UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended September 30, 2004
	OR
o	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)

 

 

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  ý

No  o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes  o

No  ý

 

9,302,774 shares of common stock of the Registrant were outstanding at November 1, 2004.

 

 

PART 1 –    FINANCIAL INFORMATION

 

ITEM 1.     FINANCIAL STATEMENTS

 

CHANNELL COMMERCIAL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME(Unaudited)

(amounts in thousands, except per share data)

 

		Nine months ended September 30,						Three months ended September 30,
		2004			2003			2004			2003
Net sales		$	66,638		$	55,937		$	27,615		$	19,434
Cost of goods sold		47,470			39,491			19,719			13,919
Gross profit		19,168			16,446			7,896			5,515
Operating expenses
Selling		9,308			6,994			4,009			2,347
General and administrative		6,039			5,776			2,212			2,048
Research and development		1,642			1,193			577			408
Restructuring charge		(686		)	—			(686		)	—
		16,303			13,963			6,112			4,803
Income from operations		2,865			2,483			1,784			712
Interest expense, net		320			438			170			178
Income before income taxes		2,545			2,045			1,614			534
Income taxes (benefit)		(679		)	730			(679		)	(1		)
Net income before minority interest		3,224			1,315			2,293			535
Minority interest		75			—			75			—
Net income		$	3,149		$	1,315		$	2,218		$	535
Net income per share
Basic		$	0.34		$	0.14		$	0.24		$	0.06
Diluted		$	0.34		$	0.14		$	0.24		$	0.06
Net income		$	3,149		$	1,315		$	2,218		$	535
Other comprehensive (loss) income, net of tax Foreign currency translation adjustments		(170		)	1,281			411			79
Comprehensive net income		$	2,979		$	2,596		$	2,629		$	614

 

The accompanying notes are an integral part of these financial statements.

 

1

 

CHANNELL COMMERCIAL CORPORATION

CONSOLIDATED BALANCE SHEETS

(amounts in thousands)

 

		September 30, 2004			December 31, 2003
		(Unaudited)
ASSETS
Current assets
Cash and cash equivalents		$	4,064		$	9,527
Accounts receivable, net		13,989			10,051
Inventories		13,377			8,855
Deferred income taxes		812			876
Prepaid expenses and other current assets		1,136			996
Income taxes receivable		1,587			102
Total current assets		34,965			30,407
Property and equipment at cost, net		18,945			17,164
Deferred income taxes		5,535			5,277
Intangible assets, net		15,368			613
Other assets		742			504
		$	75,555		$	53,965
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable		$	13,944		$	5,103
Short term debt (including current maturities of long term debt)		5,567			952
Current maturities of capital lease obligations		11			57
Accrued restructuring liability		245			2,857
Accrued expenses		6,731			4,240
Total current liabilities		26,498			13,209
Long term debt, less current maturities		4,633			2,830
Capital lease obligations, less current maturities		127			67
Deferred gain on sale leaseback transaction		468			513
Commitments and contingencies		—			—
Minority interest		2,790			—
Stockholders’ equity
Preferred stock, par value $.01 per share, authorized - 1,000 shares, none issued and outstanding		—			—
Common stock, par value $.01 per share, authorized - 19,000 shares; issued - 9,372 shares at December 31, 2003 and 9,547 at September 30, 2004; outstanding - 9,128 shares at December 31, 2003 and 9,303 at September 30, 2004		95			94
Additional paid-in capital		29,377			28,664
Treasury stock - 244 shares in 2003 and 2004		(1,871		)	(1,871		)
Retained earnings		13,619			10,470
Accumulated other comprehensive loss - Foreign currency translation		(181		)	(11		)
Total stockholders’ equity		41,039			37,346
Total liabilities and stockholders’ equity		$	75,555		$	53,965

 

The accompanying notes are an integral part of these financial statements.

 

2

 

CHANNELL COMMERCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(amounts in thousands)

 

		Nine months ended September 30,
		2004			2003
Cash flows from operating activities:
Net income		$	3,149		$	1,315
Depreciation and amortization		3,484			4,785
Deferred income taxes		221			(100		)
(Gain) Loss on disposal of fixed asset		(20		)	62
Amortization of deferred gain on sale leaseback		(45		)	16
Change in assets and liabilities:
(Increase) decrease in assets:
Accounts receivable		(1,558		)	374
Inventories		(1,998		)	(859		)
Prepaid expenses		(40		)	(160		)
Other		(234		)	(70		)
Income taxes receivable		(1,481		)	(71		)
Increase (decrease) in liabilities:
Accounts payable		5,558			(789		)
Accrued expenses		697			1,003
Restructuring liability		(2,687		)	(899		)
Net cash provided by operating activities		5,046			4,607
Cash flows from investing activities:
Acquisition of property and equipment		(2,054		)	(915		)
Proceeds from the sales of property and equipment		24			2,320
Business acquisitions, net of cash acquired		(17,503		)	—
Net cash (used in) provided by investing activities		(19,533		)	1,405
Cash flows from financing activities:
Proceeds from issuance of debt		6,958			—
Repayment of debt		(714		)	(1,809		)
Repayment of obligations under capital lease		18			(614		)
Proceeds from minority investor		2,715			—
Proceeds from issance of stock		714			—
Exercise of stock options		—			9
Net cash provided by (used in) financing activities		9,691			(2,414		)
Effect of exchange rates on cash		(667		)	525
(Decrease) increase in cash and cash equivalents		(5,463		)	4,123
Cash and cash equivalents, beginning of period		9,527			3,162
Cash and cash equivalents, end of period		$	4,064		$	7,285
Cash paid during the period for:
Interest		$	223		$	239
Income taxes		$	601		$	757

 

The accompanying notes are an integral part of these financial statements.

 

3

 

CHANNELL COMMERCIAL CORPORATION

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

Nine months ended September 30, 2004

(amounts in thousands)

 

							Additional paid-in capital								Retained earnings			Accumulated other comprehensive Income (loss)			Total stockholders equity
		Common stock								Treasury stock
		Shares		Amount						Shares		Amount
Balance, January 1, 2004		9,372		$	94		$	28,664		244		$	(1,871	)	$	10,470		$	(11	)	$	37,346
Shares issued		175		1			713														714
Foreign currency translation																		(170		)	(170		)
Net income for the period															3,149						3,149
Balance, September 30, 2004		9,547		$	95		$	29,377		244		$	(1,871	)	$	13,619		$	(181	)	$	41,039

 

The accompanying notes are an integral part of this financial statement.

 

4

 

CHANNELL COMMERCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Unaudited)

September 30, 2004 and 2003

(amounts in thousands, except per share data)

 

1.                       Unaudited financial statements.  In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly the consolidated financial position of Channell Commercial Corporation (the “Company”) as of September 30, 2004 and the results of its operations for the three months and nine months ended September 30, 2004 and September 30, 2003 and its cash flows for the nine months ended September 30, 2004 and September 30, 2003.  The results of operations and cash flows for the nine months ended September 30, 2004 are not necessarily indicative of the results to be expected for any other interim period or the full year.  These consolidated financial statements should be read in combination with the audited consolidated financial statements and notes thereto for the year ended December 31, 2003.

 

2.                       Inventories.  Inventories stated at the lower of cost (first-in, first-out method) or market are summarized as follows:

 

		September 30, 2004			December 31, 2003
Raw Materials		$	4,185		$	2,895
Work-in-Process		3,284			2,468
Finished Goods		5,908			3,492
		$	13,377		$	8,855

 

3.                       Income per share.  Basic income per share excludes dilution and is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding for the nine month and three month periods ended September 30, 2004 and 2003.  Diluted income per share reflects the potential dilution that could occur if dilutive options to acquire common stock were exercised.  The following is a reconciliation of the number of shares (denominator) used in the basic and diluted income per share computations for the nine month and three month periods ended  September 30, 2004 and 2003 (shares in thousands):

 

		Nine months ended September 30,
		2004					2003
		Shares		Per Share Amount			Shares		Per Share Amount
Basic income per share		9,165		$	0.34		9,126		$	0.14
Effect of dilutive stock options		11		—			38		—
Diluted income per share		9,176		$	0.34		9,164		$	0.14

 

The following options were not included in the computation of diluted income per share due to their antidilutive effect.

 

		Nine months ended September 30,
		2004		2003
Options to purchase shares of common stock		1,401		101
Exercise prices		$4.84 - $13.75		$6.50 - $13.75
Expiration dates		July 2006 - September 2013		July 2006 - May 2012

 

		Three months ended September 30,
		2004					2003
		Shares		Per Share Amount			Shares		Per Share Amount
Basic income per share		9,240		$	0.24		9,127		$	0.06
Effect of dilutive stock options		3		—			88		—
Diluted income per share		9,243		$	0.24		9,215		$	0.06

 

5

 

The following options were not included in the computation of diluted income per share due to their antidilutive effect.

 

		Three months ended September 30,
		2004		2003
Options to purchase shares of common stock		1,461		101
Exercise prices		$4.75 - $13.75		$6.50 - $13.75
Expiration dates		July 2006 - September 2013		July 2006 - May 2012

 

In February 2003, the Company offered current employees and non-employee directors an opportunity to exchange their outstanding options granted under the 1996 Stock Plan.  Pursuant to the offer, a total of 1,326,890 options were cancelled on March 20, 2003.  On September 24, 2003, a total of 1,324,090 new options were exchanged for options cancelled in March 2003.

 

4.               Stock Based Compensation.  Statement of Financial Accounting Standards No. 148, “Accounting for Stock Based Compensation – Transition and Disclosure on Amendment of SFAS 123 “, encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans at fair value.  The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in previously issued standards.  Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company’s stock at the date of grant over the amount an employee must pay to acquire the stock.

 

Pursuant to the exchange offer described in Note 3 above, participating eligible option holders were granted a new option for each old cancelled option.  For each new option granted, the vesting status and vesting schedule of the old option was preserved.  The weighted average fair value of the options issued in September 2003 was $1.91.  The weighted average exercise price was $4.84.

 

Had compensation cost for the plan been determined based on the fair value of the options at the grant dates based on the above method, the Company’s net income and income per share would have been:

 

		Nine months ended September 30,
		2004			2003
Reported net income		$	3,149		$	1,315
Less expense determined under fair value accounting for all awards, net of tax		327			890
Proforma net income		$	2,822		$	425
Reported basic and diluted net income per share		$	0.34		$	0.14
Less expense determined under fair value accounting for all awards, net of tax		0.04			0.09
Proforma basic and diluted net income per share		$	0.30		$	0.05

 

 

		Three months ended September 30,
		2004			2003
Reported net income		$	2,218		$	535
Less expense determined under fair value accounting for all awards, net of tax		106			838
Proforma net income (loss)		$	2,112		$	(303	)
Reported basic and diluted net income per share		$	0.24		$	0.06
Less expense determined under fair value accounting for all awards, net of tax		0.01			0.01
Proforma basic and diluted net income (loss) per share		$	0.23		$	(0.03	)

 

6

 

The fair value of options at date of grant was estimated using the Black-Scholes model with the following weighted average assumptions:

 

		Periods ended September 30,
		2004		2003
Expected life (years)		5 years		5 years
Risk-free interest rate		3.50	%	3.00	%
Expected volatility		40	%	40	%
Expected dividend yield		—		—

 

5.               Segments.  There are two segments:  Americas and International.  Americas includes the United States, Central and South America and Canada.  International includes Europe, Africa, Middle East, Australia and Asia.  The following table summarizes segment information for the nine months and three months ended September 30, 2004 and 2003:

 

		Nine months ended September 30,
		2004			2003
Revenues from unrelated entities (1):
Americas		$	51,064		$	47,218
International		15,574			8,719
		$	66,638		$	55,937
Income (loss) from operations:
Americas		$	3,463		$	3,679
International		(598		)	(1,196		)
		$	2,865		$	2,483
Interest expense, net:
Americas		$	133		$	75
International		187			363
		$	320		$	438

 

		Three months ended September 30,
		2004			2003
Revenues from unrelated entities (1):
Americas		$	18,282		$	16,762
International		9,333			2,672
		$	27,615		$	19,434
Income (loss) from operations:
Americas		$	1,168		$	1,189
International		616			(477		)
		$	1,784		$	712
Interest expense, net:
Americas		$	105		$	60
International		65			118
		$	170		$	178

 

(1) Note: Revenues from Australia exceeded 10% of total revenues for both the three month and nine month periods ended September 30, 2004. Revenues from Australia totaled $7,503 for the three month and $10,452 for the nine month period. Revenues from individual foreign countries did not exceed 10% of total revenues during the corresponding periods in 2003.

 

7

 

The Company has revenues from external customers from the following product lines:

 

		Nine months ended September 30,
		2004			2003
Product lines
Enclosures		$	45,350		$	43,871
Water related products		13,182			5,433
Connectivity		7,101			5,887
Other		1,005			746
		$	66,638		$	55,937

 

		Three months ended September 30,
		2004			2003
Product lines
Enclosures		$	14,184		$	15,009
Water related products		10,033			1,919
Connectivity		3,024			2,265
Other		374			241
		$	27,615		$	19,434

 

The Company has identifiable assets in the following geographic regions:

 

		September 30, 2004			December 31, 2003
		(Unaudited)
Identifiable Assets:
Americas		$	43,563		$	40,949
International		31,992			13,016
		$	75,555		$	53,965

 

6.                       Recent Accounting Pronouncement.  In March 2004, The Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin 104 “Revenue Recognition” (“SAB 104”), an update to the guidance in SAB 101 “Revenue Recognition in Financial Statements” 101 (codified in Topic 13: “Revenue Recognition”).  The primary objectives of SAB 104 are to reflect the issuance of EITF Issue 00-21, “Revenue Arrangements with Multiple Deliverables”, to delete the guidance on reporting revenues gross as a principal or net as an agent because EITF Issue 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent”, and to rescind SAB 101 “Revenue Recognition in Financial Statements - Frequently Asked Questions and Answers (FAQ)” and incorporate selected portions of the FAQ into Topic 13.  The FAQ permitted registrants to elect a policy of not recognizing any revenue on equipment sold on an installed basis until installation is complete.  Because EITF Issue 00-21 requires revenue arrangements with multiple deliverables to be divided into separate units of accounting if certain criteria are met, this election is no longer available to registrants upon adoption of EITF Issue 00-21. The Company believes that SAB 104 has not had any effect on the Company’s financial position, cash flows, or results of operations.

 

7.                       Restructuring Charges.  In the fourth quarter of 2002, the Company announced a restructuring plan to rationalize international manufacturing operations.  As part of the plan, various manufacturing operations in the International segment were either consolidated or outsourced.  The management of all International operations was consolidated under the Managing Director, International.  The restructuring charge totaled $1,228.  The principal actions in the restructuring plan involved the closure of facilities and a reduction in head count.

 

In the fourth quarter of 2003, the Company further evaluated International operations to improve profitability.   A plan was developed to close a manufacturing facility in International operations by June 2004.  As part of the plan, there was a reduction of approximately 31 employees in the International operations.  There was one employee severed in the third quarter of 2004, and $0 severance payments were made. The restructuring charge totaled $1,565.  The principal components of the 2003 restructuring charge involved the closure of facilities and a reduction in head count.

 

A credit to restructuring charge of $686 was recorded in the third quarter of 2004 primarily due to the assignment of the lease of a vacated facility in the United Kingdom at a cost less than previously estimated by management.  The

 

8

 

facility closure costs were originally estimated in the third quarter of 2001.  Due to difficulties in negotiating a lease termination or subletting of the facility, the estimate for the facility closure costs was subsequently increased in the fourth quarter of 2002 and further increased in the fourth quarter of 2003.  In July 2004, the lease on the facility was assigned for the remaining lease term on more favorable terms than management had estimated and thus the credit to restructuring charge.

 

The restructuring charges were determined based on formal plans approved by the Company’s management using the best information available to it at the time.  The amounts the Company may ultimately incur could differ materially as the restructuring initiative is executed.   The changes in the accrual for restructuring charges during the three month period ended September 30, 2004 are summarized in the table below:

 

		Facilities			Workforce Reduction			Total
Restructuring accrual balance at June 30, 2004		$	1,848		$	66		$	1,914
Costs incurred in the three months ended September 30, 2004		1,021			(38		)	983
Credit to operations in the three months ended September 30, 2004		686			—			686
Restructuring accrual balance at September 30, 2004		$	141		$	104		$	245

 

8.                    Sale Leaseback Agreement.   In June, 2002, the Company entered into a sale and leaseback agreement for a facility located in Temecula, California.  The proceeds from the sale totaled approximately $6,200 and resulted in a pretax deferred gain of $604.  The resulting lease is being accounted for as an operating lease.  The lease base term is ten years with two five-year options at rental amounts to be adjusted to the fair market rental value at the end of the base term.  A portion of the proceeds from the sale was used to pay the outstanding mortgage balance on the facility of $4,036.  As of September 30, 2004 the unamortized balance of the deferred gain is $468.

 

9.                       Income Taxes.  In the second quarter of fiscal 2004, the Company commissioned an independent appraisal of a subsidiary in the United Kingdom.  This appraisal follows the Company’s announcement in February 2004 to close the European manufacturing operations.  Based on the independent appraisal, the Company concluded that the subsidiary was insolvent as of June 30, 2004 and therefore met the requirements of an ordinary worthless stock deduction under the Internal Revenue Code.  The amount of the worthless stock deduction is approximately $9,000 with a corresponding federal income tax benefit of approximately $3,000.  The Company has an effective tax rate of (26.7%) for the nine months ended September 30, 2004.  This differs from the federal statutory rate of 34.0% primarily due to the subsidiary stock deduction described above offset by foreign operating losses incurred without a tax benefit recorded and an increase in the Company’s valuation allowance against the deferred tax assets.  The Company has an effective tax rate for the three months ended September 30, 2004 of (42.1%).

 

The Federal income taxes of the Company for the years ended December 31, 1997, 1998, 2000, and 2001 are currently under examination by the Internal Revenue Service (IRS).  In July 2002, the IRS issued the proposed result of their examination for the years ended December 31, 1997 and 1998, which increases the 1997 income tax amount due by $315 related to transfer pricing for sales to the Company’s Canadian subsidiary.  In November 2003, the IRS agreed to reduce the transfer pricing assessment for the 1997 and 1998 tax years to $19 which was accrued at December 31, 2003.  Management believes that the ultimate outcome of IRS audits for the years ended 2000 and 2001 will not have a material adverse impact on the Company’s consolidated results of operations or financial position.

 

10.                 Commitments and Contingencies.  In 2001, the State of Texas issued a report assessing the Company additional sales and use tax of $1,600, including interest.  The Company has appealed the assessment and is currently providing the State of Texas with documentation to support the Company’s contention that the transactions did not require the Company to remit sales and use tax to the State of Texas. The State of Texas has agreed to a reduction of the amount owed to $600.  The Company has paid the State of Texas $400.  The Company believes that it has meritorious defenses to the remaining claim of $200 and intends to vigorously defend its position.  The Company believes that the ultimate outcome of this examination will not result in a material impact on the Company’s consolidated results of operations or financial position.

 

In June 2002, the Company recorded a $1,573 allowance for doubtful accounts due to the Chapter 11 bankruptcy filing of a major customer, Adelphia Communications.  The Company subsequently wrote off all of the open receivables with Adelphia as of the bankruptcy date.  Based on the Company’s knowledge of the bankruptcy proceedings, the Company is unable to reasonably estimate the potential recovery relating to the Adelphia receivables mentioned above.  Therefore, no recovery amount has been recorded in the Company’s financial statements.  The Company has also been approached by a

 

9

 

third party investor regarding the Company’s sale of its Adelphia receivables at a discount.  However, no definitive agreement between the Company and the third party investor has been reached at this time.

 

11.                 Related Party Transactions.  In May 2002, the Company sold its RF line of passive electronic devices to RMS Communications, Inc., which is owned by Gary Napolitano, a former officer of the Company.  A sale in the amount of $800 was recorded.  RMS Communications, Inc. paid the Company $125 in cash at the time of sale, and the remaining $675 is payable in monthly installments through June 30, 2003, bearing interest at 7% per annum.  The Company purchased $87 of inventory from RMS Communications, Inc. in the nine months ended September 30, 2004 and has offset the amount payable to RMS Communications, Inc. against the open receivable. The amount due from RMS Communications, Inc. included in accounts receivable at September 30, 2004 is $249.  The account is currently in arrears.  The Company has a security interest in the inventory and a personal guarantee from Mr. Napolitano and believes the amount will be paid in full.

 

12.                 Concentrations.  Sales to Comcast of $11,560 in the first nine months of 2004 represented 17.3% of Company sales in the period.  Sales to Comcast of $14,360 in the first nine months of 2003 represented 25.7% of Company sales for the period.  The second largest customer in the first nine months of 2004 was Verizon with sales of $11,420 representing 17.1% of the total.  Sales to Verizon of $6,060 in the first nine months of 2003 represented 10.8% of Company sales.

 

Sales to Verizon of $6,080 in the third quarter of 2004 represented 22.0% of Company sales in the period.  Sales to Verizon of $2,030 in the third quarter of 2003 represented 10.4% of Company sales for the period.  The second largest customer in the third quarter of 2004 was Comcast with sales of $2,950 representing 10.7% of the total.  Sales to Comcast of $5,000 in the third quarter of 2003 represented 25.7% of Company sales.

 

13.                 Guarantees.  In 1997, the Company guaranteed debt of the Company’s principal stockholder and Chairman of the Board of approximately $754.  The guaranteed debt was incurred in connection with construction of the facilities leased to the Company and is collateralized by said facilities.  The loan amount subject to the unsecured guarantee is expected to decline before expiring in 2017. It is not practicable to estimate the fair value of the guarantee; however, the Company does not anticipate that it will incur losses as a result of this guarantee.  The Company has not recorded a liability for this guarantee.  If the principal stockholder were to default on the outstanding loan balance, the Company may be required to repay the remaining principal balance. The maximum potential amount the Company would be required to pay is equal to the outstanding principal and interest balance of the loan to the stockholder.  At September 30, 2004, the outstanding loan balance subject to the guarantee totaled $590.

 

14.                 Bushman Tanks Acquisition.   On August 2, 2004, the Company, through a majority-owned subsidiary, acquired a controlling interest in Bushman Tanks, a manufacturer and distributor of rotational molded plastic (polyethylene) water storage tanks.  Bushman Tanks operates out of four leased facilities in Australia, located in Dalby, Orange, Terang, and Adelaide.  The purchase price was $16,838.  The Company also incurred an additional $764 in direct costs of the acquisition.  An additional $1,400 is payable to the sellers in the event that the Bushman Tanks business achieves specified sales targets in 2005 and 2006. Additional amounts may be paid to the sellers if certain cost reduction targets are achieved.  The sellers will receive one-half of the amounts of the cost reductions in the specified cost items that are achieved between 2005 through 2009.  The maximum amount payable is $1,400 if the cost incurred on these specified items is reduced to zero.  In the event that the cost incurred for these items exceeded a predetermined threshold, the seller would be liable to the Company for the amount of the cost exceeding the threshold. The purchase agreement includes a working capital adjustment based on the April 30, 2004 working capital amounts. The amount of the adjustment at present is not finalized. The working capital adjustment as presently estimated by management has been included in the $16,838 purchase price. The final working capital adjustment will result in a change to goodwill and the amount of consideration to the sellers.

 

Consideration for the acquisition of $16,838 consisted of $8,016 in cash contributed by the Company, 175,113 shares of the Company’s common stock valued at $714, a $5,520 term loan from The National Australia Bank Ltd, and $2,588 in cash contributed by ANZ Private Equity, a unit of Australia and New Zealand Banking Group Ltd. As a result of the transaction, the Company acquired a 75% equity interest in Bushman Tanks, and ANZ Private Equity acquired the remaining 25%. In addition, the Company incurred direct acquisition costs of $764.

 

The Bushman Tanks acquisition has been accounted for using the purchase method of accounting and, accordingly, the assets acquired and liabilities assumed have been recorded at their estimated fair values based upon preliminary estimates as of the acquisition date. Further adjustments to the acquired assets and assumed liabilities will be made following more detailed reviews by management of tangible assets acquired and liabilities assumed. Changes in the estimated fair value of acquired assets and assumed liabilities will be reflected as a change in the allocated fair value

 

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of the identifiable tangible and intangible assets and liabilities and goodwill in the period in which this determination is made, which management expects to be by December 31, 2004.

 

The following table summarizes the estimated fair value of the assets acquired and liabilities assumed in the Bushman Tanks acquisition at August 2, 2004:

 

 

Below is the unaudited pro forma condensed combined statement of operations for the three months and nine months ended September 30, 2004 and September 30, 2003.  The unaudited pro forma condensed combined statement of operations includes the historical operations of the Company and Bushman Tanks (translated at the average currency exchange rate for the applicable period) and gives effect to the acquisition as if it had occurred at the beginning of the applicable period. The unaudited pro forma financial statement is based upon available information and assumptions and adjustments that the Company believes is reasonable.  The unaudited pro forma condensed combined statement of operations does not purport to represent what our results of operations actually would have been.  The unaudited pro forma condensed combined financial statement is qualified in its entirety and should be read in conjunction with the historical financial statements and accompanying notes of the Company included in the annual report on form 10-K for the year ended December 31, 2003, the quarterly report on form 10-Q for the three and six month periods ended June 30, 2004, and the 8-KA filed October 18, 2004.

 

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CHANNELL COMMERCIAL CORPORATION AND BUSHMAN TANKS

UNAUDITED PROFORMA

CONDENSED COMBINED STATEMENTS OF OPERATIONS

(amounts in thousands, except per share data)

 

		Nine months ended September 30,						Three months ended September 30,
		2004			2003			2004			2003
Net sales		$	84,071		$	75,619		$	30,431		$	26,200
Cost of goods sold		57,277			50,310			21,303			17,551
Gross profit		26,794			25,309			9,128			8,649
Operating expenses		24,106		*	21,287			7,078			7,143
Income from operations		2,688			4,022			2,050			1,506
Interest expense, net		732			893			229			330
Income before income taxes		1,956			3,129			1,821			1,176
Income taxes (benefit)		(855		)	1,055			(617		)	192
Net income before minority interest		2,811			2,074			2,438			984
Minority interest		(40		)	199			111			116
Net income		$	2,851		$	1,875		$	2,327		$	868
Net income per share
Basic		$	0.31		$	0.20		$	0.25		$	0.09
Diluted		$	0.31		$	0.20		$	0.25		$	0.09
Weighted number of shares outstanding
Basic		9,303			9,301			9,303			9,302
Diluted		9,314			9,339			9,306			9,390

 

* Nine months ended September 30, 2004 includes $1,077 of fringe benefit costs for the previous owners of Bushman Tanks that are not expected to recur.

 

15.                                     Intangible Assets.   The balance of the intangible assets on the Company’s balance sheet fluctuates from period to period due to the application of foreign currency translation to United States dollars in calculating the balance of goodwill of our foreign subsidiaries.  The changes in goodwill are summarized in the table below.

 

 

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