Item 1. Business --------
Background
Channell Commercial Corporation (the "Company") was incorporated in Delaware on April 23, 1996, as the successor to Channell Commercial Corporation, a California corporation. The Company's executive offices are located at 26040 Ynez Road, Temecula, California 92591-9022, and its telephone number at that address is (909) 719-2600.
General
The Company is a designer and manufacturer of telecommunications equipment supplied to telephone, cable television and power utility network providers worldwide. Major product lines include a complete line of thermoplastic and metal fabricated enclosures, advanced copper termination and connectorization products, fiber optic cable management systems, coaxial-based passive RF electronics and heat shrink products. The Company believes it was the first to design, manufacture and market thermoplastic enclosure products for use in the telecommunications industry on a wide scale, and the Company believes it currently supplies a substantial portion of the enclosure product requirements of a number of major community antenna television ("CATV") and telephone service providers. The Company's enclosure products house, protect and provide access to advanced telecommunications hardware, including both radio frequency ("RF") electronics and photonics, and transmission media, including coaxial cable, copper wire and optical fibers, used in the delivery of voice, video and data services. The enclosure products are deployed within the portion of the local signal delivery network, commonly known as the "outside plant", "local loop" or "Last Mile", that connects the network provider's signal origination office with residences and businesses.
As a result of the acquisitions of RMS Electronics, Inc. ("RMS") and Standby Electronics Corp. ("Standby Electronics") in 1997, and A.C. Egerton (Holdings) PLC ("Egerton") in 1998, the Company is also a supplier of passive RF electronics and a manufacturer of metal fabricated enclosures in addition to designing and manufacturing a full range of copper and fiber optic connectivity products. The Company also supplies enclosures for the power utility industry and markets a complete line of grade level boxes for buried and underground network applications, thus offering network operators a full system solution to their outside plant requirements.
Industry
The communications industry continues the rapid expansion it has experienced for a number of years, both domestically and worldwide. Contributing to this growth is the increasing need for network signal transmission bandwidth to accommodate new high-speed communications applications deployed on upgraded existing networks and newly constructed broadband networks. Major developments including the Internet and other high-speed data communications technologies, on-going convergence between the CATV and telecommunications industries, and demand for enhanced communications services, have led to a changing regulatory and competitive environment in many markets. Throughout the world, the deployment of new networks or improvements to existing networks for advanced broadband applications is a national priority for many countries, permitting them to participate and compete in the rapidly emerging information-based global economy.
To meet today's demands and anticipating future demand, CATV, local telephone operators and power utilities are building, rebuilding or upgrading signal delivery networks around the world. These networks are designed to deliver video, voice, data or power transmissions and provide Internet connectivity to individual residences and businesses. Operators deploy a variety of network technologies and architectures, such as HFC, FTTC, DLC and ADSL (see "Glossary of Terms") to carry broadband and narrowband signals. These architectures are constructed of electronic hardware connected via coaxial cables, copper wires and/or optical fibers, including various access devices, amplifiers, nodes, hubs and other signal transmission and powering electronics. Many of these devices in the outside plant require housing in secure, protective enclosures and cable management connectivity systems, such as those manufactured by the Company.
As critical components of the outside plant, enclosure products provide protection against weather and vandalism, ready access to devices for technicians who maintain and manage the outside plant and, in some cases, provide dissipation of heat generated by the active electronic hardware. CATV and local telephone network operators place great reliance on manufacturers of protective enclosures because any material damage to the signal delivery networks is likely to disrupt communications services.
The primary drivers of demand for enclosures in the communications industry is the construction, rebuilding, upgrading and maintenance of signal delivery networks by CATV operators and local telephone companies. Particular technological developments in the communications industry are resulting in significant increases in system upgrades. For example, CATV networks are being upgraded and prepared for advanced two-way services such as high-speed Internet access via cable modems, telephony and PCS transport.
Within the local telephone company segment of the industry, local telephone operators are employing new advanced technologies, such as a variety of digital subscriber line ("DSL") technologies, which utilize installed copper wires for broadband services. These "local loop" copper wire systems often require significant upgrading and maintenance to provide the optimal throughput necessary to carry high-speed broadband signals, increasing the need for fully sealed outside plant facilities in order to sustain network reliability and longevity. In addition, as local telephone companies build broadband networks for the delivery of integrated voice, video and data services competitive with CATV, they are expected to require new enclosure products designed for optical fiber-based networks. These and other technological, regulatory and competitive factors are expected to result in continued growth of the market for enclosure and connectivity products designed for the communications industry.
Business Strategy
The Company's strategy is to capitalize on opportunities in the global communications industry by providing enclosures, connectivity products and other complementary components to meet the evolving needs of its customers' communications networks. The Company's wide range of products, manufacturing expertise, application-based sales and marketing approach and reputation for high quality products address key requirements of its customers. Principal elements of the Company's strategy include the following:
Continue to Focus on Core Telecommunications Business. The Company will continue to seek to capitalize on its position as a leading designer, manufacturer and marketer of enclosures for the CATV and local telephone industries in the United States and Canada through new product development for both domestic and international market applications. The Company believes it currently supplies a substantial portion of the enclosure product requirements of a number of major CATV and telephone company operators.
In addition to its core thermoplastic enclosure products for the CATV and telephone industries, the Company has positioned itself to increase its participation in the large scale broadband network construction and upgrade programs anticipated over the next several years. The Company is able to offer a complete package of products used by all telecommunications network operators as they upgrade their networks in order to provide additional services and expand network capacity. These expansions and upgrades are expected to enable telecommunications network operators to increase network bandwidth to accommodate increased demand for faster and larger throughput of signal transmissions and greater reliability of their infrastructure.
The Company intends to continue to invest in the development of a broader range of products designed specifically for telephone market applications. The Company has achieved significant success in marketing its traditional CATV/broadband products to local telephone companies that have been designing and deploying broadband networks to deliver competitive video and data services. The Company will continue to target this market for growth, both with telephone network operators and with major system OEMs.
Expand International Presence. Management believes international markets offer significant opportunities for increased sales in both the CATV and telephone segments. The Company's principal international markets currently consist of Canada, Mexico, Asia, the Pacific Rim, the Middle East and Europe. Trends expected to result in international growth opportunities include the on-going deregulation and privatization of telecommunications in many national contexts around the world, the focus of numerous countries on building, expanding and enhancing their communications systems in order to participate fully in the information-based global economy, and multinational expansion by many U.S. based network carriers. The Company currently operates overseas manufacturing and sales operations in Australia, Canada, Malaysia and the UK in order to focus directly on the unique requirements of each major market. 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 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 which have received U.S. patent protection. The Company's products are designed to improve the performance of its customers' outside plant systems. The Company has a proven record in designing, developing and manufacturing "next generation" products that provide solutions for its customers and offer advantages over those offered by other suppliers to the industry. In addition, the Company seeks to diversify its customer base by developing new products for customers outside the communications industry that require enclosure products, such as the utility industry.
Products
The Company currently markets over 50 product families, with several thousand optional product configurations. The primary functions of the Company's products designed for the telecommunications industry are cable routing and management, equipment access, heat dissipation and security. The Company believes that it offers one of the most complete lines of outside plant infrastructure products in the telecommunications industry.
Enclosures. The Company manufactures precision-molded, highly engineered and application-specific thermoplastic and metal fabricated enclosures that are considered state-of-the-industry for many applications, having been field tested and received approvals and standardization certifications from major CATV and telephone company operators. Most of the Company's products are designed for buried and underground network applications. The Company's enclosure products provide technicians access to these networks and equipment for maintenance, upgrades and installation of new services. Buried and underground networks and enclosures are generally preferred by CATV operators for increased network reliability, lower maintenance, improved security, reduced utility right-of-way conflicts, and aesthetic appeal. The enclosure products, particularly the thermoplastic versions, must provide advanced heat dissipation characteristics as required for the protection of active electronics in many network installations. The Company is also a designer and supplier of metal fabricated enclosures that house advanced electronics, fiber optic cable and power systems for broadband teleommunications 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 existing 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, as compared with alternative 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 resulted in new technical challenges. Several new products, including the DigiTap 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 telecommunications services worldwide. These proprietary IDC products environmentally seal network termination points with a high level of reliability. The Company's Mini-Rocker(TM) line of copper connectivity modules, blocks and accessories offer tool-less installation, hinged wire-entry parts and transparent wire receivers.
Fiber Optic Products. The Company offers a range of fiber optic cable management products designed for use in telephone, broadband and power utility telecommunications networks. Fiber cable splicing enclosures are used for organizing, managing and protecting the connection points between separate lengths of fiber optic cable. Fiber cable assemblies and interconnect hardware are used to connect fiber optic electronics and fiber optic cables. 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. The power utility market offers additional growth opportunities as power utility companies move to add telecommunications services to their customer menu.
Marketing and Sales
The Company markets its products primarily through a direct sales force of technically trained salespeople. The Company's sales force is deployed worldwide and divided into major market groups as follows: US; Canada; South/Central America; Australia/Asia; and Europe/Middle East. The Company employs an application-specific, systems approach to marketing its products, offering the customer, where appropriate, a complete, cost-effective system solution to meet its enclosure and other outside plant requirements. All sales personnel have technical expertise in the products they market and are supported by the Company's engineering and technical marketing staff.
The Company's technical and product marketing department provides its sales force with extensive support. The field technical service personnel within this department work closely with the outside sales staff and customers to develop system solutions and provide a full range of technical support, training and certification for users of the Company's products. Product marketing personnel perform a variety of functions, including product line management and general marketing services. These individuals also provide strategic plans for product development, new market entry, acquisitions and strategic alliances, and work closely with the Company's sales, engineering and manufacturing departments to implement such strategic plans.
An internal sales/customer service department that administers and schedules incoming orders, handles requests for product enhancements and service inquiries, also supports the Company's direct sales force. With locations in California, North Carolina, 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 modern, vertically integrated manufacturing processes 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 facilities include approximately 352,000 square feet in Temecula, California; 24,000 square feet in Mississauga, Ontario, Canada; 92,000 square feet in Orpington, Kent, UK; 39,000 square feet in Sydney, Australia; 44,000 square feet in Charlotte, North Carolina; and 16,000 square feet in Selangor Darul Ehsan, Malaysia.
Management has followed a long-term capacity plan, adding the equipment, facilities and trained personnel as required, to support anticipated growth of the Company's business. As a result, management believes the Company's manufacturing facilities are adequate to meet anticipated product demand for the foreseeable future.
Product Development and Engineering
The Company believes it was the first to design, manufacture and market thermoplastic enclosure products for use in the communications 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; . High performance passive RF electronics products; . 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; and . Excellent protection and management of optical fibers and cables.
The Company's product development and engineering processes enable the Company to respond to demands of the communications industry for increasingly sophisticated enclosure products. Many of the Company's thermoplastic enclosure products are now considered state-of-the-industry, having been field tested and received approvals and standardization certifications from major CATV and telephone company operators. The Company is engaged in extensive new product development programs in RF passive electronics, metal fabricated enclosures and telephone connectorization devices.
The Company's product development approach is applications-based and customer driven. A team comprised of engineering, marketing, manufacturing and direct sales personnel work together to define, develop and deliver comprehensive systems solutions to customers, focusing on the complete design cycle from product concept through tooling and high-volume manufacturing. The Company is equipped to conduct many of its own product testing regimens for performance qualification purposes, enabling it to accelerate the product development process. The Company spent approximately $0.5 million in 1995 and 1996, $1.0 million in 1997, $1.9 million in 1998, and $2.6 million in 1999 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. During 1999, the Company's five largest customers accounted for 40.5% of total net sales. In 1999, the Company's five largest customers in the United States (by sales volume) were AT&T (formerly TCI, acquired by AT&T in 1999), Cox, Comcast, Media One and Time Warner. One customer, AT&T, accounted for 10.2% of the Company's net sales in 1999.
In international markets, the Company's five largest customers (by sales volume) were Telstra (Australia), Middendorp (Australia), Rogers (Canada), Telewest (UK) and Hunting Engineering Limited (UK).
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 vertically integrated manufacturing operations provide the Company with significant competitive advantages.
Management believes the principal competitive factors in the communications equipment market are product availability, customer service, product performance, new product capabilities and price.
Competitive price pressures are common in the industry. In the past, the Company has responded effectively to competition with cost controls through vertical integration utilizing advanced manufacturing techniques, cost-effective product designs and material selection, and an aggressive procurement approach.
In the past, certain of the Company's telecommunications customers have required relatively lengthy field testing of new products prior to purchasing such products in quantity. With the deregulation of the telecommunications industry and the continuing convergence occurring within the CATV and telecommunications industries, it is uncertain whether, and the extent to which, such field testing may continue to be required. While field testing can delay the introduction of new products, it can also act as a competitive advantage for those companies tested and approved, in that 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. Some hot and cold rolled steels are either hot-dipped galvanized or zinc or cadmium electro-plated. The Company outsources to local processors to perform the coating operations.
Positioning itself as a full-line product supplier, the Company also relies on certain other manufacturers to supply products that complement the Company's own product line, such as grade level boxes and cable-in-conduit. The Company believes there are multiple sources of supply for these products.
Employees
As of December 31, 1999, the Company employed 836 people (including 24 temporary employees), of whom 87 were in sales, 671 were in manufacturing operations (including the 24 temporary employees), 16 were in research and development and 62 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 communications industry is subject to regulations in the United States and other countries. Federal and state regulatory agencies regulate most of the Company's domestic customers. On February 1, 1996, the United States Congress passed the Telecommunications Act of 1996 that the President signed into law on February 8, 1996. The Telecommunications Act lifts certain restrictions on the ability of companies, including RBOCs and other customers of the Company, to compete with one another and generally reduces the regulation of the communications industry.
The Company is also subject to a wide variety of federal, state and local environmental laws and regulations. The Company utilizes, principally in connection with its thermoplastic manufacturing processes, a limited number of chemicals, or similar substances, that are classified as hazardous. It is difficult to predict what impact these environmental laws and regulations may have on the Company in the future. Restrictions on chemical uses or certain manufacturing processes could restrict the ability of the Company to operate in the manner that it currently operates or is permitted to operate. Management believes that the Company's operations are in compliance in all material respects with current environmental laws and regulations. Nevertheless, it is possible that the Company may experience releases of certain chemicals to environmental media which could constitute violations of environmental law (and have an impact on its operations) or which could cause the Company to incur material cleanup costs or other damages. For these reasons, the Company might become involved in legal proceedings involving exposure to chemicals or the remediation of environmental contamination from past or present operations. Because certain environmental laws impose joint and several, strict and retrospective liability upon current owners or operators of facilities from which there have been releases of hazardous substances, the Company could be held liable for remedial measures or other damages (such as liability in personal injury actions) at properties it owns or utilizes in its operations, even if the contamination was not caused by the Company's operations.
Item 2.
Item 2. Properties ----------
The Company's facilities approximate 567,000 square feet, of which approximately 56%, 32% and 12% is used for manufacturing, warehouse and office space, respectively. In Temecula, California, 260,000 square feet of the total 352,000 square feet are leased from William H. Channell, Sr., the Company's Chairman of the Board and Chief Executive Officer. (See "Certain Relationships and Related Transactions", Item 13.) The Company also leases an aggregate of approximately 184,000 square feet of manufacturing, warehouse and office space in Canada, Australia, Malaysia, United Kingdom and North Carolina. The Company owns approximately 123,000 square feet of manufacturing, warehouse and office space in Temecula, California and the United Kingdom. The Company considers its current facilities to be adequate for its operations.
Item 3.
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 is listed and traded on the NASDAQ Stock Market (National Market System) under the symbol CHNL. The following table sets forth, for the periods indicated, the high and low sale prices for the Company's Common Stock, as reported on the NASDAQ Stock Market (National Market System). There was no existing public market for the Company's Common Stock prior to the third quarter of 1996.
The Company has not declared any dividends since termination of the S corporation election in connection with its Initial Public Offering in July 1996. During the years ended December 31, 1995 and 1996, while an S corporation, the Company declared dividends on its common stock in the amounts of $5.4 million and $14.2 million, respectively.
The Company currently anticipates it will retain all available funds to finance its future growth and business expansion. The Company does not intend to pay cash dividends in the foreseeable future. Under the terms of the Company's credit agreement, the Company has agreed, under certain circumstances, not to pay any dividends during the term of this agreement.
As of December 31, 1999, the Company had 9,076,392 shares of its Common Stock outstanding, held by approximately 796 shareholders of record.
Item 6.
Item 6. Selected Financial Data -----------------------
The following table sets forth financial data of the Company. The summary financial data in the table is derived from the consolidated financial statements of the Company. Certain pro forma, net income per share and adjusted financial data has not been presented for all periods because it is not applicable to those periods. The data should be read in conjunction with the financial statements, related notes and other financial information included therein (amounts in thousands, except per share data).
Notes to Selected Financial Data
(amounts in thousands, except per share data)
(1) Commission income represented the amount of commissions paid to the Company by the manufacturer of certain cable-in-conduit products in connection with the Company's sale of such products, which the Company offered to its customers in order to complement its own product line.
(2) License fees represent the amounts paid by the Company to William H. Channell, Sr., the Company's Chairman of the Board and Chief Executive Officer, for the use of six patents ("Channell Patents") covering products manufactured and sold by the Company. Prior to the consummation of the Initial Public Offering, these patents were sold to the Company, the license fee arrangements with Mr. Channell, Sr. were terminated and, thereafter, the Company no longer paid any license fees with respect to the Channell Patents.
(3) Prior to the Initial Public Offering, the Company was an S corporation for federal and state income tax purposes. The pro forma presentation reflects the income tax provision of the Company as recorded in its income statement plus additional tax on S Corporation income at C Corporation rates. Such presentation does not reflect the adjustments set forth in note (8) below. The effect of the Company's use of a portion of the net proceeds of the Initial Public Offering to repay outstanding bank indebtedness has not been reflected in pro forma net income or pro forma net income per share because the impact is not material.
(4) Pro forma net income per share has been computed by dividing pro forma net income by the pro forma weighted average shares outstanding. Pro forma weighted average shares outstanding include 1,558 (779 for 1996) of the shares offered by the Company at a price of $11.00 per share, the net proceeds of which were used to fund the distributions in connection with the termination of the Company's S corporation status. See Footnote B to the Financial Statements included elsewhere herein for the weighted average shares outstanding in 1997, 1998 and 1999.
(5) Gross margin is gross profit as a percentage of net sales.
(6) Operating margin is income from operations as a percentage of net sales.
(7) EBITDA represents income from operations before interest and income taxes, plus depreciation and amortization expense. EBITDA is not intended to represent cash flow, operating income or any other measure of performance in accordance with generally accepted accounting principles, but is included here because management believes that certain investors find it to be a useful tool for measuring a company's ability to service its debt.
(8) The adjusted financial data reflects, (i) the elimination of the expense for the license fees payable to Mr. Channell, Sr., which license fees were terminated as part of the termination of the Company's S corporation status, (ii) an increase in Mr. Channell, Sr.'s annual base salary from $225 to $500 in connection with the Initial Public Offering, and (iii) provision for income taxes as if the Company had always been a C corporation at an assumed rate of 41%.
(9) Adjusted EBITDA represents adjusted income from operations before interest and income taxes, plus depreciation and amortization expense. See note (7) above.
(10) Adjusted operating margin is adjusted income from operations as a percentage of net sales.
(11) Adjusted net income per share is adjusted net income divided by 7,695 pro forma weighted average shares outstanding for 1995 and 8,403 pro forma weighted average shares outstanding for 1996. The S corporation dividends declared in 1996 include $11,665 of distributions made in connection with the termination of the Company's S Corporation status.
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. The Company sells its products directly to CATV operators and telephone companies throughout the United States, Canada, Australia, United Kingdom and certain other international markets, principally within developed nations. The Company believes that many of its customers periodically review their supply relationships, and the Company can experience significant changes in buying patterns from specific customers between fiscal periods. The Company has historically operated with a relatively small backlog, and sales and operating results in any quarter are principally dependent upon orders booked and products shipped in that quarter. Further, the Company's customers generally do not enter into long-term supply contracts providing for future purchase commitments for the Company's products. These factors, when combined with the Company's operating leverage and the need to incur certain
capital expenditures and expenses in part based upon the expectation of future sales, results in the Company's operating results being at risk to changing customer buying patterns. If sales levels in a particular period do not meet the Company's expectations, operating results for that period may be materially and adversely affected.
The Company uses numerous raw materials in its manufacturing processes. Although management believes that the Company has adequate sources of supply for such raw materials, increases in the market prices of the Company's raw materials could significantly increase the Company's cost of goods sold and materially adversely affect the Company's profitability. The Company's profitability may also be materially adversely affected by decreases in its sales volume because many of the costs associated with the Company's rent, product development, engineering, tooling and other manufacturing processes are fixed in nature and must be spread over its sales base in order to maintain historic levels of profitability.
In addition to Company manufactured products, the Company markets complementary products manufactured by third parties. With respect to sales of cable-in-conduit products, the Company generally received a commission upon the sale of such products. Pursuant to the agreement, which was terminated in 1998, under which the Company marketed such products, during the terms thereof and for a period of two years thereafter, both the Company and the manufacturer of such products is prohibited from competing with the other in any product line that is, or within the year prior to termination has been, represented, manufactured or sold by the other within the specified markets covered by the agreements.
During the periods discussed under "Results of Operations" below, the Company's sales increases resulted primarily from additional sales to the Company's existing customers as they expanded, rebuilt and upgraded their signal delivery networks in order to deliver enhanced communications services, as well as additional sales to new customers, particularly telephone companies that have recently entered the CATV market, international customers, and through the RMS, Standby Electronics and Egerton acquisitions.
Results of Operations
The following table sets forth the Company's operating results for the periods indicated expressed as a percentage of sales.
New Accounting Pronouncement
In 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 ("SFAS 133"), Accounting for Derivative Instruments and Hedging Activities, which is effective for 2001. SFAS 133 will require the Company to record all derivatives on the balance sheet at fair value. For derivatives that are hedges, changes in the fair value of derivatives will be offset by the changes in the fair value of the hedged assets, liabilities or firm commitments. The Company believes the impact of adopting this standard will not be material to results of operations or equity.
Comparison of the Year Ended December 31, 1999 With Year Ended December 31, 1998
Net Sales. Net sales increased $28.0 million or 30.2% from $92.7 million in 1998 to $120.7 million in 1999, as a result of increased sales of telecommunications enclosure and component products.
Domestic net sales increased $16.4 million or 25.8% from $63.6 million in 1998 to $80.0 million in 1999, primarily due to continued growth in both upgrade and rebuild construction to facilitate enhanced voice, data and video requirements, in addition to industry consolidation and convergence. International net sales increased $11.6 million or 39.9% from $29.1 million in 1998 to $40.7 million in 1999 as a result of $30.7 million in sales of Egerton products, including a large network upgrade in Australia, compared with $20.1 million in 1998 (for the eight months following the acquisition).
Gross Profit. Gross profit increased $8.5 million or 23.6% from $36.1 million in 1998 to $44.6 million in 1999. Of this improvement, $6.0 million was attributable to sales of Egerton products and $2.5 million was attributable to increased sales volume of Channell's telecommunications enclosure and component products. Gross margin decreased from 39.0% in 1998 to 36.9% in 1999, primarily due to a 25.6% margin contribution from Egerton revenues, while margin on Channell's telecommunications enclosure and component products increased from 40.4% in 1998 to 41.7% in 1999 due to an increase in sales volume, which resulted in higher operating leverage (i.e., a higher percentage of sales relative to fixed costs).
Commission Income. Commission income decreased $0.3 million or 100.0% in 1999. The decrease is a result of the 1998 termination of a marketing agreement for the sale of cable-in-conduit products.
Selling. Selling expense increased $3.1 million or 26.7% from $11.6 million in 1998 to $14.7 million in 1999, primarily as a result of $2.1 million of increased selling expenses related to the Egerton operations (including Hong Kong, Malaysia and New Zealand), $1.0 million of increased domestic sales and marketing expenses associated with increased sales activities (including $0.5 million for the development of a new corporate identity program). As a percentage of net sales, selling expense decreased from 12.5% in 1998 to 12.2% in 1999.
General and Administrative. General and administrative expenses increased $0.9 million or 11.1% from $8.1 million in 1998 to $9.0 million in 1999. Such increase occurred primarily as a result of the Egerton operations and $0.5 million of goodwill amortization associated with the Egerton acquisition. As a percentage of net sales, general and administrative expenses decreased from 8.7% in 1998 to 7.5% in 1999.
Research and Development. Research and development expenses increased $0.7 million or 36.8% from $1.9 million in 1998 to $2.6 million in 1999, as a result of $0.3 million of additional facility expense, $0.2 million increased research and development supplies and $0.2 million related to Egerton. As a percentage of net sales, research and development expenses increased from 2.0% in 1998 to 2.1% in 1999.
Income from Operations. As a result of the items discussed above, income from operations increased $3.3 million or 22.2% from $14.9 million in 1998 to $18.2 million in 1999, but decreased as a percentage of net sales from 16.1% in 1998 to 15.1% in 1999.
Interest Income (Expense). Interest expense increased from $1.1 million in 1998 to $2.7 million in 1999, an increase of 145.5%. This increase was a result of twelve months interest expense in 1999 on the increased borrowings to fund the Egerton acquisition as opposed to eight months of interest expense in 1998 and 1999 capital expenditures.
Income Taxes. Income taxes were $5.7 million in 1998 and $6.2 million in 1999, with effective tax rates of 41.0% and 40.0%, respectively. The decrease in the effective tax rate is primarily due to an increase in income from states with lower tax rates and an increase in the California Manufacturers Investment Tax Credit.
Comparison of the Year Ended December 31, 1998 With Year Ended December 31, 1997
Net Sales. Net sales increased $32.8 million or 54.8% from $59.9 million in 1997 to $92.7 million in 1998, as a result of increased sales of telecommunications enclosure and component products of $32.0 million (including $20.1 million of Egerton products) and $0.8 million of other related equipment.
Domestic net sales increased $14.6 million or 29.8% from $49.0 million in 1997 to $63.6 million in 1998, primarily due to accelerated growth in both upgrade and rebuild construction as a result of increased broadband requirements. International net sales increased $18.2 million or 167.0% from $10.9 million in 1997 to $29.1 million in 1998, due to the sales of $20.1 million of Egerton products while Channell's broadband sales decreased $1.9 million due to the sluggish Asian economy.
Gross Profit. Gross profit increased $11.2 million or 45.0% from $24.9 million in 1997 to $36.1 million in 1998. Of this improvement, $6.8 million is attributable to sales of Egerton products and $4.4 million was attributable to increased sales volume of Channell's telecommunications enclosure and component products. Gross margin decreased from 41.6% in 1997 to 39.0% in 1998, primarily due to a 33.8% margin contribution from Egerton revenues, while margin on Channell's telecommunications enclosure and component products decreased from 41.6% in 1997 to 40.4% in 1998 due to increased depreciation expenses from capital expenditures in the comparative periods and increased manufacturing staffing.
Commission Income. Commission income decreased $0.3 million or 50.0% from $0.6 million in 1997 to $0.3 million in 1998. The decrease is a result of the termination of a marketing agreement for the sale of cable-in-conduit products.
Selling. Selling expense increased $4.3 million or 58.9% from $7.3 million in 1997 to $11.6 million in 1998, as a result of $2.0 million for increased payroll and related expenses in connection with expanded staffing to support increased sales and marketing activities worldwide and $2.3 million of increased selling expenses related to the Egerton operations. As a percentage of net sales, selling expense increased from 12.1% in 1997 to 12.5% in 1998.
General and Administrative. General and administrative expenses increased $4.0 million or 97.8% from $4.1 million in 1997 to $8.1 million in 1998. Such increase occurred as a result of increased payroll and related expenses due to increased staffing requirements in the amount of $0.7 million and $0.5 million of increased legal, auditing and professional services. General and administrative expense increased $2.9 million as a result of the Egerton operations including $0.5 million of goodwill amortization. As a percentage of net sales, general and administrative expenses increased from 6.8% in 1997 to 8.7% in 1998.
Research and Development. Research and development expenses increased $0.9 million or 90.0% from $1.0 million in 1997 to $1.9 million in 1998, as a result of increased payroll and expenses in the amount of $0.7 million associated with increased staffing and $0.3 million related to Egerton. As a percentage of net sales, research and development expenses increased from 1.7% in 1997 to 2.0% in 1998.
Income from Operations. As a result of the items discussed above, income from operations increased $1.7 million or 12.1% from $13.2 million in 1997 to $14.9 million in 1998, but declined as a percentage of net sales from 22.0% in 1997 to 16.1% in 1998.
Interest Income (Expense). Interest income decreased from $1.0 million in 1997 to $0.3 million in 1998, a reduction of 73.6%. This decrease was caused by a reduction in the amount of the Company's investments in 1998, as the Company used approximately $10.2 million of its investments to fund the purchase of Egerton. Interest expense increased from $0.1 million in 1997 to $1.3 million in 1998 as a result of increased borrowings to fund the Egerton acquisition and capital expenditures.
Income Taxes. Income taxes were $5.6 million in 1997 and $5.7 million in 1998, with effective tax rates of 39.7% and 41.0%, respectively. The increase in the effective tax rate is primarily due to the increase in the amount of non- deductible amortization of goodwill.
Liquidity and Capital Resources
Net cash provided by operating activities was $6.6 million and $8.1 million in 1998 and 1999, respectively. Net cash used in investing activities was $22.3 million and $9.4 million in 1998 and 1999, respectively. The cost of acquisitions, net of cash acquired, used in investing activities was $24.0 million in 1998. Net cash provided by financing activities was $17.9 million in 1998 and net cash used in financing activities was $1.7 million in 1999.
Accounts receivable increased from $17.9 million for the year ended December 31, 1998 to $23.2 million for the year ended December 31, 1999, primarily as a result of higher sales during the fourth quarter of 1999 as compared to the same period of 1998. Inventories increased from $15.0 million for the year ended December 31, 1998, to $19.4 million for the
year ended December 31, 1999, as a result of increased raw materials and work-in-process inventories required for the increased sales volume forecasted.
The Company made capital expenditures (including capital leases) of $16.8 million and $13.0 million in 1998 and 1999, respectively, including $6.0 million in 1998 to acquire a 92,000 square foot building adjacent to its existing facilities in Temecula, California, which is used for metal fabrication, tool and die production and research and development. The Company acquired machinery and equipment under capital leases totaling $6.2 million in 1998 and $3.9 million in 1999.
The Board of Directors, on April 1, 1998, having determined such action to be in the best interest of the Company, authorized a stock repurchase plan of up to $2.0 million worth of Company stock. The Company repurchased 137,623 shares of its Common Stock at a cost of approximately $1.2 million in 1998 and 22,985 shares at a cost of approximately $0.2 million in 1999.
In conjunction with the acquisition of Egerton, the Company entered into a new Senior Revolving Loan Agreement ("Revolving Facility") with a bank to provide funds for the Egerton acquisition, as well as for working capital and equipment acquisition purposes. The Revolving Facility is in the amount of $30.0 million ($25.0 million at December 31, 1998) of which $22.0 million had been drawn down as of December 31, 1999. The outstanding balance bears interest, payable monthly, at a variable rate based on either the bank's base rate or the applicable LIBOR rate depending on the nature of the borrowings. At December 31, 1999, the weighted average interest rate was 6.95%. The loan is collateralized by substantially all the Company's tangible and intangible assets and up to 65% of the capital stock of the Company's subsidiaries and is due April 30, 2003.
The Revolving Facility 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. In 1999, the Company exceeded the allowable capital expenditures limitations of the senior revolving credit facility. The Company obtained a waiver of the capital expenditure covenant.
The Company also had a credit facility available to the Egerton subsidiaries, which included an overdraft facility totaling approximately $5.0 million plus the combined cash balances of those subsidiaries. The facility also included approximately $2.0 million, to provide financing for international letters of credit, forward exchange contracts and other items. The outstanding balance (net of cash balances) bears interest at the bank's base rate, 5.50% at December 31, 1999, plus a factor ranging from 1.25% to a maximum of 4.0% depending on the amount borrowed. The facility was collateralized by the assets of the subsidiaries. In February 2000, the Egerton credit facility was repaid using additional borrowings from the revolving facility.
The Company believes that income from operations, coupled with borrowing under its revolving credit facilities will be sufficient to fund the Company's capital expenditure and working capital requirements through 2000.
Forward-Looking Statements
This Report on Form 10-K contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are being provided pursuant to that legislation. In addition to the other information contained in this Form 10-K, the following risk factors should be carefully considered in evaluating the Company and its business. The following is not intended as, and should not be considered, an exhaustive list of relevant factors.
Obsolescence; Uncertainty of Market Acceptance of New Products
The communications industry is in a state of rapid technological change. The introduction of new technologies, network architectures or changes in industry standards can render the Company's existing products or products under development obsolete or unmarketable. For example, satellite, wireless and other communication technologies under development or currently being deployed may represent a threat to copper, coaxial and fiber optic-based systems by reducing the need for wire-line networks. To date, however, the Company believes that these technologies have not had a significant impact on the demand for traditional wire-line network based services. Further, management anticipates that a number of factors, including network capacity requirements, existing investments in wire-line networks, security and long-term cost
effectiveness, will result in continued growth of wire-line networks. However, there can be no assurance that future advances or further development of these or other new technologies will not have a material adverse effect on the Company's business. The Company's growth strategies are designed, in part, to take advantage of opportunities that the Company believes are emerging as a result of the development of enhanced voice, video, data and other transmission networks, and high-speed Internet access in the telecommunications industry. There can be no assurance that demand resulting from these emerging trends will develop rapidly or that the Company's products will be met with market acceptance.
Importance of New Product Development to Growth
A significant factor in the Company's ability to grow and remain competitive, will be its ability to anticipate changes in technology and industry standards, and to successfully develop and introduce new products on a timely basis. New product development often requires long-term forecasting of market trends, development and implementation of new designs and processes, and substantial capital commitment. Trends toward consolidation of the communications industry and convergence of technologies may require the Company to quickly adapt to rapidly changing market conditions and customer requirements.
The Company's manufacturing and marketing expertise has enabled it to successfully develop and market new products in the past. However, any failure by the Company to anticipate or respond in a cost-effective and timely manner to technological developments or changes in industry standards or customer requirements, or any significant delays in product development or introduction, could have a material adverse effect on the Company's business, operating results and financial condition.
Concentration of Customers; Limited Backlog
The telecommunications industry is concentrated, with relatively few operators accounting for a large percentage of the Company's available market. Consequently, the Company's five largest customers (by sales volume) accounted for 40.5% of the Company's total net sales in 1999. One customer, AT&T, accounted for 10.2% of the Company's total net sales during the period. Mergers and acquisitions in the telecommunications industry are increasing the concentration of the industry and of the Company's customer base.
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 meet the Company's expectations, operating results for that period may be materially and adversely affected.
Dependence on the Communications 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 cable operators 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 cable operators to financing, government regulation of cable operators, demand for cable services and technological developments in the broadband communications technology.
Although local telephone operators may have greater access to capital than many cable operators, the same factors dictating the demand for products in the CATV segment of the industry also apply to the local telephone customers. Thus, the Company's success is dependent upon continued demand for products used in signal transmission systems from the communications industry generally, including both CATV and telephone, which may be affected by factors beyond the Company's control, including the convergence of video, voice, and data transmission systems occurring within the CATV and telephone markets, continuing consolidation of companies within those markets and the provision of Internet access by cable operators and local telephone companies.
Price Fluctuations of Raw Materials; Availability of Complementary Products
The Company's cost of sales may be materially affected by increases in the market prices of the raw materials used in the Company's manufacturing processes, including resins. The Company does not engage in hedging transactions for such materials, although it periodically enters into contracts for certain raw materials for as much as one year or more. There can be no assurance that price increases in raw materials can be passed on to the Company's customers through increases in product prices. In addition, in order to position itself as a full-line product supplier, the Company relies on certain manufacturers to supply products that complement the Company's own product line, including grade level boxes. Although the Company believes there are multiple sources of supply for these products, disruptions or delays in the supply of such products could have a material adverse effect on sales of the Company's own products.
Acquisitions and Failure to Integrate Acquired Businesses
One of the Company's principal strategies is to increase its revenues, earnings per share and the markets it serves through the acquisition of complementary businesses. There can be no assurance that the Company will be able to identify and acquire attractive acquisition candidates, profitably manage such acquired businesses or successfully integrate such acquired businesses into the Company without substantial costs, delays or other problems. Acquisitions may involve a number of special risks, including, but not limited to, adverse short-term effects on the Company's reported financial condition or results of operations, diversion of management's attention, dependence on retention, hiring and training of key personnel, risks associated with unanticipated problems or liabilities and amortization of acquired intangible assets, some or all of which could have a material adverse effect on the Company's business, financial condition or results or operations.
In addition, there can be no assurance that businesses acquired in the future will be profitable at the time of acquisition or that the businesses recently acquired or acquired in the future will achieve sales and profitability justifying the Company's investment therein or that the Company will realize the synergies expected from such acquisitions.
The failure to obtain any or all of the desired results from these acquisitions could have a material adverse effect on the Company's business, financial condition or results of operations.
Impact of Operating Leverage in the Event of Sales Decline
Because the related fixed costs for rent, product development, engineering, tooling and manufacturing are a relatively high percentage of total costs, the Company's ability to maintain its historic profitability is dependent on generating a sufficient volume of product sales, thereby spreading fixed costs over the sales base. Due to this "operating leverage", a reduction in sales or the rate of sales growth could have a disproportionately adverse effect on the Company's financial results.
Seasonality and Fluctuations in Operating Results
The Company's business is somewhat seasonal in nature, with the first and fourth quarters generally reflecting lower sales due to the impact of adverse weather conditions on construction projects that may alter or postpone the needs of customers for delivery of the Company's products. The Company's operating results may also fluctuate significantly from quarter to quarter due to several other factors, including the volume and timing of orders from, and shipments to, major customers, the timing of new product announcements and the availability of products by the Company or its competitors, the overall level of capital expenditures by CATV operators and local telephone companies, market acceptance of new and enhanced versions of the Company's products, variations in the mix of products the Company sells, and the availability and cost of raw materials.
Risks Associated with International Operations
International sales, including export sales from U.S. operations, accounted for 18.2%, 31.4% and 34.5% of the Company's net sales in 1997, 1998 and 1999, respectively, and the Company expects that international sales may increase as a percentage of sales in the future. Due to its international sales, the Company is subject to the risks of conducting business internationally, including unexpected changes in or impositions of legislative or regulatory requirements, fluctuations in the U.S. dollar which could materially adversely affect U.S. dollar revenues or operating expenses, tariffs and other barriers and restrictions, potentially longer collection cycles, greater difficulty in accounts receivable collection, potentially adverse taxes
and the burdens of complying with a variety of international laws and communications standards. The Company is also subject to general geopolitical risks, such as political and economic instability and changes in diplomatic and trade relationships, in connection with its international operations. There can be no assurance that these risks of conducting business internationally will not have a material adverse effect on the Company's business.
Competition
The industries in which the Company operates are highly competitive. Further, because of the anticipated growth in the telecommunications industry generally, the demand for products required in signal transmission networks in particular, the level and intensity of competition may increase in the future.
The Company's competition includes a company that has a significant market share in the telephone segment of the industry. The Company's strategy includes continued focus on increasing sales to this segment. While the Company's net sales to this segment have increased, there can be no assurance that the Company will be able to compete successfully against that company or other competitors, many of whom may have access to greater financial resources than the Company.
Disruptions at the Company's Manufacturing Facility; Lease with Related Party
The majority of the Company's manufacturing operations are currently located at the Company's facility in Temecula, California, which also includes the Company's principal warehouse and corporate offices. The Company's success depends in large part on the orderly operation of this facility. Because the Company's manufacturing operations and administrative departments are concentrated at this facility, a fire, earthquake or other disaster at this facility could materially and adversely affect its business and results of operations. The Company maintains standard property and earthquake insurance on this facility as well as business interruption insurance and back-up data systems.
The Company currently leases a portion of its Temecula facilities from William H. Channell, Sr., a principal stockholder and Chairman of the Board and Chief Executive Officer of the Company. The Company believes the terms of these leases are no less favorable than would be available from an unrelated third party after arm's length negotiations. Although the Company has renewal options through the year 2015 under these leases, there can be no assurance that the Company and Mr. Channell, Sr. will be able to agree on renewal options for the properties currently leased by the Company. The failure of the Company to renew the leases would require the Company to relocate its existing facilities, which could have a material adverse affect on the Company's business, financial condition or results of operations.
Dependence on Key Personnel
The future success of the Company depends in part on its ability to attract and retain key executive, engineering, marketing and sales personnel. Key personnel of the Company include William H. Channell, Sr., the Chairman of the Board and Chief Executive Officer, William H. Channell, Jr., the President and Chief Operating Officer, and the other executive officers of the Company. Competition for qualified personnel in the communications industry is intense, and the loss of certain key personnel could have a material adverse affect on the Company. The Company has entered into employment contracts with Mr. Channell, Sr. and Mr. Channell, Jr.
Changing Regulatory Environment
The communications industry is subject to regulation in the United States and other countries. Federal and state agencies regulate most of the Company's domestic customers. On February 1, 1996, the United States Congress passed the Telecommunications Act of 1996 (the "Telecommunications Act"), which the President signed into law on February 8, 1996. The Telecommunications Act lifts certain restrictions on the liability of companies, including RBOCs and other customers of the Company, to compete with one another and liberally reduces the regulation of the communications industry. While the Company believes that the deregulation of the communications industry may increase the Company's opportunities to provide for its customers' signal transmission network needs, the effect of the Telecommunications Act on the market for the Company's products is difficult to predict at this time, and there can be no assurance that competition in the Company's markets will not intensify as a result of such deregulation. Changes in current or future laws or regulations, in the United States or elsewhere, could materially adversely affect the Company's business.
Uncertain Ability to Manage Growth; Risks Associated with Implementation of New Management Information System
The growth in the Company's business has required, and is expected to continue to require, significant Company resources in terms of personnel, management and other infrastructure. The Company's ability to manage any future growth effectively will require it to attract, train, motivate and manage new employees successfully, to integrate new employees into its overall operations and to continue to improve its operational, financial and management information systems.
Environmental Matters
The Company is subject to a wide variety of federal, state and local environmental laws and regulations and uses a limited number of chemicals that are classified as hazardous or similar substances. Although management believes that the Company's operations are in compliance in all material respects with current environmental laws and regulations, the Company's failure to comply with such laws and regulations could have a material adverse effect on the Company.
Selected Quarterly Financial Data
Set forth below is certain unaudited quarterly financial information. (See also Footnote P to the Financial Statements included elsewhere herein.) The Company believes that all necessary adjustments, consisting only of normal recurring adjustments, have been included in the amounts stated below to present fairly, and in accordance with generally accepted accounting principles, the selected quarterly information when read in conjunction with the Financial Statements.
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 either the bank's base rate or the applicable LIBOR rate depending on the nature of the borrowings. The credit facility exposes earnings to changes in short-term interest rates since the interest rates on the credit facility are variable.
If the variable rates on the Company's credit facility were to increase by 1% from the rate at December 31, 1999, and if the Company borrowed the maximum amount available under its credit facility ($30.0 million) for all of fiscal 2000, the Company's interest expense would increase, and net income would decrease by $0.1 million. If LIBOR were to increase 1% from the rate at December 31, 1999, and if the Company borrowed the maximum amount available, the Company's interest expense would increase, and also net income would decrease by $0.1 million. A marginal income tax rate of 40.0% was used. This analysis does not consider the effects of the reduced level of overall economic activity that could exist in such an environment. In the event of a 1% change in interest rates, management would likely take actions to further mitigate its exposure to the change.
Foreign Exchange Risk
The Company typically does not hedge its foreign currency exposure. Management does not believe it currently has any material exposure to foreign currency rate fluctuations.
Item 8.
Item 8. Financial Statements and Supplementary Data -------------------------------------------
Consolidated Financial Statements of Channell Commercial Corporation are as follows:
Financial statement schedules are as follows:
All schedules are omitted because they are not applicable, or the required information is included in the financial statements or the notes thereto.
Item 9.
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 current executive officers and directors and their ages as of December 31, 1999.
The Company's Board of Directors was comprised of five members at December 31, 1999. In March 2000, a sixth member was appointed to the Board. The directors of the Company are staggered into three classes, with the directors in a single class elected at each annual meeting of stockholders to serve for a term of three years or until their successors have been elected and qualified. The authorized number of members of the Board of Directors is currently seven. The executive officers of the Company serve at the pleasure of the Board of Directors.
William H. Channell, Sr., the son of the Company's founder, James W. Channell, has been the Chairman of the Board and Chief Executive Officer since the Initial Public Offering. Prior to this time, he had held the position of President and Chief Executive Officer since 1966. Mr. Channell, Sr. is a co-trustee of the Channell Family Trust, which is a principal stockholder of the Company, and is the husband of Jacqueline M. Channell and the father of William H. Channell, Jr. His term as a director expires in 2002.
William H. Channell, Jr. has been President and Chief Operating Officer of the Company since the Initial Public Offering. He has been a Director of the Company since 1984. Since joining the Company in 1979, Mr. Channell, Jr. has held the positions of Executive Vice President, Director of Marketing and National Sales Manager. Mr. Channell, Jr. is a principal stockholder of the Company and is the son of William H. Channell, Sr. and Jacqueline M. Channell. His term as a director expires in 2000.
Gary W. Baker has been the Company's Vice President, Finance since May 1996, and the Chief Financial Officer since 1990. Mr. Baker was the Company's Corporate Controller from 1985 to 1990. From 1983 to 1985, Mr. Baker was the Corporate Controller of Symbolics, Inc., a publicly traded manufacturer of computer products, and has over 30 years of public and private accounting experience.
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.
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.
Jacqueline M. Channell has been the Company's Secretary and a Director since 1966. She is a co-trustee of the Channell Family Trust, which is a principal stockholder of the Company, and is the wife of William H. Channell, Sr. and the mother of William H. Channell, Jr. Mrs. Channell's term as a director expires in 2001.
Eugene R. Schutt, Jr. has been a Director of the Company since July 1996. Mr. Schutt is the CEO of CD1 Financial.com, an automotive lending and leasing company owned by CarsDirect.com. Prior to joining CarsDirect.com, Mr. Schutt had 25 years of experience in finance and acquisitions covering a variety of industries. He most recently served as President of Avco International, a division of Avco Financial Services, Inc. From 1984 to 1992 he served as President of Pratt Industries. Mr. Schutt has served on the board of directors of numerous companies. Mr. Schutt's term as Director expires in 2002.
Richard A. Cude became a director of the Company during 1996. Mr. Cude has been the General Manager of the Los Angeles Support Center for Courtaulds PLC London, England since 1994 and has served in various capacities with Courtaulds since 1988. Prior to that, Mr. Cude has been with various companies involved in the marketing of products to the communications and telecommunications industry. Mr. Cude is currently retired. Mr. Cude's term as Director expires in 2000.
Peter J. Hicks became a Director of the Company in March, 2000. Mr. Hicks is a managing director of Linx Partners, an investment firm specializing in private industrial equity investments. From 1987 to 1999, Mr. Hicks was a managing director of Schroder and Company. Mr. Hicks has more than 23 years of investment banking and corporate finance experience and has served on the board of directors of numerous companies. Mr. Hicks' term as Director expires in 2001.
Compensation of Directors
Directors who are also officers of the Company (except as indicated below) receive no additional compensation for their services as directors. The Company's non-management directors receive compensation consisting of an annual retainer fee of $15,000 plus $1,000 for attendance at any meeting of the Board of Directors or any committee thereof, plus direct out-of-pocket costs related to such attendance. Mrs. Channell also receives non-management director retainer and attendance fees. Mrs. Channell does not receive separate compensation for serving as the Company's Secretary. In addition, pursuant to the Company's 1996 Incentive Stock Plan (as described below), each non-management director (including Mrs. Channell) received options to acquire 1,000 shares of the Company's Common Stock with an exercise price equal to the Initial Public Offering price, and on the date of each of the Company's annual stockholder meetings after the Initial Public Offering, each non-management director (including non-executive officers who serve as directors) serving on the Board of Directors immediately following such meeting are to receive options to acquire an additional 1,000 shares of the Company's Common Stock with an exercise price equal to the market value of the Common Stock on the date such options are granted. These options will become exercisable at a rate of 33 1/3% per year commencing on the first anniversary of the date of issuance and will have a term of 10 years.
Section 16(a) Beneficial Ownership Reporting Compliance
Information required by Item 405 of Regulation S-K is incorporated by reference to the Company's Proxy Statement relating to its 1999 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 four additional most highly compensated executive officers for the year ended December 31, 1999 (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) As an incentive for continued services, the Company, in 1996, granted a cash bonus of $200,000 to Mr. Baker and Mr. Burke, which was earned and payable in three equal installments on each of December 31, 1997, 1998, and 1999, provided each remained employed by the Company and subject to continued payment in the event of death.
1996 Incentive Stock Plan
The Company's 1996 Incentive Stock Plan (the "Stock Plan") currently permits the granting to the Company's key employees, directors and other service providers of (i) options to purchase shares of the Company's Common Stock and (ii) shares of the Company's Common Stock that are subject to certain vesting and other restrictions ("Restricted Stock"). 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 1999, the Company granted 97,250 "non-qualified" options to 16 employees and directors, including 50,000 stock options issued to William H. Channell, Jr., the Company's President. In addition, 77,500 options originally issued in 1997 at an option price of $13.25 were canceled and reissued at an option price of $11.00. None of the repriced options were issued to William H. Channell, Jr. or to any director. After cancellation of options previously issued to terminated employees, there were options to acquire 768,350 shares of Common Stock outstanding at December 31, 1999. 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, 1999.
Aggregated Option/SAR Exercises in Last Fiscal Year and December 31, 1999 Option/SAR Values
The following table sets forth the number and value of outstanding stock options at December 31, 1999. No options have been exercised in 1999.
Option/SAR Repricings
During 1999, the Compensation Committee reviewed the effectiveness of the outstanding stock options in light of the current stock trading prices. Based on a comparison of the option exercise prices and the trading price of the stock, the Committee determined that certain of the outstanding options failed to provide the incentives that they were initially intended to provide. On April 20, 1999 the Committee recommended and the Board of Directors approved the repricing of substantially all the options granted in the year 1997.
The 1997 options were initially priced at $13.25 per share and they were repriced at $11.00 per share. The trading price of the Company's stock at the time of the repricing on April 20, 1999 was $8.50. The following table sets forth information with respect to options held by any current officer or director and all other options as a group.
Options issued in 1997 held by Mr. William H. Channell, Jr., the President of the Company, and by members of the Board of Directors were not repriced.
Profit Sharing and Savings Plans
The Company maintains a plan, established in 1993, in accordance with Section 401(K) of the Internal Revenue Code. Under the terms of this plan, eligible employees may make voluntary contributions to the extent allowable by law. Employees of the Company are eligible to participate in the plan after 90 days of employment. Matching contributions by the Company to this plan are discretionary and will not exceed that allowable for Federal income tax purposes. The Company's contributions are vested over five years in annual increments.
Employment Contracts
The Company has entered into employment agreements with each of William H. Channell, Sr. and William H. Channell, Jr., engaging them as the Chairman of the Board and Chief Executive Officer, and President and Chief Operating Officer of the Company, respectively. For their service, each of Messrs. Channell, Sr. and Channell, Jr., is entitled to receive an annual salary of $500,000 and $520,000, respectively. Mr. Channell, Sr.'s salary is subject to annual cost of living increases. Mr. Channell, Sr., during 1999, reduced his hours of contribution to the Company and he agreed to reduce his compensation proportionally by $100,000 to $420,000. In addition, each executive is entitled to participate in the Incentive Stock Plan, the 401(K) Plan and the Incentive Compensation Plan. The employment agreements provide that each executive is entitled to certain other benefits paid for by the Company, including an automobile allowance, health insurance and sick leave, in accordance with the Company's customary practices for senior executive officers.
In the case of Mr. Channell, Sr., such benefits also include (i) during the term of the agreement, the payment of premiums for a term disability policy providing for $250,000 in annual benefits in the case of his temporary or permanent disability, (ii) during the lifetime of Mr. Channell, Sr. and his wife, Jacqueline M. Channell, medical insurance for each of Mr. and Mrs. Channell comparable to that provided to the Company's senior executive officers, subject to a premium reimbursement obligation in the case of the medical insurance provided to Mrs. Channell, and (iii) during Mr. Channell, Sr.'s lifetime, a portion of the premiums on a life insurance policy owned by Mr. Channell, Sr., under which Mrs. Channell is the beneficiary.
Each of the employment agreements has a term of five years. In the event either executive is terminated without cause (as defined in the employment agreements), he is entitled to receive, as a severance benefit, an amount equal to three times his annual base salary, and any options or Restricted Stock previously granted to such executive will become immediately vested.
At the time of the Initial Public Offering, as an incentive for continued services, the Company entered into a bonus agreement with Mr. Baker and Mr. Burke. This agreement granted to each of the three a bonus in the amount of $200,000, which was earned and payable in three equal installments on December 31, 1997, 1998 and 1999, provided each remained employed by the Company. The final installment of this bonus was paid to each prior to December 31, 1999.
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. For 1999, no bonuses were paid or accrued under this Plan.
The Company's executive compensation program is administered by the Compensation Committee of the Board of Directors. During 1999, this Committee was composed of Mr. William H. Channell, Sr., an executive officer and employee of the Company, Mr. Eugene R. Schutt, Jr. and Mr. Richard A. Cude. (See "Certain Relationships and Related Transactions".) It is the responsibility of the Committee to review and approve the Company's executive compensation plans and policies and to monitor these compensation programs in relation to the performance of the particular executive and the overall performance of the Company.
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, 1999 with the performance of the NASDAQ market, the S & P Industrials and a similar Industry Index for the same period.
COMPARISON OF 42 MONTH CUMULATIVE TOTAL RETURN AMONG CHANNELL COMMERCIAL CORPORATION, THE NASDAQ STOCK MARKET (U.S.) INDEX, S & P INDUSTRIALS INDEX AND THE S & P COMMUNICATIONS EQUIPMENT INDEX
[GRAPH APPEARS HERE]
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 recordholder of such shares).
(1) Refers to the number of shares covered by options exercisable within 60 days of March 1, 2000.
Security Ownership of Management
The following table sets forth certain information, as of March 1, 2000, 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 1, 2000.
Item 13.
Item 13. Certain Relationships and Related Transactions ----------------------------------------------
The Company has two leases for approximately 260,000 square feet of manufacturing, warehouse and office space in Temecula, California, with William H. Channell, Sr., a principal stockholder and the Chairman of the Board and Chief Executive Officer of the Company. The term of the first lease is through December 31, 2005, with two five-year renewal options. The lease provides for annual cost of living increases. Additionally, an adjacent 100,000 square foot building was constructed and completed in 1996. Subsequent to December 31, 1996, the Company guaranteed debt of Mr. Channell, Sr. of approximately $2.7 million incurred in connection with construction of the building. This building is also being leased from Mr. Channell, Sr. through 2005, with two five-year renewal options. The Company believes that the terms of these leases are no less favorable to the Company than could be obtained from an independent third party.
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 All schedules are omitted because they are not applicable, or the required information is included in the financial statements or notes thereto.
(a)(3) and (c). The following exhibits are filed herewith: Exhibit Number Exhibit Title ------ ------------- 3.1 Restated Certificate of Incorporation of the Company (1) 3.2 Bylaws of the Company (1) 4 Form of Common Stock Certificate (1) 10.1 Tax Agreement between the Company and the Existing Stockholders (1) 10.2 Channell Commercial Corporation 1996 Incentive Stock Plan (including form of Stock Option Agreements and Restricted Stock Agreement) (1) 10.3 Senior Revolving Loan Agreement dated as of May 1, 1998, between the Company and Fleet National Bank (3) 10.8 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 November 2, 1989 between the Company and Meadowvale Court Property Management Ltd., as amended (1) 10.16 Lease Agreement dated as of March 1, 1996 between Winthrop Resources Corp. and the Company (1) 10.17 Form of Indemnity Agreement (1) 10.18 Form of Agreement Regarding Intellectual Property (1) 10.19 401(k) Plan of the Company (5) 10.20 Letter Agreement regarding employment, Andrew M. Zogby (2) 10.21 Letter Agreement regarding employment, John B. Kaiser (2) 10.22 A.C. Egerton (Holdings) PLC Share Purchase Agreement (3) 10.23 Amendment to Employment Agreement, William H. Channell Jr., dated December 31, 1998 (5) 11 Computation of Proforma Income per Share (2) 23 Consent of Independent Certified Public Accountant (6) 27 Financial Data Schedule (6) (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended December 31, 1999. _______ (1) Incorporated by reference to the indicated exhibits filed in connection with the Company's Registration Statement on Form S-1 (File No. 333-3621). (2) Incorporated by reference to the indicated exhibits filed in connection with the Company's Form 10-K on March 31, 1997. (3) Incorporated by reference to the indicated exhibits filed in connection with the Company's Form 8-K on May 18, 1998. (4) Incorporated by reference to the indicated exhibits filed in connection with the Company's Form 10-Q on May 6, 1998. (5) Incorporated by reference to the indicated exhibits filed in connection with the Company's Form 10-K on March 31, 1999. (6) Filed herewith.
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 29, 2000.
CHANNELL COMMERCIAL CORPORATION a Delaware corporation
By /s/ WILLIAM H. CHANNELL, SR. -------------------------------------- William H. Channell, Sr. Chairman of the Board and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Form 10-K Annual Report has been signed by the following persons in the capacities indicated below as of March 29, 2000.
Signature Capacity in Which Signed --------- ------------------------
/s/ WILLIAM H. CHANNELL, SR. Chairman of the Board and - ------------------------------- Chief Executive Officer William H. Channell, Sr. (Principal Executive Officer)
/s/ WILLIAM H. CHANNELL, JR. President, Chief Operating Officer - ------------------------------- and Director William H. Channell, Jr.
/s/ GARY W. BAKER Vice President, Finance and - ------------------------------- Chief Financial Officer Gary W. Baker
/s/ JACQUELINE M. CHANNELL Secretary and Director - ------------------------------- Jacqueline M. Channell
/s/ EUGENE R. SCHUTT, JR. Director - ------------------------------- Eugene R. Schutt, Jr.
/s/ RICHARD A. CUDE Director - ------------------------------- Richard A. Cude
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, 1998 and 1999, and the related consolidated statements of income and comprehensive income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Channell Commercial Corporation as of December 31, 1998 and 1999, and the consolidated results of its operations and its consolidated cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States.
/s/ Grant Thornton LLP
Los Angeles, California February 28, 2000
CHANNELL COMMERCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, (amounts in thousands, except per share data)
The accompanying notes are an integral part of these statements.
CHANNELL COMMERCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS - CONTINUED
December 31, (amounts in thousands, except per share data)
The accompanying notes are an integral part of these statements.
CHANNELL COMMERCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME Year ended December 31, (amounts in thousands, except per share data)
The accompanying notes are an integral part of these statements.
CHANNELL COMMERCIAL CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Years ended December 31, 1997, 1998 and 1999 (amounts in thousands, except per share data)
The accompanying notes are an integral part of these statements.
CHANNELL COMMERCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended December 31, (amounts in thousands)
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, 1997, 1998 and 1999 (amounts in thousands, except per share data)
NOTE A--DESCRIPTION OF BUSINESS
The Company is a designer and manufacturer of telecommunications equipment supplied to telephone, cable television and power utility network providers worldwide. Major product lines include a complete line of thermoplastic and metal fabricated enclosures, advanced copper termination and connectorization products, fiber optic cable management systems, coaxial-based passive RF electronics and heat shrink products. The Company's enclosure products house, protect and provide access to advanced telecommunications hardware, including both radio frequency electronics and photonics, and transmission media, including coaxial cable, copper wire and optical fibers, used in the delivery of voice, video and data services. The enclosure products are deployed within the portion of a local signal delivery network, commonly known as the "outside plant" or "local loop", that connects the network provider's signal origination office with residences and businesses.
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Estimates--In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Basis of Consolidation--The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany transactions and balances have been eliminated.
Foreign Currency Translation--Assets and liabilities of certain foreign operations are translated into U.S. dollars at current exchange rates. Income and expenses are translated into U.S. dollars at average rates of exchange prevailing during the period. Foreign currency transaction gains and losses are included in net income. Adjustments resulting from translating foreign functional currency financial statements into U.S. dollars are included in other comprehensive income.
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, 1997, 1998 and 1999 (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. The Company reviews the carrying value of goodwill for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Other acquired intangibles are being amortized on a straight-line basis over their estimated useful lives of 3 years. Amortization expense charged to income amounted to $137, $603 and $863 in 1997, 1998 and 1999, respectively.
Revenue Recognition--The Company recognizes revenue from product sales and commission income at the time of shipment.
Income taxes--Deferred income taxes reflect the impact of temporary differences between the amounts of assets and liabilities recognized for financial reporting purposes and the amounts recognized for income tax purposes. These deferred income taxes are measured by applying currently enacted income tax rates. A valuation allowance reduces deferred income tax assets when it is more likely than not that some portion or all of the deferred income tax assets will not be realized.
Income per share--Basic income per share excludes dilution and is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted income per share reflects the potential dilution that could occur if options to acquire common stock were exercised.
CHANNELL COMMERCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1997, 1998 and 1999 (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:
The following options were not included in the computation of diluted income per share as a result of the options' exercise price exceeding the average market price of the common shares:
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, 1997, 1998 and 1999 (amounts in thousands, except per share data)
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued
Reclassifications-- Certain reclassifications have been made to the 1997 and 1998 financial statements to conform with the 1999 presentation.
NOTE C--INVENTORIES
Inventories are summarized as follows:
NOTE D--PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows:
Included in machinery and equipment is $7,157 and $10,061 of equipment under capital lease at December 31, 1998 and 1999, respectively. Accumulated amortization of assets under capital lease totaled $653 and $1,997 at December 31, 1998 and 1999, respectively. See Note H.
CHANNELL COMMERCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1997, 1998 and 1999 (amounts in thousands, except per share data)
NOTE E-- ACCRUED EXPENSES
Accrued expenses consist of the following:
NOTE F-- LONG-TERM DEBT Long-term debt consists of the following:
CHANNELL COMMERCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1997, 1998 and 1999 (amounts in thousands, except per share data)
NOTE F-- LONG-TERM DEBT--Continued
The senior revolving credit facility contains various financial and operating covenants which, among other things, imposes 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. In 1999, the Company exceeded the allowable capital expenditures limitations of the senior revolving credit facility. The Company obtained a waiver of the capital expenditure covenant.
The senior revolving credit facility includes an $8,000 multi-currency revolving commitment designed to provide working capital to the Company's international subsidiaries, as well as financing for international letters of credit and foreign exchange contracts.
The Company also had a separate credit facility available to its Egerton subsidiaries that includes an overdraft facility totaling approximately $5,000 plus the combined cash balances of those subsidiaries. Also included were facilities, totaling approximately $2,000, to provide financing for international letters of credit, forward exchange contracts, and other items. Outstanding borrowings (net of cash balances) bore interest at the bank's base rate (5.5% at December 31, 1999) plus a factor ranging from 1.25% to a maximum of 4% depending on the amount borrowed. The facility was collateralized by the assets of the subsidiaries. In February 2000, the Egerton credit facility was repaid using additional borrowings from the senior revolving credit facility.
Long-term debt at December 31, 1999 matures as follows:
CHANNELL COMMERCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1997, 1998 and 1999 (amounts in thousands, except per share data)
NOTE G--INCOME TAXES
The components of income taxes are as follows:
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:
CHANNELL COMMERCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1997, 1998 and 1999 (amounts in thousands, except per share data)
NOTE G--INCOME TAXES--Continued
Significant components of the Company's deferred tax assets and liabilities are as follows:
The classification of the net deferred tax asset between current and non-current is as follows:
At December 31, 1999, the Company had $3,200 of international operating loss carryforwards with a potential tax benefit of $990. These loss carryforwards do not expire. Realization of the deferred tax asset is dependent upon generating sufficient taxable income. A valuation allowance was not recorded in 1999 because management believes it is more likely than not that all of the deferred tax assets will be realized.
CHANNELL COMMERCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1997, 1998 and 1999 (amounts in thousands, except per share data)
NOTE H--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:
NOTE I--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 1997, 1998 and 1999.
CHANNELL COMMERCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1997, 1998 and 1999 (amounts in thousands, except per share data)
NOTE I--STOCKHOLDERS' EQUITY--Continued
Plan transactions are as follows:
Weighted average fair value of options granted during the year are as follows:
The range of exercise prices of options outstanding at December 31, 1999 is $8.38 to $13.25 and the options have a weighted average remaining contractual life of 7 years. At December 31, 1999, 559 of the 768 options outstanding are exercisable by the optionee.
CHANNELL COMMERCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1997, 1998 and 1999 (amounts in thousands, except per share data)
NOTE I--STOCKHOLDERS' EQUITY--Continued
The fair value of options at date of grant was estimated using the Black-Scholes model with the following weighted average assumptions:
Had compensation cost for the plan been determined based on the fair value of the options at the grant dates based on the above method, the Company's net income and income per share would have been:
CHANNELL COMMERCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1997, 1998 and 1999 (amounts in thousands, except per share data)
NOTE J--ACQUISITIONS
During 1997 and 1998, the Company acquired the entities described below. The acquisitions were accounted for by the purchase method of accounting:
RMS Electronics, Inc.--On January 2, 1997, the Company acquired substantially all of the assets of RMS Electronics, Inc. and an affiliated company, RMS - UK Limited (collectively referred to as "RMS") for $2,695, including acquisition costs. The purchase price consisted of $2,295 in cash and the remainder through the issuance of a promissory note (Note E). RMS is a designer, importer and distributor of passive electronic products and devices for various segments of the telecommunications industry. These devices are typically used in conjunction with the Company's enclosure products. The excess of the purchase price over the fair values of the net assets acquired was $1,134 and has been recorded as goodwill, which is being amortized on a straight-line basis over fifteen years. Other intangible assets acquired in connection with the acquisition totaled $100 and are being amortized over three years.
Standby Electronics Corp.--On June 30, 1997, the Company acquired 100% of the outstanding shares of Standby Electronics Corp. ("Standby"), a designer and supplier of metal-fabricated enclosures to house advanced electronics fiber optic cable and power systems for telecommunications networks, for $479. In addition, the purchase agreement provided for additional consideration of up to $300 to be paid over three years, contingent upon Standby achieving specified revenue levels over the three year period. The excess of the purchase price (excluding the contingent consideration) over the fair values of the net assets acquired was $552 and has been recorded as goodwill, which is being amortized on a straight-line basis over fifteen years. In 1999, a final contingent purchase payment of $213 was made resulting in an increase in the recorded goodwill.
A.C. Egerton (Holdings) PLC--On May 1, 1998, the Company acquired 100% of the outstanding common stock of A.C. Egerton (Holdings) PLC ("Egerton"), a public limited company incorporated in England and Wales. Egerton is a manufacturer of outside plant splicing and terminating products for both optical fiber and copper applications used in the telecommunications industry. The purchase price, paid in cash, amounted to $27,900, including $1,325 of acquisition costs. The fair value of tangible assets acquired in excess of liabilities assumed amounted to $13,847, which resulted in goodwill in the amount of $14,053. The final appraisal of the property and equipment acquired was completed in the forth quarter of 1998, resulting in adjustments to Egerton's property and equipment and goodwill and the related depreciation and amortization. The effect of recording these adjustments was to increase net income for the fourth quarter of 1998 by $435 ($.05 per share). Goodwill is being amortized on the straight-line basis over twenty years.
CHANNELL COMMERCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1997, 1998 and 1999 (amounts in thousands, except per share data)
NOTE J--ACQUISITIONS--Continued
The operating results of these acquired businesses have been included in the consolidated statement of income from the dates of acquisition. The following unaudited pro forma information presents a summary of consolidated results of operations of the Company and the acquired businesses as if the acquisition of Egerton had occurred January 1, 1997.
These unaudited pro forma results have been presented for comparative purposes only and include certain adjustments, such as additional amortization expense of goodwill and increased interest expense on acquisition debt. They do not purport to be indicative of the results of operations which actually would have resulted had the acquisition of Egerton been effective January 1, 1997, or of future results of operations of the consolidated entities.
NOTE K--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 one year of employment. Matching contributions by the Company to this plan are discretionary and will not exceed that allowable for Federal income tax purposes. The Company's contributions are vested over five years in equal increments. The accompanying statements of income include expenses of $40, $174 and $193 which have been incurred for the plans for the years ended December 31, 1997, 1998 and 1999, respectively.
CHANNELL COMMERCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1997, 1998 and 1999 (amounts in thousands, except per share data)
NOTE L--RELATED PARTY TRANSACTIONS
The Company leases a portion of its facilities in Temecula, California from the Company's Chairman of the Board and Chief Executive Officer. The lease provides for payments of insurance, repairs, and maintenance and property taxes, and extend through 2005. The Company has two five-year renewal options to extend the terms to 2015. Rent expense paid under the lease was $1,081, $1,103 and $1,127 for the years ended December 31, 1997, 1998 and 1999, respectively.
In 1997, the Company guaranteed debt of the Company's Chairman of the Board and Chief Executive Officer of approximately $2,700. The guaranteed debt was incurred in connection with construction of the facilities leased to the Company and is collateralized by said facilities. The loan amount subject to the guarantee is expected to decline over a 20 year period before expiring in 2016. It is not practicable to estimate the fair value of the guarantee; however, the Company does not anticipate that it will incur losses as a result of this guarantee.
At December 31, 1999, the Company had advances due from employees totaling $617 included in miscellaneous receivables. Employee advances are noninterest bearing and due by June 30, 2000.
NOTE M--COMMITMENTS
The Company leases equipment and manufacturing and office space under several operating leases expiring through 2005. Rent expense under all operating leases amounted to $1,081, $1,777 and $2,182 for the years ended December 31, 1997, 1998 and 1999, respectively. Total future minimum rental payments under noncancellable operating leases as of December 31, 1999, including the operating lease with the related party discussed in Note L, are as follows:
In addition to these minimum rental commitments, certain of these operating leases provide for payments of insurance, repairs and maintenance and property taxes.
CHANNELL COMMERCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1997, 1998 and 1999 (amounts in thousands, except per share data)
NOTE N--CREDIT CONCENTRATIONS AND MAJOR CUSTOMERS
The Company maintains cash balances in financial institutions located in the United States, Canada, Australia and the United Kingdom. At December 31, 1998, the amount of cash balances held in financial institutions outside of the United States was $4,621. Cash balances held in financial institutions outside of the United States was not significant at December 31, 1999. Cash balances held in financial institutions located in the United States may, at times, exceed federally insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash and cash equivalents.
In 1999, one customer accounted for 10.2% of sales. In 1998, one customer accounted for 12.5% of sales and a second customer accounted for 11.7% of sales. In 1997, one customer accounted for 15.1% of sales and a second customer made up 10.0% of sales. Credit risk with respect to accounts receivable is generally diversified due to the large number of entities comprising the Company's base and their geographic dispersion. The Company controls credit risk through credit approvals, credit limits and monitoring procedures but does not generally require collateral.
CHANNELL COMMERCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1997, 1998 and 1999 (amounts in thousands, except per share data)
NOTE O--SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in one industry segment as a manufacturer and supplier of telecommunications equipment. Currently, the Company is organized into four geographic regions: the United States, Europe/Middle East, Canada and Australia/Asia. The following tables summarize segment information:
(1)Inter-geographic revenues were not significant.
(2)Includes export sales of approximately $2,300, $1,700 and $1,043 in 1997, 1998 and 1999, respectively.
CHANNELL COMMERCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 31, 1997, 1998 and 1999 (amounts in thousands, except per share data)
NOTE O--SEGMENT AND GEOGRAPHIC INFORMATION--Continued
(3)Excludes assets acquired under capital leases of $214, $6,248 and $3,898 in 1997, 1998 and 1999, respectively.
NOTE P--QUARTERLY FINANCIAL DATA (Unaudited)
Summarized quarterly financial data for 1997, 1998 and 1999 follows:
GLOSSARY OF TERMS
ADSL (Asymmetric Digital Subscriber Line): A standard allowing digital broadband signals and standard telephone service to be transmitted up to 12,000 feet over a twisted copper pair.
Broadband: Transmission rates in excess of 1.544 mega bits per second typically deployed for delivery of high-speed data, video and voice services.
Cable Modem: Electronic transmission device placed on the CATV network, located at end user locations, providing two-way, high-speed data service capability, including internet access for subscribers.
CATV (Community Antenna TV, commonly called cable television): A system for distributing television programming by a cable network rather than by broadcasting electromagnetic radiation.
Coaxial Cable: The most commonly used means of transmitting cable television signals. It consists of a cylindrical outer conductor (shield) surrounding a center conductor held concentrically in place by an insulating material.
DLC (Digital Loop Carrier): Telecommunications transmission technology which multiplexes multiple individual voice circuits onto copper or fiber cables.
DSL (Digital Subscriber Line): Generic descriptor covering various versions of DSL services delivered over copper wires. Included are HDSL and ADSL services.
Fiber Node: Refers to the equipment that terminates the fiber cables originating from the host digital terminal. This network element converts the optical signals to their coax electrical, RF equivalents. Synonymous with optical network interface (ONI).
Fiber Optics: The process of transmitting infrared and visible light frequencies through a low-loss glass fiber with a transmitting laser or LED and a photo diode receiver.
FTTC (Fiber-To-The-Curb): In a long distance network consisting of fiber optics, fiber-to-the-curb refers to the fiber optics running from the distribution plant to the curb, at which point copper is used for the curb-to- home connection.
HDSL (High bit rate Digital Subscriber Line): By using sophisticated coding techniques, a large amount of information may be transmitted over copper. The HDSL scheme uses such coding over four copper wires and is primarily intended for high capacity bi-directional business services.
Headend: The primary transmission point in a cable system supplying the hubs and trunk cables.
HFC (Hybrid Fiber Coax): A type of distribution plant that utilizes fiber optics to carry service from a CO to the carrier serving area, then coaxial cable within the CSA to or close to the individual residences.
ONU (Optical Network Unit): The curb mounted electronics device which converts fiber optic signals to electrical for service delivery or copper wires.
PCS (Personal Communications Services): Any service offered on a personal communications network. These include basic telephone, voice mail, paging and others. Personal communications networks operate in the 1800-2000 mHz range, utilizing low power cells compared to traditional cellular technology.
RBOC (Regional Bell Operating Company): A term for the seven regional holding companies created when AT&T divested the Bell operating companies.
RF (Radio Frequency): An electromagnetic wave frequency intermediate between audio frequencies and infrared frequencies used especially in wireless telecommunications and CATV transmission.
G-1