<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 26, 1996
REGISTRATION NO. 333-3621
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
CHANNELL COMMERCIAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
---------------
DELAWARE 3669 95-2453261
(STATE OF INCORPORATION) (PRIMARY STANDARD (I.R.S. EMPLOYER
INDUSTRIAL CLASSIFICATION IDENTIFICATION NUMBER)
CODE NUMBER)
26040 YNEZ ROAD
TEMECULA, CA 92591-9022
(909) 694-9160
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
WILLIAM H. CHANNELL, SR.
CHAIRMAN OF THE BOARD
26040 YNEZ ROAD
TEMECULA, CA 92591-9022
(909) 694-9160
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPY TO:
EDMUND M. KAUFMAN, ESQ. C.N. FRANKLIN REDDICK III, ESQ.
IRELL & MANELLA LLP 333 SOUTH HOPE STREET, TROOP MEISINGER STEUBER & PASICH LLP
SUITE 3300 LOS ANGELES, CALIFORNIA 10940 WILSHIRE BLVD., 8TH FLOOR
90071 (213) 620-1555 LOS ANGELES, CALIFORNIA 90024
(310) 824-7000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [X]
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT, OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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<PAGE>
CROSS-REFERENCE SHEET
----------------
THE FOLLOWING SETS FORTH THE LOCATION IN THE PROSPECTUS
OF INFORMATION REQUIRED BY ITEMS IN PART I OF FORM S-1.
<TABLE>
<CAPTION>
FORM S-1 ITEM NUMBER AND CAPTION LOCATION IN PROSPECTUS
-------------------------------- ----------------------
<S> <C>
1. Forepart of the Registration
Statement and Outside Front Cover Outside Front Cover Page of
Page of Prospectus................... Prospectus
2. Inside Front and Outside Back Cover
Pages Inside Front Cover Page of
of Prospectus........................ Prospectus
3. Summary Information, Risk Factors and
Ratio of Earnings to Fixed Charges... Prospectus Summary; Risk Factors
4. Use of Proceeds...................... Use of Proceeds
5. Determination of Offering Price...... Outside Front Cover Page of
Prospectus; Underwriting
6. Dilution............................. Dilution
7. Selling Security Holders............. Principal and Selling Stockholders
8. Plan of Distribution................. Outside Front Cover Page of
Prospectus; Underwriting
9. Description of Securities to be
Registered........................... Description of Capital Stock
10. Interests of Named Experts and
Counsel.............................. Legal Matters
11. Information with Respect to the
Registrant
(a) Description of Business......... Prospectus Summary; Business;
Management's Discussion and Analysis
of Financial Condition and Results
of Operations; Certain Transactions
(b) Description of Property......... Business
(c) Legal Proceedings............... Business
(d) Market Price of and Dividends on
Common Equity and Related Outside Front Cover Page of
Shareholder Matters............. Prospectus; Underwriting; Principal
and Selling Stockholders;
Description of Capital Stock;
Dividend Policy
(e) Financial Statements............ Financial Statements
(f) Selected Financial Data......... Capitalization; Selected Historical,
Pro Forma and Other Financial
Information
(g) Supplementary Financial
Information..................... Not Applicable
(h) Management's Discussion and
Analysis of Financial Condition Management's Discussion and Analysis
and Results of Operations....... of Financial Condition and Results
of Operations
(i) Changes in and Disagreements
with Accountants on Accounting
and Financial Disclosure........ Not Applicable
(j) Directors and Executive
Officers........................ Management; Certain Transactions
(k) Executive Compensation.......... Management
(l) Security Ownership of Certain
Beneficial Owners and
Management...................... Principal and Selling Stockholders
(m) Certain Relationships and
Related Transactions............ Certain Transactions
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities.......................... Not Applicable
</TABLE>
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION DATED JUNE 26, 1996
3,100,000 SHARES
[LOGO OF CHANNELL COMMERCIAL CORPORATION]
COMMON STOCK
($.01 PAR VALUE)
Of the 3,100,000 shares of Common Stock offered hereby, 2,700,000 shares are
being sold by Channell Commercial Corporation, a Delaware corporation (the
"Company"), and 400,000 shares are being sold by the Selling Stockholder. The
Company will not receive any of the proceeds from the sale of shares of Common
Stock by the Selling Stockholder. See "Principal and Selling Stockholders."
Prior to this Offering, there has been no public market for the Company's
Common Stock. It is currently estimated that the initial public offering price
will be between $12.00 and $14.00 per share. See "Underwriting" for information
relating to the method of determining the initial public offering price.
The Common Stock has been approved for quotation and trading on the Nasdaq
National Market under the symbol "CHNL."
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 8.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
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UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDER
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<S> <C> <C> <C> <C>
Per Share....................... $ $ $ $
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Total(3)........................ $ $ $ $
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</TABLE>
(1) See "Underwriting" for indemnification arrangements.
(2) Before deducting estimated expenses of $600,000 payable by the Company.
(3) The Selling Stockholder has granted the Underwriters a 30-day option to
purchase up to an additional 465,000 shares of Common Stock at the Price to
Public, less the Underwriting Discounts and Commissions shown above, solely
to cover over-allotments, if any. If this option is exercised in full, the
total Price to Public, Underwriting Discounts and Commissions, Proceeds to
Company and Proceeds to Selling Stockholder will be $ ,
$ , $ and $ , respectively. See
"Underwriting."
The shares of Common Stock offered hereby are being offered by the several
Underwriters named herein, subject to prior sale and acceptance by the
Underwriters and subject to their right to reject any order in whole or in
part. It is expected that the Common Stock will be available for delivery on or
about , 1996 at the offices of Schroder Wertheim & Co.
Incorporated, New York, New York.
SCHRODER WERTHEIM & CO. SMITH BARNEY INC.
, 1996
<PAGE>
[CHANNELL LOGO] [PHOTO APPEARS HERE]
[PHOTO APPEARS HERE]
[PHOTO APPEARS HERE] CHANNELL COMMERCIAL CORPORATION is a leading
designer, manufacturer and marketer of
injection-molded thermoplastic enclosures
used by cable television ("CATV") operators
and local ("Telecom") telephone companies
worldwide.
TOP RIGHT: The Company's injection-molded
enclosure products house, protect and
provide access to the network electronics
used in the delivery of CATV services.
MIDDLE: The Company's headquarters and
custom-designed manufacturing facilities
are located in Temecula, California.
BOTTOM LEFT: The Company's rotational-molded
enclosure products are considered state-of-
the-industry for many applications.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OF THE COMPANY AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN THE OVER-THE-COUNTER MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. Unless otherwise indicated, (i) all information,
including financial data, in this Prospectus has been adjusted to give pro
forma effect to the transactions described below under "Reorganization and
Termination of S Corporation Status," including the merger of Channell
Commercial Corporation, a California corporation (the "Predecessor"), into
Channell Commercial Corporation, a Delaware corporation (the "Company"), (ii)
all references in this Prospectus to the Company include the Company and the
Predecessor, and (iii) the information in this Prospectus assumes that the
Underwriters' over-allotment option is not exercised.
For a definition of certain terms used herein, see "Glossary of Terms" on
page G-1 hereof.
THE COMPANY
The Company is a leading designer, manufacturer and marketer of precision-
molded thermoplastic enclosures used by cable television ("CATV") operators and
local telephone companies worldwide. The Company believes it was the first to
design, manufacture and market thermoplastic enclosure products for use in the
communications industry on a wide scale, and the Company believes it currently
supplies a substantial portion of the enclosure product requirements of a
number of major CATV and telephone company operators. The Company's products
house, protect and provide access to advanced telecommunications electronics
and transmission media, including coaxial cable, copper wire and optical
fibers, used in the delivery of CATV and telephone services. The products are
deployed within the portion of the local signal delivery network, commonly
known as the "outside plant," that connects the network provider's signal
origination office with residences and businesses. Enclosure products are
critical components of outside plants, providing protection against weather and
vandalism, access for technicians who maintain and manage the outside plant
and, in some cases, dissipation of heat created by active electronic hardware.
CATV operators and local telephone companies rely significantly on
manufacturers of protective enclosures because any material damage to the
signal delivery networks is likely to disrupt communication services. The
Company also designs and manufactures a series of termination blocks, brackets
and cable management devices that are mounted inside its enclosure products,
and the Company markets a variety of complementary products manufactured by
third parties, including grade level boxes and cable-in-conduit, in order to
provide a full system solution to meet its customers' outside plant
requirements.
From 1991 to 1995, the Company's net sales increased from $15.9 million to
$41.0 million, a compounded annual growth rate of 26.7%. During the same
period, after giving pro forma effect to certain transactions to be consummated
in connection with the Offering, the Company's adjusted net income increased
from $0.5 million to $6.4 million, a compounded annual growth rate of 90.1%.
The Company's net sales and adjusted net income increased from $9.2 million and
$1.1 million, respectively, in the first quarter of 1995 to $10.3 million and
$1.6 million, respectively, in the first quarter of 1996.
The Company has a leading share of the CATV market for enclosures in the
United States and Canada (based upon the portion of enclosure product
requirements of major CATV operators sold by the Company) and markets a wide
range of products to local telephone companies. In the last few years, the
Company began to expand its marketing efforts internationally, with product
sales in South America, the Pacific Rim, the Middle East and Europe. As part of
its strategy, the Company expects to continue to expand its international
presence in the future. During 1995, the Company shipped products to more than
4,000 customer locations. The Company's customers include many of the largest
CATV operators and local telephone companies in the world. In the United
States, major customers (determined based upon the level of sales to the
customers by the Company) include BellSouth, Comcast, Continental Cablevision,
GTE, TCI and Time Warner. Of these, TCI and Time Warner were the only customers
representing more than 10% of the Company's net sales in 1995. In international
markets,
3
<PAGE>
the Company's major customers (determined in the same manner) in its principal
geographic markets include Bricast/VisionStream (Australia), Cable Systems
Media (Israel) and Rogers Communications (Canada) (none of which represented
more than 10% of the Company's net sales in 1995).
The communications industry is experiencing rapid expansion, both
domestically and internationally, in response to a number of factors, including
(i) developments in high-speed communications technologies for video, voice and
data transmission and internet access via cable modem, (ii) the convergence
occurring within the CATV and telecommunications industries, (iii) consumer
demand for enhanced communications services, and (iv) a changing regulatory and
competitive environment. The Company's customers are responding to these
changes by expanding, rebuilding and upgrading their signal delivery networks.
These activities generate demand for the types of highly engineered enclosures
and related outside plant products offered by the Company.
The Company's enclosure products are designed to provide superior
environmental sealing and protection, heat dissipation, easy access for cable
routing and network management by technicians who maintain outside plant
facilities, compatibility with a variety of signal delivery network
architectures, versatility to accommodate network growth, security and
aesthetic appeal. The Company believes that it offers the broadest line of
enclosure products for use in the CATV industry. Many of the Company's
thermoplastic enclosure products are now considered state-of-the-industry,
having received field testing and other approvals and standardization
certifications from major CATV and telephone company operators, and are often
used to replace enclosure products constructed of sheet metal and other
materials that previously had been the industry standard. Examples of
innovative products developed by the Company include its low profile (i.e.,
close to the ground) enclosures that permit 360 degree access by technicians
and pedestals that provide for mechanical sealing that is maintained without
the need for gels, compounds or heat shrinkage. Such features, in addition to
other product improvements developed by the Company over many years, received
U.S. patent protection and improve the performance and ease of use of the
Company's products in its customers' outside plant systems. The Company's
products are sold primarily through a direct sales force of technically trained
salespeople who use an application-based, complete system approach in marketing
to customers.
The Company's products are manufactured at its custom designed, 160,000
square foot facility in Temecula, California, which was originally constructed
in 1989. An adjacent 100,000 square foot building is also being constructed and
is expected to be completed in July 1996, which the Company will lease. The
Company's vertically integrated and modern manufacturing processes enable the
Company to control each step in the manufacturing process, including product
design and engineering, custom tool and die construction, molding, wiring,
assembly and packaging. The Company's vertical integration and manufacturing
expertise enable it to tailor its products to satisfy customer demands rapidly
and efficiently. In particular, the Company's in-house product design and
engineering together with its manufacturing expertise enable the Company to
provide timely solutions to its customers' product design and engineering needs
at a lower cost than would be incurred if outside design and engineering
services were required to be employed.
The Company's strategy is to capitalize on opportunities in the growing and
changing global communications industry by providing enclosures and
complementary products to meet the needs of its customers' evolving
communications networks. The Company's wide range of products, manufacturing
expertise, application-based sales and marketing approach and reputation for
high quality products address key requirements of its customers. Principal
elements of the Company's strategy include the following:
CONTINUE TO FOCUS ON CORE CATV BUSINESS. The Company intends to capitalize on
its position as a leading designer, manufacturer and marketer of broadband
enclosures for the CATV industry in the United States and Canada through new
product development for both domestic and international market applications.
The Company has positioned itself to participate in continued CATV network
construction and upgrades that are designed to improve service quality and
expand network capacity in order to prepare CATV operators for new
4
<PAGE>
competition in the broadband services market. These expansions and upgrades
will enable CATV operators to accommodate increased consumer demand for
internet access via cable modem, telephony and enhanced video services. From
1993 to 1995, the Company's net sales to the CATV industry increased from $20.4
million to $35.4 million, representing a compounded annual growth rate of
31.7%.
INCREASE SALES TO LOCAL TELEPHONE COMPANIES. The Company seeks to leverage
its in-depth knowledge of, and expertise in, the broadband telecommunications
and telephone markets to provide innovative enclosure solutions for the
telephone industry. From 1993 to 1995, the Company's net sales to local
telephone companies increased from $3.3 million to $5.6 million, representing a
compounded annual growth rate of 29.7%. The Company intends to continue to
invest in the development of a broader range of products designed specifically
for telephone market applications. The Company has already achieved significant
success in marketing its traditional CATV/broadband products to local telephone
companies which have been designing and deploying broadband networks to deliver
competitive video and data services. The Company will continue to target this
market for growth.
EXPAND INTERNATIONAL PRESENCE. Management believes that international markets
offer significant opportunities for increased sales in both the CATV and
telephone segments. From 1993 to 1995, the Company's international net sales
increased from $3.4 million to $6.1 million, representing a compounded annual
growth rate of 34.4%. Trends expected to result in international growth
opportunities include the deregulation and privatization of telecommunications
in many international markets, the focus of numerous countries on building,
expanding and enhancing their communications systems in order to participate
fully in the information-based global economy, and multi-national expansion by
many U.S.-based network carriers. The Company will concentrate on expansion in
international markets that are characterized by deregulation or privatization
of telecommunications and the availability of capital for the construction of
signal delivery networks.
DEVELOP NEW PRODUCTS AND ENTER NEW BUSINESS SEGMENTS. The Company continues
to leverage its core capabilities by developing innovative products that meet
the changing needs of its customers. The Company has a proven record in
designing, developing and manufacturing "next generation" products that provide
solutions for its customers and offer differential advantages over other
suppliers to the industry. In addition, the Company will seek to diversify its
customer base by developing new products for customers outside the
communications industry that require enclosure products, such as the utility
industry.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by:
The Company...................... 2,700,000 shares
The Selling Stockholder.......... 400,000 shares
Common Stock to be outstanding
after the Offering................ 8,837,000 shares(1)
Use of Proceeds.................... Distributions and payments to Existing
Stockholders in connection with the
termination of the Company's S corporation
status, new product development, repayment
of indebtedness and general corporate
purposes.
Nasdaq National Market symbol...... CHNL
</TABLE>
- --------
(1) Excludes approximately 525,000 shares of Common Stock subject to stock
options to be issued to certain of the Company's employees and directors
(including 100,000 stock options being issued to William H. Channell, Jr.,
the Company's President) under the Company's 1996 Incentive Stock Plan at
the time of the Offering with an exercise price equal to the initial public
offering price per share. These options become exercisable in three equal
annual installments beginning on the first anniversary of the date of
issuance. See "Management--1996 Incentive Stock Plan."
5
<PAGE>
SUMMARY HISTORICAL, PRO FORMA AND OTHER FINANCIAL INFORMATION
(amounts in thousands, except per share data)
The following data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Financial Statements and the notes thereto included in this Prospectus.
Data for the Company's fiscal years ended December 31, 1993, 1994 and 1995 are
derived from the Company's audited Financial Statements and the notes thereto
included in this Prospectus. Data for the Company's fiscal years ended December
31, 1991 and 1992 and the three months ended March 31, 1995 and 1996 are
derived from unaudited financial statements, which the Company believes contain
all necessary adjustments, consisting only of normal recurring adjustments,
necessary to present fairly, and in accordance with generally accepted
accounting principles, the Company's financial position and results of
operations for the periods presented. Financial results for the three months
ended March 31, 1995 and 1996 presented below are not necessarily indicative of
results of operations for a full fiscal year.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------- ----------------------
1991 1992 1993 1994 1995 1995 1996
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<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Net sales............... $15,893 $19,006 $23,713 $34,504 $40,972 $ 9,225 $10,279
Gross profit............ 4,381 6,465 8,879 14,754 17,913 3,738 4,541
License fees(1)......... 602 690 1,039 1,560 2,035 458 531
Income from operations.. 778 2,130 3,173 7,183 9,171 1,633 2,189
Income before income
taxes.................. 542 1,890 3,007 7,027 8,832 1,543 2,124
Pro forma net income(2). 296 1,099 1,816 4,129 5,377 927 1,279
Pro forma net income per
share(3)............... 0.72 0.17
Pro forma weighted
average shares
outstanding(3)......... 7,451 7,451
OTHER DATA:
Gross margin(4)......... 27.6% 34.0% 37.4% 42.8% 43.7% 40.5% 44.2%
Operating margin(5)..... 4.9 11.2 13.4 20.8 22.3 17.7 21.3
EBITDA(6)............... $ 1,389 $ 2,785 $ 3,949 $ 8,255 $10,583 $ 2,048 $ 2,591
Capital expenditures.... 917 1,172 1,480 5,851 2,160 1,030 472
ADJUSTED FINANCIAL
DATA(7):
Net sales (as
historically reported). $19,006 $23,713 $34,504 $40,972 $ 9,225 $10,279
Adjusted EBITDA(8)...... 1,716 3,200 4,713 9,540 12,343 2,437 3,053
Adjusted income from
operations............. 1,105 2,545 3,937 8,468 10,931 2,022 2,651
Adjusted operating
margin(9).............. 7.0% 13.4% 16.6% 24.5% 26.7% 21.9% 25.8%
Adjusted net income..... $ 492 $ 1,349 $ 2,274 $ 4,899 $ 6,431 $ 1,149 $ 1,555
Adjusted net income per
share(10).............. 0.86 0.21
<CAPTION>
MARCH 31, 1996
-------------------------------
PRO AS
ACTUAL FORMA(11) ADJUSTED(12)
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<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Current assets.......... $10,004 $10,206 $23,766
Total assets............ 20,655 21,529 35,089
Long-term obligations
(including current
maturities)............ 2,883 2,883 --
Stockholders' equity
(deficit).............. 13,263 (988) 31,055
</TABLE>
6
<PAGE>
NOTES TO SUMMARY HISTORICAL, PRO FORMA AND OTHER FINANCIAL INFORMATION
(amounts in thousands, except per share data)
(1) License fees represent the amounts paid by the Company to William H.
Channell, Sr., the Company's Chairman of the Board and Chief Executive
Officer, for the use of the Channell Patents (as defined below). Prior to
the consummation of the Offering, these patents will be sold to the
Company, the license fee arrangement with Mr. Channell, Sr. will be
terminated and, thereafter, the Company will no longer pay any license
fees with respect to the Channell Patents. See "Reorganization and
Termination of S Corporation Status."
(2) Prior to the Offering, the Company was an S corporation for federal and
state income tax purposes. The pro forma presentation reflects a provision
for income taxes as if the Company had always been a C corporation, at an
assumed effective tax rate of approximately 41% less tax credits. Such
presentation does not reflect the adjustments set forth in note (7) below.
The effect of the Company's use of a portion of the net proceeds of the
Offering to repay outstanding bank indebtedness (see "Use of Proceeds")
has not been reflected in pro forma net income or pro forma net income per
share because the impact is not material.
(3) 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 1,314 of the shares offered
hereby by the Company at an assumed price of $13.00 per share, the net
proceeds of which will be used to fund the distributions and payments in
connection with the Termination of the Company's S Corporation Status (as
defined below). See "Reorganization and Termination of S Corporation
Status."
(4) Gross margin is gross profit as a percentage of net sales.
(5) Operating margin is income from operations as a percentage of net sales.
(6) 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.
(7) The adjusted financial data reflects, in addition to the pro forma
adjustments referred to in note (2) above, (i) the elimination of the
expense for the license fees payable to Mr. Channell, Sr., and related
income tax impact, which license fees are being terminated as part of the
Termination of the Company's S Corporation Status, and (ii) an increase in
Mr. Channell, Sr.'s annual base salary from $225 to $500 in connection
with the Offering. See "Reorganization and Termination of S Corporation
Status" and "Management--Employment Contracts." Upon consummation of the
Offering, the Company also intends to increase the base salary of William
H. Channell, Jr., the Company's President, from $350 to $500 (which
increase has not been reflected in the adjusted financial data because Mr.
Channell, Jr.'s actual total compensation in 1995 exceeded $500) and to
grant a cash bonus of $200 to each of Gary W. Baker, the Company's Chief
Financial Officer, Dale C. Wooding, the Company's Vice President,
Manufacturing, and Edward J. Burke, the Company's Vice President,
Engineering, which bonus will be earned and payable in three equal
installments on each of December 31, 1997, 1998 and 1999, provided such
executive officer remains employed by the Company and subject to continued
payment in the event of the death of the executive officer. See
"Management--Executive Compensation."
(8) Adjusted EBITDA represents adjusted income from operations before
interest and income taxes, plus depreciation and amortization expense.
See note (6) above.
(9) Adjusted operating margin is adjusted income from operations as a
percentage of net sales.
(10) Adjusted net income per share is adjusted net income divided by 7,451 pro
forma weighted average shares outstanding.
(11) The pro forma adjustments set forth in this column give effect to the
Termination of the Company's S Corporation Status. See note (2) above.
(12) Adjusted to reflect the Termination of the Company's S Corporation Status
and the sale of 2,700 shares of Common Stock by the Company in the
Offering and the application of the net proceeds therefrom.
7
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RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be carefully considered in evaluating the Company and its
business before purchasing the Common Stock offered by this Prospectus. 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 characterized by rapid technological change.
The introduction of products embodying new technologies or the emergence of
new industry standards can render existing products or products under
development obsolete or unmarketable. For example, satellite, wireless and
other communication technologies 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, and 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. Further,
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 and other transmission networks and
internet access in the CATV and telecommunications industries. There can be no
assurance that demand resulting from these emerging trends will develop
rapidly or that the Company's products will meet with market acceptance.
IMPORTANCE OF NEW PRODUCT DEVELOPMENT TO GROWTH
The Company's ability to anticipate changes in technology and industry
standards and to successfully develop and introduce new products on a timely
basis will be a significant factor in the Company's ability to grow and remain
competitive. New product development often requires long-term forecasting of
market trends, development and implementation of new designs and processes and
a substantial capital commitment. The trend toward consolidation of the
communications industry may require the Company to quickly adapt to rapidly
changing market conditions and customer requirements. Although the Company's
manufacturing and marketing expertise has enabled it to successfully develop
and market new products in the past, 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.
Of the net proceeds of this Offering, the Company currently expects that
approximately $7.0 million to $10.0 million will be used for new product
development projects. See "Use of Proceeds."
CONCENTRATION OF CUSTOMERS; LIMITED BACKLOG
The Company's core business consists of enclosure product sales to the CATV
market. Such sales comprised approximately 86% of the Company's total net
sales in each of 1993, 1994 and 1995. The CATV industry is concentrated, with
relatively few cable operators accounting for a large percentage of the
Company's available market. Consequently, while the Company shipped product to
over 4,000 customer locations in 1995, its five largest customers (by sales
volume) accounted for 47.9% of the Company's total net sales in 1995. Two
customers, TCI and Time Warner, accounted for 17.5% and 15.6%, respectively,
of the Company's total net sales during the period.
The Company's customers typically require prompt shipment of the Company's
products. As a result, 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 (see "Operating
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Leverage" below) 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 industries in which the Company operates are highly competitive. The
Company believes that many of its customers periodically review their supply
relationships and alter buying patterns based upon their current assessment of
the products and pricing available in the marketplace. This periodic review
can and does result in significant changes from fiscal period to fiscal period
in the level of purchases of the Company's products by specific customers. The
Company understands that TCI is currently conducting such a review. TCI
indicated that its review is prompted in part by the high concentration of its
outside plant enclosure product purchases from the Company (TCI informed the
Company that, in recent periods, the Company provided a substantial majority
of outside plant enclosure products to TCI), and TCI's desire to secure
additional sources of supply. Further, TCI indicated that, for certain
applications, price, technical factors and performance characteristics may
result in the selection of metal or other types of enclosure products rather
than thermoplastic enclosures. Based upon TCI's perception of the relative
costs and benefits of thermoplastic versus metal enclosures and other business
considerations, it is possible that the Company's sales to TCI may be reduced.
However, the Company believes that, for most applications, thermoplastic
enclosures perform as well or better than metal enclosures in all significant
performance categories, and that the superior performance of thermoplastic
enclosures is evidenced by the growth of the Company's market share in the
CATV segment of the market, where plastic is now the primary material used in
enclosure products. For this reason, among others, the Company believes that
it will continue to supply a significant portion of TCI's outside plant
enclosure requirements, although there can be no assurance in this regard.
DEPENDENCE ON THE COMMUNICATIONS INDUSTRY
The Company's sales to the communications industry represent substantially
all of the Company's historical sales and are expected to continue to do so
for the foreseeable future. Within that industry, 86.4% of the Company's total
net sales in 1995 were derived from domestic and international sales to the
CATV segment, with 33.1% of total net sales for that year attributable to two
customers in that industry, TCI and Time Warner. The Company expects that
sales to the CATV industry will continue to represent a substantial portion of
its total sales. Demand for products to this segment 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 industry. The
Company's remaining sales in 1995 were derived from the telecommunications
industry, primarily local telephone operators. 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 segment. 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 voice, data and video 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. See "Business--
Customers."
PRICE FLUCTUATIONS OF RAW MATERIALS; AVAILABILITY OF COMPLEMENTARY PRODUCTS
The Company's cost of sales may be materially adversely affected by
increases in the market prices of the raw materials used in the Company's
manufacturing processes, including resin. 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
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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 and cable-in-conduit. 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. See "Business--Raw Materials; Availability of
Complementary Products."
IMPACT OF OPERATING LEVERAGE IN THE EVENT OF SALES DECLINE
Because of the relatively high percentage of fixed costs for rent, product
development, engineering, tooling and related fixed manufacturing costs as a
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. In fiscal 1995, such fixed
costs as a percentage of total costs were 33.5%. 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. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Quarterly Results of Operations."
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
International sales accounted for 14.4%, 13.2% and 14.8% of the Company's
net sales in 1993, 1994 and 1995, 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 payment
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, in connection with the anticipated growth in the communications
industry generally and demand for products required in signal transmission
networks in particular, the level and intensity of competition may increase in
the future. In the telephone segment of the industry, the Company's
competition includes a company that has a significant market share. While the
Company's net sales to this segment have increased from $3.3 million in 1993
to $5.6 million in 1995, representing a compounded annual growth rate of
29.7%, and the Company's strategy includes continued focus on increasing sales
to this segment, there can be no assurance that the Company will be able to
compete successfully against that company or other competitors, many of which
may have access to greater financial resources than the Company. See
"Concentration of Customers; Limited Backlog" and "Business--Competition."
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DISRUPTIONS AT THE COMPANY'S MANUFACTURING FACILITY; LEASE WITH RELATED PARTY
All 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. See
"Business--Properties."
The Company currently leases the Temecula facility from William H. Channell,
Sr., a principal stockholder and Chairman of the Board and Chief Executive
Officer of the Company. Annual rental expense for this property was
approximately $650,000 from 1993 through 1995. An adjacent 100,000 square foot
building is being constructed and is expected to be completed in July 1996.
This building is also being leased from Mr. Channell, Sr. and requires annual
rental payments of $420,000 commencing upon completion of construction. The
Company believes the terms of these leases are no less favorable than would be
available from an unrelated third party after arms' 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 terms for the properties currently leased by the
Company. The failure of the Company to renew the leases would require the
Company to relocate its existing facilities. See "Certain Transactions."
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 the other executive officers of the Company listed under "Management--
Executive Officers and Directors." Competition for qualified personnel in the
communications industry is intense, and the loss of certain key personnel
could have a material adverse effect on the Company. The Company has entered
into employment contracts with Mr. Channell, Sr. and Mr. Channell, Jr. See
"Management--Employment Contracts."
CHANGING REGULATORY ENVIRONMENT
The communications industry is subject to regulation 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 (the "Telecommunications
Act"), which the President signed into law on February 8, 1996. The
Telecommunications Act lifts certain restrictions on the ability of companies,
including RBOCs and other customers of the Company, to compete with one
another and generally reduces the regulation of the communications industry.
While the Company believes that the deregulation of the communications
industry may increase the Company's opportunities to provide solutions 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. In particular, in 1996, the Company intends to
implement a new
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management information system ("MIS"). The Company believes the new MIS will
significantly affect many aspects of its business, including its accounting,
operations, purchasing, sales and marketing functions. The successful
implementation of this system will be important to the Company's provision of
services and to facilitate future growth. If the Company is not successful in
implementing its MIS or if the Company experiences difficulties in such
implementation, the Company could experience problems with delivery of its
products or an adverse impact on its ability to access financial and
accounting information on a timely basis.
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. See "Business--Regulation."
POSSIBLE VOLATILITY OF STOCK PRICE; NO PRIOR PUBLIC MARKET
The market price of shares of the Company's Common Stock may be highly
volatile. Factors such as announcements of technological innovations or new
products by the Company or its competitors, developments in patent or other
proprietary rights by the Company or its competitors, litigation, fluctuations
in the Company's operating results, market conditions for emerging growth
stocks or communications industry stocks in general, regulatory developments
affecting the communications industry, and other factors outside the control
of the Company, could have a significant impact on the future price of the
Common Stock. Immediately prior to the Offering, there has been no public
market for any of the Company's securities. There can be no assurance that a
regular trading market will develop in the Common Stock.
EFFECT ON STOCK PRICE OF CERTAIN ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Restated Certificate of Incorporation
and Bylaws and of Delaware law could have the effect of making it more
difficult for a third party to acquire, or of discouraging a third party from
attempting to acquire, control of the Company. These provisions could limit
the price that certain investors might be willing to pay in the future for
shares of the Company's Common Stock. See "Description of Capital Stock--
Delaware Law and Certain Charter and Bylaw Provisions."
CONTROL BY PRINCIPAL STOCKHOLDERS
Immediately following the Offering, members of the Channell family (or
entities controlled by them) will own 64.9% of the outstanding Common Stock
(59.7% if the Underwriters' over-allotment option is exercised in full). As a
result of their interests in the Company, the members of the Channell family
together will be able to elect a majority of the Board of Directors and
control the management and affairs of the Company.
BENEFITS TO INSIDERS FROM THE OFFERING
The officers, directors and principal stockholders of the Company will
receive certain payments and other benefits in connection with the Offering.
Among other things, the Company will declare a cash dividend (currently
estimated to aggregate $12.5 million) to the existing stockholders of the
Company, representing all of the Company's S corporation "accumulated
adjustments account" remaining upon termination of the Company's S corporation
status; the Company will purchase certain patents utilized by the Company in
its business that were previously owned by William H. Channell, Sr. for
aggregate cash consideration of $3.1 million; the Selling Stockholder will
sell 400,000 shares of Common Stock (865,000 if the underwriters' over-
allotment option is exercised in full) at the initial public offering price;
and the officers and directors will enter into various new employment,
compensatory and indemnity arrangements with the Company. See "Reorganization
and Termination of S Corporation Status," "Use of Proceeds," "Management" and
"Description of Capital Stock."
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LIMITATION ON DIVIDENDS
The Company's policy is to retain its future earnings to finance the growth
and development of its business and the Company does not anticipate declaring
or paying cash dividends on its Common Stock in the foreseeable future. See
"Dividend Policy."
IMPACT ON PUBLIC TRADING MARKET OF SHARES ELIGIBLE FOR FUTURE SALE
Future sales of the Company's Common Stock could adversely affect the market
price of the Common Stock. Members of the Channell family or entities
controlled by them will hold a significant portion of the Company's
outstanding Common Stock following the Offering, and a decision by one or more
of them to sell their shares could adversely affect the market price of the
Common Stock. The Company and each of the Channell Family Trust dated June 29,
1990, as amended (the "Channell Family Trust"), William H. Channell, Jr.,
Carrie S. Rouveyrol and the Taylor Family Trust dated June 5, 1996 (the
"Taylor Family Trust") have entered into contractual "lock-up" agreements with
the Representatives of the Underwriters providing that, except for shares sold
pursuant to the Offering, they will not offer, sell, contract to sell or
otherwise dispose of the shares of Common Stock of the Company owned by them
for a period of 180 days after the effective date of the Offering without the
prior written consent of Schroder Wertheim & Co. Incorporated, subject to
certain exceptions. Following the 180-day lock-up period, 5,737,000 shares
(5,272,000 shares if the Underwriters' over-allotment option is exercised in
full) will be eligible for sale in the public market pursuant to Rule 144 or
other exemptions from the registration requirements of the Securities Act of
1933, as amended (the "Securities Act"). In general, under Rule 144, a holder
who is an "affiliate" of the Company will be able to sell, without
registration under the Securities Act, within any three-month period, a number
of shares of Common Stock that does not exceed the greater of 1% of the total
number of outstanding shares of Common Stock or the average weekly trading
volume during the four calendar weeks preceding the sale. These volume limits
will not apply to a sale by a non-affiliate who has held his or her stock for
more than three years or to any sale that is registered under the Securities
Act. Ms. Rouveyrol and the Taylor Family Trust have agreed that, during the
two-year period following the date of this Prospectus, unless otherwise
permitted by the Representatives, any sales of shares of Common Stock by them
will be subject to the volume limitations of Rule 144 of the Securities Act,
without regard to whether they are otherwise legally obligated to comply with
such limitations. See "Shares Eligible for Future Sale" and "Underwriting."
DILUTION
Purchasers of the Common Stock in this Offering will experience immediate
and substantial dilution in net tangible book value per share of Common Stock
from the initial public offering price. See "Dilution."
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REORGANIZATION AND TERMINATION OF S CORPORATION STATUS
In connection with the Offering, the following transactions have been or
will be effected:
Merger of Predecessor Into Company. In contemplation of the Offering, the
Predecessor was merged with and into the Company, with the Company being the
surviving entity in the merger (the "Merger"). As part of the Merger, the
Predecessor's existing stockholders (the "Existing Stockholders") were issued
12.274 shares of the Company's Common Stock in exchange for each outstanding
share of the Predecessor's Common Stock.
Termination of S Corporation Status. Since 1990, the Company has been an S
corporation for both federal and state income tax purposes. Prior to the
consummation of the Offering, however, the Company's S corporation election
will be terminated (the "S Corporation Termination"). As a result of the
Company's S corporation status, since 1990 through the date immediately
preceding the date of the S Corporation Termination (the "Termination Date"),
the Company's earnings have been and will be taxed for federal income tax
purposes directly to the Existing Stockholders, rather than to the Company.
Other than a tax imposed on S corporations by the State of California
(currently 1.5% of income), state income taxes on earnings also have been the
responsibility of the Existing Stockholders. On the Termination Date, the
Company will become subject to federal and state corporate income taxes. The
Company paid an aggregate of $12.0 million in S corporation distributions to
the Existing Stockholders from January 1, 1993 through April 30, 1996.
Upon the S Corporation Termination, the Company will record deferred tax
assets on its balance sheet with a corresponding credit to its statement of
operations, which will ultimately increase retained earnings. The pro forma
deferred tax assets, relating to temporary differences in the carrying value
of certain assets for book and tax purposes, were approximately $0.8 million.
Prior to the closing of the Offering, the Company will declare a dividend
(currently estimated to aggregate $12.5 million) to the Existing Stockholders
representing all of the Company's S corporation "accumulated adjustments
account" remaining at that time (the "S Corporation Distribution"). An
estimate of the S Corporation Distribution will be paid immediately upon the
closing of the Offering out of the net proceeds thereof. Upon a final
reconciliation of the accumulated adjustments account through the Termination
Date, any remaining amount of the S Corporation Distribution will be paid.
Immediately prior to the Offering, the Company and the Existing Stockholders
will enter into an agreement (the "Tax Agreement") relating to their
respective income tax liabilities. Because the Company will be fully subject
to corporate income taxation after the S Corporation Termination, the
reallocation of income and deductions between the period during which the
Company was treated as an S corporation and the period during which the
Company will be subject to corporate income taxation may increase the taxable
income of one party while decreasing that of another party. Accordingly, the
Tax Agreement is intended to assure that taxes are borne by the Company on the
one hand and the Existing Stockholders on the other only to the extent that
such parties were taxable on the related income. Pursuant to the Tax
Agreement, if the Company's taxable income for a year in which it was treated
as an S corporation is adjusted and such adjustment results in an increase in
the income tax liability (including interest and penalties and related costs
and expenses) of the Company or the Existing Stockholders, then such party
will be reimbursed the amount of such increase by the other party, but only to
the extent the other party's income tax liability (including interest) is
correspondingly decreased as a result of such adjustment. Any such
reimbursement paid to the Existing Stockholders will include all taxes imposed
upon them as a result of their receipt of such reimbursement, subject to a
ceiling on all reimbursements equal to the decrease in the related income tax
liability (including interest) of the Company. Any payment made by the Company
to the Existing Stockholders pursuant to the Tax Agreement may be considered
by the Internal Revenue Service or state taxing authorities to be non-
deductible by the Company for income tax purposes.
Termination of Patent License Fees. Prior to the Offering, William H.
Channell, Sr., the Company's Chairman of the Board and Chief Executive
Officer, owned six patents utilized by the Company in its business (the
"Channell Patents"), with respect to which Mr. Channell, Sr. was entitled to
receive license fees based upon
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the sale of certain products embodying the Channell Patents. See "Certain
Transactions." Prior to the Offering, the Channell Patents will be sold to the
Company for aggregate consideration of $3.1 million, which amount will be
initially funded through borrowings under the Company's bank line and then
repaid from the net proceeds of the Offering. See "Use of Proceeds." As a
result, the Company will own all of the Channell Patents, the license fee
arrangement between the Company and Mr. Channell, Sr. will be terminated (the
"License Fee Termination") and, thereafter, no license fees will be paid to
Mr. Channell, Sr. or any other person with respect to the Channell Patents
(including with respect to product sales in 1996). In addition, any patents
obtained in the future with respect to new technology developed by Mr.
Channell, Sr. will be owned by the Company.
The purchase price paid by the Company for the Channell Patents was
established in part based upon an opinion dated June 14, 1996 (the "Patent
Opinion") of Houlihan Lokey Howard & Zukin, Inc. ("Houlihan"), regarding the
fair market value of the Channell Patents. In arriving at the Patent Opinion,
among other things, Houlihan held discussions with certain members of
management of the Company concerning the uses and future prospects of the
Channell Patents and reviewed various documents pertaining to the Channell
Patents, including the registration statement containing this Prospectus as
originally filed, the Company's financial statements and notes thereto
included elsewhere therein (which management identified as the most current
financial statements available), and figures regarding historical sales of
products embodying the Channell Patents during the period from 1991 to 1995
and management's projections of such sales during the period from 1996 to
2000. Houlihan then valued the Channell Patents using the relief from royalty
method. Houlihan did not independently verify, and does not assume
responsibility for, the accuracy or completeness of the information supplied
to it by the Company. The Patent Opinion is directed solely to the valuation
of the Channell Patents, not to any other properties or assets of the Company,
and does not constitute a recommendation to anyone to purchase the securities
offered hereby. The full text of the Patent Opinion has been filed as an
exhibit to the Registration Statement that contains this Prospectus. Based
upon the Patent Opinion, the Company believes that the terms of the
transactions involving the Channell Patents are at least as favorable to the
Company as those that could be obtained from an independent third party.
Unless the context otherwise indicates, references in this Prospectus to the
"Termination of the Company's S Corporation Status" include the S Corporation
Termination, the S Corporation Distribution to the Existing Stockholders and
the License Fee Termination and payments by the Company in connection
therewith.
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USE OF PROCEEDS
The net proceeds to the Company from the Offering are expected to be
approximately $32.0 million, assuming an initial public offering price of
$13.00 per share and after deducting estimated underwriting discounts and
commissions and expenses of the Offering. The Company currently intends to use
such proceeds as follows:
. Approximately $15.6 million to fund distributions and payments being
made in connection with the Termination of the Company's S Corporation
Status. See "Reorganization and Termination of S Corporation Status." Of
the $15.6 million, the $3.1 million portion thereof representing the
purchase price to be paid by the Company for the Channell Patents will
initially be funded through bank borrowings by the Company and
subsequently repaid by the Company from the net proceeds of the
Offering.
. Approximately $7.0 million to $10.0 million to fund new product
development, including capital expenditures for new plant and equipment
(exclusive of the 100,000 square foot building currently under
construction, see "Business--Properties"), related working capital
requirements and an increase in the Company's product development and
engineering staff of approximately two to four additional employees.
Management anticipates that such proceeds will be used to fund new
product development activities over a period of one to three years. New
product development initiatives being studied by the Company include
additional products for the CATV and telecommunications market,
including product families and components designed to complement the
Company's existing product line.
. Approximately $3.5 million to repay bank indebtedness of the Company. As
of March 31, 1996, the Company's bank indebtedness consisted of
approximately $2.9 million of borrowings. It is expected that the
Company will incur additional indebtedness under its bank lines before
the closing of this Offering, consisting of indebtedness to fund working
capital requirements and miscellaneous equipment acquisitions. See
"Reorganization and Termination of S Corporation Status." All borrowings
under the Company's bank credit facilities were or will be incurred for
purposes of facility expansion and new manufacturing equipment. Such
indebtedness matures on various dates currently extending through 2001
and bears interest at the bank's reference rate plus a spread ranging
between 0.25% and 0.50%. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources." As indicated above, immediately prior to the closing of the
Offering, the Company anticipates that it will incur $3.1 million of
bank borrowings to fund its purchase of the Channell Patents, which
borrowings will be subsequently repaid by the Company from the net
proceeds of the Offering.
. The remainder for general corporate purposes, which may include
expansion into new international markets, acquisitions of related
businesses or product lines and potential new facility construction in
addition to that currently underway.
The net proceeds to the Selling Stockholder are expected to be approximately
$4.8 million ($10.5 million if the Underwriters' over-allotment option is
exercised in full), assuming an initial public offering price of $13.00 per
share and after deducting estimated underwriting discounts and commissions.
The Company will not receive any proceeds from the sale of shares by the
Selling Stockholder.
DIVIDEND POLICY
The Company intends to retain future earnings to finance the growth and
development of its business and therefore does not anticipate declaring or
paying cash dividends on its Common Stock in the foreseeable future. The
Company's credit facilities also contain covenants that, under certain
circumstances, may limit its ability to pay dividends. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
16
<PAGE>
CAPITALIZATION
(amounts in thousands, except share and per share data)
The following table sets forth the capitalization of the Company (i) at
March 31, 1996, (ii) on a pro forma basis giving effect to the Termination of
the Company's S Corporation Status, and (iii) as adjusted to reflect the
issuance and sale of 2,700,000 shares of Common Stock by the Company, at an
assumed initial public offering price of $13.00 per share, and the application
of the estimated net proceeds therefrom. See "Use of Proceeds." The table
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Company's Financial
Statements and related notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1996
----------------------------
PRO AS
ACTUAL FORMA(1) ADJUSTED(2)
------- -------- ----------
<S> <C> <C> <C>
Long-term obligations (including current
maturities)................................... $ 2,883 $ 2,883 $ --
Stockholders' equity:
Preferred Stock, $.01 par value; 1,000,000
shares authorized;
none issued................................. -- -- --
Common Stock, $.01 par value; 19,000,000
shares authorized; 6,137,000 shares issued;
8,837,000 shares issued, as adjusted(3)..... 61 61 88
Additional paid-in capital................... 26 (2,543) 29,473
Retained earnings............................ 13,176 1,494 1,494
------- ------- -------
Total stockholders' equity................... 13,263 (988) 31,055
------- ------- -------
Total capitalization....................... $16,146 $ 1,895 $31,055
======= ======= =======
</TABLE>
- --------
(1) The pro forma adjustments set forth in this column give effect to the
Termination of the Company's S Corporation Status. See "Reorganization and
Termination of S Corporation Status" and note (3) to "Selected Historical,
Pro Forma and Other Financial Information."
(2) Adjusted to reflect the sale of 2,700,000 shares of Common Stock by the
Company in the Offering and the application of the net proceeds therefrom.
(3) Excludes approximately 525,000 shares of Common Stock subject to stock
options to be issued to approximately 70 of the Company's employees and
directors (including 100,000 stock options being issued to William H.
Channell, Jr., the Company's President) under the Company's 1996 Incentive
Stock Plan at the time of the Offering with an exercise price equal to the
public offering price per share. These options become exercisable in three
equal annual installments beginning on the first anniversary of the date
of issuance.
17
<PAGE>
DILUTION
The net tangible book value of the Company as of March 31, 1996 was $13.3
million, or $2.16 per share of Common Stock. Net tangible book value per share
of Common Stock represents the amount of the Company's total tangible assets
less total liabilities, divided by the number of shares of Common Stock
outstanding. After giving effect to the sale of the 2,700,000 shares of Common
Stock offered by the Company in the Offering at an assumed initial public
offering price of $13.00 per share, net proceeds to the Company of $32.0
million and a decrease in net tangible book value attributable to the
Termination of the Company's S Corporation Status (which decrease is equal to
the sum of the $12.5 million S Corporation Distribution and the $3.1 million
purchase price of the Channell Patents, divided by 6,137,000 shares
outstanding), the pro forma net tangible book value of the Company at March
31, 1996 would have been $31.1 million or $3.51 per share of Common Stock.
This represents an immediate increase in net tangible book value of $3.89 per
share of Common Stock to the Existing Stockholders and an immediate dilution
of $9.49 per share of Common Stock to new investors purchasing Common Stock in
the Offering, as illustrated in the following table:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............... $13.00
Net tangible book value per share before the Offering....... 2.16
Decrease attributable to Termination of the Company's S
Corporation Status......................................... (2.54)
Increase attributable to new investors...................... 3.89
-----
Pro forma net tangible book value per share after the
Offering..................................................... 3.51
------
Dilution in net tangible book value per share to new
investors.................................................... $ 9.49
======
</TABLE>
The following table sets forth, on a pro forma basis as of March 31, 1996,
the differences between the Existing Stockholders and new investors with
respect to the number of shares of Common Stock held, the total consideration
paid, and the average price per share assuming an initial public offering
price of $13.00 per share (amounts in thousands, except per share data).
<TABLE>
<CAPTION>
TOTAL
SHARES HELD CONSIDERATION AVERAGE
-------------- ------------------ PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------ ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing Stockholders......... 6,137 69% $ 0(1) 0% $ 0.00
New Investors................. 2,700 31 35,100 100 13.00
----- --- ------- ---
Total....................... 8,837 100% $35,100 100%
===== === ======= ===
</TABLE>
- --------
(1) The cash consideration paid by the Existing Stockholders has been reduced
by the amount of distributions and payments to be made from the proceeds
of the Offering in connection with the Termination of the Company's S
Corporation Status.
18
<PAGE>
SELECTED HISTORICAL, PRO FORMA AND OTHER FINANCIAL INFORMATION
(amounts in thousands, except per share data)
The following data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Financial Statements and the notes thereto included in this Prospectus.
Data for the Company's fiscal years ended December 31, 1993, 1994 and 1995 are
derived from the Company's audited Financial Statements and the notes thereto
included in this Prospectus. Data for the Company's fiscal years ended
December 31, 1991 and 1992 and the three months ended March 31, 1995 and 1996
are derived from unaudited financial statements, which the Company believes
contain all necessary adjustments, consisting only of normal recurring
adjustments, necessary to present fairly, and in accordance with generally
accepted accounting principles, the Company's financial position and results
of operations for the periods presented. Financial results for the three
months ended March 31, 1995 and 1996 presented below are not necessarily
indicative of results of operations for a full fiscal year.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Net sales............... $15,893 $19,006 $23,713 $34,504 $40,972 $ 9,225 $ 10,279
Cost of goods sold...... 11,512 12,541 14,834 19,750 23,059 5,487 5,738
------- ------- ------- ------- ------- --------- ---------
Gross profit............ 4,381 6,465 8,879 14,754 17,913 3,738 4,541
Commission income(1).... 473 591 686 904 1,098 262 230
------- ------- ------- ------- ------- --------- ---------
4,854 7,056 9,565 15,658 19,011 4,000 4,771
Operating expenses
Selling................ 2,563 3,061 3,767 4,952 5,600 1,339 1,553
General and
administrative........ 911 1,095 1,100 1,445 1,707 448 370
License fees(2)........ 602 690 1,039 1,560 2,035 458 531
Research and
development........... -- 80 486 518 498 122 128
------- ------- ------- ------- ------- --------- ---------
4,076 4,926 6,392 8,475 9,840 2,367 2,582
------- ------- ------- ------- ------- --------- ---------
Income from operations.. 778 2,130 3,173 7,183 9,171 1,633 2,189
Interest expense ....... 236 240 166 156 339 90 65
------- ------- ------- ------- ------- --------- ---------
Income before income
taxes.................. 542 1,890 3,007 7,027 8,832 1,543 2,124
Income taxes............ 66 124 69 429 349 61 122
------- ------- ------- ------- ------- --------- ---------
Net income.............. $ 476 $ 1,766 $ 2,938 $ 6,598 $ 8,483 $ 1,482 $ 2,002
======= ======= ======= ======= ======= ========= =========
Pro forma net income(3). $ 296 $ 1,099 $ 1,816 $ 4,129 $ 5,377 $ 927 $ 1,279
Pro forma net income per
share(4)............... 0.72 0.17
======= =========
Pro forma weighted
average shares
outstanding(4)......... 7,451 7,451
======= =========
OTHER DATA:
Gross margin(5)......... 27.6% 34.0% 37.4% 42.8% 43.7% 40.5% 44.2%
Operating margin(6)..... 4.9 11.2 13.4 20.8 22.3 17.7 21.3
EBITDA(7)............... $ 1,389 $ 2,785 $ 3,949 $ 8,255 $10,583 $ 2,048 $ 2,591
Capital expenditures.... 917 1,172 1,480 5,851 2,160 1,030 472
S Corporation dividends
declared............... -- 556 1,048 3,764 5,427 2,052 1,212
Cash provided by (used
in):
Operating activities... 292 2,343 4,181 6,201 9,758 725 897
Investing activities... (911) (1,164) (1,475) (5,880) (2,161) (1,030) (472)
Financing activities... 568 (877) (3,101) 398 (7,019) 80 (1,410)
ADJUSTED FINANCIAL
DATA(8):
Net sales (as
historically reported). $15,893 $19,006 $23,713 $34,504 $40,972 $ 9,225 $ 10,279
Adjusted EBITDA(9)...... 1,716 3,200 4,713 9,540 12,343 2,437 3,053
Adjusted income from
operations ............ 1,105 2,545 3,937 8,468 10,931 2,022 2,651
Adjusted operating
margin(10)............. 7.0% 13.4% 16.6% 24.5% 26.7% 21.9% 25.8%
Adjusted net income..... $ 492 $ 1,349 $ 2,274 $ 4,899 $ 6,431 $ 1,149 $ 1,555
Adjusted net income per
share(11).............. 0.86 0.21
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------------------------- ---------------
1991 1992 1993 1994 1995 1995 1996
------ ------ ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Current assets........... $4,342 $4,695 $ 5,068 $ 8,093 $ 8,502 $ 9,295 $10,004
Total assets............. 8,286 9,152 10,189 17,951 19,103 19,767 20,655
Long-term obligations
(including current
maturities)............. 3,292 2,415 1,018 3,684 3,213 4,278 2,883
Stockholders' equity..... 3,575 4,785 6,881 9,417 12,473 10,899 13,263
</TABLE>
19
<PAGE>
NOTES TO SELECTED HISTORICAL, PRO FORMA AND OTHER FINANCIAL INFORMATION
(amounts in thousands, except per share data)
(1) Commission income represents the amount of commissions paid to the
Company by the manufacturer of certain cable-in-conduit products in
connection with the Company's sale of such products, which the Company
offers to its customers in order to complement its own product line.
(2) License fees represent the amounts paid by the Company to William H.
Channell, Sr., the Company's Chairman of the Board and Chief Executive
Officer, for the use of the Channell Patents. Prior to the consummation
of the Offering, these patents will be sold to the Company, the license
fee arrangement with Mr. Channell, Sr. will be terminated and,
thereafter, the Company will no longer pay any license fees with respect
to the Channell Patents. See "Reorganization and Termination of S
Corporation Status."
(3) Prior to the Offering, the Company was an S corporation for federal and
state income tax purposes. The pro forma presentation reflects a
provision for income taxes as if the Company had always been a C
corporation, at an assumed effective tax rate of approximately 41% less
tax credits. 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 Offering to repay outstanding bank indebtedness (see
"Use of Proceeds") 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 1,314 of the shares
offered hereby by the Company at an assumed price of $13.00 per share,
the net proceeds of which will be used to fund the distributions in
connection with the Termination of the Company's S Corporation Status.
See "Reorganization and Termination of S Corporation Status."
(5) Gross margin is gross profit as a percentage of net sales.
(6) Operating margin is income from operations as a percentage of net sales.
(7) EBITDA represents income from operations before interest and income
taxes, plus depreciation and amortization expense. EBITDA is not intended
to represent cash flow, operating income or any other measure of
performance in accordance with generally accepted accounting principles,
but is included here because management believes that certain investors
find it to be a useful tool for measuring a company's ability to service
its debt.
(8) The adjusted financial data reflects, in addition to the pro forma
adjustments referred to in note (3) above, (i) the elimination of the
expense for the license fees payable to Mr. Channell, Sr., and related
income tax impact, which license fees are being terminated as part of the
Termination of the Company's S Corporation Status, and (ii) an increase
in Mr. Channell, Sr.'s annual base salary from $225 to $500 in connection
with the Offering. See "Reorganization and Termination of S Corporation
Status" and "Management--Employment Contracts." Upon consummation of the
Offering, the Company also intends to increase the base salary of William
H. Channell, Jr., the Company's President, from $350 to $500 (which
increase has not been reflected in the adjusted financial data because
Mr. Channell, Jr.'s actual total compensation in 1995 exceeded $500) and
to grant a cash bonus of $200 to each of Gary W. Baker, the Company's
Chief Financial Officer, Dale C. Wooding, the Company's Vice President,
Manufacturing, and Edward J. Burke, the Company's Vice President,
Engineering, which bonus will be earned and payable in three equal
installments on each of December 31, 1997, 1998 and 1999, provided such
executive officer remains employed by the Company and subject to
continued payment in the event of the death of the executive officer. See
"Management--Executive Compensation."
(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 7,451 pro
forma weighted average shares outstanding.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company is a leading designer, manufacturer and marketer of precision-
molded thermoplastic enclosures used by CATV operators and local telephone
companies worldwide. The Company believes it currently supplies a substantial
portion of the enclosure product requirements of a number of major CATV and
telephone company operators. The Company was incorporated on April 23, 1996 as
the successor to the Predecessor, which is being merged into the Company in
connection with the Offering. All financial data contained herein with respect
to the Company include the financial data of the Predecessor.
Since 1990, the Company has been an S corporation for federal and state
income tax purposes. Prior to the Offering, however, the Company will change
in form from an S corporation to a C corporation. As an S corporation, the
Company's income, whether or not distributed, was taxed at the stockholder
level for federal income tax purposes. For California franchise tax purposes,
S corporations were taxed at 2.5% of taxable income in 1993 and 1.5% of
taxable income in 1994, 1995 and the first quarter of 1996. Currently, the top
federal tax rate for C corporations is 35% and the corporate tax rate in
California is 9.3%. As a result, the change in form will affect the earnings
and the cash flows of the Company by increasing the level of federal and state
income tax. The pro forma provision for income taxes in the accompanying
statements of income shows results as if the Company had always been a C
corporation and had adopted Statement of Financial Accounting Standards
No. 109 "Accounting for Income Taxes" prior to January 1, 1991. See
"Reorganization and Termination of S Corporation Status."
Prior to the consummation of the Offering, the Company will purchase the
Channell Patents and, accordingly, the license fee arrangement between the
Company and Mr. Channell, Sr. with respect to such patents will be terminated
and, thereafter, no license fees will be paid to Mr. Channell, Sr. or any
other party with respect to the Channell Patents. In addition, any patents
obtained in the future with respect to new technology developed by Mr.
Channell, Sr. will be owned by the Company. Prior to the termination, a 10%
license fee on the sale of certain products utilizing the Channell Patents was
payable to Mr. Channell, Sr. See "Certain Transactions." During 1993, 1994,
1995 and the first quarter of 1996, the license fees payable to Mr. Channell,
Sr. were $1.0 million, $1.6 million, $2.0 million and $0.5 million,
respectively. In connection with the consummation of the Offering, no license
fees will be paid with respect to product sales during 1996.
In connection with the Offering, the annual base salary of Mr. Channell, Sr.
will be increased from $225,000 to $500,000, and the annual base salary of
William H. Channell, Jr., the Company's President, will be increased from
$350,000 to $500,000, which amounts do not include any bonuses that may be
payable to such executive officers. Upon consummation of the Offering, Mr.
Channell, Jr. will also receive options to acquire 100,000 shares of Common
Stock with an exercise price equal to the initial public offering price per
share, which options will become exercisable in three equal annual
installments beginning on the first anniversary of the date of issuance. See
"Management--Employment Contracts." In addition, the Company expects to incur
additional rent expense in 1996 and future periods when compared to prior
periods due to an addition to its facilities (see "Business--Properties") and
additional increases in compensation expense in 1996 when compared with prior
periods due to increased personnel, customary wage increases and the
implementation of management incentive programs described under "Management."
The Company's core business consists of enclosure product sales to the CATV
market, which comprised approximately 86% of the Company's total net sales in
each of 1993, 1994 and 1995, with two customers, TCI and Time Warner,
accounting for 17.5% and 15.6%, respectively, of the Company's total net sales
during 1995. 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.
TCI, the Company's largest customer (by sales volume) in 1995, is currently
conducting such a review. See "Risk Factors--Concentration of Customers;
Limited Backlog." The Company has historically operated with a relatively
small backlog, and sales and operating results in any quarter are principally
dependent upon orders
21
<PAGE>
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. See "Risk Factors--Concentration of Customers; Limited
Backlog" and "--Dependence on the Communications Industry."
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. See "Risk Factors--
Price Fluctuations of Raw Materials; Availability of Complementary Products."
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. See "Risk
Factors--Operating Leverage."
In addition to Company manufactured products, the Company markets
complementary products manufactured by third parties. With respect to sales of
cable-in-conduit products, the Company generally receives a commission upon
the sale of such products. Pursuant to the agreements under which the Company
markets such products, during the terms thereof and for a period of two years
thereafter, each of the Company and the manufacturer of such products is
prohibited from competing with the other in any product line that is, or
within the year prior to termination has been, represented, manufactured or
sold by the other within the specified markets covered by the agreements.
During the periods discussed under "Results of Operations" below, the
Company's sales increases resulted primarily from additional sales to the
Company's existing customers as they expanded, rebuilt and upgraded their
signal delivery networks in order to deliver enhanced communications services,
as well as additional sales to new customers, particularly telephone companies
that have recently entered the CATV market and international customers.
Except for historical information contained herein, the matters discussed in
this Prospectus are forward-looking statements that are subject to certain
risks and uncertainties that could cause actual results to differ materially
from those set forth in such forward-looking statements. Such risks and
uncertainties include, without limitation, the Company's ability to develop
new products in response to technological, regulatory and competitive factors
affecting the communications industry, the impact on profitability of
increases in raw material prices or lower sales levels, increased competition
and the effect of changing economic conditions. For a discussion of certain
considerations relevant to an investment in the Common Stock, see "Risk
Factors."
22
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth the Company's operating results for the
periods indicated expressed as a percentage of sales. Results of operations
for the periods ended March 31, 1995 and 1996 are derived from unaudited
interim financial statements and are not necessarily indicative of results of
operations for a full fiscal year.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
------------------- --------------
1993 1994 1995 1995 1996
----- ----- ----- ------ ------
<S> <C> <C> <C> <C> <C>
Net sales............................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold...................... 62.6 57.2 56.3 59.5 55.8
----- ----- ----- ------ ------
Gross profit............................ 37.4 42.8 43.7 40.5 44.2
Commission income....................... 2.9 2.6 2.7 2.8 2.2
----- ----- ----- ------ ------
40.3 45.4 46.4 43.3 46.4
Selling................................. 15.9 14.4 13.7 14.5 15.1
General and administrative.............. 4.6 4.2 4.2 4.9 3.6
License fees............................ 4.4 4.5 5.0 4.9 5.2
Research and development................ 2.0 1.5 1.2 1.3 1.2
----- ----- ----- ------ ------
Income from operations.................. 13.4 20.8 22.3 17.7 21.3
Interest expense........................ 0.7 0.4 0.8 1.0 0.6
----- ----- ----- ------ ------
Income before income taxes.............. 12.7 20.4 21.5 16.7 20.7
Pro forma income taxes(1)............... 5.0 8.4 8.4 6.6 8.2
----- ----- ----- ------ ------
Pro forma net income(1)................. 7.7% 12.0% 13.1% 10.1% 12.5%
===== ===== ===== ====== ======
Adjusted income from operations(2)...... 16.6% 24.5% 26.7% 21.9% 25.8%
</TABLE>
- --------
(1) Pro forma income taxes and pro forma net income have been determined
giving effect to the Termination of the Company's S Corporation Status.
See "Reorganization and Termination of S Corporation Status" and note (3)
to "Selected Historical, Pro Forma and Other Financial Information."
(2) Adjusted income from operations has been determined giving effect to the
transactions described in notes (3) and (8) to "Selected Historical, Pro
Forma and Other Financial Information."
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1995 WITH THE THREE MONTHS
ENDED MARCH 31, 1996
Net Sales. Net sales increased $1.1 million or 11.4% from $9.2 million in
the first quarter of 1995 to $10.3 million in the first quarter of 1996. CATV
net sales increased $1.2 million or 15.6% from $7.8 million in the first
quarter of 1995 to $9.0 million in the first quarter of 1996 as a result of
continued demand for CATV outside plant products for network rebuild
construction, upgrades and expansion, particularly in the southeastern part of
the United States. Telecommunications net sales decreased $0.1 million or
11.3% from $1.4 million in the first quarter of 1995 to $1.3 million in the
first quarter of 1996 as a result of the severe weather conditions in the
Northeast in the first three months of 1996.
Domestic net sales increased $1.1 million or 13.6% from $8.3 million in the
first quarter of 1995 to $9.4 million in the first quarter of 1996.
International net sales decreased $0.1 million or 8.3% from $0.9 million in
the 1995 period to $0.8 million in the 1996 period, primarily as a result of a
customer's overstocking of product and a delay in planned network construction
by a large international customer resulting in a reduction of new sales.
Gross Profit. Gross profit increased $0.8 million or 21.5% from $3.7 million
in the first quarter of 1995 to $4.5 million in the first quarter of 1996.
Gross margin increased from 40.5% to 44.2% during the comparable periods. The
improvement in gross profit and gross margin was primarily due to a higher
margin mix of products sold in the 1996 period versus the 1995 period as well
as an overall increase in sales volume, which resulted in higher operating
leverage (i.e., a higher percentage of sales relative to fixed costs).
23
<PAGE>
Commission Income. Commission income decreased $0.1 million or 12.2% from
$0.3 million in the first quarter of 1995 to $0.2 million in the first quarter
of 1996. The decrease resulted from lower sales volume of cable-in-conduit
products due to the severe winter weather conditions in the northeastern part
of the United States in the first three months of 1996.
Selling. Selling expense increased $0.3 million or 16.0% from $1.3 million
in the first quarter of 1995 to $1.6 million in the first quarter of 1996,
primarily as a result of increased payroll in connection with expanded
marketing and sales activities. As a percentage of net sales, selling expense
increased from 14.5% in the 1995 period to 15.1% in the 1996 period.
General and Administrative. General and administrative expenses were $0.4
million in both the first quarter of 1995 and 1996, but declined as a
percentage of net sales from 4.9% in the 1995 period to 3.6% in the 1996
period as a result of spreading the fixed portion of such expenses over a
larger sales base.
License Fees. License fees were approximately $0.5 million in both the first
quarter of 1995 and 1996, but increased as a percentage of net sales from 4.9%
in the 1995 period to 5.2% in the 1996 period. In connection with the
consummation of the Offering, no license fees will be paid with respect to
product sales during 1996.
Research and Development. Research and development expenses were $0.1
million in both the first quarter of 1995 and 1996. Research and development
expense is expected to be higher in the future in light of the Company's plans
for new product development following the Offering.
Income From Operations. As a result of the items discussed above, income
from operations increased $0.6 million or 34.0% from $1.6 million in the first
quarter of 1995 to $2.2 million in the first quarter of 1996, and operating
margin increased from 17.7% to 21.3%. After giving effect to the transactions
described in notes (3) and (8) to "Selected Historical, Pro Forma and Other
Financial Information," adjusted income from operations increased $0.7 million
or 31.1% from $2.0 million in the first quarter of 1995 to $2.7 million in the
first quarter of 1996. As a percentage of net sales, adjusted income from
operations increased from 21.9% in the 1995 period to 25.8% in the 1996
period.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1994 WITH THE YEAR ENDED DECEMBER
31, 1995
Net Sales. Net sales increased $6.5 million or 18.7% from $34.5 million in
1994 to $41.0 million in 1995. CATV net sales increased $5.7 million or 19.2%
from $29.7 million in 1994 to $35.4 million in 1995, principally due to
continued demand for CATV outside plant products for network rebuild
construction, upgrades and expansion, as well as new product introductions to
meet higher performance requirements of certain CATV customers.
Telecommunications net sales increased $0.8 million or 15.7% from $4.8 million
in 1994 to $5.6 million in 1995, due to the completion of field testing of
products for sale to certain telecommunications customers permitting sales of
products in quantity to those customers. Telecommunications net sales also
benefited from the trend toward convergence of the CATV and telecommunications
markets, as local telephone company customers increased services relating to
video and data transmission and internet access.
Domestic net sales increased $5.0 million or 16.5% from $29.9 million in
1994 to $34.9 million in 1995, principally due to the factors affecting CATV
sales summarized above. International net sales increased $1.5 million or
33.2% from $4.6 million in 1994 to $6.1 million in 1995, mainly due to new
CATV network construction by certain Pacific Rim and European customers.
Gross Profit. Gross profit increased $3.2 million or 21.4% from $14.8
million in 1994 to $17.9 million in 1995. Gross margin increased from 42.8% in
1994 to 43.7% in 1995. The Company's improvement in gross profit and gross
margin was primarily due to a higher margin mix of products sold as well as an
overall increase in sales volume, which resulted in higher operating leverage.
Commission Income. Commission income increased $0.2 million or 21.5% from
$0.9 million in 1994 to $1.1 million in 1995, due to higher sales of cable-in-
conduit products.
Selling. Selling expense increased $0.6 million or 13.1% from $5.0 million
in 1994 to $5.6 million in 1995, primarily as a result of higher payroll and
related expense in the amount of $0.4 million and higher marketing
24
<PAGE>
related expense in the amount of $0.1 million. These increases were due
primarily to increased sales and marketing efforts during the 1995 period. As
a percentage of net sales, selling expense declined from 14.4% in 1994 to
13.7% in 1995 as a result of spreading certain fixed selling expenses over a
larger sales base.
General and Administrative. General and administrative expenses increased
$0.3 million or 18.1% from $1.4 million in 1994 to $1.7 million in 1995,
primarily as a result of higher compensation expense in connection with staff
increases. As a percentage of net sales, general and administrative expense
was 4.2% during 1994 and 1995.
License Fees. License fees increased $0.4 million or 30.4% from $1.6 million
in 1994 to $2.0 million in 1995 as a result of an increase in sales of
products subject to patent license fee arrangements relating to the Channell
Patents.
Research and Development. Research and development expenses were $0.5
million in both 1994 and 1995, but declined as a percentage of net sales from
1.5% in 1994 to 1.2% in 1995.
Income From Operations. As a result of the items discussed above, income
from operations increased $2.0 million or 27.7% from $7.2 million in 1994 to
$9.2 million in 1995, and operating margin increased from 20.8% to 22.3%.
After giving effect to the transactions described in notes (3) and (8) to
"Selected Historical, Pro Forma and Other Financial Information," adjusted
income from operations increased $2.5 million or 29.1% from $8.5 million in
1994 to $10.9 million in 1995. As a percentage of net sales, adjusted income
from operations increased from 24.5% in 1994 to 26.7% in 1995.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1993 WITH THE YEAR ENDED DECEMBER
31, 1994
Net Sales. Net sales increased $10.8 million or 45.5% from $23.7 million in
1993 to $34.5 million in 1994. CATV net sales increased $9.3 million or 45.7%
from $20.4 million in 1993 to $29.7 million in 1994 as a result of the CATV
technology changes referred to above. Telecommunications net sales increased
$1.5 million or 44.3% from $3.3 million in 1993 to $4.8 million in 1994,
principally as a result of the completion of field testing of products for
certain customers, permitting sales of the products in quantity to those
customers.
Domestic net sales increased $9.6 million or 47.5% from $20.3 million in
1993 to $29.9 million in 1994, largely due to changes in broadband technology,
which generated an increase in CATV network rebuilds to convert to 750 MHz
systems. International net sales increased $1.2 million or 33.9% from $3.4
million in 1993 to $4.6 million in 1994, as a result of a new marketing
arrangement with a strategic partner in Canada and related increased marketing
efforts in that market in 1994.
Gross Profit. Gross profit increased $5.9 million or 66.2% from $8.9 million
in 1993 to $14.8 million in 1994. Gross margin increased from 37.4% to 42.8%.
The Company's improvement in gross profit and gross margin was primarily due
to a higher margin mix of products sold as well as an overall increase in
sales volume, which resulted in higher operating leverage.
Commission Income. Commission income increased $0.2 million or 31.7% from
$0.7 million in 1993 to $0.9 million in 1994, due to higher sales of cable-in-
conduit products.
Selling. Selling expense increased $1.2 million or 31.5% from $3.8 million
in 1993 to $5.0 million in 1994, primarily as a result of higher sales
commissions in the amount of $0.2 million and higher shipping expense in the
amount of $0.2 million, both resulting from higher net sales during the 1994
period. As a percentage of net sales, selling expense declined from 15.9% in
1993 to 14.4% in 1994 as a result of spreading certain fixed selling expenses
over a larger sales base.
General and Administrative. General and administrative expenses increased
$0.3 million or 31.4% from $1.1 million in 1993 to $1.4 million in 1994. No
single expense category increased more than $0.1 million. As a
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<PAGE>
percentage of net sales, general and administrative expenses declined from
4.6% in 1993 to 4.2% in 1994 as a result of spreading the fixed portion of
these expenses over a larger sales base.
License Fees. License fees increased $0.6 million or 50.1% from $1.0 million
in 1993 to $1.6 million in 1994, as a result of an increase in sales of
products subject to patent license fee arrangements relating to the Channell
Patents.
Research and Development. Research and development expenses were
approximately $0.5 million in both 1993 and 1994, but declined as a percentage
of sales from 2.0% in 1993 to 1.5% in 1994.
Income From Operations. As a result of the items discussed above, income
from operations increased $4.0 million or 126.4% from $3.2 million in 1993 to
$7.2 million in 1994, and operating margin increased from 13.4% to 20.8%.
After giving effect to the transactions described in notes (3) and (8) to
"Selected Historical, Pro Forma and Other Financial Information," adjusted
income from operations increased $4.5 million or 115.1% from $3.9 million in
1993 to $8.5 million in 1994. As a percentage of net sales, adjusted income
from operations increased from 16.6% in 1993 to 24.5% in 1994.
QUARTERLY RESULTS OF OPERATIONS
Set forth below is certain unaudited quarterly financial information. The
Company believes that all necessary adjustments, consisting only of normal
recurring adjustments, have been included in the amounts stated below to
present fairly, and in accordance with generally accepted accounting
principles, the selected quarterly information when read in conjunction with
the Financial Statements included elsewhere herein.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDING
DECEMBER 31, 1994 DECEMBER 31, 1995 DECEMBER 31, 1996
------------------------------- ------------------------------- -----------------
1ST 2ND 3RD 4TH 1ST 2ND 3RD 4TH 1ST
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- ------- ------- ------- ------- ------- -----------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $7,134 $9,219 $9,902 $8,249 $9,225 $11,784 $10,758 $9,205 $10,279
Gross profit............ 2,992 4,112 4,037 3,613 3,738 5,387 4,534 4,254 4,541
Income from operations.. 1,389 2,247 2,035 1,512 1,633 3,005 2,577 1,956 2,189
Income before income
taxes.................. 1,368 2,211 1,992 1,456 1,543 2,887 2,486 1,916 2,124
</TABLE>
Historically, the Company has experienced lower sales in the first and
fourth quarters due to adverse weather conditions that may affect the timing
of orders from customers and create seasonal fluctuations in demand. See "Risk
Factors--Seasonality and Fluctuations in Operating Results; Limited Backlog."
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations and capital expenditures through
internally generated funds and bank borrowings. Net cash provided by operating
activities was $6.2 million and $9.8 million in 1994 and 1995, respectively.
Net cash provided by financing activities was $0.4 million in 1994, and net
cash used in financing activities was $7.0 million in 1995.
Net cash provided by operating activities was $0.7 million and $0.9 million
for the three months ended March 31, 1995 and 1996, respectively. Net cash
provided by financing activities was $0.1 million for the three months ended
March 31, 1995, and net cash used in financing activities was $1.4 million for
the three months ended March 31, 1996. Accounts receivable increased from $4.1
million at December 31, 1995 to $6.7 million at March 31, 1996 as a result of
increased sales in the first quarter of the current year (in particular, in
February and March 1996) and unusually slow collection experience encountered
with certain customers.
26
<PAGE>
The Company made capital expenditures of $5.9 million and $2.2 million in
1994 and 1995, respectively. The Company anticipates making capital
expenditures in 1996 of approximately $4.0 million, primarily relating to new
machinery, material handling, test equipment, product tooling and MIS, which
will be funded through internally generated funds, bank borrowings and the net
proceeds of the Offering. The Company's material commitments consist of a
capital lease for various computer equipment in connection with the Company's
new management information system, which lease will require aggregate payments
of approximately $1.0 million over a three-year period that commenced in April
1996, and various operating leases with third parties for facilities, sales
fleet and a shipping trailer, which required aggregate payments of $0.2
million in 1995. The Company also leases its manufacturing and headquarters
facility in Temecula, California, consisting of two buildings of approximately
160,000 and 100,000 square feet, respectively, which require annual lease
payments of approximately $650,000 and $420,000, respectively. See "Business--
Properties" and "Certain Transactions."
The Company currently maintains a revolving credit facility (as amended to
date, the "Revolving Credit Facility") with Bank of America National Trust and
Savings Association ("Bank of America"), consisting of (i) a $3.5 million
working capital revolving line of credit, which had no outstanding balance at
March 31, 1996, and (ii) a $4.8 million equipment revolving line of credit and
standby letter of credit facility, which had an outstanding balance of $2.1
million at March 31, 1996. Loans under the working capital line bear interest
at Bank of America's reference rate and mature on May 1, 1997, while loans
under the equipment line bear interest at Bank of America's reference rate
plus 0.25% and are repayable in sixty equal monthly installments of principal
and interest commencing in the first month after issuance of each loan.
Availability of advances under the revolving credit facility expires on May 1,
1997.
The Company also has a non-revolving, $1.0 million line of credit (as
amended to date, the "Non-Revolving Line of Credit") with Bank of America for
purposes of leasehold improvements and facility expansion. Availability of
advances under this line of credit expired on October 31, 1994, at which time
the line of credit was fully drawn. As of March 31, 1996, the outstanding
principal balance under such facility was $0.8 million. The Non-Revolving Line
of Credit bears interest at Bank of America's reference rate plus 0.5% and is
repayable in 72 equal monthly installments that commenced on December 1, 1994.
In the event the Revolving Credit Facility is terminated for any reason
(including Bank of America's determination not to renew such facility upon its
expiration), all amounts outstanding under the Non-Revolving Line of Credit
become immediately due and payable.
The Revolving Credit Facility and the Non-Revolving Line of Credit contain
various covenants that are customary in agreements of this nature, including
certain financial ratios and covenants, and are collateralized by the
equipment financed by the Bank of America. Under certain circumstances,
covenants contained in such facilities may limit the Company's ability to pay
dividends. See "Dividend Policy."
Management believes that income from operations, coupled with borrowings
under the Company's bank facilities and proceeds from this Offering, will be
sufficient to fund the Company's capital expenditure and working capital
requirements for the next two to three years.
27
<PAGE>
BUSINESS
GENERAL
The Company is a leading designer, manufacturer and marketer of precision-
molded thermoplastic enclosures used by CATV operators and local telephone
companies worldwide. The Company believes it was the first to design,
manufacture and market thermoplastic enclosure products for use in the
communications industry on a wide scale, and the Company believes it currently
supplies a substantial portion of the enclosure product requirements of a
number of major CATV and telephone company operators. The Company's products
house, protect and provide access to advanced telecommunications electronics
and transmission media, including coaxial cable, copper wire and optical
fibers, used in the delivery of CATV and telephone services. The products are
deployed within the portion of the local signal delivery network, commonly
known as the "outside plant," that connects the network provider's signal
origination office with residences and businesses. The Company also markets a
variety of complementary products manufactured by third parties, including
grade level boxes and cable-in-conduit, in order to provide a full system
solution to meet its customers' outside plant requirements. For a definition
of certain terms used herein, see "Glossary of Terms" on page G-1 hereof.
INDUSTRY
For more than five years, the communications industry has experienced rapid
expansion, both domestically and internationally, in response to a number of
factors, including developments in high-speed communications technologies, the
convergence occurring within the CATV and telecommunications industries,
consumer demand for enhanced communications services, and a changing
regulatory and competitive environment leading to the deregulation or
privatization of signal delivery operations in many markets. For numerous
countries throughout the world, the implementation or improvement of advanced
communications systems has become a national priority in order to enable such
countries to participate in the information-based global economy.
CATV and local telephone operators are responding to these changes in the
industry by expanding, rebuilding and upgrading their signal delivery networks
in order to deliver enhanced communications services to their customers. These
networks are designed to deliver video, voice and data transmissions and
provide internet access to individual residences and businesses. The networks
employ a variety of signal delivery technologies and architectures, including
HFC, DLC, FTTC and ADSL (see "Glossary of Terms"), which generally carry
broadband and narrowband signals over a combination of electronic hardware,
coaxial cable, copper wire and optical fibers. The outside plants of such
networks include various access devices, fiber optic trunks, nodes and feeders
and other signal transmission electronics. These devices are required to be
housed in secure, protective enclosures, such as those manufactured by the
Company. The diagram below depicts a typical signal delivery network,
consisting of a signal origination office, the outside plant and the end user:
[Diagram depicting signal origination office, the outside plant and the end
user]
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<PAGE>
Enclosure products are critical components of the outside plants of CATV
operators and local telephone companies, providing protection against weather
and vandalism, access for technicians who maintain and manage the outside
plant and, in some cases, dissipation of heat created by active electronic
hardware. CATV operators and local telephone companies rely significantly on
manufacturers of protective enclosures because any material damage to the
signal delivery networks is likely to disrupt communication services.
Demand for enclosures in the communications industry depends primarily on
the construction, rebuilding, upgrading and maintenance of signal delivery
networks by CATV operators and local telephone companies. In particular,
technological developments in the communications industry are resulting in
significant increases in system upgrades. For example, within the CATV segment
of the industry, networks are being upgraded to support new advanced two-way
services, including internet access via cable modems, telephony and PCS
transport. Within the local telephone company segment of the industry, local
telephone operators are employing new advanced technologies, such as HDSL and
ADSL, which utilize traditional copper wires for broadband services and which
are expected to increase the need for fully sealed outside plant facilities in
order to improve network reliability and longevity. In addition, as local
telephone companies build broadband HFC networks for the delivery of video
services competitive with CATV, they are expected to require products
traditionally used by CATV operators. These and other technological,
regulatory and competitive factors are expected to result in continued growth
of the market for enclosure products designed for the communications industry.
BUSINESS STRATEGY
The Company's strategy is to capitalize on opportunities in the growing and
changing global communications industry by providing enclosures and
complementary products to meet the needs of its customers' evolving
communications networks. The Company's wide range of products, manufacturing
expertise, application-based sales and marketing approach and reputation for
high quality products address key requirements of its customers. Principal
elements of the Company's strategy include the following:
CONTINUE TO FOCUS ON CORE CATV BUSINESS. The Company intends to capitalize
on its position as a leading designer, manufacturer and marketer of broadband
enclosures for the CATV industry in the United States and Canada through new
product development for both domestic and international market applications.
The Company believes it currently supplies a substantial portion of the
enclosure product requirements of a number of major CATV and telephone company
operators. The Company has positioned itself to participate in continued CATV
network construction and upgrades that are designed to improve service quality
and expand network capacity in order to prepare CATV operators for new
competition in the broadband services market. These expansions and upgrades
will enable CATV operators to accommodate increased consumer demand for
internet access via cable modem, telephony and enhanced video services. From
1993 to 1995, the Company's net sales to the CATV industry increased from
$20.4 million to $35.4 million, representing a compounded annual growth rate
of 31.7%.
INCREASE SALES TO LOCAL TELEPHONE COMPANIES. The Company seeks to leverage
its in-depth knowledge of, and expertise in, the broadband telecommunications
and telephone markets to provide innovative enclosure solutions for the
telephone industry. From 1993 to 1995, the Company's net sales to local
telephone companies increased from $3.3 million to $5.6 million, representing
a compounded annual growth rate of 29.7%. The Company intends to continue to
invest in the development of a broader range of products designed specifically
for telephone market applications. The Company has already achieved
significant success in marketing its traditional CATV/broadband products to
local telephone companies which have been designing and deploying broadband
networks to deliver competitive video and data services. The Company will
continue to target this market for growth.
EXPAND INTERNATIONAL PRESENCE. Management believes that international
markets offer significant opportunities for increased sales in both the CATV
and telephone segments. The Company's principal international markets
currently consist of Canada, South America, the Pacific Rim, the Middle East
and Europe. From 1993 to 1995, the Company's international net sales increased
from $3.4 million to $6.1 million, representing a compounded annual growth
rate of 34.4%. Trends expected to result in international growth
29
<PAGE>
opportunities include the deregulation and privatization of telecommunications
in many international markets, the focus of numerous countries on building,
expanding and enhancing their communications systems in order to participate
fully in the information-based global economy, and multi-national expansion by
many U.S.-based network carriers. The Company will concentrate on expansion in
international markets that are characterized by deregulation or privatization
of telecommunications and the availability of capital for the construction of
signal delivery networks. See note M of the notes to the Company's Financial
Statements included elsewhere in this Prospectus for financial data of the
Company by geographic region of operation.
DEVELOP NEW PRODUCTS AND ENTER NEW BUSINESS SEGMENTS. The Company continues
to leverage its core capabilities by developing innovative products that meet
the changing needs of its customers. Examples of innovative products developed
by the Company include its low profile (i.e., close to the ground) enclosures
that permit 360 degree access by technicians and pedestals that provide for
mechanical sealing that is maintained without the need for gels, compounds or
heat shrinkage. Such features, in addition to other product improvements
developed by the Company over many years, received U.S. patent protection and
improve the performance and ease of use of the Company's products in its
customers' outside plant systems. The Company has a proven record in
designing, developing and manufacturing "next generation" products that
provide solutions for its customers and offer differential advantages over
other suppliers to the industry. In addition, the Company will seek to
diversify its customer base by developing new products for customers outside
the communications industry that require enclosure products, such as the
utility industry.
PRODUCTS
The Company manufactures precision-molded, highly engineered thermoplastic
enclosures that are considered state-of-the-industry for many applications,
having received field testing and other approvals and standardization
certifications from major CATV and telephone company operators. The majority
of the Company's products are specifically designed for buried and underground
network architectures, including enclosures that provide technicians with
access to these networks for maintenance, upgrades and installation of new
services. These types of networks and enclosures are generally preferred by
the Company's customers due to increased network reliability, lower
maintenance requirements, improved security, utility right of way issues and
aesthetic appeal. Enclosure products for these networks must be secure,
durable and aesthetically pleasing and often provide advanced heat dissipation
characteristics required for active electronics. The Company also manufactures
products that are flush-to-grade and buried, requiring environmental sealing
and load-bearing capabilities. The majority of the Company's products are
constructed of thermoplastic and fitted with metal frameworks, fasteners and
locking mechanisms. The Company also designs and manufactures a series of
termination blocks, brackets and cable management devices that are mounted
inside its enclosure products. The Company is recognized for its
differentiated product designs and the functionality, field performance and
service life of its products as compared with alternative products.
In order to position itself as a full-line product supplier, the Company
also offers a variety of complementary products, including grade level boxes
and cable-in-conduit. These products are typically purchased by customers as
part of a system package and are sold by the Company through marketing
arrangements with original equipment manufacturers ("OEMs"). The Company seeks
strategic alliances with these OEMs that generally include technical
information exchanges that are used by the Company in the development of new
products and enhancements to existing designs. The Company has established
additional relationships with system integrators and innovative end users.
30
<PAGE>
The Company currently markets 35 enclosure product families, with numerous
options that result in several thousand product configurations. The diagram
below depicts the location of the Company's products in typical outside plants
of CATV operators and local telephone companies:
[Diagram depicting the location of the Company's products
in typical outside plants of CATV and local telephone operators]
The primary functions of the Company's products designed for the CATV
industry are cable routing and management, equipment access, heat dissipation
and security. The Company believes that it offers the broadest line of
enclosure products for use in the CATV industry. In addition to being widely
deployed by CATV operators, these products are also now being approved for use
by a number of telephone companies that are adding fiber optic and broadband
functionality to their networks. The Company anticipates demands for the CATV
product line to result from continued construction of broadband networks and
upgrades of existing CATV networks to accommodate enhanced video services,
internet access via cable modems and wireless PCS transport.
The Company also specializes in the manufacture of products designed to meet
the needs of its local telephone company customers, including sealed plant
products. These products include a sealed chamber to provide environmental
protection for copper wires, coaxial cable and optical fibers that have been
exposed for purposes of splicing and termination. The Company's sealed plant
products feature a mechanical sealing system which, unlike many competitors'
products, does not require gels, compounds or heat shrink to create and
maintain the required seal. This system provides significant value to users in
terms of faster installations, repeat access and elimination of excessive
components and the need for special tools.
31
<PAGE>
Historically, the Company's sealed plant products have been deployed in
areas characterized by severe flooding, moisture and corrosion problems.
Recently, some telephone companies have adopted a complete sealed plant
strategy designed to enhance the reliability of their networks, reduce
maintenance costs and extend the service life of their copper-based systems.
In addition, management expects that demand for sealed plant products may
result from new transmission technologies that enhance the capabilities and
capacity of existing copper networks, such as HDSL and ADSL, which support
high-speed data, video and internet access over existing copper wires. As a
result of these technologies, it is anticipated that network operators may
seek to upgrade their copper wire facilities in order to improve reliability
and performance. The Company's sealed plant products are well suited for such
applications.
The Company continues to review new products to complement its existing
product line and marketing strengths. New product development initiatives
being studied by the Company include additional products for the CATV and
local telephone markets as well as new products for customers in industries
outside of the communications industry, such as the utility industry. See
"Business Strategy" and "Product Development and Engineering."
MARKETING AND SALES
The Company markets its products primarily through a direct sales force of
21 technically trained salespeople and over 25 independent sales distributors
and manufacturers representatives as of March 31, 1996. The Company's sales
force is based in North America and select international markets and is
divided into three groups covering domestic CATV customers, domestic
telecommunications customers and international customers. The Company employs
an application-based, system approach to marketing its products, offering the
customer, where appropriate, a complete, cost-effective system solution to
meet its enclosure and other outside plant requirements. All sales personnel
have technical expertise in the products they market and are assisted by the
Company's engineering and technical marketing specialists in designing these
system solutions.
The Company's direct sales force is supported by a sales/customer service
department that administers and schedules incoming orders, requests for
product enhancements and service inquiries. This department has locations in
Temecula, California, Canada and the United Kingdom, and maintains direct
communications with customers and the Company's field sales and operations
personnel. As of March 31, 1996, the Company employed eight people in its
sales/customer service department.
The sales force receives additional support from the Company's technical and
product marketing department. The field technical service personnel within
this department work closely with the sales staff and customers to develop
system solutions and provide a full range of technical support, training and
certification for users of the Company's products. The product marketing
personnel within this department perform a variety of functions, including
product line management and general marketing services. These individuals also
provide the Company with strategic plans for product development, new market
access, acquisitions and strategic alliances and work closely with the
Company's sales, engineering and manufacturing departments to implement such
strategic plans. As of March 31, 1996, the Company employed ten people in its
technical and product marketing department.
The marketing department also promotes and positions the Company both
domestically and internationally by performing functions relating to public
relations, product literature, market research and advertising. The Company
participates regularly in industry trade shows and exhibits for the CATV and
local telephone markets.
MANUFACTURING OPERATIONS
The Company's products are manufactured at its facility in Temecula,
California. The Company's vertically integrated and modern manufacturing
processes enable the Company to control each step in the manufacturing
process, including product design and engineering; design and development of
its own dies, tools and molds; and wiring, assembly and packaging. The
Company's manufacturing expertise enables it to tailor its products to
32
<PAGE>
satisfy customer demands, rapidly and efficiently produce large volumes of
products, control expenses and ensure product quality. Management considers
the Company's manufacturing expertise a significant competitive advantage,
providing it with the ability to satisfy the requirements of major customers
with relatively short lead-times and reduce backlog by promptly booking and
shipping orders.
The Company's Temecula facility contains approximately 160,000 square feet
of manufacturing, warehouse and office space designed and constructed
specifically to the Company's requirements. An adjacent 100,000 square foot
building is also being constructed and is expected to be completed in July,
1996 and will be leased by the Company. This building is intended to enhance
manufacturing efficiency, increase warehouse space and enable the Company to
increase manufacturing capacity as required. In 1996, the Company is expected
to be awarded ISO 9000 certification, a worldwide industry standards
certification, with respect to its manufacturing facility. Management has
followed a long-term capacity plan, adding the equipment, facilities and
trained personnel required to support anticipated growth of the Company's
business. As a result, management believes that the Company's manufacturing
facility is adequate to meet anticipated product demand for the foreseeable
future.
The Company owns its manufacturing equipment, which is generally state-of-
the-industry, and all manufacturing processes are performed by trained Company
personnel. The Company's broad range of manufacturing processes includes
injection molding, structural foam molding, rotational molding, metal
fabrication, rubber injection, transfer and compression molding, and
termination block fabrication. The Company has implemented several quality and
process assurance programs, including continuous monitoring of key processes
and regular product inspection and testing. The Company is committed to the
production of the highest quality products.
PRODUCT DEVELOPMENT AND ENGINEERING
The Company believes it was the first to design, manufacture and market
thermoplastic enclosure products for use in the communications industry on a
wide scale. Since the original introduction of its products, the Company has
continued to design all of its own products and develop core capabilities in
product engineering and development. As a result, in response to demands of
the communications industry for increasingly sophisticated enclosure products,
the Company has been able to develop a series of products with effective heat
dissipation qualities; a superior environmental sealing and protection system
that, unlike many competitors' products, does not require gels, compounds or
heat shrink to maintain the required seal; easy access for technicians through
circular covers that can be removed to fully expose the enclosed electronics;
compatibility with a variety of signal delivery network architectures; and
versatility to accommodate network growth through custom hardware and
universal mounting systems that adapt to a variety of new electronic hardware.
Many of the Company's thermoplastic enclosure products are now considered
state-of-the-industry, having received field testing and other approvals and
standardization certifications from major CATV and telephone company
operators.
The Company's new product development philosophy is applications based and
customer driven, focusing on the complete design cycle from product concept
through tooling and high-volume manufacturing. A team comprised of
engineering, marketing, manufacturing and direct sales personnel work together
to define, develop and deliver complete system solutions to customers. The
Company is equipped to conduct many of its own product testing procedures for
performance qualification purposes, enabling it to accelerate the product
development process.
As of March 31, 1996, the Company employed 13 people in its product
development and engineering department. In each of 1993, 1994 and 1995, the
Company spent approximately $0.5 million on research and development. The
Company intends to continue to invest in new product development, including
plans to use approximately $7.0 million to $10.0 million of the net proceeds
of the Offering for this purpose.
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<PAGE>
CUSTOMERS
The Company sells its products directly to CATV operators and telephone
companies throughout the United States, Canada and certain other international
markets, principally developed nations. During 1995, the Company shipped
products to more than 4,000 customer locations, and its five largest customers
accounted for 47.9% of total net sales. In 1995, the Company's five largest
customers (by sales volume) were, in the United States, BellSouth, Comcast,
Continental Cablevision, TCI and Time Warner, and in international markets,
Bricast/VisionStream (Australia), Cablenet (Canada), Cable Systems Media
(Israel), Rogers Communications (Canada) and Shaw Cable (Canada). Two
customers, TCI and Time Warner, accounted for 17.5% and 15.6%, respectively,
of the Company's net sales in 1995.
The Company's customers generally do not enter into long-term supply
contracts providing for future purchase commitments for the Company's
products. Further, the Company believes that many of its customers
periodically review their supply relationships and alter buying patterns based
upon their current assessment of the products and pricing available in the
marketplace. This periodic review can and does result in significant changes
from fiscal period to fiscal period in the level of purchases of the Company's
products by specific customers. The Company understands that TCI is currently
conducting such a review. See "Risk Factors--Concentration of Customers;
Limited Backlog" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
INTELLECTUAL PROPERTY
Following consummation of the Offering, the Company will own all of the
patents and other technology employed by it in the manufacture and design of
its products. See "Reorganization and Termination of S Corporation Status."
The Company's patents, which expire between 1996 and 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 that 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. See
"Risk Factors--Competition." The Company believes, however, that several
factors, including its ability to service national and multi-national
customers, direct sales force, focus on enclosure products, specialized
engineering resources and vertically integrated manufacturing operations,
provide the Company with a competitive advantage. Management believes that the
principal competitive factors in the communications equipment market are
product availability, customer service, product performance, new product
capabilities and price. Competitive price pressures are common in the
industry. In the past, the Company has responded to these pressures
effectively with cost control through vertical integration utilizing advanced
manufacturing techniques, cost-effective product designs and material
selection and an aggressive procurement philosophy. In addition, in the past,
certain of the Company's telecommunications customers have required relatively
lengthy field testing of new products prior to purchasing such products in
quantity. In connection with the deregulation of the telecommunications
segment and the related convergence occurring within the CATV and
telecommunications industries, it is uncertain whether and the extent to which
such field testing will continue to be required. While field testing can delay
the introduction of new products, it can also act as a competitive advantage
in that it makes new product introduction and sales by competitors more
difficult.
RAW MATERIALS; AVAILABILITY OF COMPLEMENTARY PRODUCTS
The principal raw materials used by the Company are thermoplastic resins,
neoprene rubbers, hot and cold rolled steel, stainless steel and copper. The
Company also uses certain other raw materials, such as fasteners, packaging
materials and communications cable. Management believes the Company has
adequate sources of
34
<PAGE>
supply for the raw materials used in its manufacturing processes and attempts
to develop and maintain multiple sources of supply for raw materials in order
to help ensure the availability and competitive pricing of these materials.
Most plastic resins are purchased under annual and multi-year contracts to
help stabilize cost and improve supplier delivery performance. Neoprene
rubbers are manufactured by multiple custom compounders using the Company's
proprietary formulas. Metal products are supplied in standard stock shapes,
coils and custom rollforms. All hot and cold rolled steels are either hot
dipped galvanized or zinc or cadmium electro-plated, which coating operations
are conducted by local outside processors.
In addition, in order to position itself as a full-line product supplier,
the Company also relies on certain manufacturers to supply products that
complement the Company's own product line, such as grade level boxes and
cable-in-conduit. The Company believes there are multiple sources of supply
for these products.
EMPLOYEES
As of March 31, 1996, the Company employed 245 people (including 29
temporary employees), of whom 40 were in sales, 189 were in manufacturing
operations (including the 29 temporary employees) and 16 were in finance and
administration. The Company considers its employee relations to be good, and
it recognizes that its ability to attract and retain qualified employees is an
important factor in its growth and development. None of the Company's
employees is subject to a collective bargaining agreement, and the Company has
not experienced any material business interruption as a result of labor
disputes within the past five years.
PROPERTIES
The Company occupies approximately 160,000 square feet of space in Temecula,
California, of which approximately 55%, 30% and 15% is used for manufacturing,
warehouse and office space, respectively. This facility is leased from William
H. Channell, Sr., the Company's Chairman of the Board and Chief Executive
Officer. See "Certain Transactions" and "Risk Factors--Disruptions at the
Company's Manufacturing Facilities; Lease With Related Party." The lease term
for this facility extends through 2005, and the Company has two five-year
renewal options to extend the term to 2015. An adjacent 100,000 square foot
building is also being constructed and is expected to be completed in July,
1996. This building, which will be used primarily for warehouse space, is also
being leased from Mr. Channell, Sr. through 2005, with two five-year renewal
options to extend the term to 2015. See "Manufacturing Operations." Rental
expense in 1996 under the Company's existing facility in Temecula, California
is expected to be $650,000. Rental expense on the addition is expected to
commence upon completion of construction at an annual rate of $420,000. The
Company also leases an aggregate of approximately 40,000 square feet of
warehouse and regional sales office space in California, North Carolina,
Canada and the United Kingdom. The Company considers its current facilities to
be adequate for its operations.
REGULATION
The communications industry is subject to regulation in the United States
and other countries. Federal and state regulatory agencies regulate most of
the Company's domestic customers. On February 1, 1996, the United States
Congress passed the Telecommunications Act, which the President signed into
law on February 8, 1996. The Telecommunications Act lifts certain restrictions
on the ability of companies, including RBOCs and other customers of the
Company, to compete with one another and generally reduces the regulation of
the communications industry. Although the Company believes that the
deregulation of the communications industry may increase the Company's
opportunities to provide solutions 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.
35
<PAGE>
The Company is also subject to a wide variety of federal, state and local
environmental laws and regulations. The Company utilizes, principally in
connection with its thermoplastic manufacturing processes, a limited number of
chemicals which are classified as hazardous or similar substances. It is
difficult to predict what impact these environmental laws and regulations may
have on the Company in the future. Restrictions on chemical uses or certain
manufacturing processes could restrict the ability of the Company to operate
in the manner that it currently operates or is permitted to operate.
Management believes that the Company's operations are in compliance in all
material respects with current environmental laws and regulations.
Nevertheless, it is possible that the Company may experience releases of
certain chemicals to environmental media which could constitute violations of
environmental law (and have an impact on its operations) or which could cause
the incurrence of material cleanup costs or other damages. For these reasons,
the Company might become involved in legal proceedings involving exposure to
chemicals or the remediation of environmental contamination from past or
present operations. Because certain environmental laws impose joint, several,
strict and retrospective liability upon current owners or operators of
facilities from which there have been releases of hazardous substances, the
Company could be held liable for remedial measures or other damages (such as
liability for personal injury actions) at properties it owns or utilizes in
its operations, even if the contamination was not caused by the Company's
operations. See "Risk Factors--Environmental Matters."
LITIGATION
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.
BACKGROUND
The Company was incorporated in Delaware on April 23, 1996, as the successor
to the Predecessor. The Company's executive offices are located at 26040 Ynez
Road, Temecula, California 92591-9022, and its telephone number at that
address is (909) 694-9160.
36
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth information with respect to the Company's
executive officers and directors and their ages as of March 31, 1996.
<TABLE>
<CAPTION>
NAME AGE POSITIONS
---- --- ---------
<C> <C> <S>
William H. Channell, Sr. ........... 68 Chairman of the Board and Chief
Executive Officer
William H. Channell, Jr. ........... 38 President and Director
Gary W. Baker....................... 52 Chief Financial Officer
Andrew M. Zogby..................... 35 Vice President, Marketing
Edward J. Burke..................... 40 Vice President, Engineering
Dale C. Wooding..................... 45 Vice President, Manufacturing
John B. Kaiser...................... 44 Vice President, Broadband Sales
George R. Bell...................... 42 Vice President, Telecommunications
Sales
Gary D. Williams.................... 49 Vice President, International Sales
Jacqueline M. Channell.............. 64 Secretary and Director
Arthur L. Addis..................... 76 Director
</TABLE>
In addition, Eugene R. Schutt, Jr. and Edmund M. Kaufman have agreed to
serve as directors of the Company commencing immediately following the closing
of the Offering. The Company's independent, non-management directors will
represent a majority on each of the Company's three-member Audit Committee and
Compensation Committee.
The directors of the Company are staggered into three classes, with the
directors in a single class elected at each annual meeting of stockholders to
serve for a term of three years or until their successors have been elected
and qualified. The authorized number of members of the Board of Directors is
currently seven. The executive officers of the Company serve at the pleasure
of the Board of Directors. In 1996, the Company changed the title of several
executive officers to more accurately reflect their roles and
responsibilities.
William H. Channell, Sr., the son of the Company's founder, James W.
Channell, will assume the position of Chairman of the Board in connection with
the Offering and will continue to serve as Chief Executive Officer after the
Offering. Prior to the Offering, he had held the position of President and
Chief Executive Officer since 1966. Mr. Channell, Sr. is a co-trustee of the
Channell Family Trust, which is a principal stockholder of the Company, and is
the husband of Jacqueline M. Channell and the father of William H. Channell,
Jr. His initial term as a director expires in 1999.
William H. Channell, Jr. will assume the position of President in connection
with the Offering. He has been a Director of the Company since 1984. Since
joining the Company in 1979, Mr. Channell, Jr. has held the positions of
Executive Vice President, Director of Marketing and National Sales Manager.
Mr. Channell, Jr. is a principal stockholder of the Company and is the son of
William H. Channell, Sr. and Jacqueline M. Channell. His initial term as a
director expires in 1997.
Gary W. Baker has been the Company's Chief Financial Officer since 1985.
From 1983 to 1985, Mr. Baker was the corporate controller of Symbolics, Inc.,
a publicly traded manufacturer of computer products.
Andrew M. Zogby has been the Company's Vice President, Marketing since
March, 1996. Prior to joining the Company, Mr. Zogby was Director of Strategic
Marketing, Broadband Connectivity Group for ADC Telecommunications, a publicly
traded, telecommunications equipment supplier to both telephone and CATV
37
<PAGE>
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, Engineering since May
1996 and has served in various similar and other capacities with the Company
since 1984. Mr. Burke has held various technical positions in the
thermoplastic product engineering and tooling design field since 1978.
Dale C. Wooding has been the Company's Vice President, Manufacturing since
May 1996 and has served in various similar and other capacities with the
Company since 1985. Mr. Wooding has held various positions in the
manufacturing management field since 1976.
John B. Kaiser has been the Company's Vice President, Broadband Sales since
May, 1996. He held the position of Director of Marketing for the Company from
1987 to 1991. Between 1991 and his return to the Company, Mr. Kaiser held the
position of District Manager, Southern California, for the General Polymers
Division of Ashland Chemical, a thermoplastics distributor, where his
responsibilities included general management of district operations, including
sales, warehousing, procurement and logistics.
George R. Bell has been the Company's Vice President, Telecommunications
Sales since May 1996 and has served in various similar and other capacities
with the Company since 1989. Mr. Bell has held various sales and marketing
positions in the telecommunications and CATV equipment industry since 1981.
Gary D. Williams has been the Company's Vice President, International Sales
since May 1996 and has served in various similar and other capacities since
1988. Mr. Williams has held various positions in the CATV operations and
equipment field for over 20 years.
Jacqueline M. Channell has been the Company's Secretary and a Director since
1966. She is a co-trustee of the Channell Family Trust, which is a principal
stockholder of the Company, and is the wife of William H. Channell, Sr. and
the mother of William H. Channell, Jr. Mrs. Channell's term as a director
expires in 1998.
Arthur L. Addis has been a Director of the Company since 1981. Since 1974,
Mr. Addis has been the President of Arthur Addis & Associates, a business
consulting firm, and in such capacity has provided consulting services to the
Company since 1981. Mr. Addis has been a member of the boards of directors of
numerous other domestic and international companies in a variety of
industries. Mr. Addis's initial term as a director expires in 1998.
Edmund M. Kaufman has agreed to serve as a director of the Company
commencing immediately following the closing of the Offering, with his initial
term expiring in 1997. Since 1964, Mr. Kaufman (or an entity controlled by
him) has been a partner of the law firm Irell & Manella LLP, which firm is
acting as counsel to the Company in connection with the Offering and is
expected to continue to represent the Company following the Offering.
Eugene R. Schutt, Jr. has agreed to serve as a director of the Company
commencing immediately following the closing of the Offering, with his initial
term expiring in 1999. Since January 1992, Mr. Schutt has been the President
of Avco International, a division of Avco Financial Services, Inc., an
international financial services company. From 1984 to 1992, he served as
President of Pratt Industries, Inc., a manufacturer of paper and related
products.
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
38
<PAGE>
compensation for serving as the Company's Secretary. In addition, pursuant to
the Company's 1996 Incentive Stock Plan (as described below), (i) effective
upon consummation of the Offering, each non-management director (including
Mrs. Channell) will receive options to acquire 1,000 shares of the Company's
Common Stock with an exercise price equal to the initial public offering
price, and (ii) on the date of each of the Company's annual stockholder
meetings after the Offering, each non-management director (including non-
executive officers who serve as directors) serving on the Board of Directors
immediately following such meeting will receive options to acquire 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.
The Company also engages Arthur Addis & Associates, of which Mr. Addis is
the president, to perform management consulting services for the Company, for
which such firm receives certain fees. See "Certain Transactions."
EXECUTIVE COMPENSATION
Summary Compensation Table. The following table sets forth the annual and
long-term compensation of the Company's Chief Executive Officer and four
additional most highly compensated executive officers for the year ended
December 31, 1995 (collectively, the "Named Officers").
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
--------------------------------
AWARDS PAYOUTS
--------------------- ----------
SECURITIES
ANNUAL COMPENSATION OTHER ANNUAL RESTRICTED UNDERLYING ALL OTHER
NAME AND POSITIONS -------------------- COMPENSATION STOCK OPTIONS/ LTIP COMPENSATION
HELD WITH THE COMPANY SALARY($) BONUS($) ($)(1) AWARDS($) SARS(#) PAYOUTS($) ($)(2)
--------------------- ---------- --------- ------------ ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
William H. Channell, $ 225,000 $ -- $-- $-- -- $-- $4,020
Sr.....................
Chairman of the Board
and Chief Executive
Officer(3)
William H. Channell, 350,000 542,000 -- -- -- -- 4,020
Jr.....................
President
Gary W. Baker........... 118,657 45,000 -- -- -- -- 4,020
Chief Financial Officer
Edward J. Burke......... 108,486 45,000 -- -- -- -- 4,020
Vice President,
Engineering
Dale C. Wooding......... 95,092 45,000 -- -- -- -- 4,020
Vice President,
Manufacturing
</TABLE>
- --------
(1) For each individual named, compensation excludes perquisites and other
personal benefits, that did not exceed the lesser of $50,000 or 10% of the
total annual salary and bonus reported for such individual.
(2) Amounts reflect payments under the Company's Profit Sharing Plan (as
described below).
(3) The amounts set forth with respect to Mr. Channell, Sr. do not reflect (i)
license fees in the amount of $2.0 million paid to Mr. Channell, Sr. with
respect to 1995 sales of products relating to the Channell Patents or (ii)
payment of premiums by the Company on a life insurance policy for Mr.
Channell, Sr. under which the Company was previously the beneficiary. See
"Employment Contracts" and "Certain Transactions."
In connection with the Offering, each of Mr. Channell, Sr.'s and Mr.
Channell, Jr.'s annual base salary will be increased to $500,000. See
"Employment Contracts." Upon consummation of the Offering, Mr. Channell, Jr.
will also receive options to acquire 100,000 shares of Common Stock with an
exercise price equal to the initial public offering price per share, which
options will become exercisable in three equal annual installments beginning
on the first anniversary of the date of issuance. In addition, as an incentive
for continued services, the Company currently intends to grant a cash bonus of
$200,000 to each of Messrs. Baker, Wooding and Burke,
39
<PAGE>
which bonus will be earned and payable in three equal installments on each of
December 31, 1997, 1998 and 1999, provided such executive officer remains
employed by the Company and subject to continued payment in the event of the
death of the executive officer. The average tenure of these executive officers
with the Company is 11 years.
1996 INCENTIVE STOCK PLAN
The Company's 1996 Incentive Stock Plan (the "Stock Plan") currently permits
the granting to the Company's key employees, directors and other service
providers of (i) options to purchase shares of the Company's Common Stock and
(ii) shares of the Company's Common Stock that are subject to certain vesting
and other restrictions ("Restricted Stock"). A maximum of 750,000 shares of
Common Stock have been reserved for issuance under the Stock Plan.
Approximately 525,000 "non-qualified" options to acquire shares of Common
Stock will be granted to approximately 70 of the Company's employees and
directors (including 100,000 stock options being issued to William H.
Channell, Jr., the Company's President) at the time of the Offering with an
exercise price equal to the public offering price. These options will vest at
a rate of 33 1/3% per year beginning on the first anniversary of the date of
issuance and will have a term of 10 years.
The Stock Plan is administered by the Compensation Committee of the Board of
Directors, which will be composed entirely of two or more directors who are
"disinterested" within the meaning of Rule 16b-3 under the Exchange Act and
"outside directors" within the meaning of Section 162(m) of the Internal
Revenue Code of 1986, as amended (the "Code"). 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.
40
<PAGE>
PROFIT SHARING AND SAVINGS PLANS
The Company maintains a qualified Profit Sharing Plan. Any employee who has
completed two years of employment with the Company is eligible to participate
in such plan. A participating employee is fully vested at all times in his or
her account, including any interest credited to the account. However, a
participating employee may not withdraw all of any portion of his or her
account prior to the date that he or she either (i) incurs total and permanent
disability or (ii) terminates employment with the Company. Annual
contributions by the Company to the Profit Sharing Plan are discretionary and
do not exceed the amount allowable for federal income tax purposes.
The Company also maintains a qualified "savings plan" pursuant to Section
401(k) of the Code. This plan allows any employee who has completed three
months of employment with the Company to contribute each pay period up to 15%
of his or her earnings (but not more than $9,500 annually) for investment in
annuity contracts and mutual funds. A participating employee is fully vested
at all times in his or her account, including any interest credited to the
account. However, a participating employee may not withdraw all of any portion
of his or her account prior to the date that he or she either (i) incurs total
and permanent disability or (ii) terminates employment with the Company. The
Company is under no obligation to make, and has not made, any contributions on
behalf of employees participating in this plan.
EMPLOYMENT CONTRACTS
The Company has entered into employment agreements with each of William H.
Channell, Sr. and William H. Channell, Jr., engaging them as the Chairman of
the Board and Chief Executive Officer and President of the Company,
respectively. For their service, each of Messrs. Channell, Sr. and Channell,
Jr. is entitled to receive an annual salary of $500,000, subject to cost of
living increases. In addition, each executive is entitled to participate in
the Stock Plan, the Profit Sharing Plan and the Incentive Plan (described
below). 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, and (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. 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.
In addition, prior to the Offering, the Company maintained and paid the
premiums with respect to a $1.5 million whole life insurance policy for Mr.
Channell, Sr., under which the Company was named as the beneficiary. In
connection with the Offering, this policy will be transferred to Mr. Channell,
Sr. in consideration of the payment by Mr. Channell, Sr. to the Company of an
amount equal to the estimated $328,000 cash surrender value of this policy as
of the closing of the Offering, and the beneficiary under this policy will be
redesignated as Mrs. Channell. Thereafter, the Company will continue to pay a
portion of the premiums with respect to this policy during Mr. Channell, Sr.'s
lifetime.
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 and other service providers to 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-
41
<PAGE>
established performance goals. Measures of performance may include level of
sales, EBITDA, net income, income from operations, earnings per share, return
on sales, expense reductions, return on capital, stock appreciation, return on
equity, invention, design or development of proprietary products or
improvements thereto (patented or otherwise), or sales of such proprietary
products or improvements or profitability achieved from sales of proprietary
products or improvements. Awards under the Incentive Plan are payable in cash
or, at the election of the Compensation Committee, Common Stock of the
Company. The Compensation Committee may establish a bonus pool from which all
awards under the Incentive Plan may be granted as well as individual, non-
bonus pool awards. No participant in the Incentive Plan may receive awards
under such plan during any fiscal year of the Company in excess of $1,000,000
or 100,000 shares of Common Stock.
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<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of June 18, 1996,
including beneficial ownership by the Selling Stockholder, each person (or
group of affiliated persons) who is known by the Company to own beneficially
more than 5% of the Common Stock, each of the Company's directors and
prospective directors, each of the Named Officers, and all directors,
prospective directors and executive officers as a group. Except as otherwise
noted, the Company believes that the persons named in the table have sole
voting and investment power with respect to all shares of Common Stock shown
as beneficially owned by them. Information regarding percentage ownership
after the Offering assumes no exercise of the Underwriters' over-allotment
option.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO OFFERING(2) SHARES AFTER OFFERING(2)
----------------------- BEING --------------------
NAME(1) SHARES PERCENT OFFERED(3) SHARES PERCENT(3)
------- ------------ ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
William H. Channell, Sr.
and Jacqueline M.
Channell,
as co-trustees of the
Channell Family
Trust(4)............... 3,620,830 59.0% 400,000 3,220,830 36.4%
William H. Channell,
Jr..................... 1,534,250 25.0 -- 1,534,250 17.4
Carrie S. Rouveyrol(5).. 490,960 8.0 -- 490,960 5.6
The Taylor Family
Trust(5)............... 490,960 8.0 -- 490,960 5.6
Gary W. Baker........... -- -- -- -- --
Edward J. Burke......... -- -- -- -- --
Dale C. Wooding......... -- -- -- -- --
Arthur L. Addis (6)..... -- -- -- 5,000 (7)
Edmund M. Kaufman....... -- -- -- -- --
Eugene R. Schutt, Jr.... -- -- -- -- --
All current executive
officers, directors and
prospective
directors as a group
(13 persons)........... 5,155,080 84.0% 400,000 4,760,080 53.9%
</TABLE>
- --------
(1) The address for each stockholder is 26040 Ynez Road, Temecula, California
92591-9022.
(2) Upon the consummation of the Offering, the Company will issue to certain
employees and directors options to acquire approximately 525,000 shares of
Common Stock (including 100,000 stock options being issued to William H.
Channell, Jr., the Company's President) with an exercise price equal to
the initial public offering price. These options will become exercisable
in three equal annual installments beginning on the first anniversary of
the date of issuance. This chart does not reflect any of the portion of
these options that will be issued to certain individuals listed in the
chart.
(3) In the event the Underwriters' over-allotment option is exercised in full,
the Channell Family Trust will sell an additional 465,000 shares of Common
Stock, thereby reducing its percentage ownership after the Offering to
31.2% and reducing the percentage ownership of the Company's current
executive officers, directors and prospective directors as a group to
48.6%.
(4) William H. Channell, Sr., the Company's Chairman of the Board and Chief
Executive Officer, and Jacqueline M. Channell, the secretary and a
director of the Company, are the sole trustees of the Channell Family
Trust and together have sole voting and dispositive power over the shares
of Common Stock owned by such trust.
(5) Ms. Rouveyrol and Michele Taylor, who is a co-trustee of the Taylor Family
Trust, are daughters of William H. Channell, Sr. and Jacqueline M.
Channell. Ms. Taylor and her husband, Roy Taylor, are the sole trustees of
the Taylor Family Trust and together have sole voting and dispositive
power over the shares of Common Stock owned by such trust.
(6) It is anticipated that Mr. Addis will purchase 5,000 shares of Common
Stock in the Offering at a price equal to the initial public offering
price.
(7) Less than 1%.
43
<PAGE>
CERTAIN TRANSACTIONS
The Company leases approximately 160,000 square feet of manufacturing,
warehouse and office space in Temecula, California, from William H. Channell,
Sr., a principal stockholder and the Chairman of the Board and Chief Executive
Officer of the Company. The term of the lease is through December 31, 2005,
with two five-year renewal options. The original monthly rental payment
(commencing in 1990) is $54,182, and the lease provides for annual cost of
living increases beginning in 1993. For the 1993-1996 period, the lease was
amended to waive the cost of living increases. An adjacent 100,000 square foot
building is also being constructed and is expected to be completed in July,
1996. This building is also being leased from Mr. Channell, Sr. through 2005,
with two five-year renewal options, requiring monthly rental payments of
$35,000. The Company believes that the terms of these leases are no less
favorable to the Company than could be obtained from an independent third
party.
Prior to the Offering, Mr. Channell, Sr. received from the Company a 10%
license fee on the sale of certain products utilizing the Channell Patents.
For 1993, 1994 and 1995, the expense for these license fees totaled
$1.0 million, $1.6 million and $2.0 million, respectively. Prior to the
consummation of the Offering, the Channell Patents will be sold to the
Company, the license fee arrangement between the Company and Mr. Channell, Sr.
will be terminated and, thereafter, no license fees will be paid to Mr.
Channell, Sr. or any other person with respect to the Channell Patents. See
"Reorganization and Termination of S Corporation Status" and "Use of
Proceeds."
Prior to the consummation of the Offering, the Company maintained and paid
the premiums with respect to a $1.5 million whole life insurance policy for
Mr. Channell, Sr., under which the Company was named as the beneficiary. In
connection with the Offering, this policy will be transferred to Mr. Channell,
Sr. in consideration of the payment by Mr. Channell, Sr. to the Company of an
amount equal to the estimated $328,000 cash surrender value of this policy as
of the closing of the Offering, and the beneficiary under this policy will be
redesignated as Mr. Channell, Sr.'s wife, Jacqueline M. Channell. Thereafter,
the Company will continue to pay a portion of the premiums with respect to
this policy during Mr. Channell, Sr.'s lifetime.
During 1994, Mr. Channell, Sr. made a non-interest bearing loan of $100,000
to the Company, which loan was repaid in full as of March 31, 1996.
The Company engages Arthur Addis & Associates, the President of which is
Arthur L. Addis, a director of the Company, to provide management consulting
services to the Company. For these services, the Company paid this firm a fee
of $91,000, $92,000 and $60,000 in 1993, 1994 and 1995, respectively. The
Company currently pays this firm an annual retainer fee of $60,000, payable
monthly. The Company believes that the fees paid to Arthur Addis & Associates
are fair and reasonable to the Company.
Edmund M. Kaufman, who has agreed to serve on the Company's Board of
Directors commencing immediately following the closing of the Offering, is the
President of Edmund M. Kaufman Professional Corporation, which is a partner of
the law firm Irell & Manella LLP. Such law firm (including Mr. Kaufman) has
acted as counsel to the Company in connection with the Offering and is
expected to continue to represent the Company following the Offering, for
which such law firm will receive customary fees and expense reimbursement.
44
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Pursuant to the terms of the Company's Restated Certificate of
Incorporation, the Company's authorized capital stock consists of 19,000,000
shares of Common Stock, $.01 par value per share, and 1,000,000 shares of
Preferred Stock, $.01 par value per share. The following description of the
Company's capital stock does not purport to be complete or to give full effect
to the provisions of statutory or common law and is in all respects qualified
by reference to the applicable provisions of the Company's Restated
Certificate of Incorporation.
COMMON STOCK
Immediately prior to the closing of the Offering, the Company's issued and
outstanding capital stock will consist of 6,137,000 shares of Common Stock
owned by four stockholders, all of whom are members of, or are controlled by
members of, the Channell family.
The holders of Common Stock are entitled to one vote for each share held.
Shares of Common Stock may not be voted cumulatively. All holders of Common
Stock are entitled to receive such dividends, if any, as may be declared from
time to time by the Company's Board of Directors in its discretion from funds
legally available therefor, and upon liquidation or dissolution are entitled
to receive all assets available for distribution to the stockholders, in each
case subject to the preferences that may be applicable to any outstanding
Preferred Stock. The Common Stock has no preemptive, redemption, sinking fund,
conversion or other subscription rights. All of the outstanding shares of
Common Stock are, and the shares of Common Stock offered by the Company in the
Offering will be, when issued and paid for, fully paid and nonassessable. The
rights, preferences and privileges of holders of Common Stock are subject to,
and may be adversely affected by, the rights of the holders of shares of any
series of Preferred Stock that the Company may designate and issue in the
future.
PREFERRED STOCK
There are currently no shares of the Company's Preferred Stock outstanding.
The Company's Board of Directors is authorized to issue from time to time up
to 1,000,000 shares of Preferred Stock in one or more series, to determine the
rights, preferences, privileges and restrictions with respect thereto and to
fix the number and designation of shares constituting any series, in each case
without further stockholder approval. The issuance of shares of Preferred
Stock, while potentially providing desirable flexibility in connection with
possible acquisitions or other corporate purposes, could have the effect of
making it more difficult for a third party to acquire control of the Company.
The Company has no present intention to issues shares of Preferred Stock.
ELECTION OF DIRECTORS; STAGGERED BOARD
Pursuant to the Company's Restated Certificate of Incorporation, the
Company's Board of Directors is staggered into three classes. At each annual
meeting of stockholders, the directors in a single class will be elected to
serve as directors for a term of three years. Following the closing of the
Offering, the Company expects that the Board of Directors will be comprised of
six members. The initial assignment of existing and prospective directors to
classes is indicated above under "Management--Executive Officers and
Directors."
DELAWARE LAW AND CERTAIN CHARTER AND BYLAW PROVISIONS
The Company is a Delaware corporation and subject to Section 203 of the
Delaware General Corporation Law (the "Delaware Law"), an anti-takeover law.
In general, Section 203 of the Delaware Law prevents an "interested
stockholder" (defined generally as a person owning 15% or more of a
corporation's outstanding voting stock) from engaging in a "business
combination" (as defined) with a Delaware corporation for three years
following the date such person became an interested stockholder, subject to
certain exceptions such as the approval of the board of directors and of the
holders of at least two-thirds of the outstanding shares of voting stock not
owned by the interested stockholder. The existence of this provision would be
expected to have the effect of discouraging takeover attempts, including
attempts that might result in a premium over the market price for the shares
of Common Stock held by stockholders.
45
<PAGE>
In addition, pursuant to the Company's Restated Certificate of Incorporation
and Bylaws, (i) any action required or permitted to be taken by the Company's
stockholders may be taken only at a duly called annual or special meeting of
the stockholders, rather than by written consent of the stockholders, (ii) a
special meeting of the Company's stockholders may only be called by the
Company's Board of Directors, Chairman of the Board or Chief Executive
Officer, (iii) the Company's stockholders must comply with certain advance
notice procedures with regard to the nomination of candidates for election as
directors or for stockholder proposals to be submitted at stockholder
meetings, and (iv) directors of the Company may only be removed for cause and
only by the affirmative vote of 75% of the voting power of the Company or a
majority of the Board of Directors. Such provisions could have the effect of
making it more difficult for a third party to effect a change in the control
of the Board of Directors and therefore may discourage another person or
entity from making a tender offer for the Company's Common Stock, including
offers at a premium over the market price of the Common Stock, and might
result in a delay in changes in control of management. In addition, these
provisions could have the effect of making it more difficult for proposals
favored by the stockholders to be presented for stockholder consideration.
The Company has also included in its Restated Certificate of Incorporation
provisions to eliminate the personal liability of its directors for monetary
damages resulting from breaches of their fiduciary duty to the extent
permitted by the Delaware Law and to indemnify its directors and officers to
the fullest extent permitted by Section 145 of the Delaware Law. The Company
has also entered into indemnity agreements with each of its executive officers
and directors providing, among other things, that the executive officer or
director shall be indemnified to the fullest extent permitted by applicable
law.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is Boston
Equiserve L.P., a joint venture of the First National Bank of Boston, N.A. and
State Street Bank.
46
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have 8,837,000 shares of
Common Stock outstanding. Of these shares, the 3,100,000 shares being offered
hereby (3,565,000 shares if the Underwriters' over-allotment option is
exercised in full) will be freely tradeable under the Securities Act, subject
to observance of the volume limitations described below in the case of shares
beneficially owned by "affiliates" of the Company.
The remaining 5,737,000 shares of Common Stock outstanding (5,272,000 shares
if the Underwriters' over-allotment option is exercised in full) are
"restricted securities" within the meaning of Rule 144 under the Securities
Act ("Restricted Shares"). Restricted Shares may be sold in the public market
only if registered or if they qualify for an exemption from registration under
the Securities Act, including Rule 144 promulgated thereunder, which is
summarized below. Sales of unrestricted shares or the Restricted Shares in the
public market could adversely affect the market price of the Common Stock.
The Company and each of the Channell Family Trust, William H. Channell, Jr.,
Carrie S. Rouveyrol and the Taylor Family Trust have entered into contractual
"lock-up" agreements with the Representatives of the Underwriters providing
that, except for shares sold pursuant to the Offering, they will not offer,
sell, contract to sell or otherwise dispose of the shares of Common Stock of
the Company owned by them for a period of 180 days after the effective date of
the Offering without the prior written consent of Schroder Wertheim & Co.
Incorporated, subject to certain exceptions. Following the 180-day lock-up
period, 5,737,000 shares (5,272,000 shares if the Underwriters' over-allotment
option is exercised in full) will be eligible for sale in the public market
pursuant to Rule 144 or other exemptions from the registration requirements of
the Securities Act. Shares eligible to be sold by affiliates pursuant to Rule
144 are subject to the volume restrictions described below. In general, under
Rule 144, a holder who is an "affiliate" of the Company will be able sell,
without registration under the Securities Act, within any three-month period,
a number of shares of Common Stock that does not exceed the greater of 1% of
the total number of outstanding shares of Common Stock or the average weekly
trading volume during the four calendar weeks preceding the sale. These volume
limits will not apply to a sale by a non-affiliate who has held his or her
stock for more than three years or to any sale that is registered under the
Securities Act. Ms. Rouveyrol and the Taylor Family Trust have agreed that,
during the two-year period following the date of this Prospectus, unless
otherwise permitted by the Representatives, any sales of shares of Common
Stock by them will be subject to the volume limitations of Rule 144 of the
Securities Act, without regard to whether they are otherwise legally obligated
to comply with such limitations. See "Underwriting."
47
<PAGE>
UNDERWRITING
The Underwriters named below have severally agreed, subject to certain
conditions, to purchase from the Company and the Selling Stockholder the
aggregate number of shares of Common Stock set forth opposite their respective
names.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
<S> <C>
Schroder Wertheim & Co. Incorporated............................
Smith Barney Inc. ..............................................
-------
Total.........................................................
=======
</TABLE>
The Underwriting Agreement provides that the Underwriters are obligated to
purchase all the 3,100,000 shares of Common Stock offered hereby, if any are
purchased. Schroder Wertheim & Co. Incorporated and Smith Barney Inc., as
representatives (the "Representatives") of the several Underwriters, have
advised the Company and the Selling Stockholder that the Underwriters propose
to offer the shares to the public initially at the public offering price set
forth on the cover page of this Prospectus; that the Underwriters propose
initially to offer a concession not in excess of $ per share to certain
dealers, including the Underwriters; that the Underwriters and such dealers
may initially allow a discount not in excess of $ per share to other
dealers; and that the initial public offering price and the concession and
discount to dealers may be changed by the Representatives after the Offering.
The Selling Stockholder has granted to the Underwriters an option, expiring
at the close of business on the 30th day after the date of the Underwriting
Agreement, to purchase up to an additional 465,000 shares of Common Stock, at
the initial public offering price less underwriting discounts and commissions,
all as set forth on the cover page of this Prospectus. The Underwriters may
exercise the option only to cover over-allotments, if any, in the sale of
shares of Common Stock in the Offering. To the extent that the Underwriters
exercise this option, each Underwriter will be committed, subject to certain
conditions, to purchase a number of the additional shares proportionate to
such Underwriter's initial commitment.
The Company and each of the Channell Family Trust, William H. Channell, Jr.,
Carrie S. Rouveyrol and the Taylor Family Trust have agreed not to offer to
sell, grant any option to purchase or otherwise dispose of any shares of
Common Stock held by them for a period of 180 days after the date of this
Prospectus without the prior written consent of Schroder Wertheim & Co.
Incorporated, subject to certain exceptions. In addition, Ms. Rouveyrol and
the Taylor Family Trust have agreed that, during the two-year period following
the date of this Prospectus, unless otherwise permitted by the
Representatives, any sales of shares of Common Stock by them will be subject
to the volume limitations of Rule 144 of the Securities Act, without regard to
whether they are otherwise legally obligated to comply with such limitations.
The Representatives have informed the Company that the Underwriters do not
intend to confirm sales to accounts over which they exercise discretionary
authority.
The Common Stock has been approved for quotation and trading on the Nasdaq
National Market under the symbol "CHNL."
Prior to the Offering, there has been no public market for the Company's
Common Stock. The initial public offering price will be negotiated between the
Company and the Representatives. Among the factors to be considered in
determining the initial public offering price, in addition to prevailing
market conditions, will be
48
<PAGE>
the Company's historical performance, estimates of the business potential and
earnings prospects of the Company, an assessment of the Company's management
and the consideration of the above factors in relation to market valuation of
companies in related businesses.
The Company, the Selling Stockholder and the Underwriters have agreed to
indemnify each other against certain liabilities, including liabilities under
the Securities Act.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for the
Company by the law firm of Irell & Manella LLP, Los Angeles, California, and
certain legal matters will be passed upon for the Underwriters by the law firm
of Troop Meisinger Steuber & Pasich LLP, Los Angeles, California. Edmund M.
Kaufman, who has agreed to serve on the Company's Board of Directors
commencing immediately following the Offering, is the President of Edmund M.
Kaufman Professional Corporation, which is a partner of the law firm Irell &
Manella LLP.
EXPERTS
The financial statements of the Company as of December 31, 1994 and December
31, 1995, and for each of the three years in the period ended December 31,
1995, have been included herein and in the Registration Statement of which
this Prospectus is a part in reliance upon the reports of Grant Thornton LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company intends to furnish its stockholders with annual reports
containing financial statements audited by its independent public accountants
and quarterly reports containing unaudited financial information for each of
the first three quarters of each fiscal year.
49
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Certified Public Accountants........................ F-2
Balance Sheets as of December 31, 1994, December 31, 1995 and March 31,
1996 (unaudited)......................................................... F-3
Statements of Income for the years ended December 31, 1993, December 31,
1994 and December 31, 1995 and for the three months ended March 31, 1995
and 1996 (unaudited)..................................................... F-4
Statements of Stockholders' Equity for the years ended December 31, 1993,
December 31, 1994 and December 31, 1995 and for the three months ended
March 31, 1996 (unaudited)............................................... F-5
Statements of Cash Flows for the years ended December 31, 1993, December
31, 1994 and December 31, 1995 and for the three months ended March 31,
1995 and 1996 (unaudited)................................................ F-6
Notes to Financial Statements............................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Channell Commercial Corporation
We have audited the accompanying balance sheets of Channell Commercial
Corporation as of December 31, 1994 and 1995, and the related statements of
income, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Channell Commercial
Corporation as of December 31, 1994 and 1995, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting
principles.
GRANT THORNTON LLP
Los Angeles, California
May 9, 1996 (except for Notes N and O as to
which the date is June 14, 1996)
F-2
<PAGE>
CHANNELL COMMERCIAL CORPORATION
BALANCE SHEETS
(amounts in thousands, except share and per share data)
<TABLE>
<CAPTION>
UNAUDITED
DECEMBER 31, MARCH 31, 1996
--------------- ------------------
PRO
FORMA
(NOTE
1994 1995 HISTORICAL B)
------- ------- ---------- -------
ASSETS
<S> <C> <C> <C> <C>
CURRENT ASSETS
Cash..................................... $ 797 $ 1,375 $ 390 $ 390
Accounts receivable (Note F)............. 4,358 4,122 6,688 6,688
Accounts receivable--related party....... -- -- -- 56
Inventories (Notes C and F).............. 2,605 2,609 2,584 2,584
Deferred income taxes.................... -- -- -- 146
Prepaid expenses......................... 333 396 342 342
------- ------- ------- -------
Total current assets................... 8,093 8,502 10,004 10,206
PROPERTY AND EQUIPMENT, at cost, net
(Notes D and F)........................... 9,314 10,062 10,132 10,132
DEFERRED INCOME TAXES...................... -- -- -- 672
OTHER ASSETS............................... 544 539 519 519
------- ------- ------- -------
TOTAL ASSETS............................. $17,951 $19,103 $20,655 $21,529
======= ======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
CURRENT LIABILITIES
Accounts payable......................... $ 1,303 $ 1,251 $ 2,555 $ 2,555
Accrued expenses......................... 1,046 972 773 773
Accrued license fees--related party
(Note J)................................ 394 471 475 --
Current maturities of long-term
obligations (Note F).................... 848 860 832 832
Distributions payable to stockholders.... 1,795 674 706 16,306
Income taxes payable..................... 312 49 -- --
------- ------- ------- -------
Total current liabilities.............. 5,698 4,277 5,341 20,466
LONG-TERM OBLIGATIONS (Note F)............. 2,836 2,353 2,051 2,051
STOCKHOLDERS' EQUITY (DEFICIT) (Note N)
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 61
Additional paid-in capital............... 26 26 26 (2,543)
Retained earnings........................ 9,330 12,386 13,176 1,494
------- ------- ------- -------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT)..... 9,417 12,473 13,263 (988)
------- ------- ------- -------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY.................................. $17,951 $19,103 $20,655 $21,529
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
CHANNELL COMMERCIAL CORPORATION
STATEMENTS OF INCOME
(amounts in thousands, except per share data)
<TABLE>
<CAPTION>
UNAUDITED
THREE MONTHS
YEARS ENDED DECEMBER ENDED
31, MARCH 31,
----------------------- --------------
1993 1994 1995 1995 1996
------- ------- ------- ------ -------
<S> <C> <C> <C> <C> <C>
Net sales............................... $23,713 $34,504 $40,972 $9,225 $10,279
Cost of goods sold...................... 14,834 19,750 23,059 5,487 5,738
------- ------- ------- ------ -------
Gross profit........................ 8,879 14,754 17,913 3,738 4,541
Commission income....................... 686 904 1,098 262 230
------- ------- ------- ------ -------
9,565 15,658 19,011 4,000 4,771
Operating expenses
Selling................................ 3,767 4,952 5,600 1,339 1,553
General and administrative............. 1,100 1,445 1,707 448 370
License fees--related party (Note J)... 1,039 1,560 2,035 458 531
Research and development............... 486 518 498 122 128
------- ------- ------- ------ -------
6,392 8,475 9,840 2,367 2,582
------- ------- ------- ------ -------
Income from operations.............. 3,173 7,183 9,171 1,633 2,189
Interest expense........................ 166 156 339 90 65
------- ------- ------- ------ -------
Income before income taxes.......... 3,007 7,027 8,832 1,543 2,124
Income taxes (Note G)................... 69 429 349 61 122
------- ------- ------- ------ -------
Net income.......................... $ 2,938 $ 6,598 $ 8,483 $1,482 $ 2,002
======= ======= ======= ====== =======
PRO FORMA INFORMATION (UNAUDITED) (Note
B):
Historical income before income taxes.. $ 3,007 $ 7,027 $ 8,832 $1,543 $ 2,124
Pro forma income taxes................. 1,191 2,898 3,455 616 845
------- ------- ------- ------ -------
Pro forma net income................... $ 1,816 $ 4,129 $ 5,377 $ 927 $ 1,279
======= ======= ======= ====== =======
Pro forma net income per share......... $ 0.72 $ 0.17
======= =======
Pro forma weighted average shares
outstanding........................... 7,451 7,451
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
CHANNELL COMMERCIAL CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND THE THREE MONTHS ENDED MARCH 31, 1996 (UNAUDITED)
(amounts in thousands)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS
------ ---------- --------
<S> <C> <C> <C>
Balance, January 1, 1993............................ $61 $26 $ 4,904
Net income.......................................... -- -- 2,938
Dividends declared ($0.17 per share)................ -- -- (1,048)
--- --- -------
Balance, December 31, 1993.......................... 61 26 6,794
Net income.......................................... -- -- 6,598
Liquidating dividend--Canadian corporation.......... -- -- (298)
Dividends declared ($0.61 per share)................ -- -- (3,764)
--- --- -------
Balance, December 31, 1994.......................... 61 26 9,330
Net income.......................................... -- -- 8,483
Dividends declared ($0.88 per share)................ -- -- (5,427)
--- --- -------
Balance, December 31, 1995.......................... 61 26 12,386
Dividends declared ($0.20 per share)................ -- -- (1,212)
Net income (unaudited).............................. -- -- 2,002
--- --- -------
Balance, March 31, 1996 (unaudited)................. $61 $26 $13,176
=== === =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
CHANNELL COMMERCIAL CORPORATION
STATEMENTS OF CASH FLOWS
(amounts in thousands)
<TABLE>
<CAPTION>
UNAUDITED
THREE MONTHS
YEARS ENDED DECEMBER ENDED
31, MARCH 31,
------------------------- ----------------
1993 1994 1995 1995 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income...................... $ 2,938 $ 6,598 $ 8,483 $ 1,482 $ 2,002
Non-cash items included in net
income:
Depreciation and amortization.. 776 1,072 1,412 415 402
Disposal of unproductive
assets........................ 376 80 -- -- --
(Increase) decrease in assets:
Accounts receivable............ (596) (1,527) 236 (873) (2,566)
Inventories.................... (163) (709) (4) (710) 25
Prepaid expenses............... (43) (70) (63) 155 54
Other.......................... -- (8) 6 1 (80)
Increase (decrease) in
liabilities:
Accounts payable............... 385 25 (52) 1,120 1,304
Accrued expenses............... 550 436 3 (512) (195)
Income taxes payable........... (42) 304 (263) (353) (49)
------- ------- ------- ------- -------
Net cash provided by operating
activities....................... 4,181 6,201 9,758 725 897
------- ------- ------- ------- -------
INVESTING ACTIVITIES:
Acquisition of property and
equipment...................... (1,480) (5,851) (2,160) (1,030) (472)
Other........................... 5 (29) (1) -- --
------- ------- ------- ------- -------
Net cash used in investing
activities....................... (1,475) (5,880) (2,161) (1,030) (472)
------- ------- ------- ------- -------
FINANCING ACTIVITIES:
Liquidating dividend--Canadian
corporation.................... -- (298) -- -- --
Repayment of long-term
obligations.................... (1,691) (614) (877) (205) (230)
Dividends paid.................. (1,604) (1,969) (6,547) (515) (1,180)
Proceeds from issuance of long-
term debt...................... 194 3,279 405 800 --
------- ------- ------- ------- -------
Net cash (used in) provided by
financing activities............. (3,101) 398 (7,019) 80 (1,410)
------- ------- ------- ------- -------
(Decrease) increase in cash....... (395) 719 578 (225) (985)
Cash, beginning of period......... 473 78 797 797 1,375
------- ------- ------- ------- -------
Cash, end of period............... $ 78 $ 797 $ 1,375 $ 572 $ 390
======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
CHANNELL COMMERCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
NOTE A--DESCRIPTION OF BUSINESS
The Company is a designer, manufacturer and marketer of precision-molded
thermoplastic enclosures used by cable television operators and local
telephone companies.
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition--The Company recognizes revenue from product sales and
commission income at the time of shipment.
Cash--For purposes of reporting cash flows, cash and its equivalents include
cash on hand, cash in banks and short-term investments with original
maturities of 90 days or less.
Combination--The Company purchased substantially all of the assets of
Channell Commercial Canada Ltd. (CCCL) as of December 31, 1993. CCCL was
liquidated in 1994. The Canadian operations are continued by the Company as a
separate division. Prior to the combination, CCCL was owned by the majority
stockholder of the Company. For periods prior to the combination, the accounts
of CCCL have been included in the accompanying financial statements in a
manner similar to a pooling of interests.
Inventories--Inventories are stated at the lower of cost or market. Cost is
determined by the first-in, first-out method of accounting.
Depreciation and amortization--Property, equipment and improvements are
stated at cost. Depreciation is computed using the straight-line method over
the estimated useful lives of the assets. Capital lease assets are amortized
using the straight-line method over the useful life of the asset. Expenditures
for all maintenance and repairs are charged against income. Additions, major
renewals and replacements that increase the useful lives of assets are
capitalized. Amortization of leasehold improvements is computed using the
straight-line method over the shorter of the lease term or the estimated
useful life of the leasehold improvements.
Compensation for paid absences--The Company accrues its liability for
estimated employee compensation for future absences which are related to
services already provided. An estimated liability for future absences in the
amount of $351 and $450 is included with accrued expenses at December 31, 1994
and 1995, respectively.
Fair value of financial instruments--The carrying value of financial
instruments potentially subject to valuation risk (principally consisting of
cash, accounts receivable, accounts payable and long-term obligations)
approximate fair value.
Income taxes--Effective February 1, 1990, the Company and its stockholder
elected to be taxed under Section 1361 of the Internal Revenue Code as an "S"
Corporation. Under these provisions, the Company does not pay federal
corporate income taxes on its taxable income. Instead, the stockholders are
individually liable for federal income taxes based on the Company's taxable
income. This election is also valid for state income tax reporting; however, a
provision for state income taxes is required based on a 1.5% tax rate.
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.
F-7
<PAGE>
CHANNELL COMMERCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(amounts in thousands, except per share data)
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
New Accounting Standards--In March 1995, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of." Statement No. 121 provides specific guidance regarding when
impairment of long-lived assets such as plant, equipment and certain
intangibles, including goodwill, should be recognized and how impairment
losses of such assets should be measured. Statement No. 121 is effective for
fiscal years beginning after December 15, 1995. The Company has adopted
Statement No. 121 for 1996 and expects that the impact on its statements of
operations and financial position will not be material.
In October 1995, the Financial Accounting Standards Board issued Statement
No. 123, "Accounting for Stock-Based Compensation." Statement No. 123 permits
a company to choose either a new fair value based method of accounting for its
stock based compensation arrangements or to comply with the current APB
Opinion 25 intrinsic value based method, adding pro forma disclosures of net
income and income per share computed as if the fair valued based method had
been applied in the financial statements. Statement No. 123 is effective for
fiscal years beginning after December 15, 1995. The Company has chosen to
retain APB Opinion 25 and in 1996 will provide pro forma disclosures of net
income and income per share.
Unaudited financial statements--The balance sheet as of March 31, 1996 and
the related statements of income, stockholders' equity and cash flows for the
three months ended March 31, 1995 and 1996 were prepared from the Company's
books and records without audit. However, in the opinion of management, such
information includes all adjustments (consisting of normal accruals), which
are necessary to properly reflect the financial position at March 31, 1996 and
the results of operations and cash flows for the three months ended March 31,
1995 and 1996. The results of operations for the three months ended March 31,
1996 are not necessarily indicative of the results to be expected for the
year.
Pro forma financial information (unaudited)--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 March 31, 1996 balance sheet
presentation gives effect to (i) the termination of the Company's S
Corporation status, (ii) the effects of $12,500 of planned distributions to
stockholders, (iii) 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 will be paid initially through borrowings
under the Company's bank line and then repaid from the net proceeds of the
Company's proposed public offering of common stock, and (iv) 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 1,314 shares to be offered in the
contemplated public offering at an assumed price of $13.00 per share, the net
proceeds of which will be used to fund the distributions 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
contemplated public offering to repay approximately $2.9 million of bank
indebtedness outstanding as of March 31, 1996 has not been reflected in pro
forma net income or pro forma net income per share because the impact is not
material.
F-8
<PAGE>
CHANNELL COMMERCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(amounts in thousands, except per share data)
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--CONTINUED
A reconciliation of pro forma income taxes to the Federal statutory rate is
as follows:
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Federal statutory rate...................................... 34% 34% 34%
State income taxes, net of Federal tax benefit.............. 6 6 6
Other....................................................... -- 1 (1)
--- --- ---
40% 41% 39%
=== === ===
</TABLE>
Pro forma deferred income taxes as of March 31, 1996 result from temporary
differences in the financial statement and income tax basis of assets and
liabilities. The sources of these differences and the tax effect of each is as
follows:
<TABLE>
<S> <C>
Patents............................................................ $1,209
Accounts receivable................................................ 46
Inventory.......................................................... 100
Depreciation....................................................... (537)
------
$ 818
======
</TABLE>
The breakdown of such pro forma deferred income taxes between current and
non-current is as follows:
<TABLE>
<S> <C>
Current............................................................... $146
Non-current........................................................... 672
----
$818
====
</TABLE>
NOTE C--INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------- MARCH 31,
1994 1995 1996
------ ------ ---------
<S> <C> <C> <C>
Raw materials...................................... $ 513 $1,111 $1,094
Work-in-process.................................... 1,064 744 732
Finished goods..................................... 1,028 754 758
------ ------ ------
$2,605 $2,609 $2,584
====== ====== ======
</TABLE>
F-9
<PAGE>
CHANNELL COMMERCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(amounts in thousands, except per share data)
NOTE D--PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, ESTIMATED
---------------- USEFUL
1994 1995 LIVES
------- ------- -----------
<S> <C> <C> <C>
Machinery and equipment..................... $11,167 $12,889 3-10 years
Office furniture and equipment.............. 925 1,059 3- 7 years
Leasehold improvements...................... 1,866 1,893 15-20 years
Construction in progress.................... 714 930 --
------- -------
14,672 16,771
Less accumulated depreciation and amortiza-
tion....................................... (5,358) (6,709)
------- -------
$ 9,314 $10,062
======= =======
</TABLE>
NOTE E--LINE OF CREDIT
The Company has in place a $3,250 line of credit with a bank for working
capital purposes. This line of credit bears interest at the bank's reference
rate, payable monthly. The line of credit expires on May 31, 1996. The Company
is subject to various covenants identical to those described in Note F. No
balances were outstanding at December 31, 1994 and 1995. This line of credit is
collateralized by the equipment financed by the bank. The Company has
renegotiated its line of credit. See Note O.
NOTE F--LONG-TERM OBLIGATIONS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1994 1995
------ ------
<S> <C> <C>
Equipment line of credit with a bank, for equipment
acquisitions, collateralized by accounts receivable,
inventory, the equipment financed by the bank and
certain other items of personal property, with interest
at the bank's reference rate plus 0.5% (effective rate
at December 31, 1995 of 9.0%) payable $61 per month,
through 2000. This line allows borrowings up to $4,300
including standby letters of credit up to $500 (See
Note O)................................................ $2,564 $2,282
Non-revolving line of credit with a bank, allowing
borrowings up to $1,000, collateralized by accounts
receivable, inventory, the equipment financed by the
bank and certain other items of personal property, with
interest at the bank's reference rate plus 0.5%
(effective rate at December 31, 1995 of 9.0%) payable
$13 per month, due through 2000........................ 972 806
Notes payable to stockholder, due on demand............ 120 120
Other.................................................. 28 5
------ ------
3,684 3,213
Less current maturities................................ (848) (860)
------ ------
$2,836 $2,353
====== ======
</TABLE>
F-10
<PAGE>
CHANNELL COMMERCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(amounts in thousands, except per share data)
NOTE F--LONG-TERM OBLIGATIONS--CONTINUED
Maturities of long-term obligations are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
1996........................................................... $ 860
1997........................................................... 798
1998........................................................... 732
1999........................................................... 516
2000........................................................... 187
Thereafter...................................................... 120
------
$3,213
======
</TABLE>
The lines of credit contain various financial and operating covenants which,
among other things, impose certain limitations on the Company's ability to
incur additional indebtedness, merge or consolidate, sell its assets, make
certain investments or, under certain circumstances, pay dividends. The
Company is also required to comply with covenants related to tangible net
worth and other financial ratios.
NOTE G--INCOME TAXES
The Company and its stockholders have elected to be taxed as an "S"
Corporation. Accordingly, the Company does not pay federal corporate income
taxes.
The components of income taxes are as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
----------------
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
State.................................................... $ 68 $116 $130
Research and development credit......................... (3) (9) (8)
Manufacturer's credit................................... -- -- (86)
---- ---- ----
Total state taxes....................................... 65 107 36
Canadian................................................. 4 322 313
---- ---- ----
$ 69 $429 $349
==== ==== ====
</TABLE>
Income taxes include the state corporate franchise tax for California and
the Canadian tax imposed on the taxable income of the Company's Canadian
operations. The actual state tax provision differs from the expected statutory
tax due to non-deductible entertainment expense and officers' life insurance
premiums.
Temporary differences between financial statement and income tax reporting
are due to the accounting for doubtful accounts, accrued license fees and
depreciation. The effect of these temporary differences on the Company's
balance sheet is not material.
F-11
<PAGE>
CHANNELL COMMERCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(amounts in thousands, except per share data)
NOTE H--RETIREMENT PLANS
Eligible employees of the Company are included in a profit-sharing plan.
Annual contributions by the Company to this plan are discretionary and will
not exceed that allowable for Federal income tax purposes. The accompanying
statements of income include expenses of $150, $150 and $198 which have been
accrued for the plan for the years ended December 31, 1993, December 31, 1994
and December 31, 1995, respectively.
During 1993, the Company established an additional retirement plan in
accordance with section 401(k) of the Internal Revenue Code. Under the terms
of this plan, eligible employees may make voluntary contributions to the
extent allowable by law. The Company is under no obligation and has not made
contributions on behalf of employees to this plan.
NOTE I--CASH FLOW INFORMATION
Supplemental disclosure of cash flow information is as follows:
<TABLE>
<CAPTION>
THREE
MONTHS
YEARS ENDED ENDED
DECEMBER 31, MARCH 31,
-------------- ---------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Interest paid..................................... $151 $191 $352 $94 $69
Income taxes paid................................. 128 100 957 387 171
</TABLE>
NOTE J--RELATED PARTY TRANSACTIONS
Under the terms of exclusive licensing agreements, Mr. Channell, Sr.
received payments for the use of certain patents or pending patents. These
payments are based on the sale of products. Operations have been charged with
$1,039, $1,560 and $2,035 for the years ended December 31, 1993, 1994 and
1995, respectively. See note B concerning contemplated transactions to
terminate these agreements in connection with the contemplated public offering
of the Company's Common Stock.
The Company leases its facilities under an operating lease with Mr.
Channell, Sr. Rentals paid for the years ended December 31, 1993, 1994 and
1995 were $650 each year.
The following is a schedule of future minimum rental payments, exclusive of
property taxes and insurance:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
1996............................................................... $ 650
1997............................................................... 650
1998............................................................... 650
1999............................................................... 650
2000............................................................... 650
Thereafter.......................................................... 3,250
------
$6,500
======
</TABLE>
F-12
<PAGE>
CHANNELL COMMERCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(amounts in thousands, except per share data)
NOTE K--COMMITMENTS
The Company is obligated under the terms of several non-cancelable operating
leases with third parties for its facilities, sales fleet and shipping
trailer. Expense for the periods ended December 31, 1993, 1994 and 1995 was
$118, $194 and $227, respectively.
The following is a schedule of future minimum rental payments:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
1996............................................................ $100
1997............................................................ 58
1998............................................................ 16
----
$174
====
</TABLE>
In March, 1996 the Company entered into an agreement to lease certain
computer equipment and software in an amount up to $988. Lease terms commence
in April 1996 and will extend for a three year period. The leases will be
accounted for as capital leases.
NOTE L--CREDIT CONCENTRATIONS AND MAJOR CUSTOMERS
The Company maintains the majority of its cash balances in one financial
institution located in California which, at times, may exceed federally
insured limits. The Company has not experienced any losses in such accounts
and believes it is not exposed to any significant credit risk on cash and cash
equivalents.
One customer made up 15.5%, 18.1% and 17.5% of sales in 1993, 1994 and 1995,
respectively. In 1995, another customer made up 15.6% 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.
NOTE M--EXPORT NET SALES
The Company's export net sales are as follows:
<TABLE>
<CAPTION>
YEARS
ENDED DECEMBER 31,
--------------------
1993 1994 1995
------ ------ ------
<S> <C> <C> <C>
Canada.............................................. $1,712 $3,799 $3,717
Other............................................... 1,692 758 2,354
------ ------ ------
$3,404 $4,557 $6,071
====== ====== ======
</TABLE>
F-13
<PAGE>
CHANNELL COMMERCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(amounts in thousands, except per share data)
NOTE N--REORGANIZATION
Effective June 14, 1996, as part of a proposed public offering of the
Company's common stock, the Company was merged into a newly formed
corporation, with the newly formed corporation being the surviving entity
while retaining the same name as the predecessor. As part of the merger, the
predecessor's existing stockholders will be issued 12.274 shares of the newly
formed corporation's common stock in exchange for each outstanding share of
the predecessor's common stock. This exchange has been accounted for as a
reorganization and the number of outstanding shares has been restated on a
retroactive basis similar to a stock split.
NOTE O--SUBSEQUENT EVENT
Effective May 30, 1996, the Company renegotiated its lines of credit for
working capital purposes and equipment, which now provide for advances of up
to $3,500 and $4,800, respectively, available through May 1, 1997, and
interest rates equal to the bank's reference rate in the case of the working
capital line and the bank's reference rate plus 0.25% in the case of the
equipment line. Such lines of credit are collateralized by the equipment
financed by the bank.
F-14
<PAGE>
GLOSSARY OF TERMS
ADSL (Asymmetric Digital Subscriber Line): A standard allowing digital
broadband signals and standard telephone service to be transmitted up to
12,000 feet over a twisted copper pair.
Broadband: Transmission rates in excess of 1.544 mega bits per second
typically deployed for delivery of high speed data, video and voice services.
Cable Modem: Electronic transmission device placed on the CATV network,
located at end user locations, providing two-way, high-speed data service
capability including internet access for subscribers.
CATV (Community Antenna TV, commonly called cable television): A system for
distributing television programming by a cable network rather than by
broadcasting electromagnetic radiation.
Coaxial Cable: The most commonly used means of transmitting cable television
signals. It consists of a cylindrical outer conductor (shield) surrounding a
center conductor held concentrically in place by an insulating material.
DLC (Digital Loop Carrier): Telecommunications transmission technology which
multiplexes multiple individual voice circuits onto copper or fiber cables.
Fiber Node: Refers to the equipment that terminates the fiber cables
originating from the host digital terminal. This network element converts the
optical signals to their coax electrical, RF equivalents. Synonymous with
optical network interface (ONI).
Fiber Optics: The process of transmitting infrared and visible light
frequencies through a low-loss glass fiber with a transmitting laser or LED
and a photo diode receiver.
FTTC (Fiber-To-The-Curb): In a long distance network consisting of fiber
optics, fiber-to-the-curb refers to the fiber optics running from the
distribution plant to the curb, at which point copper is used for the curb-to-
home connection.
HDSL (High bit rate Digital Subscriber Line): By using sophisticated coding
techniques, a large amount of information may be transmitted over copper. The
HDSL scheme uses such coding over four copper wires and is primarily intended
for high capacity bidirectional 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.
Sealed Plant: An industry term referring to the environmental protection
devices built into access and termination products deployed in the outside
plant portion of the telecommunications network.
G-1
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING MADE HEREBY AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITY
OTHER THAN THE SECURITIES COVERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN
OFFER OR SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH AN OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATES AS OF WHICH INFORMATION IS FURNISHED OR THE DATE HEREOF.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 8
Reorganization and Termination
of S Corporation Status.................................................. 14
Use of Proceeds........................................................... 16
Dividend Policy........................................................... 16
Capitalization............................................................ 17
Dilution.................................................................. 18
Selected Historical, Pro Forma and Other Financial Information............ 19
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 21
Business.................................................................. 28
Management................................................................ 37
Principal and Selling Stockholders........................................ 43
Certain Transactions...................................................... 44
Description of Capital Stock.............................................. 45
Shares Eligible for Future Sale........................................... 47
Underwriting.............................................................. 48
Legal Matters............................................................. 49
Experts................................................................... 49
Available Information..................................................... 49
Index to Financial Statements............................................. F-1
Glossary of Terms......................................................... G-1
</TABLE>
---------------
UNTIL (25 DAYS AFTER THE DATE HEREOF), ALL DEALERS EFFECTING
TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
3,100,000 SHARES
[LOGO OF CHANNELL COMMERCIAL CORPORATION]
COMMON STOCK
($.01 PAR VALUE)
SCHRODER WERTHEIM & CO.
SMITH BARNEY INC.
, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the expenses payable in connection with the
offering of the securities to be registered and offered hereby. All of such
expenses are estimates, other than the registration fee payable to the
Securities and Exchange Commission and to the National Association of
Securities Dealers, Inc., and all such expenses will be paid by the Company.
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee............. $ 17,211
NASD Fee........................................................ 5,491
Nasdaq National Market Listing Fees............................. 39,600
Blue Sky Fees................................................... 15,000
Printing and Engraving Expenses................................. 125,000
Legal Fees and Expenses......................................... 245,000
Accounting Fees and Expenses.................................... 150,000
Miscellaneous................................................... 2,698
--------
Total......................................................... $600,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the General Corporation Law of Delaware ("GCL") empowers a
corporation to indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative, by
reason of the fact that he or she is or was a director, officer, employee or
agent of the corporation or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation
or enterprise. Depending on the character of the proceeding, a corporation may
indemnify against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred in connection with
such action, suit or proceeding if the person indemnified acted in good faith
and in a manner he or she reasonably believed to be in or not opposed to the
best interest of the corporation, and, with respect to any criminal action or
proceeding, had no cause to believe his or her conduct was unlawful. In the
case of any action by or in the right of the corporation, no indemnification
may be made in respect to any claim, issue or matter as to which such person
shall have been adjudged to be liable for negligence or misconduct in the
performance of his or her duty to the corporation unless and only to the
extent that the Court of Chancery or the court in which such action or suit
was brought shall determine that despite the adjudication of liability such
person is fairly and reasonably entitled to indemnity for such expenses which
the court shall deem proper. Section 145 further provides that to the extent a
director or officer of a corporation has been successful in the defense of any
action, suit or proceeding referred to above or in the defense of any claim,
issue or matter therein, he or she shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by him or her in
connection therewith.
The Restated Certificate of Incorporation and Bylaws of the Company provide,
in effect, that to the extent and under the circumstances permitted by Section
145 of the GCL and subject to certain conditions, the Company shall indemnify
any person who was or is a party or is threatened to be made a party to or is
involved in any action, suit or proceeding of the type described above by
reason of the fact that he or she is or was a director or officer of the
Company, or is or was serving at the request of the Company as a director,
officer, employee or agent of the Company. The Company has also entered into
indemnity agreements with each of its directors and executive officers
providing, among other things, that the executive officer or director shall be
indemnified to the fullest extent permitted by applicable law.
The Company's Restated Certificate of Incorporation currently provides that,
to the fullest extent permitted by applicable law, a director of the Company
shall not be personally liable to the Company or its stockholders for monetary
damages for breach of fiduciary duty as a director.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
None.
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement(1)
3.1 Restated Certificate of Incorporation of the Company(1)
3.2 Bylaws of the Company(1)
4 Form of Common Stock Certificate(1)
5 Opinion of Irell & Manella LLP(1)
10.1 Form of 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)
10.4 Business Loan Agreement dated as of April 19, 1995 between the Company
and Bank of America, as amended(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 Form of Employment Agreement between the Company and William H.
Channell, Sr.(1)
10.9 Form of Employment Agreement between the Company and William H.
Channell, Jr.(1)
10.10 Channell Commercial Corporation 1996 Performance-Based Annual
Incentive Compensation Plan(1)
10.11 Lease dated December 22, 1989 between the Company and William H.
Channell, Sr., as amended(1)
10.12 Lease dated May 29, 1996 between the Company and the Channell Family
Trust(1)
10.13 Lease dated May 17, 1994 between the Company and the Z. Paul Akian and
Sonia Akian Family Trust(1)
10.14 Lease dated March 1, 1994 between the Company and Allstate Life
Insurance Company(1)
10.15 Lease dated November 2, 1989 between the Company and Meadowvale Court
Property Management Ltd., as amended(1)
10.16 Lease Agreement dated as of March 1, 1996 between Winthrop Resources
Corp. and the Company(1)
10.17 Form of Indemnity Agreement(1)
10.18 Form of Agreement Regarding Intellectual Property(1)
10.19 401(k) Plan of the Company(1)
21 Subsidiaries of the Registrant: None
23.1 Consent of Irell & Manella LLP (included in Exhibit 5)
23.2 Consent of Grant Thornton LLP(1)
23.3 Consent of Houlihan, Lokey, Howard & Zukin, Inc.(1)
27 Financial Data Schedule(2)
99 Opinion Letter of Houlihan, Lokey, Howard & Zukin, Inc.(1)
99.1 Consent of Eugene R. Schutt, Jr.(2)
99.2 Consent of Edmund M. Kaufman(2)
</TABLE>
- --------
(1) Previously filed.
(2) Filed herewith.
II-2
<PAGE>
ITEM 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
registration in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective;
(2) For purposes of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the items listed in item 14 hereof, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 2 to Form S-1 Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Temecula, State of California, on June 26, 1996.
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 Act of 1933, this Amendment
No. 2 to Form S-1 Registration Statement has been signed by the following
persons in the capacities indicated below as of June 26, 1996.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C> <C>
/s/ William H. Channell, Sr. Chairman of the Board and
____________________________________ Chief Executive Officer
William H. Channell, Sr. (Principal Executive
Officer)
* President and Director
____________________________________
William H. Channell, Jr.
* Chief Financial Officer
____________________________________ (Principal Financial and
Gary W. Baker Accounting Officer)
* Secretary and Director
____________________________________
Jacqueline M. Channell
* Director
____________________________________
Arthur L. Addis
*By /s/ William H. Channell, Sr. Director
____________________________________
William H. Channell, Sr.
Attorney-in-fact
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------- ----------- ------------
<C> <S> <C>
27 Financial Data Schedule
99.1 Consent of Eugene R. Schutt, Jr.
99.2 Consent of Edmund M. Kaufman
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS & NOTES THERETO CONTAIN IN THE COMPANY'S REGISTRATION STATEMENT ON
FORM S-1 FILED ON MAY 13, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1995
<PERIOD-START> JAN-01-1996 JAN-01-1995
<PERIOD-END> MAR-31-1996 DEC-31-1995
<CASH> 390 1,375
<SECURITIES> 0 0
<RECEIVABLES> 6,688 4,122
<ALLOWANCES> 0 0
<INVENTORY> 2,584 2,609
<CURRENT-ASSETS> 10,004 8,502
<PP&E> 10,132 10,062
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 20,655 19,103
<CURRENT-LIABILITIES> 5,341 4,277
<BONDS> 0 0
0 0
0 0
<COMMON> 61 61
<OTHER-SE> 13,202 12,412
<TOTAL-LIABILITY-AND-EQUITY> 20,655 19,103
<SALES> 10,279 40,972
<TOTAL-REVENUES> 0 0
<CGS> 5,738 23,059
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 65 339
<INCOME-PRETAX> 2,124 8,832
<INCOME-TAX> 122 349
<INCOME-CONTINUING> 2,002 8,483
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,002 8,483
<EPS-PRIMARY> .17 .72
<EPS-DILUTED> .17 .72
</TABLE>
<PAGE>
EXHIBIT 99.1
To the Board of Directors of
Channell Commercial Corporation:
I hereby agree to serve as a director of Channell Commercial Corporation, a
Delaware corporation (the "Company"), commencing immediately following the
closing of the initial public offering of the Company's common stock pursuant to
the Company's Registration Statement on Form S-1 (File No. 333-3621), and I
consent to the use of my name as a prospective director of the Company in such
Registration Statement under the captions "Management" and "Principal and
Selling Stockholders."
/s/ Eugene R. Schutt, Jr.
-------------------------------
Eugene R. Schutt, Jr.
Dated: June 25, 1996
<PAGE>
EXHIBIT 99.2
To the Board of Directors of
Channell Commercial Corporation:
I hereby agree to serve as a director of Channell Commercial Corporation, a
Delaware corporation (the "Company"), commencing immediately following the
closing of the initial public offering of the Company's common stock pursuant to
the Company's Registration Statement on Form S-1 (File No. 333-3621), and I
consent to the use of my name as a prospective director of the Company in such
Registration Statement under the captions "Management" and "Principal and
Selling Stockholders."
/s/ Edmund M. Kaufman
-------------------------------
Edmund M. Kaufman
Dated: June 25, 1996
