibits filed in connection with the Company's Form 10-Q on August 14, 2001. (8) Incorporated by reference to the indicated exhibits filed in connection with the Company's Form 10-Q on November 14, 2001. (9) Filed herewith
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders Channell Commercial Corporation
We have audited the consolidated balance sheets of Channell Commercial Corporation as of December 31, 2000 and 2001, and the related consolidated statements of operations and comprehensive income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Channell Commercial Corporation as of December 31, 2000 and 2001, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America.
We have also audited Schedule II of Channell Commercial Corporation for each of the three years ended December 31, 2001. In our opinion, this schedule presents fairly, in all material respects, the information required to be set forth therein.
/s/ Grant Thornton LLP Los Angeles, California February 8, 2002, except for Note F as to which the date is March 1, 2002
CHANNELL COMMERCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, (amounts in thousands)
2000 2001 -------- -------
ASSETS CURRENT ASSETS Cash and cash equivalents $ 913 $ 8,762 Accounts receivable, net 24,007 13,301 Inventories 21,620 9,776 Deferred income taxes 1,171 1,473 Prepaid expenses and miscellaneous receivables 1,966 1,238 Income taxes receivable 1,854 5,076 -------- -------
Total current assets 51,531 39,626
PROPERTY AND EQUIPMENT, net 48,669 38,718
DEFERRED INCOME TAXES 2,102 5,509
INTANGIBLE ASSETS, net of amortization of $2,361 and $3,057 in 2000 and 2001 13,931 1,463
OTHER ASSETS 515 446 -------- -------
$116,748 $85,762 ======== =======
The accompanying notes are an integral part of these statements.
CHANNELL COMMERCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS - CONTINUED
December 31, (amounts in thousands)
The accompanying notes are an integral part of these statements.
CHANNELL COMMERCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
Year ended December 31, (amounts in thousands, except per share data)
The accompanying notes are an integral part of this statement.
CHANNELL COMMERCIAL CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Years ended December 31, 1999, 2000 and 2001 (amounts in thousands)
The accompanying notes are an integral part of this statement.
CHANNELL COMMERCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31, (amounts in thousands)
The accompanying notes are an integral part of these statements.
CHANNELL COMMERCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Year ended December 31, (amounts in thousands)
The accompanying notes are an integral part of these statements.
CHANNELL COMMERCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 2000 and 2001 (amounts in thousands, except per share data)
NOTE A--DESCRIPTION OF BUSINESS
The Company is a designer and manufacturer of telecommunications equipment supplied to telephone, cable television and power utility network providers worldwide. Major product lines include a complete line of thermoplastic and metal fabricated enclosures, advanced copper termination and connectorization products, fiber optic cable management systems, coaxial-based passive RF electronics and heat shrink products. The Company's enclosure products house, protect and provide access to advanced telecommunications hardware, including both radio frequency electronics and photonics, and transmission media, including coaxial cable, copper wire and optical fibers, used in the delivery of voice, video and data services. The enclosure products are deployed within the portion of a local signal delivery network, commonly known as the "outside plant" or "local loop", that connects the network provider's signal origination office with residences and businesses.
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Estimates--In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Significant estimates include the inventory valuation reserve, restructuring accruals associated with vacated facilities and the deferred tax asset valuation allowance. Actual results could differ from those estimates and the differences could be material.
Basis of Consolidation--The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany transactions and balances have been eliminated.
Foreign Currency Translation--Assets and liabilities of foreign operations are translated into U.S. dollars at current exchange rates. Income and expenses are translated into U.S. dollars at average rates of exchange prevailing during the period. Adjustments resulting from translating foreign functional currency financial statements into U.S. dollars are included in other comprehensive income. Foreign currency transaction gains and losses are included in general and administrative expenses. In 2000, foreign currency transaction gains totaled $328, resulting primarily from borrowings payable in foreign currencies. Transactions gains and losses were not significant in 1999 or 2001.
Cash and Cash Equivalents--For purposes of reporting cash flows, cash and its equivalents include cash on hand, cash in banks and short-term investments with original maturities of 90 days or less.
CHANNELL COMMERCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(Continued)
December 31, 1999, 2000 and 2001 (amounts in thousands, except per share data)
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
Inventories--Inventories are stated at the lower of cost or market. Cost is determined by the first-in, first-out method of accounting.
Property and Equipment--Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Capital lease assets are amortized using the straight-line method over the useful lives of the assets. Expenditures for all maintenance and repairs are charged against income. Additions, major renewals and replacements that increase the useful lives of assets are capitalized. Amortization of leasehold improvements is computed using the straight-line method over the shorter of the lease term or the estimated useful life of the leasehold improvements.
Intangible Assets--The excess of cost over net assets acquired (goodwill) is being amortized on a straight-line basis over periods ranging from 15 to 20 years. Other acquired intangibles were being amortized on a straight-line basis over their estimated useful lives of 3 years and were fully amortized by December 31, 1999. The Company reviews the carrying value of intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If an evaluation is required, the estimated future undiscounted cash flows associated with the asset would be compared to the asset's carrying amount to determine if a write-down to market value or discounted cash flow is required. Amortization expense charged to income amounted to $863, $876 and $696 in 1999, 2000 and 2001, respectively.
Revenue Recognition--The Company recognizes revenue from product sales at the time of shipment.
Shipping Costs--Shipping and handling costs are charged to expense as incurred. Total shipping costs of $499, $1,839 and $1,752 are included in general and administrative expenses for 1999, 2000 and 2001, respectively.
Income taxes--Deferred income taxes reflect the impact of temporary differences between the amounts of assets and liabilities recognized for financial reporting purposes and the amounts recognized for income tax purposes. These deferred income taxes are measured by applying currently enacted income tax rates. A valuation allowance reduces deferred income tax assets when it is more likely than not that some portion or all of the deferred income tax assets will not be realized.
Income (loss) per share--Basic income (loss) per share excludes dilution and is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted income per share reflects the potential dilution that could occur if options to acquire common stock were exercised.
CHANNELL COMMERCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(Continued)
December 31, 1999, 2000 and 2001 (amounts in thousands, except per share data)
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
The following is a reconciliation of the number of shares (denominator) used in the basic and diluted income per share computations:
1999 2000 2001 --------------- --------------- ---------------- Per Per Per Share Share Share Shares Amount Shares Amount Shares Amount ------ ------ ------ ------ ------ -------
Basic income per share 9,094 $ 1.03 9,091 $ 0.39 9,050 $ (2.78) Effect of dilutive stock options 17 (.01) 35 -- -- -- ----- ------ ----- ------ ----- ------- Diluted income per share 9,111 $ 1.02 9,126 $ 0.39 9,050 $ (2.78) ===== ====== ===== ====== ===== =======
The following options were not included in the computation of diluted income (loss) per share due to their antidilutive effect:
Fair value of financial instruments--The carrying amount of cash, accounts receivable, accounts payable, accrued expenses and short-term borrowings approximates fair value because of the short maturity of these financial instruments. Long-term obligations are carried at amounts that approximate fair value. The estimated fair value of the long-term obligations is based on borrowing rates currently available to the Company for loans with similar terms and maturities.
CHANNELL COMMERCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(Continued)
December 31, 1999, 2000 and 2001 (amounts in thousands, except per share data)
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
Reclassifications--Certain reclassifications have been made to the 1999 and 2000 financial statements to conform with the 2001 presentation, including the reclassification of the 2000 accrued restructuring liability from accrued expenses on the consolidated balance sheet.
Recent Accounting Pronouncements--On July 20, 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) 141, Business Combinations, and SFAS 142, Goodwill and Intangible Assets. SFAS 141 is effective for all business combinations completed after June 30, 2001. SFAS 142 is effective for fiscal years beginning after December 15, 2001; however, certain provisions of this Statement apply to goodwill and other intangible assets acquired between July 1, 2001 and the effective date of SFAS 142. Major provisions of these Statements and their effective dates for the Company are as follows:
. All business combinations initiated after June 30, 2001 must use the purchase method of accounting.
. Intangible assets acquired in a business combination must be recorded separately from goodwill if they arise from contractual or other legal rights or are separable from the acquired entity and can be sold, transferred, licensed, rented or changed, either individually or as part of a related contract, asset or liability.
. Goodwill, as well as intangible assets with indefinite lives, acquired after June 30, 2001, will not be amortized. Effective January 1, 2002, all previously recognized goodwill and intangible assets with indefinite lives will no longer be subject to amortization.
. Effective January 1, 2002, goodwill and intangible assets with indefinite lives will be tested for impairment annually and whenever there is an impairment indicator.
. All acquired goodwill must be assigned to reporting units for purposes of impairment testing and segment reporting.
The Company will continue to amortize goodwill under its current method until January 1, 2002, at which time annual and quarterly goodwill amortization of $135 and $34 will no longer be recognized. By June 30, 2002 the Company will have completed a transitional fair value based impairment test of goodwill as of January 1, 2002. Impairment losses, if any, resulting from the transitional testing will be recognized in the quarter ending March 31, 2002, as a cumulative effect of a change in accounting principle. The Company believes the adoption of SFAS 142 will not have a material impact on its consolidated financial position or results of operations.
CHANNELL COMMERCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(Continued)
December 31, 1999, 2000 and 2001 (amounts in thousands, except per share data)
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
Recent Accounting Pronouncements (continued)--In June 2001, the FASB issued Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations" (SFAS 143), which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and associated asset retirement costs. The new rules apply to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and (or) normal operation of a long-lived asset. SFAS 143 is effective for the Company at the beginning of fiscal 2003. The Company believes the adoption of SFAS 143 will not have a material impact on its consolidated financial position or results of operations.
In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS 144). SFAS 144 establishes a single accounting model for the Impairment or disposal of long-lived assets, including discontinued operations. SFAS 144 superseded Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (SFAS 121), and APB Opinion No. 30, Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. The provisions of SFAS 144 are effective in fiscal years beginning after December 15, 2001, with early adoption permitted, and in general are to be applied prospectively. The Company believes the adoption of SFAS 144 will not have a material impact on its consolidated financial position or results of operations.
NOTE C--INVENTORIES
Inventories are summarized as follows:
2000 2001 -------- --------
Raw materials $ 6,429 $ 4,738 Work-in-process 3,575 2,605 Finished goods 11,616 2,433 -------- --------
$ 21,620 $ 9,776 ======== ========
CHANNELL COMMERCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(Continued)
December 31, 1999, 2000 and 2001 (amounts in thousands, except per share data)
NOTE D--PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows:
Included in machinery and equipment is $10,052 of equipment under capital lease at December 31, 2000 and 2001. Accumulated amortization of assets under capital lease totaled $3,985 and $5,973 at December 31, 2000 and 2001, respectively. See Note G.
Pursuant to its policy, the Company reviews the carrying value of property, plant and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. As a result of lower utilization of certain production equipment in the European operations, an impairment review was conducted on these assets in the fourth quarter of 2000. A projection of future cash flows was developed as a basis of measurement of the asset impairment charge. In the fourth quarter of 2000, the Company adjusted the carrying value of this machinery and equipment resulting in a non-cash impairment charge of $4,569.
As a result of the restructuring activities in the third quarter of 2001 to reduce manufacturing costs, headcount and facilities, certain production equipment, tooling and leasehold improvements have been idled or sold. An impairment review of these assets was conducted. In the third quarter of 2001, the Company adjusted the carrying value of this production equipment, tooling and leasehold improvements resulting in a non-cash impairment charge of $4,322. The 2001 impairment charge includes approximately $1,303 for equipment in the European operations, $1,019 for production tooling and leasehold improvements in Sydney, Australia and $2,000 for production equipment and building improvements in the United States.
CHANNELL COMMERCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(Continued)
December 31, 1999, 2000 and 2001 (amounts in thousands, except per share data)
NOTE E-- ACCRUED EXPENSES
Accrued expenses consist of the following:
2000 2001 ------ ------ Accrued vacation $ 784 $ 626 Accrued bonus 508 -- Other 1,844 3,313 ------ ------ $3,136 $3,939 ====== ======
NOTE F-- LONG-TERM DEBT
Long-term debt consists of the following:
CHANNELL COMMERCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(Continued)
December 31, 1999, 2000 and 2001 (amounts in thousands, except per share data)
NOTE F-- LONG-TERM DEBT - Continued
The senior credit facility contains various financial and operating covenants which, among other things, impose limitations on the Company's ability to incur additional indebtedness, merge or consolidate, acquire fixed assets, sell assets except in the ordinary course of business, make certain investments, enter into leases and pay dividends. The Company is also required to comply with covenants related to minimum net worth and other financial ratios. The Company exceeded the allowable ratio of debt to EBITDA and fixed charge coverage ratio of the senior credit facility as of March 31, 2001, June 30, 2001 and September 30, 2001. In December 2001, the Company received waivers of these covenants for all three measurement periods and paid $100 in extension fees. The banks also amended the financial covenants. The Company was in compliance with the financial and operating covenants as of December 31, 2001.
The outstanding balance under the senior credit facility is due and payable in full on December 31, 2002. The maturity of the senior credit facility represents an extension of an earlier credit agreement maturity. The Company was unable to obtain refinancing for a full repayment of the outstanding balance of the senior credit facility in the third quarter of 2001 and in the fourth quarter of 2001 the banks extended the maturity of the senior credit facility to June 30, 2002. In March 2002, the banks extended the maturity of the senior credit facility to December 31, 2002. The Company will pay an extension fee to the banks on each of June 30, 2002 and September 30, 2002 in the event there is an outstanding balance under the Credit Agreement. The Company is involved in discussions with several financial institutions and believes it should be able to obtain financing to repay in full the outstanding balance under the Credit Agreement on or before December 31, 2002. In the event the Company obtains financing for the senior credit facility, it expects to incur costs of no less than $250 but does not expect at this time any material increase in the interest rate. In the event the Company does not obtain refinancing of the senior credit facility by December 31, 2002, and if the current banks were to agree to extend the maturity date of the senior credit facility, the Company would expect the banks to impose requirements such as an extension fee and additional principal repayments.
Long-term debt at December 31, 2001 is schedule to mature as follows:
Year Amount - ---------- ------- 2002 $30,228 2003 93 2004 95 2005 102 2006 109 Thereafter 3,592 ------- $34,219 =======
CHANNELL COMMERCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(Continued)
December 31, 1999, 2000 and 2001 (amounts in thousands, except per share data)
NOTE G--CAPITAL LEASE OBLIGATIONS
The Company leases certain machinery and equipment under various agreements which are classified as capital leases. The leases expire on various dates through August 2003. Future minimum payments, by year, are as follows:
Year - ---- 2002 $ 2,035 2003 748 ------- 2,783 Less amount representing interest 186 ------- 2,597 Less current maturities 1,983 ------- $ 614 =======
CHANNELL COMMERCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(Continued)
December 31, 1999, 2000 and 2001 (amounts in thousands, except per share data)
NOTE H--RESTRUCTURING CHARGES
2000 Restructuring Charge - -------------------------
In the fourth quarter of 2000, in connection with management's plan to reduce costs and improve operating efficiencies, the Company recorded a restructuring charge of $1,513. The principal actions in the restructuring plan involve the closure of facilities and consolidation of support infrastructure. This restructuring resulted in the elimination of approximately 90 administration staff and manufacturing positions and was substantially completed by December 31, 2001. The major components of the 2000 restructuring charges are as follows:
Employee severance and related benefit costs $ 621 Costs associated with vacated facilities 819 Legal and professional services 73 ------- $ 1,513 =======
Severance ---------
The Company had a total reduction of approximately 90 employees, approximately 10% of the total force. The reductions are 55 employees in the European operations, consisting of factory direct labor, factory support and administrative positions, and 35 people in North America, consisting of factory direct labor, factory support and administrative positions.
Costs Associated with Vacated Facilities ----------------------------------------
The Company accrued $819 as the costs of the remaining payments on leased facilities to be vacated less anticipated future income from subleases. In the European operations, two smaller facilities have been vacated as of December 31, 2000, and a third larger facility was vacated in September 2001. The Charlotte, North Carolina distribution facility was vacated April 30, 2001. The Hong Kong sales office was vacated on February 28th, 2001. The majority of accrued lease expenses related to the European facilities.
Legal and Professional Services -------------------------------
The Company incurred legal and professional fees in the fourth quarter of 2000 associated with the implementation of the above restructuring activities in the international operations. These services primarily relate to labor issues.
CHANNELL COMMERCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(Continued)
December 31, 1999, 2000 and 2001 (amounts in thousands, except per share data)
NOTE H--RESTRUCTURING CHARGES - Continued
2001 Restructuring Charge - -------------------------
In the third quarter of 2001, the Company announced an additional restructuring plan in an effort to further reduce costs and align headcount and facilities with expected business levels. The additional restructuring charge totaled $2,999. The principal actions in the restructuring plan involve the closure of facilities and a reduction of headcount. The restructuring plan resulted in the elimination of 116 management, administrative, sales and manufacturing positions and was substantially completed by December 31, 2001. The major components of the 2001 restructuring charge are as follows:
Employee severance and related benefit costs $ 935 Costs associated with vacated and sold facilities 1,959 Lease cancellations and other asset sales 105 ------- $ 2,999 =======
Severance ---------
The Company had a total reduction of 116 employees, approximately 20% of the total force. The reductions are 83 employees in the European operations, consisting of factory direct labor, factory support, management, administrative and sales positions, 28 people in the United States, consisting of management administrative, and sales positions, two employees in Australia and three employees in Canada.
Costs Associated with Vacated and Sold Facilities -------------------------------------------------
The Company has accrued $1,959, consisting principally of the costs of the remaining payments on leased facilities to be vacated less anticipated future income from subleases. In the European operations, the manufacturing and distribution facility in Warrington, U.K. has been closed. One half of the manufacturing and distribution facility in Sydney, Australia has been vacated. In the United States, warehouse space in a leased facility has been vacated and a separate facility that the Company owns has been offered for sale. The Company expects the sale of the owned facility to be completed in 2002.
Lease Cancellations and Other Asset Sales -----------------------------------------
The Company terminated various auto leases, office equipment leases, and software maintenance contracts, and sold vehicles that were no longer needed. The lease cancellations and vehicle sales resulted in costs of approximately $105.
CHANNELL COMMERCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(Continued)
December 31, 1999, 2000 and 2001 (amounts in thousands, except per share data)
NOTE H--RESTRUCTURING CHARGES - Continued
The restructuring charges were determined based on formal plans approved by the Company's management using the best information available to it at the time. The amounts the Company may ultimately incur could differ materially as the restructuring initiative is executed. The changes in the accrual for restructuring charges during 2000 and 2001 are summarized in the table below:
CHANNELL COMMERCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(Continued)
December 31, 1999, 2000 and 2001 (amounts in thousands, except per share data)
NOTE I--GOODWILL IMPAIRMENT CHARGE
Pursuant to its policy, the Company reviews the carrying value of goodwill whenever events and circumstances indicate that the carrying value of a business may not be recoverable from the estimated future cash flow expected to result from its use and eventual disposition. As a result of the restructuring activities that reduce the level of foreign operations and the decision to exit certain product lines, an impairment review of goodwill was conducted. The goodwill impairment review included a valuation analysis of the relevant operations as a basis of measurement of the goodwill impairment charge. In the third quarter of 2001, the Company adjusted the carrying value of goodwill resulting in a non-cash impairment charge of $11,772.
NOTE J--INCOME TAXES
The components of income tax expense (benefit) are as follows:
1999 2000 2001 -------- -------- --------- Current Federal $ 5,011 $ 3,247 $ (4,941) State 712 863 50 Foreign 984 408 393 -------- -------- --------- 6,707 4,518 (4,498) -------- -------- --------- Deferred Federal 369 (992) (2,172) State (6) (483) (1,316) Foreign (849) (967) (221) -------- -------- --------- (486) (2,442) (3,709) -------- -------- --------- Total income tax expense (benefit) $ 6,221 $ 2,076 $ (8,207) ======== ======== =========
CHANNELL COMMERCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
December 31, 1999, 2000 and 2001 (amounts in thousands,except per share data)
NOTE J--INCOME TAXES - Continued
A reconciliation from the U.S. Federal statutory income tax rate to the effective income tax rate for the years ended December 31, is as follows:
1999 2000 2001 ---- ---- ----
U.S. Federal statutory rate 34% 34% (34)% State income taxes, net of federal tax benefit 5 5 (5) Amortization of intangibles 1 -- -- Nondeductible meals and entertainment 2 1 1 Change in valuation allowance -- -- 11 Effect of subsidiaries taxes at other than the U.S. statutory rate (2) (3) 2 --- --- ---
40% 37% (25)% === === ===
Significant components of the Company's deferred tax assets and liabilities are as follows:
2000 2001 ------ ------- Assets Patents $ 830 $ 719 Allowance for bad debts 25 18 Inventory capitalization 353 204 Vacation pay 336 261 Accrued liabilities and reserves -- 703 Restructuring charge 524 1,235 Impairment charge 1,957 4,682 State tax credits and loss carryforwards -- 325 Foreign tax credit and loss carryforwards 1,773 4,100 Valuation allowance -- (2,823) ------ -------
5,798 9,424 ------ -------
CHANNELL COMMERCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
December 31, 1999, 2000 and 2001 (amounts in thousands,except per share data)
NOTE J--INCOME TAXES - Continued
2000 2001 ------ ------ Liabilities State taxes $ 67 $ 699 Amortization of goodwill 46 198 Accelerated depreciation 2,412 1,545 ------ ------
2,525 2,442 ------ ------
Net deferred tax asset $3,273 $6,982 ====== ======
The classification of the net deferred tax asset between current and non-current is as follows:
2000 2001 ------ ------
Net current asset $1,171 $1,473 Net long-term asset 2,102 5,509 ------ ------
Net deferred tax asset $3,273 $6,982 ====== ======
At December 31, 2001, the Company had approximately $14,200 of international operating loss carryforwards (primarily in the United Kingdom and Australia) with a potential tax benefit of $4,100. These loss carryforwards do not expire. The Company has recorded a valuation allowance in 2001 on the deferred tax asset relating to the foreign net operating loss carryforwards because of uncertainty regarding its realization. The ultimate realization of the remaining deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers projected future taxable income and tax planning strategies in making this assessment. Based on the historical domestic taxable income and projections for future taxable income over periods that the deferred assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these deductible differences, net of valuation allowances as of December 31, 2001. The amount of the deferred tax assets considered realizable, however, could materially change in the near future if estimates of future taxable income during the carryforward period are changed.
CHANNELL COMMERCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
December 31, 1999, 2000 and 2001 (amounts in thousands,except per share data)
NOTE K--STOCKHOLDERS' EQUITY
In July 1996, the Company adopted the 1996 Incentive Stock Plan (the Plan), under which it was authorized to issue non-qualified stock options and incentive stock options to key employees, directors and consultants to purchase up to an aggregate of 750 shares of the Company's common stock. The options have a term of ten years and generally become fully vested by the end of the third year. In May 1999, the Plan was amended to increase the authorized number of shares issued to 1,500.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation", encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in previously issued standards. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of grant over the amount an employee must pay to acquire the stock. Compensation cost has not been significant for 1999, 2000 and 2001.
Plan transactions are as follows:
CHANNELL COMMERCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
December 31, 1999, 2000 and 2001 (amounts in thousands,except per share data)
NOTE K--STOCKHOLDERS' EQUITY--Continued
The range of exercise prices of options outstanding at December 31, 2001 is $3.05 to $13.75 and the options have a weighted average remaining contractual life of 7 years. At December 31, 2001, 714 of the 1,092 options outstanding are exercisable by the optionee.
The fair value of options at date of grant was estimated using the Black-Scholes model with the following weighted average assumptions:
1999 2000 2001 ------- ------- -------
Expected life (years) 5 years 5 years 5 years Risk-free interest rate 5.5% 6.0% 5.5% Expected volatility 35% 40% 40% Expected dividend yield -- -- --
Had compensation cost for the plan been determined based on the fair value of the options at the grant dates based on the above method, the Company's net income (loss) and income (loss) per share would have been:
Net income (loss) per share Net --------------------------- income Basic Diluted -------- ------- ------- As reported $ 9,334 $ 1.03 $ 1.02 Pro forma $ 9,001 $ 0.99 $ 0.98
As reported $ 3,568 $ 0.39 $ 0.39 Pro forma $ 3,210 $ 0.35 $ 0.35
As reported $(25,198) $ (2.78) $ (2.78) Pro forma $(25,536) $ (2.82) $ (2.82)
CHANNELL COMMERCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
December 31, 1999, 2000 and 2001 (amounts in thousands,except per share data)
NOTE L--RETIREMENT PLAN
The Company established a retirement plan in accordance with section 401(k) of the Internal Revenue Code. Under the terms of this plan, eligible employees may make voluntary contributions to the extent allowable by law. Employees of the Company are eligible after 90 days of employment. Matching contributions by the Company to this plan are discretionary and will not exceed that allowable for Federal income tax purposes. The Company's contributions are vested over five years in equal increments. The accompanying statements of operations include contribution expense of $193, $212 and $125 for the years ended December 31, 1999, 2000 and 2001, respectively.
NOTE M--RELATED PARTY TRANSACTIONS
The Company leases two of its three facilities in Temecula, California from the Company's principal stockholder and Chairman of the Board. The leases provide for payments of insurance, repairs, maintenance and property taxes, and extend through 2005. The Company has two five-year renewal options to extend the terms of both leases to 2015. Rent expense paid under the leases was $1,127, $1,158 and $1,169 for the years ended December 31, 1999, 2000 and 2001, respectively. As a part of the restructuring plan announced in the third quarter of 2001, the Company has vacated warehouse space in one of the facilities. The Company intends to sublease the vacated warehouse space.
In 1997, the Company guaranteed debt of the Company's principal stockholder and Chairman of the Board of approximately $2,700. The guaranteed debt was incurred in connection with construction of the facilities leased to the Company and is collateralized by said facilities. The loan amount subject to the guarantee is expected to decline before expiring in 2016. At December 31, 2001, the outstanding loan balance subject to the guarantee totaled $1,914. It is not practicable to estimate the fair value of the guarantee; however, the Company does not anticipate that it will incur losses as a result of this guarantee.
In January 2001, the Company guaranteed personal debt of the Company's President and Chief Operating Officer of $650. The guarantee was terminated in March 2002. In connection with this guarantee, the Company's President and Chief Operating Officer paid the Company a fee equal to 1% of the loan balance and provided as collateral to the Company 300,000 shares of Company stock.
The Company purchased insurance through Talbot Agency Inc. in 1999, 2000 and 2001. Roy H. Taylor, President of Talbot Agency Inc. is a co-trustee of the Taylor Family Trust, a beneficial owner of more than 5% of the Company's outstanding stock. The total premiums and fees paid for insurance obtained through the Talbot Agency for the years ended December 31, 1999, 2000 and 2001 was $1,604, $1,396 and $1,265, respectively, which included commissions earned.
CHANNELL COMMERCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
December 31, 1999, 2000 and 2001 (amounts in thousands,except per share data)
NOTE N--COMMITMENTS AND CONTINGENCIES
The Company leases equipment and manufacturing and office space under several operating leases expiring through 2010. Rent expense under all operating leases amounted to $1,942, $2,032 and $2,188 for the years ended December 31, 1999, 2000 and 2001, respectively. Total future minimum rental payments under noncancellable operating leases as of December 31, 2001, including the operating leases with the related party discussed in Note M, are as follows:
Year Amount - ---------- -------
2002 $ 1,945 2003 1,825 2004 1,735 2005 1,747 2006 433 Thereafter 2,471 ------- $10,156 =======
In addition to these minimum rental commitments, certain of these operating leases provide for payments of insurance, repairs and maintenance and property taxes.
The Federal income taxes of the Company for the years ended December 31, 1998 and 1999 are currently under examination by the Internal Revenue Service (IRS). On November 5, 2001, the IRS issued a report assessing penalties of $240 for failure to file certain information with the 1998 and 1999 income tax returns with respect to its foreign subsidiaries. In December 2001, the Company reached a settlement in which the IRS agreed to reduce the penalty assessment to $40. The Company recorded a charge in the fourth quarter of 2001 for the settlement amount and the amount was paid in February 2002. The Company believes that any amount in excess of its recorded liability, if any, will not be significant.
On September 18, 2001, the State of Texas issued a report assessing the Company for additional sales and use tax of $1,600, including interest. The Company has appealed the assessment and is currently providing the State of Texas with documentation to support that the transactions did not require the Company to remit sales and use tax to the State of Texas. Through February 8, 2002, the State of Texas has agreed to a reduction of the amount owed to $1,300. The Company believes that they have meritorious defenses to the remaining claim of $1,300 and intends to vigorously defend its position. The Company does not believe that the ultimate outcome of this examination will result in a material impact on the Company's consolidated results of operations or financial position.
CHANNELL COMMERCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
December 31, 1999, 2000 and 2001 (amounts in thousands,except per share data)
NOTE O--CREDIT CONCENTRATIONS AND MAJOR CUSTOMERS
The Company maintains cash balances in financial institutions located in the United States, Canada, Australia and the United Kingdom. Cash balances held in financial institutions outside of the United States was not significant at December 31, 2000 and 2001. Cash balances held in financial institutions located in the United States may, at times, exceed federally insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash and cash equivalents.
The telecommunications industry is concentrated, with relatively few operators accounting for a large percentage of the Company's available market. Consequently, the Company's five largest customers (by sales volume) accounted for 40.4% and 44.1% of the Company's total net sales in 2000 and 2001. Two customers, AT&T Broadband and AOL Time Warner, accounted for 11.2% and 10.4% respectively, of the Company's net sales in 2000. One customer, AOL Time Warner, accounted for 11.2% of the Company's total net sales in 2001. Mergers and acquisitions in the telecommunications industry are not only increasing the concentration of the industry and of the Company's customer base, but also from time to time delay customers' capital expenditures as newly merged services providers consolidate their operations. The Company generally extends credit to these customers. Its exposure to credit risk is affected by conditions in the telecommunications industry. The Company controls credit risk through credit approvals, credit limits and monitoring procedures but does not generally require collateral. The Company has not experienced significant credit losses.
CHANNELL COMMERCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
December 31, 1999, 2000 and 2001 (amounts in thousands,except per share data)
NOTE P--SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in four geographic segments as a manufacturer and supplier of telecommunications equipment. The four geographic regions are: the United States, Europe/Middle East, Canada and Australia/Asia. The following tables summarize segment information:
1999 2000 2001 --------- --------- --------- Revenues from unrelated entities/(1)/: United States/(2)/ $ 80,028 $ 88,531 $ 65,762 Europe/Middle East 19,030 21,746 11,036 Canada 5,148 7,270 4,405 Australia/Asia 16,482 10,632 7,495 --------- --------- --------- $ 120,688 $ 128,179 $ 88,698 ========= ========= ========= Income (loss) from operations: United States $ 18,382 $ 16,212 $ (4,407) Europe/Middle East (2,780) (7,878) (19,160) Canada 413 1,286 405 Australia/Asia 2,190 (1,117) (6,369) --------- --------- --------- $ 18,205 $ 8,503 $ (29,531) ========= ========= ========= Interest income: United States $ 38 $ 207 $ 61 Canada 8 15 11 --------- --------- --------- $ 46 $ 222 $ 72 ========= ========= =========
Interest expense: United States $ 2,348 $ 2,630 $ 3,639 Europe/Middle East 338 447 307 Canada -- 4 -- Australia/Asia 10 -- -- --------- --------- --------- $ 2,696 $ 3,081 $ 3,946 ========= ========= =========
/(1)/Inter-geographic revenues were not significant. Revenues from external customers from any individual foreign country did not exceed 10% of total revenue.
/(2)/ Includes export sales of approximately $1,043, $1,971 and $1,175 in 1999, 2000 and 2001, respectively.
CHANNELL COMMERCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
December 31, 1999, 2000 and 2001 (amounts in thousands,except per share data)
NOTE P--SEGMENT AND GEOGRAPHIC INFORMATION--Continued
1999 2000 2001 --------- --------- --------- Income tax expense (benefit): United States $ 6,086 $ 2,635 $ (7,009) Europe/Middle East (904) (783) (1,567) Canada 193 474 229 Australia/Asia 846 (250) 140 --------- --------- --------
$ 6,221 $ 2,076 $ (8,207) ========= ========= ========
Identifiable assets: United States $ 60,860 $ 64,868 $ 60,211 Europe/Middle East/(3)/ 35,009 34,827 15,489 Canada 3,508 2,525 2,123 Australia/Asia/(4)/ 15,163 14,528 7,939 --------- --------- --------
$ 114,540 $ 116,748 $ 85,762 ========= ========= ========
Depreciation and amortization United States $ 4,090 $ 5,296 $ 6,643 Europe/Middle East 1,455 1,932 1,263 Canada 100 117 140 Australia/Asia 893 823 511 --------- --------- --------
$ 6,538 $ 8,168 $ 8,557 ========= ========= ========
Capital expenditures: United States/(5)/ $ 5,392 $ 5,815 $ 1,847 Europe/Middle East 3,650 4,996 643 Canada 106 41 15 Australia/Asia -- 754 648 --------- --------- --------
$ 9,148 $ 11,606 $ 3,153 ========= ========= ========
/(3)/Includes long-lived assets in the United Kingdom of $21,421, $18,980 and $7,703 in 1999, 2000 and 2001, respectively.
/(4)/Includes long-lived assets in Australia of $7,488, $8,194 and $4,231 in 1999, 2000 and 2001, respectively.
/(5)/Excludes assets acquired under capital leases of $3,898 in 1999.
CHANNELL COMMERCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
December 31, 1999, 2000 and 2001 (amounts in thousands,except per share data)
NOTE P--SEGMENT AND GEOGRAPHIC INFORMATION--Continued
The Company has revenues from external customers from the following product lines:
1999 2000 2001 -------- -------- -------
Enclosures $ 91,111 $ 96,861 $68,994 Connectivity 21,258 23,351 13,499 Other 8,319 7,967 6,205 -------- -------- ------- Total $120,688 $128,179 $88,698 ======== ======== =======
NOTE Q--QUARTERLY FINANCIAL DATA (Unaudited)
Summarized quarterly financial data for 1999, 2000 and 2001 follows:
First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- --------
Net sales $24,698 $31,315 $32,938 $ 31,729 Gross profit 9,594 12,341 12,375 10,255 Net income 1,710 2,718 2,823 2,083 Income per share Basic 0.19 0.30 0.31 0.23 Diluted 0.19 0.30 0.31 0.22
Net sales 32,250 35,722 33,182 27,025 Gross profit 11,241 13,884 12,525 9,421 Net income (loss)/(1)/ 1,611 3,132 2,048 (3,223) Income (loss) per share/(1)/ Basic 0.18 0.34 0.23 (0.35) Diluted 0.17 0.34 0.22 (0.35)
CHANNELL COMMERCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
December 31, 1999, 2000 and 2001 (amounts in thousands,except per share data)
NOTE Q--QUARTERLY FINANCIAL DATA (Unaudited) - Continued
First Second Third Fourth 2001 Quarter Quarter Quarter Quarter ------- ------- -------- ---------
Net sales $21,967 $25,762 $ 22,336 $ 18,633 Gross profit (loss) 6,512 8,383 (1,700) 5,611 Net income (loss)/(2)/ (1,271) 352 (23,909) (370) Income (loss) per share/(2)/ Basic (0.14) 0.04 (2.64) (0.04) Diluted (0.14) 0.04 (2.64) (0.04)
/(1)/ In the fourth quarter of 2000, the Company recorded a restructuring charge of $1,513 ($923 after tax, or $0.10 per share). See Note H. During the fourth quarter of 2000, the Company also recorded a charge for the impairment of long-lived assets of $4,569 ($2,787 after tax, or $0.31 per share). See Note D.
/(2)/ In the third quarter of 2001, the Company recorded a restructuring charge of $2,999 (see Note H). During the third quarter of 2001, the Company also recorded a charge for the impairment of goodwill of $11,772 (see Note I) and a charge for impairment of fixed assets of $4,322 (see Note D).
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CHANNELL COMMERCIAL CORPORATION
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(Amounts in thousands)
GLOSSARY OF TERMS
ADSL (Asymmetric Digital Subscriber Line): A standard allowing digital broadband signals and standard telephone service to be transmitted up to 12,000 feet over a twisted copper pair.
Broadband: Transmission rates in excess of 1.544 mega bits per second typically deployed for delivery of high-speed data, video and voice services.
Cable Modem: Electronic transmission device placed on the CATV network, located at end user locations, providing two-way, high-speed data service capability, including internet access for subscribers.
CATV (Community Antenna TV, commonly called cable television): A system for distributing television programming by a cable network rather than by broadcasting electromagnetic radiation.
Coaxial Cable: The most commonly used means of transmitting cable television signals. It consists of a cylindrical outer conductor (shield) surrounding a center conductor held concentrically in place by an insulating material.
DLC (Digital Loop Carrier): Telecommunications transmission technology which multiplexes multiple individual voice circuits onto copper or fiber cables.
DSL (Digital Subscriber Line): Generic descriptor covering various versions of DSL services delivered over copper wires. Included are HDSL and ADSL services.
Fiber Node: Refers to the equipment that terminates the fiber cables originating from the host digital terminal. This network element converts the optical signals to their coax electrical, RF equivalents. Synonymous with optical network interface (ONI).
Fiber Optics: The process of transmitting infrared and visible light frequencies through a low-loss glass fiber with a transmitting laser or LED and a photo diode receiver.
FTTC (Fiber-To-The-Curb): In a long distance network consisting of fiber optics, fiber-to-the-curb refers to the fiber optics running from the distribution plant to the curb, at which point copper is used for the curb-to-home connection.
HDSL (High bit rate Digital Subscriber Line): By using sophisticated coding techniques, a large amount of information may be transmitted over copper. The HDSL scheme uses such coding over four copper wires and is primarily intended for high capacity bi-directional business services.
Headend: The primary transmission point in a cable system supplying the hubs and trunk cables.
HFC (Hybrid Fiber Coax): A type of distribution plant that utilizes fiber optics to carry service from a CO to the carrier serving area, then coaxial cable within the CSA to or close to the individual residences.
ONU (Optical Network Unit): The curb mounted electronics device which converts fiber optic signals to electrical for service delivery or copper wires.
PCS (Personal Communications Services): Any service offered on a personal communications network. These include basic telephone, voice mail, paging and others. Personal communications networks operate in the 1800-2000 mHz range, utilizing low power cells compared to traditional cellular technology.
RBOC (Regional Bell Operating Company): A term for the seven regional holding companies created when AT&T divested the Bell operating companies.
RF (Radio Frequency): An electromagnetic wave frequency intermediate between audio frequencies and infrared frequencies used especially in wireless telecommunications and CATV transmission.
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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 26, 2002.
CHANNELL COMMERCIAL CORPORATION a Delaware corporation
By /s/ William H. Channell, Sr. --------------------------------- William H. Channell, Sr. Chairman of the Board
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 26, 2002.
Signature Capacity in Which Signed --------- ------------------------
/s/ William H. Channell, Sr. Chairman of the Board - --------------------------------------- William H. Channell, Sr.
/s/ Richard A. Cude Chief Executive Officer and Director - --------------------------------------- Richard A. Cude
/s/ William H. Channell, Jr. President, Chief Operating Officer - --------------------------------------- and Director William H. Channell, Jr.
/s/ Jacqueline M. Channell Director - --------------------------------------- Jacqueline M. Channell
/s/ Eugene R. Schutt, Jr. Director - --------------------------------------- Eugene R. Schutt, Jr.
/s/ Peter J. Hicks Secretary and Director - --------------------------------------- Peter J. Hicks
/s/ Thomas Liguori Chief Financial Officer - --------------------------------------- Thomas Liguori