<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to ______________
Commission File No. 333-3621
CHANNELL COMMERCIAL CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
95-2453261
(I.R.S. Employer Identification No.)
26040 Ynez Road, Temecula, California
(Address of principal executive offices)
92591
(Zip Code)
(909) 694-9160
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes __ X__ No _____
6,137,000 shares of common stock of the Registrant were outstanding at
June 30, 1996.
<PAGE>
Part I - Financial Information
Item 1 - Financial Statements
CHANNELL COMMERCIAL CORPORATION
STATEMENTS OF INCOME (Unaudited)
(amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Six months ended Three months ended
June 30 June 30
----------------- -------------------
1996 1995 1996 1995
------- ------- -------- --------
<S> <C> <C> <C> <C>
Net Sales $23,240 $21,009 $12,961 $11,784
Cost of goods sold 12,713 11,884 6,975 6,397
------- ------- ------- -------
Gross profit 10,527 9,125 5,986 5,387
Commission income 510 563 280 301
------- ------- ------- -------
11,037 9,688 6,266 5,688
Operating expenses
Selling 3,441 2,831 1,888 1,492
General and Administrative 795 926 425 478
License fees -- related party 531 1,050 -- 592
Research and development 267 243 139 121
------- ------- ------- -------
5,034 5,050 2,452 2,683
------- ------- ------- -------
Income from operations 6,003 4,638 3,814 3,005
Interest expense 128 208 63 118
------- ------- ------- -------
Income before income taxes 5,875 4,430 3,751 2,887
Income taxes 220 179 98 118
------- ------- ------- -------
Net income $ 5,655 $ 4,251 $ 3,653 $ 2,769
======= ======= ======= =======
Pro forma information (unaudited):
Historical income before income taxes $ 5,875 $ 4,430 $ 3,751 $ 2,887
Pro forma income taxes 2,409 1,816 1,564 1,200
------- ------- ------- -------
Pro forma net income $ 3,466 $ 2,614 $ 2,187 $ 1,687
======= ======= ======= =======
Pro forma net income per share $ 0.45 $ 0.34 $ 0.28 $ 0.22
======= ======= ======= =======
Pro forma weighted average shares outstanding 7,695 7,695 7,695 7,695
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 1 of 10
<PAGE>
CHANNELL COMMERCIAL CORPORATION
BALANCE SHEETS
(amounts in thousands, except share and per share data)
<TABLE>
<CAPTION>
Unaudited
6/30/96 12/31/95
---------------------- ---------
Historical Pro forma
---------- ---------
<S> <C> <C> <C>
ASSETS
Current Assets
Cash $ 1,206 $ 1,206 $ 1,375
Accounts receivable 6,471 6,471 4,122
Accounts receivable - related party 310 366 --
Inventories 2,640 2,640 2,609
Deferred income taxes -- 146 --
Prepaid expenses 351 351 396
------- ------- -------
Total current assets 10,978 11,180 8,502
Property and equipment 10,235 10,235 10,062
Deferred income taxes -- 672 --
Other assets 941 941 539
------- ------- -------
Total assets $22,154 $23,028 $19,103
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities
Accounts payable $ 2,264 $ 2,264 $ 1,251
Accrued expenses 1,021 1,021 972
Accrued license fees - related party 475 -- 471
Current maturities of long-term obligations 822 822 860
Distributions payable to stockholders -- 15,600 674
Income taxes payable 70 70 49
------- ------- -------
Total current liabilities 4,652 19,777 4,277
Long-term obligations 1,899 1,899 2,353
Stockholders' equity (deficit)
Preferred stock, par value $.01 per share, authorized --
1,000,000 shares, none issued and outstanding -- -- --
Common stock, par value $.01 per share, authorized --
19,000,000 shares; issued and outstanding --
6,137,000 shares 61 61 61
Additional paid-in capital 26 (2,543) 26
Retained earnings 15,516 3,834 12,386
------- ------- -------
Total stockholders' equity (deficit) 15,603 1,352 12,473
------- ------- -------
Total liabilities and stockholders' equity $22,154 $23,028 $19,103
======= ======= =======
</TABLE>
The accompanying notes are an integral part of theses financial statements.
Page 2 of 10
<PAGE>
CHANNELL COMMERCIAL CORPORATION
STATEMENTS OF CASH FLOWS (Unaudited)
(amounts in thousands)
<TABLE>
<CAPTION>
Six months ended
June 30
-----------------
1996 1995
-------- -------
<S> <C> <C>
Operating Activities:
Net Income $ 5,655 $ 4,251
Non-cash items included in net income:
Depreciation and amortization 804 832
(Increase) decrease in assets:
Accounts receivable (2,659) (2,230)
Inventories (31) (852)
Prepaid expenses 45 206
Other (402) (385)
Increase (decrease) in liabilities
Accounts payable 1,013 1,351
Accrued expenses 53 370
Income taxes payable 21 (312)
------- -------
Net cash provided by operating activities 4,499 3,231
------- -------
Investing activities:
Acquisition of property and equipment (977) (1,505)
------- -------
Net cash used in investing activities (977) (1,505)
------- -------
Financing activities:
Repayment of long-term obligations (558) (468)
Dividends paid (3,199) (3,976)
Proceeds from issuance of long-term debt 66 2,113
------- -------
Net cash (used in) provided by financing activities (3,691) (2,331)
------- -------
(Decrease) increase in cash (169) (605)
Cash, beginning of period 1,375 797
------- -------
Cash, end of period $ 1,206 $ 192
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 3 of 10
<PAGE>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
(amounts in thousands except per share data)
1. Unaudited financial statements: In the opinion of management, all
adjustments, consisting only of normal recurring adjustments necessary for
a fair presentation of (a) the results of operations for the three- and
six- month periods ended June 30, 1996 and 1995, (b) the financial position
at June 30, 1996 and December 31, 1995, and (c) the consolidated statements
of cash flows for the six-month periods ended June 30, 1996 and 1995 have
been made. The results for the three- and six-month periods ended June 30,
1996, are not necessarily indicative of the results for the entire year
1996.
2. Pro forma financial information: Prior to the Company's initial public
offering of common stock in July 1996 (the "IPO"), it was an S Corporation
for federal and state income tax purposes. The pro forma income statement
presentation reflects a provision for income taxes as if the Company had
always been a C Corporation using an assumed effective tax rate of
approximately 41% less tax credits. The pro forma June 30, 1996 balance
sheet presentation gives effect to (a) the termination of the Company's S
Corporation status, (b) the effects of $12,500 of distributions to
stockholders in connection with the termination of the Company's S
Corporation status, (c) the acquisition by the Company of certain patents
(the "Channell Patents") previously owned by William H. Channell, Sr.,
Chairman of the Board and Chief Executive Officer, and other stockholders
for an aggregate consideration of $3.1 million, which was paid initially
through borrowings under the Company's bank line and was then repaid from
the net proceeds of the IPO, and (d) the contribution by Mr. Channell, Sr.
of license fees attributable to product sales in 1996 relating to the
Channell Patents.
Pro forma net income per share has been computed by dividing pro forma net
income by the pro forma weighted average shares outstanding. Pro forma
weighted average shares outstanding includes 1,558 shares sold in the IPO
at a price of $11.00 per share, the net proceeds of which were used to fund
the distribution to existing stockholders in connection with the
termination of the Company's S Corporation status and to acquire the
Channell Patents. The effect of the Company's use of a portion of the net
proceeds of the IPO to repay approximately $2.7 million of bank
indebtedness outstanding as of June 30, 1996, has not been reflected in pro
forma net income or pro forma net income per share because the impact is
not material.
3. Exclusive licensing agreements: The exclusive licensing agreements
relating to the Channell Patents were terminated in April 1996 and,
accordingly, no license fees expense has been reflected in the accompanying
statements of income for the three-month period ended June 30, 1996.
4. Inventories: Inventories stated at the lower of cost or market (first-in,
first-out method) are summarized as follows:
December 31, June 30,
1995 1996
----------- --------
Unaudited
Raw materials $1,111 $ 765
Work-in process 744 819
Finished goods 754 1,056
------- ------
$2,609 $2,640
======= ======
Page 4 of 10
<PAGE>
Part I - Financial Information
Item 2 - Management's Discussion and Analysis of Results of Operations and
Financial Condition
RESULTS OF OPERATIONS
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1996 WITH THE SIX MONTHS ENDED JUNE
30, 1995
Net Sales. Net sales increased $2.2 million or 10.6% from $21.0 million in
the first six months of 1995 to $23.2 million in the first six months of 1996.
CATV net sales increased $2.4 million or 13.5% from $18.1 million in the first
six months of 1995 to $20.5 million in the first six months of 1996 as a result
of continued moderate growth from rebuild and new network construction projects.
Telecommunications net sales decreased $0.2 million or 6.9% from $2.9
million in the first six months of 1995 to $2.7 million in the first six months
of 1996. This decrease is due to short-term delays and rescheduling by
telephone companies for their broadband network construction programs. The
passage of the federal telecommunications legislation and recent industry
announcements indicate that such construction programs are likely to be more
consistent with original forecasts during the remainder of 1996.
Domestic net sales increased $2.1 million or 11.0% from $19.1 million in
the first six months of 1995 to $21.2 million in the first six months of 1996.
International net sales increased $0.1 million or 5.3% from $1.9 million in
the 1995 period to $2.0 million in the 1996 period. Several major international
broadband network construction programs slowed in the first quarter due to
seasonally reduced construction schedules in Canada and the South Pacific, and
due to delays in the delivery of advanced network electronics by certain major
transmission equipment suppliers. Stronger construction activity has resumed in
the second quarter.
Gross Profit. Gross profit increased $1.4 million or 15.4% from $9.1
million in the first six months of 1995 to $10.5 million in the first six months
of 1996. Gross margin increased from 43.4% to 45.3% during the comparable
periods. The improvement in gross profit and gross margin was primarily due to
an increase in sales volume, which resulted in higher operating leverage.
Page 5 of 10
<PAGE>
Commission Income. Commission income decreased $0.1 million or 9.4% from
$0.6 million in the first six months of 1995 to $0.5 million in the first six
months of 1996. The decrease resulted from lower sales volume of cable-in-
conduit products due to severe winter weather conditions in the eastern part of
the United States.
Selling. Selling expense increased $0.6 million or 21.5% from $2.8 million
in the first six months of 1995 to $3.4 million in the first six months of 1996,
primarily as a result of higher travel and related expenses in the amount of
$0.2 million, relocation expense in the amount of $0.1 million, shipping expense
in the amount of $0.1 million and computer software expense in the amount of
$0.1 million. These increases were due primarily to increased sales and
marketing efforts during the period. As a percentage of net sales, selling
expense increased from 13.5% in the 1995 period to 14.8% in the 1996 period.
General and Administrative. General and administrative expenses decreased
$0.1 million or 11.1% from $0.9 million in the first six months of 1995 to $0.8
million in the first six months of 1996. As a percentage of net sales, general
and administrative expense declined from 4.4% in the 1995 period to 3.4% in the
1996 period as a result of spreading the fixed portion of these expenses over a
larger sales base.
License Fees. License fees decreased $0.6 million or 54.5% from $1.1
million in the first six months of 1995 to $0.5 million in the first six months
of 1996. As a result of the termination of the license fee arrangement in April
1996, no license expense was recorded in the second quarter of 1996, and no
license fees will be recorded in any future periods.
Research and Development. Research and development expenses were
approximately $0.3 million in the first six months of both 1995 and 1996, but
decreased as a percentage of net sales from 1.2% in 1995 to 1.1% in 1996.
Research and development expense is expected to be higher in the future as the
Company implements its new product development plans using, in part, proceeds of
the IPO.
Income from Operations. As a result of the items discussed above, income
from operations increased $1.4 million or 29.4% from $4.6 million in the first
six months of 1995 to $6.0 million in the first six months of 1996, and
operating margin increased from 22.1% to 25.8%.
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 1996 WITH THE THREE MONTHS ENDED
JUNE 30, 1995
Net Sales. Net sales increased $1.2 million or 10.0% from $11.8 million in
the second quarter of 1995 to $13.0 million in the second quarter of 1996. CATV
net sales
Page 6 of 10
<PAGE>
increased $1.2 million or 11.9% from $10.3 million in the second quarter of 1995
to $11.5 million in the second quarter of 1996 as a result of continued moderate
growth from rebuild and new network construction projects.
Telecommunications net sales decreased $0.1 million or 6.7% from $1.5
million in the second quarter of 1995 to $1.4 million in the second quarter of
1996. This decrease is due to delays and rescheduling by telephone companies
for their broadband network construction programs. The passage of the federal
telecommunications legislation and recent industry announcements indicate that
such construction programs are likely to be more consistent with original
forecasts during the remainder of 1996.
Domestic net sales increased $1.0 million or 9.3% from $10.8 million in
the second quarter of 1995 to $11.8 million in the second quarter of 1996.
International net sales increased $0.2 million or 20.0% from $1.0 million
in the 1995 period to $1.2 million in the 1996 period. Such increase reflects
that international broadband network construction programs have been resumed.
Gross Profit. Gross profit increased $0.6 million or 11.1% from $5.4
million in the second quarter of 1995 to $6.0 million in the second quarter of
1996. Gross margin increased from 45.7% to 46.2% during the comparable periods.
The improvements in gross profit and gross margin are primarily due to the
increase in overall sales volume, which resulted in higher operating leverage.
Commission Income. Commission income was $0.3 million in both the second
quarter of 1995 and 1996.
Selling. Selling expense increased $0.4 million or 26.5% from $1.5 million
in the second quarter of 1995 to $1.9 million in the second quarter of 1996,
primarily as a result of higher travel and related expenses in the amount of
$0.1 million, relocation expense in the amount of $0.1 million, shipping expense
in the amount of $0.1 million, and computer software expense in the amount of
$0.1 million. These increases were due primarily to increased sales and
marketing efforts during the quarter. As a percentage of net sales, selling
expense increased from 12.7% in the 1995 period to 14.6% in the 1996 period.
General and Administrative. General and administrative expenses decreased
$0.1 million or 11.1% from $0.5 million in the second quarter of 1995 to $0.4
million in the second quarter of 1996. As a percentage of net sales, general
and administrative expense declined from 4.1% in the 1995 period to 3.3% in the
1996 period.
Page 7 of 10
<PAGE>
License Fee. License fee expense was not incurred in the second quarter of
1996 as a result of the termination of the license fee agreements in April 1996.
Research and Development. Research and development expenses were $0.1
million in both the second quarter of 1995 and 1996.
Income from Operations. As a result of the items discussed above, income
from operations increased $0.8 million or 26.9% from $3.0 million in the second
quarter of 1995 to $3.8 million in the second quarter of 1996, and operating
margin increased from 25.5% to 29.4%.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $3.2 million and $4.5 million
for the six months ended June 30, 1995 and 1996, respectively. Net cash used in
financing activities was $2.3 million and $3.7 million for the six months ended
June 30, 1995 and 1996, respectively. Net cash used in investing activities was
$1.5 million and $1.0 million for the six months ended June 30, 1995 and 1996,
respectively.
Accounts receivable increased from $4.1 million at December 31, 1995, to
$6.5 million at June 30, 1996, as a result of higher sales during the period and
unusually slow collections experienced from certain international customers.
The Company does not believe that its bad debt reserve account needs to be
increased at this time for any potential write-offs.
The Company made capital expenditures of $1.5 million and $1.0 million
during the first six months of 1995 and 1996, respectively, and anticipates
additional capital expenditures of $2.0 million during the remainder of 1996,
principally for product tooling, test equipment and MIS.
The Company has financed its operations and capital expenditures through
internally generated funds and bank borrowings. The Company currently maintains
a revolving credit facility with a $3.5 million working capital revolving line
of credit and a $4.8 million equipment revolving line of credit, neither of
which currently has any outstanding balance. Availability of advances under the
revolving credit facility expires on May 1, 1997.
The Company believes that income from operations, coupled with borrowings
under its revolving credit facility and proceeds from the IPO, will be
sufficient to fund the Company's capital expenditure and working capital
requirements.
Page 8 of 10
<PAGE>
Part II - Other Information
Item 1. 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 the Company's financial statements taken as a whole or on its results of
operations.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
Exhibit
Number Description
- ------ -----------
3.1 Restated Certificate of Incorporation of the Company (1)
3.2 Bylaws of the Company (1)
4 Form of Common Stock Certificate (1)
10.1 Tax Agreement between the Company and the Existing Stockholders (1)
10.2 Channell Commercial Corporation 1996 Incentive Stock Plan (including
form of Stock Option Agreements and Restricted Stock Agreement) (1)
10.3 Business Loan Agreement dated as of January 21, 1994 between the
Company and Bank of America National Trust and Savings Association, as
amended ("Bank of America") (1)
10.5 The Company's Profit Sharing Plan (1)
10.6 Agreement dated as of September 30, 1982 between the Company and
Integral Corporation, as amended (1)
10.7 Telephone Sales Agreement dated as of January 23, 1991 between the
Company and Integral Corporation (1)
10.8 Employment Agreement between the Company and William H. Channell, Sr.
(1)
10.9 Employment Agreement between the Company and William H. Channell, Jr.
(1)
10.10 Channell Commercial Corporation 1996 Performance-Based Annual
Incentive Compensation Plan (1)
10.11 Lease dated December 22, 1989 between the Company and William H.
Channell, Sr., as amended (1)
10.12 Lease dated May 29, 1996 between the Company and the Channell Family
Trust (1)
10.13 Lease dated May 17, 1994 between the Company and the Z. Paul Akian and
Sonia Akian Family Trust (1)
10.14 Lease dated March 1, 1994 between the Company and Allstate Life
Insurance Company (1)
Page 9 of 10
<PAGE>
10.15 Lease dated November 2, 1989 between the Company and Meadowvale Court
Property Management Ltd., as amended (1)
10.16 Lease Agreement dated as of March 1, 1996 between Winthrop Resources
Corp. and the Company (1)
10.17 Form of Indemnity Agreement (1)
10.18 Form of Agreement Regarding Intellectual Property (1)
10.19 401(k) Plan of the Company (1)
27 Financial Data Schedule (2)
_______
(1) Incorporated by reference to the indicated exhibits filed in connection
with the Company's Registration Statement on Form S-1 (File No. 333-3621).
(2) Filed herewith.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHANNELL COMMERCIAL CORPORATION
(Registrant)
Dated: August 8, 1996 By: /s/ Gary W. Baker
-----------------------
Gary W. Baker
Chief Financial Officer
Page 10 of 10
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS & NOTES CONTAINED IN THE COMPANY'S FORM 10-Q FOR THE PERIOD ENDING
JUNE 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1996 JAN-01-1995
<PERIOD-END> JUN-30-1996 DEC-31-1995
<CASH> 1,206 1,375
<SECURITIES> 0 0
<RECEIVABLES> 6,471 4,122
<ALLOWANCES> 0 0
<INVENTORY> 2,640 2,609
<CURRENT-ASSETS> 10,978 8,502
<PP&E> 10,235 10,062
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 22,154 19,103
<CURRENT-LIABILITIES> 4,652 4,277
<BONDS> 0 0
0 0
0 0
<COMMON> 61 61
<OTHER-SE> 15,542 12,412
<TOTAL-LIABILITY-AND-EQUITY> 22,154 19,103
<SALES> 23,240 40,972
<TOTAL-REVENUES> 0 0
<CGS> 12,713 23,059
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 128 339
<INCOME-PRETAX> 5,875 8,832
<INCOME-TAX> 220 349
<INCOME-CONTINUING> 5,655 8,483
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 5,655 8,483
<EPS-PRIMARY> 0.45 0.70
<EPS-DILUTED> 0.45 0.70
</TABLE>
