<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to ______________
Commission File No. 0-28582
-------
CHANNELL COMMERCIAL CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
95-2453261
(I.R.S. Employer Identification No.)
26040 Ynez Road, Temecula, California
(Address of principal executive offices)
92591
(Zip Code)
(909) 694-9160
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes __ X__ No _____
9,127,000 shares of common stock of the Registrant were outstanding at
September 30, 1998.
<PAGE>
CHANNELL COMMERCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Nine months ended Three months ended
September 30, September 30,
---------------------- ---------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 65,971 $ 43,821 $ 27,159 $ 15,353
Cost of goods sold 39,327 25,274 16,550 8,954
--------- --------- --------- ---------
Gross profit 26,644 18,547 10,609 6,399
Commission income 104 498 2 162
--------- --------- --------- ---------
26,748 19,045 10,611 6,561
Operating expenses
Selling 7,640 5,283 2,742 1,712
General and administrative 6,549 3,221 2,878 973
Research and development 1,426 679 531 206
--------- --------- --------- ---------
15,615 9,183 6,151 2,891
--------- --------- --------- ---------
Income from operations 11,133 9,862 4,460 3,670
Interest income (expense), net (795) 711 (620) 210
--------- --------- --------- ---------
Income before income taxes 10,338 10,573 3,840 3,880
Income taxes 4,162 4,335 1,505 1,591
--------- --------- --------- ---------
Net income $ 6,176 $ 6,238 $ 2,335 $ 2,289
========= ========= ========= =========
Net income per share (basic and diluted) $ 0.67 $ 0.68 $ 0.25 $ 0.25
========= ========= ========= =========
Weighted average shares outstanding 9,226 9,237 9,204 9,237
========= ========= ========= =========
</TABLE>
Page 1 of 14
<PAGE>
CHANNELL COMMERCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS (Unaudited)
(amounts in thousands)
<TABLE>
<CAPTION>
Sept. 30, Dec. 31,
1998 1997
---------- ---------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 6,926 $ 3,840
Investments 559 11,651
Accounts receivable (net) 17,527 9,191
Inventories 15,519 7,253
Deferred income taxes 868 688
Prepaid expenses 1,132 613
---------- ---------
Total current assets 42,531 33,236
Property and equipment at cost, net 27,040 14,758
Deferred income taxes 483 664
Intangible Assets, net 20,927 1,649
Other assets 822 302
---------- ---------
Total assets $ 91,803 $ 50,609
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Bank overdraft $ 9,417 $ --
Accounts payable 7,938 2,606
Notes payable current 133 --
Current maturities of capital lease obligations 370 226
Accrued expenses 1,782 791
Income taxes payable 418 390
------------ ------------
Total current liabilities 20,058 4,013
Long-term obligations 19,628 400
Capital lease obligations 176 320
Deferred income tax 849 --
Stockholders' equity
Preferred stock -- --
Common stock, par value $.01 per share, authorized --
19,000 shares; issued and outstanding --
9,127 and 9,237 shares, at respective dates 91 92
Additional paid-in capital 27,032 27,991
Retained earnings 23,969 17,793
------------ ------------
Total stockholders' equity 51,092 45,876
------------ ------------
Total liabilities and stockholders' equity $ 91,803 $ 50,609
=========== ===========
</TABLE>
Page 2 of 14
<PAGE>
CHANNELL COMMERCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(amounts in thousands)
<TABLE>
<CAPTION>
Nine months ended
September 30,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,176 $ 6,238
Depreciation and amortization 2,831 1,514
Deferred income taxes 4 (1)
Change in assets and liabilities net of
effects from purchase of company:
Accounts receivable (3,115) (969)
Inventories (3,381) (1,498)
Prepaid expenses (519) 217
Other (517) (22)
Increase (decrease) in liabilities:
Accounts payable 3,366 (923)
Accrued expenses (791) (421)
Income taxes payable (324) (1,405)
-------- -------
Net cash provided by operating activities 3,730 2,730
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (5,263) (1,679)
Payment for purchased company, net
of cash acquired (24,504) (2,564)
Purchases of investments (2,133) (400)
Maturities of investments 13,225 --
-------- -------
Net cash used in investing activities (18,675) (4,643)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Acquisition of long term debt 19,244 (194)
Repurchase of company stock (958) --
Repayment of obligations under capital lease (255) (135)
-------- -------
Net cash provided by (used in) financing activities 18,031 (329)
-------- -------
Increase (decrease) in cash and cash equivalents 3,086 (2,242)
Cash and cash equivalents, beginning of period 3,840 9,190
-------- -------
Cash and cash equivalents, end of period $ 6,926 $ 6,948
======== =======
CASH PAID DURING THE PERIOD FOR:
Interest $ 707 $ 101
======== =======
Income taxes $ 4,088 $ 5,758
======== =======
Page 3 of 14
</TABLE>
<PAGE>
CHANNELL COMMERCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1998 AND 1997
(amounts in thousands, except per share data)
1. Unaudited financial statements: In the opinion of management, all
adjustments, consisting only of normal recurring adjustments necessary for
a fair presentation of (a) the consolidated results of operations for the
nine-months ended September 30, 1998 and 1997, (b) the consolidated
financial position at September 30, 1998, and (c) the consolidated
statements of cash flows for the nine-month periods ended September 30,
1998 and 1997 have been made. The results for the nine-month period ended
September 30, 1998, are not necessarily indicative of the results for the
entire year.
2. Inventories: Inventories stated at the lower of cost or market (first-in,
first-out method) are summarized as follows:
<TABLE>
<CAPTION>
September 30,
1998
-------------
<S> <C>
Raw materials $ 4,291
Work-in process 2,006
Finished goods 9,222
-------------
$ 15,519
=============
</TABLE>
3. Marketable Securities: The Company has invested in certain U.S. Government
issued debt instruments and other taxable securities. These investments are
classified as "available for sale" as defined by Statement of Financial
Accounting Standards No. 115. The investment in these securities are
therefore recorded at fair value with any differences between fair value
and cost recorded as a separate component of stockholders' equity. At
September 30, 1998, there were no material differences between the fair
value and cost of these marketable securities.
4. Acquisition: On May 1, 1998, the Company acquired 100% of the outstanding
common stock of A.C. Egerton (Holdings) PLC ("Egerton"), a public limited
company incorporated in England and Wales. The purchase price, paid in
cash, amounted to $27,846, including $1,286 of estimated costs of
acquisition. The fair value of assets acquired in excess of liabilities
assumed amounted to $8,002 which resulted in goodwill in the amount of
$19,844. Goodwill is being amortized on the straight-line basis over twenty
years. Results of operations of the acquired company are included in the
accompanying consolidated statements of income commencing on May 1, 1998.
Page 4 of 14
<PAGE>
Pro forma consolidated results of operations as though the acquisition had
occurred at the beginning of each of the respective periods is as follows:
<TABLE>
<CAPTION>
Nine months ended
September 30,
1998 1997
---- ----
<S> <C> <C>
Net sales $ 74,898 $ 72,322
Net income 5,187 5,828
Net income per share:
Basic $ 0.56 $ 0.63
Diluted $ 0.56 $ 0.63
</TABLE>
5. Supplemental Disclosure of Non-Cash Investing Activities: The Company
purchased all of the capital stock of Egerton for $27,846. In conjunction
with this acquisition, liabilities were assumed as follows:
<TABLE>
<S> <C>
Fair value of assets acquired $42,570
Cash paid for capital stock 27,846
-------
Liabilities assumed $14,724
=======
</TABLE>
6. Long-Term Debt: In conjunction with the acquisition of Egerton on May 1,
1998, the Company entered into a new Senior Revolving Loan Agreement
("Revolving Facility") with a bank to provide funds for the Egerton
acquisition as well as for working capital and equipment acquisition
purposes. The Revolving Facility is in the amount of $25,000 of which
$19,361 had been drawn down as of September 30, 1998. The outstanding
balance bears interest at a variable rate based on either the bank's base
rate or the applicable LIBOR rate depending on the nature of the
borrowings. The rate at September 30, 1998 was 8.5%. The loan is secured
by substantially all of the Company's tangible and intangible assets and up
to 65% of the capital stock of the Company's subsidiaries and is due April
30, 2003.
<TABLE>
<S> <C>
Loan payable - bank $19,361
Note payable individual with interest at the
bank prime rate due January, 2001 400
-------
19,761
Current portion 133
-------
$19,628
=======
</TABLE>
The Revolving Facility contains various financial and operating covenants
which, among other things, imposes limitations on the Company's ability to
incur additional indebtedness, merge or consolidate, sell assets except in
the ordinary course of business, make certain investments, enter into
leases and pay dividends. The Company is also required to comply with
covenants related to minimum net worth and other financial ratios.
Page 5 of 14
<PAGE>
7. Sale: In August the Company entered into negotiations to sell the net
assets (including the facility) of Egerton GRP, a manufacturer of
fiberglass products. Egerton GRP is a subsidiary of A.C. Egerton (Holdings)
Plc, a public limited company, acquired on May 1, 1998. As of September 30,
1998, the net assets of Egerton GRP were $0.3 million and the net sales for
the nine months ended September 30, 1998 were $1.5 million.
8. In 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 130 ("SFAS 130"), reporting
comprehensive income, which prescribes standards for reporting
comprehensive income and its components. Comprehensive income consists of
net income or loss for the current period and other comprehensive income
(income, expenses, gains and losses that currently bypass the income
statement and are reported directly in a separate component of equity).
SFAS 130 requires that components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. SFAS 130 is effective for financial statements
issued for periods beginning after December 15, 1997. There are no
components of income, other than as reflected on the Consolidated
Statements of Income, for the periods presented in these statements.
In 1997, the FASB issued Statement of Financial Accounting Standards No.
131 ("SFAS 131"), Disclosures About Segments of an Enterprise and Related
Information, which applies only to publicly held business entities. A
reportable segment, referred to as an operating segment, is a component of
an entity about which separate financial information is produced
internally, that is evaluated by the chief operating decision-maker to
assess performance and allocate resources. SFAS 131 is effective for
financial statements issued for periods beginning after December 15, 1997.
The Company operates in a one-industry segment as supplier of
telecommunications equipment. While the Company offers a wide range of
items for sale, many of them are marketed by a common sales force.
Page 6 of 14
<PAGE>
Part I-Financial Information
Item 2-Management's Discussion and Analysis of Results of Operations and
Financial Condition
RESULTS OF OPERATIONS
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1998 WITH THE NINE MONTHS
ENDED SEPTEMBER 30, 1997
Net Sales. Net sales increased $22.2 million or 50.7% from $43.8 million
in the first nine months of 1997 to $66.0 million in the first nine months of
1998, as a result of increased sales of telecommunication enclosure and
component products of $21.8 million (including $13.3 million of Egerton
products) and $0.4 million of other related equipment.
Domestic net sales increased $9.4 million or 25.6% from $36.7 million in
the first nine months of 1997 to $46.1 million in the first nine months of 1998,
primarily due to accelerated growth in both upgrade and rebuild construction as
a result of increased broadband requirements. International net sales increased
$12.8 million or 180.3% from $7.1 million in the first nine months of 1997 to
$19.9 million in the first nine months of 1998, primarily as a result of the
Egerton acquisition.
Gross Profit. Gross profit increased $8.1 million or 43.8% from $18.5
million in the first nine months of 1997 to $26.6 million in the first nine
months of 1998. $3.5 million of this increase is due to increased
telecommunication enclosure product sales volume, and $4.6 million from Egerton
component sales. Gross margin decreased from 42.2% to 40.3% during the
comparable periods due to a 34.6% margin contribution from the sale of Egerton
products.
Commission Income. Commission income decreased $0.4 million or 80.0% from
$0.5 million in the first nine months of 1997 to $0.1 million in the first nine
months of 1998. The decrease is a result of the termination of a marketing
agreement for the sale of cable-in-conduit products.
Selling. Selling expense increased $2.6 million or 43.4% from $5.3 million
in the first nine months of 1997 to $7.6 million in the first nine months of
1998, primarily as a result of higher wages and employee benefits in the amount
of $0.5 million, travel and related expenses in the amount of $0.3 million,
shipping expense of $0.4 million and computer and facility expenses of $0.2
million. These increases were the result of increased sales and marketing
efforts during the period. Increased selling expenses of $1.0 million are
related to Egerton. As a percentage of net sales, selling expense decreased
from 12.1% in the 1997 period to 11.5% in the 1998 period.
Page 7 of 14
<PAGE>
General and Administrative. General and administrative expenses increased
$3.3 million or 103.1% from $3.2 million in the first nine months of 1997 to
$6.5 million in the first nine months of 1998, primarily as a result of higher
wages, employee benefits and related expenses of $0.7 million associated with
increased staffing. Legal, audit and equipment expenses increased $0.4 million.
Increased general and administrative expenses of $2.1 million are related to
Egerton. As a percentage of net sales general and administrative expense
increased from 7.3% in the 1997 period to 9.8% in the 1998 period.
Research and Development. Research and development expenses increased $0.7
million or 100.0% from $0.7 million in the first nine months of 1997 to $1.4
million in the first nine months of 1998 primarily due to increased payroll and
expenses in the amount of $0.4 million associated with increased staffing and
development activities and $0.2 million related to Egerton. As a percentage of
net sales, research and development increased from 1.6% in the 1997 period to
2.1% in the 1998 period.
Income from Operations. As a result of the items discussed above, income
from operations increased $1.2 million or 12.1% from $9.9 million in the first
nine months of 1997 to $11.1 million in the first nine months of 1998, while
operating margin decreased from 22.6% to 16.8%.
Income Taxes. Income taxes were $4.3 million in the first nine months of
1997, a 40.6% rate, compared to $4.2 million in the first nine months of 1998, a
40.8% rate.
Page 8 of 14
<PAGE>
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 1998 WITH THE THREE MONTHS
ENDED SEPTEMBER 30, 1997
Net Sales. Net sales increased $11.8 million or 76.6% from $15.4 million
in the third quarter of 1997 to $27.2 million in the third quarter of 1998, as a
result of increased telecommunication enclosure and component products,
including $8.0 million of Egerton products.
Domestic net sales increased $4.4 million or 35.5% from $12.4 million in the
third quarter of 1997 to $16.8 million in the third quarter of 1998, primarily
due to accelerated growth in both upgrade and rebuild construction to facilitate
increased broadband requirements. International net sales increased $7.4
million or 246.7% from $3.0 million in the third quarter of 1997 to $10.4
million in the third quarter of 1998, primarily as a result of the Egerton
acquisition.
Gross Profit. Gross profit increased $4.2 million or 65.6% from $6.4
million in the third quarter of 1997 to $10.6 million in the third quarter of
1998. This increase is from increased sales volume, including $2.8 million from
Egerton products. Gross margin decreased from 41.6% in the third quarter of
1997 to 39.0% in the third quarter of 1998 as a result of product mix and a
35.0% margin contribution from Egerton products.
Commission Income. Commission income decreased $0.2 million or 100.0% from
$0.2 million in the third quarter of 1997 to less than $0.1 million in the third
quarter of 1998, primarily as a result of the termination of a marketing
agreement for the sale of cable-in-conduit products.
Selling. Selling expenses increased $1.0 million or 58.8% from $1.7
million in the third quarter of 1997 to $2.7 million in the third quarter of
1998, primarily as a result of increased selling and marketing expenses of $0.4
million and $0.6 million related to Egerton expenses. As a percentage of net
sales, expense decreased from 11.0% in the 1997 period to 9.9% in the 1998
period.
General and Administrative. General and administrative expenses increased
$1.9 million or 190.0% from $1.0 million in the third quarter of 1997 to $2.9
million in the third quarter of 1998. The increase is primarily a result of
$1.6 million related to Egerton expenses, and increased payroll and expenses of
$0.3 million associated with increased staffing. As a percentage of net sales,
general and administrative expense increased from 6.5% in the 1997 period to
10.7% in the 1998 period.
Research and Development. Research and development expenses increased
$0.3 million or 150.0% from $0.2 million in the third quarter of 1997 to $0.5
million in the third quarter of 1998, as a result of increased staffing
amounting to $0.2 million and $0.1 million related to Egerton expenses. As a
percentage of net sales, research and development increased from 1.3% in the
1997 period to 1.8% in the 1998 period.
Page 9 of 14
<PAGE>
Income from Operations. As a result of the items discussed above, income
from operations increased $0.8 million or 21.6% from $3.7 million in the third
quarter of 1997 to $4.5 million in the third quarter of 1998, while operating
margin decreased from 24.0% to 16.5%.
Income Taxes. Income taxes decreased $0.1 million or 6.2% from $1.6
million in the third quarter of 1997, a 41.0% rate, to $1.5 million in the third
quarter of 1998, a 39.5% rate.
YEAR 2000 COMPUTER SYSTEMS COMPLIANCE
The Year 2000 problem concerns the inability of certain computers and
computer systems to process data beyond January 1, 2000. Many software programs
refer to years in terms of their final two digits only. These programs may
interpret the year 2000 as 1900 and may not recognize that the year 2000 is a
leap year. (The year 1900 was not a leap year.) If not corrected, these
programs could shut down or generate incorrect data.
The Company has developed a plan to deal with the Year 2000 issues which it
faces. The Company, independent of the Year 2000 issues, has embarked on a
worldwide project to implement a new business information system throughout the
Company using i2 Rhythm Factory Planner, Oracle ERP software and associated
hardware. These new systems will make the Company's business information
systems approximately 85% Year 2000 compliant and are scheduled for completion
domestically in the second quarter of 1999 and internationally in the third
quarter of 1999. The Company is on schedule for implementation of these new
systems.
In addition to business information systems, the Company's plan calls for
the analysis, correction and testing of other embedded systems which might not
operate or might not operate properly after January 1, 2000. These systems
include, but are not limited to, telephone and voice mail systems, manufacturing
and production equipment, freight and shipping software, office machines,
elevators and building security systems. The Company is in the process of in-
house testing and/or obtaining manufacturers' certifications as to the Year 2000
compatibility of these systems. Any items which cannot be determined to be
compliant or cannot be upgraded to be compliant are being replaced if they are
deemed to be critical to the operations of the Company.
The Company's plan also includes a procedure for analyzing the Year 2000
status of key outside suppliers, service providers and customers whose failure
to comply could have an adverse affect on the Company. These procedures include
a standard Year 2000 compliance agreement as well as a survey-type questionnaire
designed to help measure the vendor's progress in dealing with the Year 2000
issues. The Company has identified the key vendors and customers and is in the
process of mailing the questionnaire and/or obtaining the certification
agreements. This phase of the plan is on-going, but is anticipated to be
complete in the third quarter of 1999.
Page 10 of 14
<PAGE>
The Company does not have contingency plans to deal with the failure of the
above to meet the Year 2000 issues. With regard to the systems upgrade, in the
contract with the suppliers is a guarantee that the new systems will be
implemented and tested timely, and that the systems will be Year 2000 compliant.
No contingency plan has been established to deal with the embedded systems issue
in that any critical, non-compliant systems will be replaced or corrected as
they are discovered. Contingency plans to deal with outside suppliers and
customers will be developed as indicated by the on-going analysis of these
entities. Such contingency plans could include the building of inventories, the
search for alternative suppliers, or the request for advance payments or
deposits from customers, all as the case may indicate.
The total costs associated with becoming Year 2000 compliant are not
expected to be material to the Company's financial position or results of
operations. Total costs associated with the project are expected to be $3.5
million, most of which are attributable to the systems upgrade which was being
done independent of the Year 2000 problems. Approximately 25% of the costs
associated with the systems upgrade have already been incurred.
Failure to anticipate and correct a Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities including,
but not limited to, temporary plant closings, delays in the delivery of
products, delays in receipt of supplies, invoice and collection errors, delays
in the collection of receivables and inventory obsolescence. The Company
believes that with the implementation of the new business information systems
and completion of the other procedures contained in the Year 2000 plan
(particularly the analysis of third party vendor and customer Year 2000
compliance activities) that any significant interruptions and negative impacts
from Year 2000 problems will be reduced.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $2.7 million and $3.7 million
for the nine months ended September 30, 1997 and 1998, respectively. Net cash
used in financing activities was $0.3 million for the nine months ended
September 30, 1997, and net cash provided from financing activities was $18.0
million for the nine months ended September 30, 1998. Net cash used in
investing activities was $4.6 million and $18.7 million for the periods ending
September 30, 1997 and 1998, respectively.
Accounts receivable increased from $9.2 million at December 31, 1997, to
$17.5 million at September 30, 1998, as a result of increased sales and $5.7
million from the acquisition of Egerton. Inventories increased from $7.3
million at December 31, 1997, to $15.5 million at September 30, 1998, primarily
as a result of increased finished goods in anticipation of higher sales in the
second half of 1998 and $4.6 million from the acquisition of Egerton.
Page 11 of 14
<PAGE>
The Company made capital expenditures of $0.7 million and $2.1 million for
the third quarter of 1997 and 1998, respectively, and anticipates increased
capital spending for equipment, product tooling and test equipment for the
remainder of 1998.
On April 1, 1998, the Board of Directors, having determined such action to
be advisable and in the best interest of the Company, authorized a stock
repurchase plan of up to $2.0 million worth of Company stock. During the third
quarter of 1998 the Company repurchased 110,000 shares of its Common Stock at a
cost of approximately $1.0 million.
On May 1, 1998, the Company acquired all of the stock of Egerton. Egerton
is a U.K. holding company with subsidiaries in the U.K., Australia and the U.S.,
which are involved primarily in the manufacturing and sales of telephone
equipment primarily in Europe, Asia and Australia. Purchase price of the stock
was approximately $27.8 million and was paid from the proceeds of bank borrowing
and the liquidation of short-term investments.
In conjunction with the acquisition of Egerton, the Company entered into a
new Senior Revolving Loan Agreement ("Revolving Facility") with a bank to
provide funds for the Egerton acquisition as well as for working capital and
equipment acquisition purposes. The Revolving Facility is in the amount of
$25.0 million of which $19.4 million had been drawn down as of September 30,
1998. The outstanding balance bears interest at a variable rate based on either
the bank's base rate or the applicable LIBOR rate depending on the nature of the
borrowings. The applicable rate at September 30, 1998 was 8.5%. The loan is
secured by substantially all the Company's tangible and intangible assets and up
to 65% of the capital stock of the Company's subsidiaries and is due April 30,
2003.
The Revolving Facility contains various financial and operating covenants
which, among other things, imposes limitations on the Company's ability to incur
additional indebtedness, merge or consolidate, sell assets except in the
ordinary course of business, make certain investments, enter into leases and pay
dividends. The Company is also required to comply with covenants related to
minimum net worth and other financial ratios.
The Company believes that income from operations, coupled with borrowing
under its revolving credit facilities will be sufficient to fund the Company's
capital expenditure and working capital requirements.
Forward-looking statements contained within this 10-Q are subject to many
uncertainties in the Company's operations and business environments. Examples
of such uncertainties include customer demand, low material costs, Year 2000
("Y2K") compliance, integration of acquired business and worldwide economic
conditions among others. Such uncertainties are discussed further in the
Company's annual report and S-1 filed with the Securities and Exchange
Commission.
Page 12 of 14
<PAGE>
Part II - Other Information
Item 1. Legal Proceedings
The Company is from time to time involved in ordinary routine litigation
incidental to the conduct of its business. The Company regularly reviews all
pending litigation matters in which it is involved and establishes reserves
deemed appropriate for such litigation matters. Management believes that no
presently pending litigation matters will have a material adverse effect on the
Company's financial statements taken as a whole or on its results of operations.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
Form 8-K, item 2, Acquisition of Assets, filed May 18, 1998
Form 8-KA, item 7, Financial Statements, filed July 17, 1998
Report of BDO Stoy Hayward, Chartered Accountants and Registered
Auditors
Consolidated Profit and Loss Accounts for each of the three years
ended December 31, 1997, 1996 and 1995, and for the three months
ended March 31, 1998 and 1997 (unaudited)
Consolidated Balance Sheets as of December 31, 1997 and 1996, and
March 31, 1998 (unaudited)
Consolidated Cash Flow Statements for each of the three years
ended December 31, 1997, 1996 and 1995, and for the three months
ended March 31, 1998 and 1997 (unaudited)
Notes Forming Part of the Financial Statements for the years
ended December 31, 1997, 1996 and 1995, and for the three months
ended March 31, 1998 and 1997 (unaudited)
Exhibit
Number Description
- ------ -----------
3.1 Restated Certificate of Incorporation of the Company (1)
3.2 Bylaws of the Company (1)
4 Form of Common Stock Certificate (1)
10.1 Tax Agreement between the Company and the Existing Stockholders (1)
10.2 Channell Commercial Corporation 1996 Incentive Stock Plan (including
form of Stock Option Agreements and Restricted Stock Agreement) (1)
10.3 Senior Revolving Loan Agreement dated as of May 1, 1998, between the
Company and Fleet National Bank (3)
10.8 Employment Agreement between the Company and William H. Channell, Sr.
(1)
Page 13 of 14
<PAGE>
10.9 Employment Agreement between the Company and William H.
Channell, Jr. (1)
10.10 Channell Commercial Corporation 1996 Performance-Based Annual Incentive
Compensation Plan (1)
10.11 Lease dated December 22, 1989 between the Company and William H.
Channell, Sr., as amended (1)
10.12 Lease dated May 29, 1996 between the Company and the Channell Family
Trust (1)
10.14 Lease dated September 24, 1997 between the Company and SCI North
Carolina Limited Partnership (5)
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 (4)
10.20 Letter Agreement regarding employment, Andrew M. Zogby (2)
10.21 Letter Agreement regarding employment, John B. Kaiser (2)
10.22 A.C. Egerton (Holdings) PLC Share Purchase Agreement (3)
11 Computation of Proforma Income per Share (2)
27 Financial Data Schedule (6)
_______
(1) Incorporated by reference to the indicated exhibits filed in connection
with the Company's Registration Statement on Form S-1 (File No. 333-3621).
(2) Incorporated by reference to the indicated exhibits filed in connection with
the Company's Form 10-K on March 31, 1997.
(3) Incorporated by reference to the indicated exhibits filed in connection with
the Company's Form 8-K on May 18, 1998.
(4) Incorporated by reference to the indicated exhibits filed in connection with
the Company's Form 10-K on March 30, 1998.
(5) Incorporated by reference to the indicated exhibits filed in connection with
the Company's Form 10-Q on May 6, 1998.
(6) Filed herewith.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHANNELL COMMERCIAL CORPORATION
(Registrant)
Dated: November 10, 1998 By: /s/ Gary W. Baker
------------------- ----------------------
Gary W. Baker
Chief Financial Officer
Page 14 of 14
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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<PAGE>
<ARTICLE> 5
<LEGEND>
FINANCIAL STATEMENTS AND NOTES THERETO CONTAINED IN THE COMPANY'S ANNUAL REPORT
ON FORM 10-K FILED ON MARCH 30, 1998.
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<S> <C> <C>
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<FISCAL-YEAR-END> TO COME DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> SEP-30-1998 DEC-31-1997
<CASH> 6,926 3,840
<SECURITIES> 559 11,651
<RECEIVABLES> 17,527 9,191
<ALLOWANCES> 0 0
<INVENTORY> 15,519 7,269
<CURRENT-ASSETS> 42,531 33,236
<PP&E> 40,235 24,925
<DEPRECIATION> (13,195) (10,167)
<TOTAL-ASSETS> 91,803 50,609
<CURRENT-LIABILITIES> 20,058 4,013
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0 0
<COMMON> 91 92
<OTHER-SE> 51,001 45,784
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<SALES> 65,971 59,943
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<CGS> 39,327 35,032
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<OTHER-EXPENSES> 15,615 12,337
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<INTEREST-EXPENSE> 795 (879)
<INCOME-PRETAX> 10,338 14,059
<INCOME-TAX> 4,162 5,589
<INCOME-CONTINUING> 6,176 8,470
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